Effect of dividend policy on the financial performance

1 Introduction

Among critical managerial decisions that the board of managers has to dwell on critically is the decision on what to do with corporate surplus earnings. Extra earnings in a company tend to translate into two major effects: ploughing back the profits and distributing the funds in the form of dividends to the shareholders. The latter has the impact of increasing the Shareholders’ equity. Either of the mentioned choices trickles down to affecting the budgetary requirements of a company. Hence, the managers must weigh their decisions wisely before deciding on the best method of dealing with corporate Surpluses.  Companies should thus have a clearly defined way of dealing with the surplus funds to eliminate cases of Managerial opportunism that those assigned to control Company finances might tend to exploit. A dividend policy takes a significantly centralrole in the financial management of any organization and is thus used as a tool for checking managerial opportunism.This research is dedicated to ascertaining the relationship between this dividend policy and the Finacial performance of some selected countries listed in the Stock Exchange of Mauritius. We further seek to relate the timing and value of the Dividends paid. These statistics will also lead us into considering the size of the firms under analysis as another indicator of the primary statistic under test. The data of these companies will, therefore, be sourced from the Stock Exchange repository. Therefore, we need to assess the trend of the data over a finite period of eightyearsfrom 2011 to 2020. This data will be exposed to statistical analysis using SPSS.

This study will investigate various units that make up the dividend policy. These include dividend payout ratio (DPR), form and timing of payments of dividends, and dividends per share. On the other hand, the companies’ financial performance will be measured using the index of return on assets (ROA). As a control mechanism, firm size and leverage are chosen as suitable variables.

Problem Statement

Most companies do not realize the importance of dividend policy as a necessary corporate document, among other crucial documents like the Memorandum of Associations and Articles of Association. As a result, Shareholders are always left in the dark even when companies reap surplus gains from the tradings. Since shareholders form the main financiers of the corporations, they need to have a method of controlling the influence of the company’s financial managers they appoint. This will ensure there is clear information between the managers and the company’s stakeholders. Therefore, business decisions will be apparent to all the members that form the company’s fraternity. This will, thus, lead to improved performance and clarity in vision in company focus.

Objectives

1.2.1    Main Objective

Investigate the effect of dividend policy on the financial performance of selected firms listed on the Stock exchange of Mauritius over eight years.

1.2.2    Specific Objectives

To conduct a comprehensive literature review and critique on existing dividend Policies

To perform Correlation Analysis between firm performance and

time of payment of dividends

, the form of dividend Payout, and dividend payout ratio.

To perform Correlation Analysis between firm performance and dividend paid per share.

To perform Correlation Analysis between firm performance and

leverage.

To compute a Coefficient of Determination of the dependent variable on the Independent variables.

To perform analysis and

run statistical Significance of Variance on the Regression Model.

To test the Statistical Model Developed.

Preliminary Literature Review

Dividends provide a technical, financial vision tool that is an essential source of primary information, especially for investors or other stakeholders(Choiri Chosiah, 2019). This is because it contains vital information that can easily with clarity indicate the company’s prospects. This makes most companies to adopt a dividend policy as a tool to check on managerial activities. Thus, it forms the Litmus on the company’s spending on the Surplus of its earnings from the directors.

(Charles Yegon, 2014)intheir paper, point out clearly that corporations need to adopt a more viable tool of spending Excess turnovers from company business after the end of every financial year. A clear guideline on the relaying of the company cashflow and Spending habits should be rendered transparent to all the stakeholders. This will aid in making wise investment decisions and on the company’s perpetuality(Mehta, 2012).

Most of the owners visualize the system as another sophisticated constitution that can be very cumbersome for the office culture to adopt(Gitonga,). It is established that themissing piecefrom the past studies is a comprehensive and structured approach in introducing the Dividend policy among companies and Showing its real potential even in big corporations.

Methodology

This research will depend on reviewing literature that is already existing. This will entail Research papers, Journal articles, Conference Proceedings, and not limited to the books. It is from this material that we shall develop a conceptual framework for the Project.  Data will be downloaded from the Mauritius Stock Exchange Repository. The data will be explored for any missing values and prepared for analysis.

However, we shall employ a descriptive research design with the populace being an 8-year data on Company performance from 2011 to 2018 hosted on the Mauritius Stock Exchange Market. The data was gathered for twenty- six firms listed on the MSE. The study will consist of correlation measures between firm performance and dividend payout-ratio andan increase in firm financial performance. The correlation of firm financial performance and form of the dividend payment will also be investigated, and its Significance tested to find its effect on company performance. The studywill alsodepict a conclusion on the timing of dividend payments relation and Significance in a firm’s financial performance. All the attributes discussed in the introduction will be tested, and the final product will be a Regressional model on the effect of thesevariables on the firm’s financial performance.

All these statistical analyses will be executed on the SPSS software package. The results of this analysis are documented in the Analysis section of the accompanying report. Graphical visualization will also accompany and validate the

findings.

References