Trends of Dividend Payment Practices of Listed Corporate Firms in the Dhaka Stock Exchange

Objective: This paper examines the dividend payment practices of corporate firms in Bangladesh over the period 2000-2014 and attempts to explain the observed behavior by analyzing the trends and growth of dividend and to find the relationship between the trends and growth of the prices of the shares.
Methodology: This study uses Simple Growth Rate (SGR), Compound Growth Rate (CGR) and Trend Growth Rate (TGR) for measuring the growth of dividend and the price of the shares in the Dhaka Stock Exchange (DSE). To find the TGR we used time series data and to find the relationship between price and dividend by regression we used panel data. Our sample contains 92 listed non-financial companies from different sectors. In this study, we have observed the trend of price movement, industry-wise both for cash dividend paying and bonus dividend paying companies.
Findings: Results show that the companies which are paying cash dividend are able to maximize their share values to a greater extent than the companies which are paying bonus dividends.


Introduction
Firms raise equity capital in order to invest in real assets that are expected to produce future cash flows. The shareholders have a claim on these cash flows. However, the firm's management has the power to determine whether these cash flows are paid directly to the shareholders as dividends or retained as a source of fund for further investment within the business. Hence, the dividend decision is of potentially great importance both to shareholders as well as the firm (Glen et al. 1995). The main objective of the financial management is to maximize shareholder's wealth (Horne and Wachowicz, 2001). The managers can maximize shareholders' wealth sometimes by paying dividends and sometimes by retaining earnings for further investment, depending on the growth prospects or available investment opportunities of the firm. If the firm has available investment opportunities with positive expected returns, then usually the firm retains the earnings for further investment because retained earnings is normally the cheaper and more dependable source of finance. On the contrary, if the firm has no suitable investment opportunities with positive expected returns then it is better to distribute the earnings to shareholders as dividends (Gordon, 1962, Walter, 1963. In practice, firms neither distribute all of their earnings to shareholders as dividends nor retain all of their earnings for further investment. Usually, the firms distribute a portion of earnings to the shareholders as dividends and retain the remainder for further investment or as a reserve to retire debt or to finance new investments. Generally, firms pay dividends once per year. Normally, dividend decision is taken on the basis of net operating income at the end of year. Dividend declaration always is given in percent on the face value.
Dividend policy determines how much of a company's earnings will be paid to shareholders and how much will be retained. The return on a shareholder's investment comprises the dividends received and the capital gain or loss over the period the shares are held. A dividend, therefore, is an important element of shareholders' returns. High dividends, however, imply low retained earnings which are an important source of funds for a company. Management must decide, therefore, what proportion of earnings to pay out as dividends and what proportion to retain.
Dividend policy constitutes a major financial decision for corporate business undertaking. It is obligatory for the firms to make a judgment as to whether they should distribute the profits to the shareholders or plough them back into the business. The choice would obviously hinge on the effect of the decision on shareholders' wealth. Regardless of conflicting options in extant literature on the impact of dividend on the valuation of firms' wealth of shareholders, the broad consensus and evidence seems to be in the favor of relevance of dividends. In practice, dividends may matter, particularly in the context of differential tax treatment of dividends and capital gains. Very often dividends are taxed at a higher rate compared to capital gains. This implies that dividends may have negative consequences for investors 2 . Similarly, cost of raising funds is not insignificant and may well lead to lower payout, particularly when positive net present value projects are available. Apart from flotation costs, information asymmetry between managers and outside investors may also have implications for dividend policy. According to Myers and Majluf (1984), in the presence of information asymmetry and flotation costs, investment decisions made by managers are subject to the pecking order of financing choices available. Managers prefer retained earnings to debt and debt to equity flotation to finance the available projects.
To summarize, several theories have been proposed in explaining why companies pay dividends 3 . While many earlier studies point out the tax-preference theory, more recent studies emphasize signaling and agency cost rationale of dividend payments. However, the dividend puzzle remains unresolved and the words of Fischer Black (Black 1976, p. 5) may well apply in today's context: "The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don't fit together".
One of the striking aspects that have been noticed in recent periods is the lower dividend paid by corporate firms in the US. Fama and French (2001) analyze the issue of lower dividends paid by corporate firms over the period 1973-1999 and the factors responsible for such a decline. They attribute the decline to changing firm characteristics e.g., size, earnings and growth.
However, it is to be seen whether the change towards lower dividends is a permanent feature or a reversal. A decline in dividends, according to Fama and French (2001), could be due to lower transaction costs, improved corporate governance mechanisms, and the increased preference towards capital gains.
In context of capital market in Bangladesh, it is still not clear as to what the dividend payment pattern of corporate firms in Bangladesh. This study attempts to identify the dividend policy practices by the corporate firms of Bangladesh by analyzing the trends and growth of the dividends and to find out whether there is any relationship between the trends of dividend and the share prices of the listed corporate firms of the DSE over the long run.

Objectives of the Study
The general objective of the study is analyzing the trends of the dividend payment practices by the corporate firms of Bangladesh. However, the specific objectives are: 1. To review and analyze the growth trend in the dividend payment pattern of listed corporate firms of Bangladesh in the DSE. 2. To examine whether there exists any relationship between the dividend trends with the growth trends of share price over the last fifteen years in the DSE.  (23) and Insurance companies (46) are then excluded from the sample because of their differential accounting system. Companies with missing data points are also excluded from the sample. The companies or particular years for certain companies are excluded from the sample where massively pushing up or pulling down the average tendency of any particular variable. Finally, this study purposively took 92 companies which declared and paid only cash dividend and only bonus dividend at least five years over the sample period of 2000-2014. The final sample consists of 92 DSE listed non-financial companies form fifteen sectors. (Please see Appendix 1 and 2).

Techniques of Data Analysis:
To analyze the trends of dividend payment pattern, number of companies paying dividend as percentage of total firms, average dividend paid, dividend per share, payout ratio, and dividend yield are computed for the period from 2000 to 2014. Dividend per share (DPS) is calculated as Where, t j DY , refers to dividend yield for firm j in year t, t j DPS , refers to dividend per share for firm j in year t, and Price, t-1 is closing price of previous year for firm j.

Measure of Growth:
The word growth means an increase. In other words, it may be termed as the process of growing. Oxford Advanced Learner's Dictionary of Current English defines it as: "An increase in economic activity, profit etc." 5 The study assumes the term as an increase in some important variables such as public issue of listed securities, market capitalization, turnover of shares and debentures etc. In the periphery of the study, to estimate the increase in different selected variables, it is decided to use the following variants of growth rates keeping in view the nature of the data available and their suitability.

Simple Growth Rate (SGR):
It simply gives the percentage increase over the previous year. The following equation represents this rate: Where, CGR = Compound Growth Rate, Y1 = Value of the variable Y at the terminal year, Y0 = Value of the variable Y at the initial year, t = Difference of year between the terminal year and the initial year. Trend Growth Rate (TGR): To observe the general performance of two groups of variables more meaningfully and objectively it is essential to compare their growth patterns over the period rather than on a year to year basis. Recognizing the above, Birla Institute of Scientific Research (BISR) observes that the best measure available for such an exercise is the compound growth rates which are least affected by the distortions brought about by the practice of window dressing indulged by the banks on the eve of releasing their balance sheets. In the same direction Stockton and Clark (1971) argue that, "if it is desired to compare the growth of two series, the best comparison can be made between the trends rather than between the two series themselves." To avoid the problem, Mason (1978) states more specifically that a semi-logarithmic trend is appropriate when the time series data is considered to be increasing or decreasing at somewhat constant rate. 6 BISR 7 Bhuyan and Akhtar uddin (1989), Chawla (1987) etc. applied the Ordinary Least Square (OLS) method to fit the semi-logarithmic trend equation. The form of the semilogarithmic trend equation is: Where Y = Dependent variable i.e., Dividend. A = Constant or intercept of the trend line i.e., the value of Y at the origin. B = Estimated trend coefficient i.e., the slope of the trend. X = Time Trend From the value of the slope (i.e., the coefficient of the trend denoted by 'B') the rate of increase for the trend could be determined. Hence, the following equation represents the growth rate: This growth rate is known as a semi-logarithmic least square trend growth rate or simply Trend Growth Rate (TGR). It is also a compound growth rate. But unlike the compound growth rate (mentioned earlier) it is calculated on the basis of the value of a variable for all the years of the time series. Therefore, it is considered to be a better estimate. 8 Then the test of significance is to be applied for finding out whether the estimated growth rate is significantly different from zero, at five percent or ten percent level of significance.

Regression Analysis:
There are one independent variables being used in this study and that variable is taken sometimes yearly cash dividend and sometimes bonus dividend. To find the TGR we used time series data and to find the relationship between price and dividend we used panel data. It contains information of DSE listed corporate firms (non-financial sector companies). Therefore, unbalanced panel estimation techniques are used in this study. Firstly, we checked stationary of each variable because major problem of time series data may be non-stationary. In this study to test stationary of each variable, we used "Phillips-Perron Fisher" Unit Root Test.
Secondly, we checked residuals of panel data that are normally distributed or not. To test this, we used "Skewness-Kurtosis" and "Jarque-Bera" model. The "Skewness-Kurtosis" and "Jarque-Bera" model are used to check normality. (Please see Table 6 and Table 9) As in all cases we used one explanatory variable so, there is no possibility "heteroscedasticity" and "multicollinearity" problem in our model. At the same time by testing stationary we reduced the chance of having "auto-correlation".

Empirical Results and Discussion
Dividend Payment Performance: Generally, investors invest their money in the capital market with a hope that it will generate more money into their funds. Usually, they do it in the forms of capital gain, dividend, and bonus or right shares from the capital market. These are the most fundamentals to all investors. Many companies pay out dividend regularly to shareholders from their earnings and send a clear, powerful message about their future prospects and performance. A company's willingness and ability to pay steady dividends over time -and its power to increase themprovide good clues about its fundamentals.
In the DSE there are 263 listed companies in 2014. There has been a rising trend of the listed companies in the DSE over the years. The number rose from 44 to 263 between 1983 and 2014. The following table 1 gives a clear picture regarding the dividend payment over the years in the DSE.  From the Table 2, it observes that only 54 companies out of total number of listed non-financial companies in the DSE were paying cash dividend in between 2000 to 2014 whereas in 2000 the number of companies were 33. So, in the last 15 years the number of companies which are paying cash dividend have increased but the rate of increasing is not significant or satisfactory label. But from the above table it shows that in 2000 the average cash dividend was 34.79% with standard deviation 33.34% and the minimum cash dividend paid 5% and maximum was 160%. In 2014 the average cash dividend was 82.81% and the maximum dividend was 550%. So, it indicates that although the number of cash dividend paying companies have not increased significantly over the study period, however the percentage of average cash dividend has increased significantly. From the Table 3 and 4, it appears that the total number of non-financial listed companies in the DSE were 90 in 2000 and out of those 33 companies were paying cash dividend and the rest could not at all paying cash dividend whereas in 2014 out of 183 non-financial listed companies only 54 companies were paying cash dividend i.e., 29.21% companies were paying dividend regularly. It is very interesting to note that out of 32.6% companies, i.e., out of 44.8 companies only 4 companies (on the average 9%) were paying dividend less than 10%, 31% companies were paying 10-20%, 19% companies were paying 20-30% and 24% companies were paying more than 50% cash dividend. This indicates that 50% of non-financial listed companies in the DSE are paying 10 to 30% cash dividend among the shareholders, which is a good sign due to its smart dividend payment ratio for the DSE. If we compare the dividend payment of the listed non-financial companies with those of savings instruments which are almost risk free investment, it can be said that investment in non-financial companies are enough profitable for the general investors. But the number of dividend paying companies are too low i.e., only 32.6% which seems a little bit risky for the investors.   Table: 4

Industry Wise Growth Analysis of Cash Dividend Paying Companies:
The following section represents the analysis of industry wise growth trends of cash dividend paying companies during the study period 2000-2014.
During 2000-2014 period, minimum 33 companies declared and paid cash dividend whereas maximum 54 companies declared and paid cash dividend. These 54 DSE listed non-financial companies classified as fifteen sectors. However, for our analysis all these 54 non-financial companies are classified into nine sectors as cement, engineering, food and allied, fuel and power, textile, pharmaceuticals and chemicals, services and real estate, tannery, and miscellaneous sectors. After analyzing the industry wise growth trends (Table 5) we can see industry trends indicate that companies in the Food and Allied, Textile, and Miscellaneous industry are most efficient in increasing stock values and their Compound Growth Rates (CGRs) are 23.09%, 19.22% and 24.23% respectively. And in case of cash dividend paying companies, the stock price growth rate of Fuel and Power industry is 7.45% which is the minimum CGR among these industries. Average CGR of cash dividend is 6.09% whereas cash dividend paying companies' CGR of stock price is 15.13% and it seems to be healthy. So, it is evident from the above analysis that over the long run cash dividend paying companies' dividend's trend growth rate (TGR) is 15.88% and in effect of that the trend growth rate (TGR) of stock price is found 43.51% which means over the study period price of the cash dividend paying companies' stock increased on an average by 43.51%.

Regression Equation of Cash Dividend and Average Stock Price
After analyzing the industry wise growth trends we have found a positive relationship between dividend and price.
The following table shows the regression equation of cash dividend and average stock price of the overall market. In Table 7 a regression equation is made where dividend is taken as the explanatory variable and price as explained variable. Here the value of coefficient (B) is 1.665079, which refers to a positive relationship between them. The probability value of t-statistics is 0.00 which means there is statistically significant relationship between them. As the value of Durbin-Watson is greater than the value of R-squared value, the relationship is not spurious.

Industry Wise Growth Analysis of Bonus Dividend Paying Company:
The following section represents the analysis of industry wise growth trends of bonus dividend paying companies during the study period 2000-2014. During 2000-2014 companies declared and paid only bonus dividend at least five years, whereas maximum 84 companies declared and paid bonus dividend in 2012 and only four companies declared and paid bonus dividend in 2000. DSE listed non-financial companies are classified as fifteen sectors. However, for our analysis all these 38 non-financial sector companies are classified into nine sectors as engineering, food and allied, fuel and power, textile, pharmaceuticals and chemicals, services and real estate, tannery, and miscellaneous sectors.  Table 8, we found the companies which are paying bonus dividend in Food and Allied, Textile, and Fuel and Power industry are most efficient in maximizing stock value and their Compound Growth Rates (CGRs) are 16.89%, 14.59% and 8.26%, respectively. And among the bonus dividend paying companies, Travel and Leisure industry's stock price growth is -29.26% which is the minimum CGR among these industries. Average CGR and TGR of bonus dividend is only 0.42% and -0.69, respectively and in contrast bonus dividend paying companies' CGR and TGR of stock price is 3.17% and 16.77%, respectively which seems to be poor because in the economy of Bangladesh the rate of inflation and risk free return (T-bill interest rate) both are quite greater than that.

Regression Equation of Bonus Dividend and Average Stock Price
After analyzing the industry wise growth trends of bonus dividend and stock price we have found a positive relationship between dividend and price. The following table reports the regression results of bonus dividend and average stock price of overall market.

Conclusion
This study has documented the trend of industry-wise price movements for both cash and bonus dividend paying companies. Results from the study clearly indicates that the DSE listed corporate firms which are paying cash dividends are able to maximize their share values to a greater extent compared to companies which are paying bonus dividends. In case of the companies which are paying cash dividend in Food and Allied, Textile and Miscellaneous industry are most efficient in increasing stock value. These industries have Compound Growth Rates (CGRs) of 23.09%, 19.22% and 24.23%, respectively. The cash dividend paying companies of Fuel and Power industry experienced a stock price growth of 7.45% which is the minimum CGR among the industries considered in this study. The average CGR of cash dividend paying companies is 15.13% and it seems to be healthy. In contrast, the companies which are paying bonus dividend in Food and Allied, Textile and Fuel and Power industry are most efficient in maximizing stock value and their CGRs are 16.89%, 14.59% and 8.26%, respectively. The bonus dividend paying companies of the Travel and Leisure industry experienced the stock price growth of -29.26%, which is the minimum CGR among the industries considered in this study. The average CGR of bonus dividend paying companies is only 3.17% which seems to be poor compared to the rate of inflation and risk-free return (T-bill interest rate). This means that investors who invested in the bonus dividend paying companies will prefer to invest in risk free assets.
The findings of this study may prove useful for the DSE corporate firms in redesigning their dividend policies. Actually dividend policy of corporate firms determine how much of a company's earnings will be paid to shareholders and how much will be retained. But in case of the DSE our evidences show most of the firms declared bonus stock dividend instead of cash dividend which dilutes the earning per share and net asset value of the firm. Our evidence confirms that DSE investors prefer stable cash dividends which resolves uncertainty and acts like a regular income. So, management of the DSE corporate firms may put more emphasis on paying cash dividends than paying bonus dividends. The results may also be useful to the regulators in understanding the investors' behavior with regard to dividend policies. Bangladesh Securities Exchange Commission (BSEC) should take adequate measures to increase the number of firms to declare dividends regularly based on their financial performances. Regular cash dividend payments will enable our capital market to attract investors and to make the capital market investments more secured. Finally, this study also provides an opportunity in testing the applicability of dividend theories in the context of capital markets in Bangladesh.