The present paper is an attempt to re-examine the applicability of Lintner's (1956) dividend policy in banking sector in India. The banks, listed on any of the Stock Exchange in India, constitute the sample for the present study. Here, a cross-sectional analysis have been carried out from the year 1996 to 2006 across ownership pattern of banks in India. The results are found in line with the Lintner model. The findings offer evidence that the dividend policy of Public Sector Banks (PSBs) is more stable than that of Private Banks (PBs). The results indicate that the major determinants of current dividend are lagged dividend and the current earnings in case of both PSBs and PBs. The above evidence is almost similar to those markets in developed countries such as the US. The study is also found giving support to the argument of `information content of dividend' in the context of dividend proceeds. Hence, dividend policy can be used as a signaling device by the managements of banks.
Notwithstanding the liberalization and financial sector reforms over the recent years, dividend decision remains a key area in the field of corporate financial management. Firms consider dividend policy very important because it determines what funds flow to investors and what funds are retained by the firm for reinvestment. There are many theoretical explanations as to the factors influencing dividend policy (Lintner, 1956; Brittain, 1966; etc.). Financial economists' analyses of corporate dividend policies generally conclude the two characteristics embedded in dividend decision process. They are long-run payout ratio and stability of dividends. In order to come out with the appropriate dividend payout ratio for the company, its management has to consider a number of factors. As revealed in the existing literature, these factors include earnings, investment opportunities in hand, difference in the cost of retained earnings and external equity, cash flow position, shareholder preferences, corporate and other taxes, legal restrictions, etc. About the stability dimension of the dividends, it may be stated that a predictable dividend policy would satisfy the shareholders' current consumption demand and facilitates the management in planning the factors in long-term investment budget. Management is likely to maintain a relatively stable dividend since any change in dividend policy may act as a signaling device to convey information about prospective earning of the company. Thus, ensuring stability in the payment of dividends resolves uncertainty in the minds of the shareholders.
The stable dividend policy is followed by corporate because many individual investors depend on dividend income to meet a portion of their living expenses. Since these expenses remain stable or increase gradually over time, the investors prefer behavioral pattern in dividends. Invariable changes in dividend income may result into selling of some shares. Moreover, institutional investors often view a record of steady dividend payment as a highly desirable feature. Alton, in his works states that the most important concern over signaling theory for emerging and transitional economies is that it depends upon standard dividend policy. From this, one can understand that the importance of the stability of dividend can hardly be exaggerated and hence, financial managers need to formulate the dividend policy very carefully for the company. |
