Abstract:
One of the most important financial decision to be made by the organizations is related to their dividend policy. There are different factors that affect the dividend policy such as firm size, financial leverage, profitability, growth opportunities and the ownership structure. Most firms retain the excessive cash for business expansion purpose. That is why market-to-ratio gives an inverse relationship with dividend payout because firms rely on internal source of funds. Similar is the case with leverage and firm size, the more the liabilities of larger firms the more they are willing to retain their free cash flows. On other hand, profitability ratios have a positive impact on dividend policy because the more profitable the firm is, more likely it is to pay dividends to its shareholders. The main purpose of paying dividends is to attract more investors so that the firm can maintain a good repute in the market. If the firm is not giving dividends, the foremost signal received by the market about such firm is that it is unsure about its future cash flows. Which eventually makes this a “highly risky firm”.
