Abstract:
This paper applies a probit model to a panel of 319 firms listed on the Karachi Stock Exchange over the period 1999–2010, and finds that changes in inflation have a statistically significant, positive impact on the probability of paying cash and bonus dividends. Inflation induces firms to revalue their assets, which raises their distributable revaluation surplus. This, in turn, serves as a good buffer when distributing cash and bonus dividends, especially during periods of high inflation and the low profitability of firms during a recession. Bonus dividend distribution becomes relatively more attractive for firms in such a scenario because these enhance debt capacity (collateral) through the revaluation of assets and reduce the debt-equity ratio. We also highlight other factors that contribute to the probability of paying cash and bonus dividends.
