Tax Shield and Its Impact on Corporate Dividend Policy: Evidence from Pakistani Stock Market

Akhlaq ul Hassan, Mubashar Tanveer, Muhammad Siddique, Muhammad Mudasar

1I-Mtas College Sinllanwali, Sargodha, Pakistan.
Govt College of Commerce Shahpur Sadar, Sargodha, Pakistan.
Universiti Teknologi Malaysia, Johor Bahru, Malaysia.
University of Sargodha, Sargodha, Pakistan.

DOI: 10.4236/ib.2013.54023                

Abstract

The problem: what is the taxation impact on dividend policy? While much optimal taxation research focuses on the economic effects of taxation, the purpose of this study is to add a new dimension by investigating the relationship between taxation and payout ratio and some other variables of dividend policy. These relations are tested using the data from financial statements of KSE listed companies. The results show that tax shield has no significant relation to the dividend payout ratio but mostly dividend policy is due to the size of the firm and its profitability.

Keywords

Dividend Policy; Tax Shield; Determinant’s of Dividends

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	J. Lintner, “Distribution of Incomes of Corporations among Dividends, Retained Earnings and Taxes,” American Economics Review, Vol. 46, No. 2, 1956, pp. 97-112.
[2]	R. Litzenberger and K. Ramaswamy, “The Effects of Personal Taxes and Dividends on Capital Asset Prices: Theory and Empirical Evidence,” Journal of Financial Economics, Vol. 7, No. 2, 1979, pp. 163-195. http://dx.doi.org/10.1016/0304-405X(79)90012-6
[3]	S. A. Ravid and O. H. Sarig, “Financial Signaling by Committing to Cash Outflows,” Journal of Financial and Quantitative Analysis, Vol. 26, No. 2, 1991, pp. 165-180. http://dx.doi.org/10.2307/2331263
[4]	C. F. Lee and J. B. Kau, “Dividend Payment Behavior and Dividend Policy on REITs,” Quarterly Review of Economics and Business, Vol. 27, No. 2, 1987, pp. 6-21.
[5]	M. Miller and K. Rock, “Dividend Policy under Asymmetric Information,” Journal of Finance, Vol. 40, No. 4, 1985, pp. 1031-1051. http://dx.doi.org/10.1111/j.1540-6261.1985.tb02362.x
[6]	K. Gugler, “Corporate Governance, Dividend Payout Policy, and the Interrelationship between Dividends, R&D and Capital Investment,” Journal of Banking and Finance, Vol. 27, No. 7, 2003, pp. 1197-1321. http://dx.doi.org/10.1016/S0378-4266(02)00258-3
[7]	M. S. Rozeff, “Growth, Beta and Agency Costs as Determinants of Dividend payout Ratios,” The Journal of Financial Research, Vol. 5, No. 3, 1982, pp. 249-259.
[8]	M. C. Jensen, “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,” The American Economic Review, Vol. 76, 1986, pp. 323-329.
[9]	J. Aharony and I. Swary, “Quarterly Dividend and Earnings Announcements and Stockholders. Returns: An Empirical Analysis,” Journal of Finance, Vol. 35, No. 1, 1980, pp. 1-12. http://dx.doi.org/10.1111/j.1540-6261.1980.tb03466.x
[10]	P. Asquith and D. Mullins, “The Impact of Initiating Dividend Payments on Shareholders’ Wealth,” Journal of Business, Vol. 56, No. 1, 1983, pp. 77-96. http://dx.doi.org/10.1086/296187
[11]	J. Poterba and S. Lawrence, “The Economic Effects of Dividend Taxation,” In: E. Altman and M. Subrahmanyam, Eds., Recent Advances in Corporation Finance, Dow Jones-Irwin, Homewood, 1985, pp. 227-284.
[12]	C. Chen and C. Wu, “The Dynamics of Dividends, Earnings and Prices: Evidence and Implications for Dividend Smoothing and Signaling,” Journal of Empirical Finance, Vol. 6, No. 1, 1999, pp. 29-58. http://dx.doi.org/10.1016/S0927-5398(98)00008-5
[13]	E. F. Fama and H. Babiak, “Dividend Policy: An Empirical Analysis,” Journal of the America, 1968.
[14]	F. Leroy and S. Barbara, “Dividend Policy and Income Taxation,” University of California, 2008.
[15]	R. W. Masulis and B. Trueman, “Corporate Investment and Dividend Decisions under Differential Personal Taxation,” Journal of Financial and Quantitative Analysis, Vol. 23, No. 4, 1988, pp. 369-386. http://dx.doi.org/10.2307/2331077
[16]	A. Nnadi and M. Akpomi, “The Effect of Taxes on Dividend Policy of Banks in Nigeria,” International Research Journal of Finance and Economics, Vol. 19, 2008, pp. 48-55.
[17]	J. Kose and J. Williams, “Dividends, Dilution, and Taxes: A Signaling Equilibrium,” Journal of Finance, Vol. 40, No. 4, 1985, pp. 1053-1070. http://dx.doi.org/10.1111/j.1540-6261.1985.tb02363.x
[18]	M. H. Miller and F. Modigliani, “Dividend Policy, Growth and the Valuation of Shares,” The Journal of Business, Vol. 34, No. 4, 1961, pp. 411-433. http://dx.doi.org/10.1086/294442
[19]	R. C. Higgins, “Sustainable Growth under Inflation,” Financial Management, Vol. 10, 1981, pp. 36-40. http://dx.doi.org/10.2307/3665217
[20]	H. Ahmedws and J. Attiya, “Dynamics and Determinants of Dividend Policy in Pakistan (Evidence from Karachi Stock Exchange Non-Financial Firms),” International Journal of Finance and Economics, No. 25, 2009, pp. 148-171.