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Analysis of determinants of dividend policy in UK

By

Yiu Man Leung

2006

A Dissertation presented in part consideration for the degree of


MA Finance and Investments
Abstract

This dissertation aims to study the determinants of dividends policy in UK since most

empirical evidence is focused on US companies, the results from US firms may not be

fully reflected the condition of UK companies. Another objective is to investigate the

consistence of the dividend policy determinants.

In order to evaluate which factor(s) is or are affecting the dividends policy, this paper

references other researches and to choose six of determinants for evaluating UK

dividends policy. Six factors are 1) Future earnings 2) Size factor in this paper is

defined as Log of revenue. 3) Stock price volatility 4) Dividends volatility 5) Earnings

volatility 6) Cash flow volatility. In addition, this research will look for any difference

between the empirical. Furthermore, this research bases on these six variables in order

to investigate their consistence from 2001 to 2004 for UK companies.

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Acknowledgements

The writing of this dissertation has been a difficult but strengthening my financial

knowledge. There are many people who have supported me and contributed to the

writing of this thesis.

I would like to thank the Business School of the University of Nottingham for their

assistance and supports during last twelve months.

In particular, during the writing of this paper, I received assistance from my

dissertation supervisor, Dr. Mohsen Derregia. I learned a lot about doing the research

from him. I would like to express to Dr. Mohsen Derregia for his precious advice,

helpful comments and continuous guidance. Without which, this thesis would not be

possible.

I would like to give a special thanks to my girl friend, Rebecca Ho for editing and

sorting the database.

For the supports from my family, I appreciate my family supports last twelve months.

I am thankful to all other individual involved in making this dissertation successful

completion.

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Content

Abstract

Acknowledgements

1. Introduction…………………………………………………………………….5

2. Literature review………………………………………………………………..6

3. Data and Methodology………………………………………………………...10

3.1. Data……………………………………………………………………..11

3.2. Data correction………………………………………………………...13

3.3. Methodology……………………………………………………………16

4. Results…………………………………………………………………………..22

4.1. Analysis of the results of 2001………………………………………...22

4.1.1. Result of correlation of 2001……………………………………..22

4.1.2. Result of regression analysis of 2001…………………………….23

4.2. Analysis of the results of 2002………………………………………...28

4.2.1. Result of correlation of 2002……………………………………..28

4.2.2. Result of regression analysis of 2002…………………………….29

4.3. Analysis of the results of 2003………………………………………...33

4.3.1. Result of correlation of 2003……………………………………..33

4.3.2. Result of regression analysis of 2003…………………………….34

4.4. Analysis of the results of 2004………………………………………...39

4.4.1. Result of correlation of 2004…………………………………….39

4.4.2. Result of regression analysis of 2004……………………………39

4.5. Summary of 4 years results…………………………………………...43

4.6. Overall correlation result for all observations………………………46

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4.6.1. Result of correlation for all observations………………………46

4.6.2. Result of regression analysis for all observations………………47

4.7. Overall summary………………………………………………………52

5. Limitations……………………………………………………………………..55

6. Conclusions…………………………………………………………………..57

7. References……………………………………………………………………..59

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1. Introduction

Miller and Modigliani (1961) provide an accepted argument for dividends irrelevance

in a world with perfect capital markets since 1961.However, this argument has been

challenged at present. If dividends are irrelevant, why companies still pay dividends

and why investors are aware of dividends because dividends are the part of return on

stock. Shefrin and Statman (1984) introduced concepts such as prospect theory and

mental accounting to explain why investors like dividends. Statman (1997) contends

that solving the dividends puzzle is impossible while ignoring the patterns of normal

investor behaviour. If paying dividends is important for companies, then we need to

identify what factors are influencing the dividends policy.

Dividends policy now is become a core part of corporate finance. Fama and French

(1998) point out that the factor explaining the dividends should be important because

the price of stock is the present value of its future dividends from the intrinsic model.

If dividends can influence the stock price, and then the investigation of dividends

policy is deserved. Since numerous researches have attempted to find out what factors

are influencing the dividends policy in US by surveys or particular models, however,

most studies do not focus on UK companies. This paper is going to find out

determinants of dividends policy from UK companies to see there has a different

outcome or not.

The paper outline is as the follows: First, summarizing the empirical studies. Second,

data and methodology of the research is demonstrated. Third, the result is discussed

and comparison to empirical evidence. Forth, the idea and findings of the paper are

concluded.

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2. Literature review

Understanding how managers set and change dividends is an important issue in

financial economics. Arguably, the most important determinants of a firm s dividends

policy are the level of current and expected future earnings and the pattern or

continuity of past dividends.

Lintner (1956) was the first one to investigate the partial adjustment model of

dividends. His behavioural model suggests that the change in dividends is a function

of the target dividends payout less the last period's dividends payout multiplied by the

speed of an adjustment factor. The target dividends paid is a fraction of the current

period's earnings. In addition, Lintner found that the most important factor of a

company's dividends policy was a significant change in earnings. Since most

managers and directors believe that shareholders prefer the stable dividends paid

rather than a significant change in dividends, therefore companies pay a steady stream

of dividends in short run. Lintner investigated this criterion and found that the

prediction of dividends paid by partial adjustment model is more accurately than

naive models. In fact, his model explained 85% of the changes in dividends for the

sample of his research. Fama and Babiak (1968) and Fama (1974) tested other models

for explaining dividends behaviour and their findings also supported the view of

Lintner which is shareholders prefer the stable dividends paid rather than a significant

change in dividends.

Farrelly et al. (1986) and Baker, Farrelly, and Edelman (1985) made a survey for 562

New York Stock Exchange (NYSE) firms about dividends polices in 1983. They

received 318 responses from utility, manufacturing, and wholesale/retail firms; they

analyzed and found that the important determinants of dividends payments were the

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expected future earnings and the pattern of past dividends. The evidence also shows

that managers were highly concerned with dividends continuity and believed that

dividends policy affects share value. The view also matched with Fama and French

(1998) since the research pointed out that the factor explaining the dividends should

be important because the price of stock is the present value of its future dividends

from the intrinsic model. Farrelly and Baker (1989) also showed that these

sophisticated investors believe that dividends policy affects stock prices. The finding

was totally matched with above studies such as Lintner's behavioural model and

dividends consistency is very important.

Pruitt and Gitman (1991) had done a survey 1,000 largest US firms in term of

investment, financing, and dividends decisions in their firms. The result showed that

the important determinants of dividends policy are the current and past profit level,

the volatility of earnings and the expected future earnings in term of the growth in

earnings. Pruitt and Gitman (1991) also found that prior years' dividends are the

important influence on current dividends. The evidence proved the findings in Farrelly,

Baker, and Edelman (1986) and the survey work of Baker, Farrelly, and Edelman

(1985), and Lintner's (1956) behavioural model were consistence each other.

Therefore, the empirical evidence is likely to show maintaining the consistency in the

level of their firms' dividends is the significant factor when companies are making the

dividends policy decisions. In addition, companies are likely to be a steady stream of

dividends rather than any major change in dividends.

Brooks et al. (1998), Laux, Starks, and Yoon (1998), and Dyl and Weigand (1998)

found that the change in dividends has a strong signal effects on prices. They all

believe long-term economic prospects of companies can be affected by changing the

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level of dividends.

Rozeff’s (1982) find that there are numbers of factors can affect the dividends policy

such as agency problems, size, investment opportunities and risk. Brown, Kleidon and

Marsh (1983) found that the size effect reverses itself for sustained periods. Miller

and Rock's model (1985) was based on the asymmetric information and pointed out

the dividends announcement provides the missing information about the sources or

uses of funds. In addition, it allows the market to estimate the firm's current earnings.

Furthermore, these earnings are always used to forecast the firm’s future earnings

level. According to Miller and Rock's model (1985) idea, the dividends announcement

is not doubtfully affecting the expected earnings of companies.

On the other hand, dividends policy can be viewed as the signaling effect to the public

not only shareholders. Divecha and Morse (1983), Bhattacharya (1979) and Ross

(1977) were all confirmed this conclusion in their researches. Brown, Finn and

Hancock (1977) the announcement of earnings and dividends has an immediate effect

on share prices which is completely consistent with signaling effect on share prices

concept. Ball et al. (1979) found a similar result to Rozeff’s (1982) that there has a

relationship between the dividend yield and risk level in term of risk-adjusted share

returns. Baskin (1989) examined the significance of dividends policy by testing the

volatility of returns. The evidence in the report showed that the measure of price

volatility and the dividend yield was highly correlated in term of price volatility and

the payout ratio. Even though adding other control variables such as the firm size,

earnings volatility and leverage, however, the coefficient of the dividend yield

remained large and highly significant. Baskin (1989) suggested that a 1% increase in

the dividend yield would cause a decrease of approximately 2.5% in the annual

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standard deviation of stock price movements.

Bradley, Michael; Capozza, Dennis R.; Seguin, Paul J. (1998) proved that the cash

flow is uncertainty and companies do not meet the target dividends, the share prices

will be declined. Baker, H. Kent; Powell, Gary E (2000) did a survey for 603 New

York Stock Exchange (NYSE) companies which are in 3 industries, manufacturing,

wholesales and retail trade and utility. Baker, H. Kent; Powell, Gary E (2000) tested

for 20 factors which are influencing the dividends policy and found that level of

current and expected future earnings, continuity of past dividends, the concern about

maintaining/increasing stock price, the change in dividends may provide a false signal

and stability of cash flow, these five factors have a significant effect on dividends

policy. These findings match with previous studies completely.

Most empirical researches are using cross section industries as a database. Some

researches may use a particular industry to determine the factors of dividends policy.

However, there have no sign to show the difference obviously between cross section

and particular sectors.

As the preview of the empirical evidence, most researches used similar methodology

for testing the dividend policy, however, there has a question between these

researches which is whether the determinants of dividend policy is/are consistent or

not within the examination periods. If the answer of the question is yes, and then we

can find out which factor (s) may have significant influence to dividend policy and

there may have a trend of dividend policy that means what thing companies take into

account for determining the dividend policy. If not, we still step further in order to

determine which factor (s) is/are affecting the dividend policy. In addition, if the

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factors of the dividend policy are inconsistent which means there have something still

is influencing the dividend policy outside the current researches.

Furthermore, most researches are using US companies as a database; therefore the

outcomes of researches cannot fully reflect other firms who are not in US. The

determinants of their dividend policy may not be similar to US corporations. On the

other hand, some importance factors in the empirical evidence may not be fit in other

countries.

As the above views, this paper raises two new researches questions. The first one is to

check the consistence of determinants of the dividend policy. It may point out which

factor has a significant influence to the dividend policy. The second question is UK

companies are selected as a database in this paper in order to compare the empirical

evidence. In addition, this paper can determine the UK dividend policy. This also

provides a new insight to the dividend policy in other country.

3. Data and Methodology

3.1. Data

Data source is come from search engine which is called “Fame” to get financial

statements of UK companies. Fame search engine allows getting financial database

for UK companies which are authenticated by “Athens”. The data source are using top

250 UK public quoted companies which is sorted by the amount of turnover and the

examination periods are from 2001 to 2004. The total observations in this research are

868 that include different industries in the sample. The sampled companies can be

classified into four different categories, which are Wholesale, Retail sale,

Manufacture and other industries except above three sectors. Table 1.1 shows how

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many companies are selected into these four groups in one examination year.

Table 1.1 The distribution of the sample in four main categories

Manufacturing Wholesale Retail Others Total


Number of firms 54 11 22 130 217

% of the sample 24.88% 5.07% 10.14% 59.91%

Table 1.2 shows the total observations distribute in four different groups.
Table 1.2 The distribution of the sample in four main categories

Manufacturing Wholesale Retail Others Total


Number of firms 216 44 88 520 868

% of the sample 24.88% 5.07% 10.14% 59.91%

Cross section sampling in this research can be shown by above two tables. In the term

of “Others”, it includes large amount of firms in many sectors such as Hotel industry,

Electricity, Construction, Transportations and others. However, the data from all

sampled companies are searched from “Fame” search engine by according to the

amount of turnover of top 250 UK public quoted companies. In order to focus UK

based data in this research, one more criteria is put in necessarily. Sampled companies

are selected in the sample which are all exchanged their stocks in London Stock

Exchange as a main exchange area. Some of top 250 companies are partly exchanging

their stocks inside London Stock exchange, and then those firms would not be in the

sample. Furthermore, some firms are exchanging outside London Stock exchange but

still classify as top 250 UK companies, and then they are completely ignored in the

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sample of this research.

Fame search engine has provided the financial data of the sampled companies,

however some of the financial data are missing, there is a one big problem that is

found in the engine. As the financial data of companies are incomplete, this problem

will affect the accuracy of the regression results. The missing part will be filled by

hand which is to browse to their official websites and get the relevant figures from

their annual reports.

The database includes numbers of financial data which is the amount of turnover,

market price of the share, net income, the net change in cash flow and the amount of

dividends. The set of the amount of turnover is collected from 2001 to 2004. Some

companies do not have the figure in this item, and then the blank will be replaced by

zero in the database. The data of turnover amount is for generating the log of revenue.

The annual average price is used in the market price of share and examination period

is between 1999 and 2004. Some companies in the sample are listed in the London

Stock Exchange since 2000 or 2001, therefore the previous year before the company

was listed are became blank in the data set because the type of data is used to

calculate the share price volatility if zero is used in the data, then the volatility of

share price will be different.

The examination period of the net income is from 1996 to 2004, nevertheless some

companies do not list in London Stock Exchange before 2001 or another year, and the

blank will be used in the database. The blank cannot be replaced by zero since the

data of net income is to calculate the earnings volatility if zero is used, the figure of

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earnings volatility will be inaccuracy.

The change in cash flow in the data is used to calculating the cash flow volatility and

its observation period is between 1996 and 2004. As the above inherent problem we

discussed, the blank will be used in the data set instead of zero since the result of cash

flow volatility will be different if using zero in the database.

The examination period of dividends is from 1996 to 2004. Again, zero is not using in

this kind of data in order to prevent the inaccurate figure of dividends volatility.

The volatility of dividends, earnings volatility, and the log of revenue, the volatility of

cash flow and the market price of share volatility are all used in the regression test.

The following section will be illustrated these five terms in details.

3.2. Data correction

The followings tables show the basic statistics from 2001 to 2004 and the all set of

data.

Statistics of 2001

Future Earnings Dividend Cash flow Stock price Log of

earnings01 volatility01 volatility01 volatility01 volatility01 revenue01

Mean -12.52748 .74445 .33791 -1.49613 .17883 19.69622

Median -.16190 .42790 .22470 .00000 .13928 20.80124

Std. Deviation 174.647905 8.029394 .659479 24.059822 .169798 5.314978


Minimum -2571.000 -39.696 -7.283 -222.366 .000 .000

Maximum 79.075 84.689 2.236 107.178 .952 25.518

Percentiles 25 -1.01925 .00000 .11150 -3.00055 .04484 20.03011

75 .15230 .94525 .52930 2.89915 .26645 21.72921

Table 2

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Statistics 2002

Future Earnings Dividend Cash flow Stock price Log of

earnings02 volatility02 volatility02 volatility02 volatility02 revenue02

Mean -1.38352 -2.44861 .37934 1.39962 .22659 20.03230

Median -.11500 .42050 .24400 1.21170 .20159 20.81785

Std. Deviation 18.109457 22.346507 .388578 33.445667 .178584 4.779067

Minimum -219.391 -240.654 .000 -171.630 .000 .000

Maximum 83.065 14.978 2.236 308.847 1.130 25.438

Percentiles 25 -.84170 .00000 .13195 -2.71760 .10888 20.12867

75 .39835 1.00620 .52195 3.88720 .28956 21.75486

Table 3

Statistics of 2003

Future Earnings Dividend Cash flow Stock price Log of

earnings03 volatility03 volatility03 volatility03 volatility03 revenue03

Mean .92549 .07883 .39673 4.01596 .26097 20.53465

Median -.05880 .40390 .23370 1.45070 .21999 20.94361

Std. Deviation 23.197943 10.099289 .413402 47.486530 .219199 3.906014

Minimum -211.276 -122.207 .000 -150.146 .000 .000

Maximum 193.667 53.774 2.236 443.497 1.474 25.590

Percentiles 25 -1.07035 -.74885 .12840 -2.96475 .11497 20.21795

75 .40300 1.16840 .56480 4.26945 .34775 21.87809

Table 4

Statistics of 2004

Future Earnings Dividends Cash flow Stock price Log of

earnings04 volatility04 volatility04 volatility04 volatility04 revenue04

Mean -1.15721 .28655 .38056 .58977 .26103 20.71949

Median -.03160 .41500 .21880 1.59220 .20619 21.05848

Std. Deviation 12.741034 5.995988 .424100 31.057597 .195523 3.656774

Minimum -119.667 -28.356 .000 -287.673 .000 .000

Maximum 58.667 60.228 2.236 195.215 1.105 25.751


Percentiles 25 -.93485 -1.01175 .11880 -3.13105 .12015 20.35305

75 .29615 1.09695 .52260 4.77735 .35637 21.95007

Table 5

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Statistics of all observations

Earnings Dividend Cash flow Stock price

Future earnings volatility volatility volatility volatility Log of revenue

Mean -3.53568 -.33470 .37364 1.12730 .23185 20.24566

Median -.10650 .41800 .22740 1.20895 .19366 20.92383

Std. Deviation 88.786812 13.281133 .483559 35.055764 .194317 4.474868

Minimum -2571.000 -240.654 -7.283 -287.673 .000 .000

Maximum 193.667 84.689 2.236 443.497 1.474 25.751

Percentiles 25 -.96113 .00000 .12073 -2.96098 .09287 20.18972

75 .32285 1.02685 .53163 3.69305 .31934 21.84974

Table 6

Since the database includes a wide range of data in different variables, for the

accuracy of the results, the database is going to be delete extreme observations. In

order to delete extreme observations in database, the acceptable range should be

between the mean value by adding and less 3 standard deviations for all independence

variables. This will be done in the overall database and the result is shown as the

following:

Statistics

Earnings Dividend Cash flow Stock price

Future earnings volatility volatility volatility volatility Log of revenue

Mean -.57436 .04154 .36235 .89572 .22213 21.17257

Median -.10600 .41550 .22340 1.21275 .19134 21.00651

Std. Deviation 16.479036 4.749915 .364403 14.729684 .171628 1.137359

Minimum -219.391 -39.696 .000 -84.751 .000 15.425

Maximum 193.667 26.817 1.733 102.173 .811 25.751

Percentiles 25 -.96090 .00000 .11965 -2.84340 .09115 20.29344

75 .32370 1.01135 .51775 3.66903 .31497 21.88571

Table 7

Table 7 shows the acceptable range of all data. The values of all independence

variables now have been refreshed; no extreme observations are existed in the

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database. Afterwards, the data will be tested for the significant factors of the dividend

policy in the section 4.

3.3. Methodology

In the research I will use regression analysis to test the data for UK companies from

their financial statements to see if results are consistent with earlier studies. In

addition, factor analysis can be used for testing the result from regression part in order

to find out which factors are most important to influence dividends policy.

The model in this research is based on Barclay, Smith, and Watts (1995) and Casey,

Dickens, and Newman (2002) models in order to find out the determinants of

dividends policy because Barclay, Smith, and Watts (1995) find investment

opportunity, regulation and size are affecting the dividends policy in industrial firms.

Casey, Dickens, and Newman (2002) use a similar approach but not identical

variables for testing banking firms. As the result of Casey, Dickens, and Newman

(2002), investment opportunities, size, agency problems, dividends history and risk

are all influencing the dividends policy.

In this research, there are several independent factors are going to be tested. This

paper is going to measure the dividends policy, thus the dependant variable should be

the dividend yield for testing other factors which can influence dividends policy. The

reason not using the amount of dividends is the difference between the companies is

fluctuating so much and in order to be comparable, the dividend yield is reasonable to

view their actual performance on dividends policy.

In Barclay, Smith, and Watts (1995) and Casey, Dickens, and Newman (2002) models,

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the both set a dummy variable as a regulation factor. In this research, the regulatory

dummy variable will be ignored because the data base is cross section which includes

many industries. The regulatory department or unit will be different from each other,

and then the regulation dummy is became no meaning in the research. In addition,

some sectors may not have regulatory unit for monitoring such as retail sales sector.

There are numbers of factor will be tested in the research. The first one is future

earnings since most empirical evidence show that either shareholders or the

management of companies have focused on this area very much. If the future earnings

cannot be maintained at a particular level or become an uncertainty, it will give a

signal that the company is taking more risk in the future. Furthermore, the dividends

are come from the earnings; therefore it directly affects shareholders’ wealth.

Bhattacharya (1979) and Miller and Rock (1985) explain how management can use

dividends to signal a true value of the firm. Miller and Modigliani (1961) illustrate

that investors are likely to interpret a change in dividends rate as the change in

management views of future earnings prospects for the company. On the other hand,

the company has a greater expected earning, the company should pay higher current

dividends and then there is a positive relationship between the dividend yield and

future earnings. The measure of the future earnings is the percentage of change in net

income over next year.

The second one is size factor. In Barclay, Smith, and Watts (1995), the size factor is

defined as the natural log of real sales. In this research, the size factor is view as the

natural log of sales/turnover since the database is according to the amount of turnover

to find top 250 UK companies from the search engine. Companies with higher

turnover or revenue imply that companies should have lower probability of

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bankruptcy and the level of dividends should paid more if companies can generate

higher revenue. In addition, high the dividend yield will imply companies with a few

growth opportunities and little incentive to invest, the ended result is to influence the

next year revenue and the target dividends payout. Therefore, it can be assumed that

the positive relationship is existed between the size and the dividend yield.

The third independent factor is stock price volatility. Baskin (1989) points out that the

relationship between stock return volatility and the underlying risk in the firm’s

product market means that the choice of the firm’s optimal dividends policy will be

affected. Furthermore, stock price of small companies is more unstable that the stock

price of large companies. This refers to small firms may be subjected to high volatility

and illiquidity; therefore it may affect the choice of dividends policy. Baskin (1989)

also suggests the stock with a high the dividend yield will be less fluctuation since

high the dividend yields imply near term cash flow and the high the dividend yield

stocks are expected to be trade at a lower price. In the research of Brown, Finn and

Hancock (1977), it finds that dividends and profits report have the immediate impact

to the stock price directly. If the larger change in dividends, then the greater change in

the stock price. Miller and Rock (1985) say that if companies distribute their

dividends, at the same time, companies can provide the earnings announcement;

investors are likely to have more confidence in the firms’ ability. It further suggests

can change or manage the volatility of stock price by means of dividends policy.

Stock price volatility is calculated as the coefficient of variation by using past three

years’ annual average stock price. This means the stock price volatility of 2004 is

measured by the coefficient of variation from 2001 to 2003. Then the stock price

volatility of 2003, 2002 and 2001 are measured by the coefficient of variation from

2000 to 2002, from 1999 to 2001 and from 1998 to 2000. The reason for using

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coefficient of variation is to represent the ratio of the standard deviation to the mean,

and it is a useful statistic for comparing the degree of variation from one data series to

another, even if the means are dramatically different from each other. As the above

discussion, I expect stock price volatility will have inverse relationship with the

dividend yield. It means low the dividend yield may display more stock price

volatility and vice versa.

The forth factor is the pattern or continuity of past dividends. In the real world, most

managers and directors believe that companies pay a steady stream of dividends in

short run is preferable because shareholders prefer the stable dividends paid rather

than a significant change in dividends. Fama and Babiak (1968) examined several

models to explain the dividends behaviour and concluded that managers prefer a

stable dividends policy rather than any major change in dividends policy. Pruitt and

Gitman (1991) also found that prior years' dividends are the important influence on

current dividends. Other empirical researches also accept this view. As the empirical

evidence proves the importance of dividends stability, the pattern of dividends has a

considerably influence to dividends policy. On the other hand, the company

determines how much dividends should be paid for this year; the company should take

the past years’ dividends into account. In theory, if one company is in the same sector,

it will undertake the same level of risk to other companies in the same industry. On

the other hand, the earnings of individual company should not be fluctuated too much.

Then, the dividends should not be fluctuated too much over than other companies.

The level of dividends paid should be similar to other competitors. Therefore,

companies with higher volatility should pay higher dividends since higher volatility

implies companies are facing more risk than others, and then investors will require

more return of dividends. Thus, this research will focus on this factor by calculating

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its volatility. Dividends volatility is the coefficient of variation using the past five

years’ dividends paid. Dividends volatility of 2004, 2003, 2002 and 2001 are

measured by the coefficient of variation from 1999 to 2003, from 1998 to 2002, from

1997 to 2001 and from 1996 to 2000. The volatility of dividends is expected to have a

positive relationship to the dividend yield.

The fifth testable variable is earnings volatility. Dividends are paid out from the

earnings. On the other hand, investors and managers are aware of the pattern of past

dividends in term of considering the past earnings as well Moh’d, Perry and Rimbery

(1995) state that if a company with an unstable earnings, then the company is not

willing to pay a high dividends. The survey of Pruitt and Gitman (1991) also show the

volatility of earnings is the most concern for most US companies and investors

because it has a signaling effect in term of the prediction the stability of future

earnings. The coefficient of variation is used for measuring the volatility of earnings

which is based on the past five years’ net income. Earnings volatility of 2004, 2003,

2002 and 2001 are measured by the coefficient of variation from 1999 to 2003, from

1998 to 2002, from 1997 to 2001 and from 1996 to 2000. In theory, the company has

large earnings volatility, then the distribution of dividends must be kept at a lower

level, therefore there is a negative effect between the dividend yield and the volatility

of earnings.

The sixth variable is cash flow stability. Bradley, Michael; Capozza, Dennis R.;

Seguin, Paul J. (1998) find that cash flow is one of the uncertainties and this

uncertainty should be taken into account to determine the dividends policy. Baker, H.

Kent; Powell, Gary E (2000) surveyed for 603 New York Stock Exchange (NYSE)

companies and also accepted the stability of cash flow is most important to dividends

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policy. Since cash flow is the basis for providing dividends. In order to maintain the

stable dividends paid, management must consider the cash flow of companies to

prevent any unexpected condition that can influence the target dividends paid. For

capturing the stability of cash flow, the observation period is from 1996 and 2004.

The measure of cash flow stability is the coefficient of variation by using the past five

years’ net change in cash flow. Cash flow stability of 2004, 2003, 2002 and 2001 are

measured by the coefficient of variation from 1999 to 2003, from 1998 to 2002, from

1997 to 2001 and from 1996 to 2000. In this research, cash flow volatility is expected

to have a negative relationship to the dividend yield.

In order to compare the empirical evidence, this research is examining the above

factors year by year. Later on, all observations will be tested in once regression in

order to check any difference between the results in particular year and the result in all

year. Since the empirical evidence tend to use all year data and test them in one

regression but including all year data. Therefore, we cannot see whether the

determinants of dividends policy are consistence or not. This research will step a little

forward to see the factors are found in the empirical evidence are right or wrong.

The regression equation is as the following:

DY n = FE n + LOG n + SPVOL n + DVOL n + EVOL n + CFVOL n + e

DY= Dividend yield; FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility;
CFVOL= Cash flow volatility; SPVOL= Stock price volatility; LOG= Log of revenue; e = error term;
n= particular examination year

In case of analyzing individual year from 2001 to 2004, therefore the regression

equation is applied to every single year. In 2004, the equation is:

21
DY 2004 = FE 2004 + LOG 2004 + SPVOL 2004 + DVOL 2004 + EVOL 2004 + CFVOL 2004 + e

For the year of 2003, the equation becomes:

DY 2003 = FE 2003 + LOG 2003 + SPVOL 2003 + DVOL 2003 + EVOL 2003 + CFVOL 2003 + e

For years of 2002 and 2001, the equations are same; the only difference is that all

variables are changed to relevance year for evaluating the dividend policy. After

examining all individual years, all observations will be ran into same equation and

look for any difference between individual years.

DY all = FE all + LOG all + SPVOL all + DVOL all + EVOL all + CFVOL all + e

Note: all= all observations

4. Results

4.1. Analysis of the results of 2001

4.1.1. Result of correlation of 2001

First of all, the assumptions and the determinants of dividends policy are made in this

research, however, we need to check those testable factors whether there has

multicollinearity or not. If some of variables are highly correlated to each other, then

we should ignore the one which is highly correlated because highly correlated factor

means those factors can be concluded into one factor, therefore the accuracy of the

result is also influenced. Figure 1.1 shows the interrelationship between all factors

and the dividend yield in 2001. In figure 1.1, it shows there has no factor is correlated

to each variable highly. On the other hand, every factor is tested in this research can

be viewed as the unique factor that do not have a significant influence other factors. In

case of multicollinearity problem, it is a potential risk to the database in term of all

22
single factors, therefore the following results are shown whether multicollinearity is

existed or not by using Variance Inflation Factor (VIF) which is shown in the result of

regression analysis. By the result of figure 1.1, it supports the assumptions of this

research merely. Log of revenue is the size factor in this research, the value of the

correlation is 0.074 that proves there is a positive relationship to the dividend yield.

The volatilities of cash flow, stock price and earnings all have a negative value; it is

totally match with this research assumptions. Dividends volatility is a negative value,

which shows the company is willing to pay lower dividends when it is with higher

dividends volatility. This is not matched with the research assumption of dividend

volatility. The value of future earnings is -0.110 that means the assumption of future

earnings is not correct at this stage. The significance levels of all factors are larger

than the critical value of 0.05 that means the correlations are not statistically

significant.

4.1.2. Result of regression analysis of 2001

The interrelationship of correlation is shown in figure 1.1, there has no single factor is

highly correlated to each other, however it cannot be concluded multicollinearity

which is not existed in the data of 2001. In order to check the multicollinearity, the

value of VIF can tell us whether it is existed or not. By convention, a VIF of 10 or

greater signals that multicollinearity is a problem. in figure 1.2, we see the VIF value of

all factors are above 0.9 that can conclude multicollinearity is not occurred in the data of

2001, therefore no independence variable is deleted.

After detecting the multicollinearity is not existed, we go through the result of 2001 in

details. Even the R square is 0.041 which is shown in figure 1.2, however it is close to

the value in Barclay, Smith, and Watts (1995) and Casey, Dickens, and Newman

23
(2002), and then the result confirms the robustness of their findings and supports the

use of their methodology as a base to evaluate the determinants of dividends policy.

However, the adjusted R-square for this model is 0.01 that means those six factors

explain 1% of the variance of the dividend yield. The value matches with Barclay,

Smith, and Watts (1995) and Casey, Dickens, and Newman (2002) closely. This

implies the model in this paper can be used for evaluating the dividend policy.

Nevertheless, the result in figure 1.2 does not support the model in this research

because the statistical significance of the F-ratio for this model is more than 0.05,

which is 0.245 that rejects the model in this research. It means the regression equation

at this stage does not explain a significant proportion of the variance in the dividend

yield. Figure 1.2 confirms the findings in figure 1.1; at the same time we can see the

future earnings and dividend volatility both have a negative sign in the column of

standardized coefficient. Both beta value are with negative sign, this finding does not

support the assumption in this research. In figure 1.2, we can compare each

independent variable contribution, the significance of all factors is larger than 0.05,

which cannot conclude all testable factors are affecting the dividends policy

effectively.

However, the result tells us that the testable factors still have some meaning to the

dividend yield. Log of revenue has a strongest explanatory power that refers to the

size factor has the highly correlation to the dividend yield and the expectation of the

research is reached. Companies with higher turnover or revenue should have lower

probability of bankruptcy and the level of dividends should paid more if companies

can generate higher revenue. Furthermore, high the dividend yield will imply

companies with a few growth opportunities and little incentive to invest, the ended

result is to influence the next year revenue and the target dividends payout. Other

24
remaining factors are all to have a negative relationship to the dividend yield.

The future earnings and dividend volatility still has a negative value in the beta

column that is challenging this research expectations as this stage. Stock price

volatility, the volatility of cash flow and the earnings volatility are with negative sign;

it refers to the change in financial figures in the term of earnings and cash flow. These

changes can lead the dividend paid out amount. No matter in the result of the

regression analysis is insignificant. In reality, it provides considerably influence to the

dividend paid. This view is matched with the empirical evidence.

Stock price volatility is affected by many factors such as the criticism of the particular

sector or the degree of the earnings announcement. In the figure 1.2, the sign of stock

price volatility is reached the research expectation which means companies with lower

stock price volatility should pay higher dividends. According to the above results,

they do not prove any evidence to the testable factors that are the determinants of

dividends policy at this stage but the views of the empirical can be ascertained.

25
Figure 1.1 Correlations of 2001

CFVOL SPVOL
DY 01 FE 01 EVOL 01 DVOL 01 LOG 01
01 01

Correlation DY 01 1 -0.1105 -0.0859 -0.1083 -0.0340 -0.0739 0.0738

FE 01 -0.1105 1 0.0512 0.1001 -0.0295 0.0111 0.0261


EVOL 01 -0.0859 0.0512 1 -0.0233 -0.0241 0.0935 -0.0107
DVOL
-0.1083 0.1001 -0.0233 1 0.0005 0.0324 0.0490
01
CFVOL
-0.0340 -0.0295 -0.0241 0.0005 1 -0.0152 0.1327
01
SPVOL
-0.0739 0.0111 0.0935 0.0324 -0.0152 1 -0.0568
01
LOG 01 0.0738 0.0261 -0.0107 0.0490 0.1327 -0.0568 1
Sig.
DY 01 . 0.0626 0.1168 0.0663 0.3191 0.1528 0.1534
(1-tailed)
FE 01 0.0626 . 0.2392 0.0824 0.3416 0.4390 0.3590
EVOL 01 0.1168 0.2392 . 0.3738 0.3691 0.0974 0.4411
DVOL
0.0663 0.0824 0.3738 . 0.4970 0.3269 0.2486
01
CFVOL
0.3191 0.3416 0.3691 0.4970 . 0.4167 0.0326
01
SPVOL
0.1528 0.4390 0.0974 0.3269 0.4167 . 0.2157
01
LOG 01 0.1534 0.3590 0.4411 0.2486 0.0326 0.2157 .
DY= Dividend yield; FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility;
CFVOL= Cash flow volatility; SPVOL= Stock price volatility; LOG= Log of revenue

26
Figure 1.2 Hierarchical Regression Analysis

Standardized coefficients - β
Dividend yield
Independent
Variables
β Sig. Tolerance VIF

FE 01 -0.0993 0.1704 0.9856 1.0146


EVOL 01 -0.0781 0.2799 0.9873 1.0129
DVOL 01 -0.1024 0.1572 0.9857 1.0145
CFVOL 01 -0.0508 0.4836 0.9808 1.0196
SPVOL 01 -0.0582 0.4204 0.9867 1.0135
LOG 01 0.0840 0.2482 0.9761 1.0244

Model summary
R2 0.041
2
Adjusted R 0.01
F 1.332
Sig. 0.245

FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility; CFVOL= Cash flow
volatility; SPVOL= Stock price volatility; LOG= Log of revenue

27
4.2. Analysis of the results of 2002

For checking the influence of the factors, one year result cannot tell us anything. Then

the results from 2002 to 2004 may give the indication as the determinants of dividend

policy of UK top 250 companies.

4.2.1. Result of correlation of 2002

Figure 2.1 is the result of correlation for all variables. It confirms the testable factors

are independent and not correlated to each other. However, the findings in figure 2.1

are quite different to the correlation result of 2001(figure 1.1). Firstly, the value of

earnings volatility in 2001 is a negative to the dividend yield but it is changed to a

positive sign in 2002. There should have other criteria which can influence the factor

of earnings volatility since the research assumption of earnings volatility does not

hold. However, the significance level is greater than the critical value of 0.05 which

mean the correlations to dividend yield is not statistically significant.

Cash flow volatility is changed from negative to positive. However, it cannot prove

the assumption in this research is incorrect because it seemed to be fifty-fifty chance

in 2001 and 2002. Again, the correlation is not significant to dividend yield. The size

factor and the stock price volatility are consistent with previous year’s result which

ascertains the research assumptions. Once again, dividend volatility is on a negative

sign and it is against the research expectation. Future earnings are with positive sign

in 2002 and the assumption of the research can be confirmed this time.

There has no surprise since no factor is statistically significant to dividend yield; the

end result is same as the previous year result. Two consecutive years’ results are same

in term of the level of significance. Nevertheless, the correlation result of 2002 is

28
quite different to the correlation result of 2001(figure 1.1) except the significance

levels are all larger than the critical value of 0.05.

4.2.2. Result of regression analysis of 2002

First of all, the multicollinearity cannot be found in the data of 2002 since the VIF

levels of all factors are in acceptable range. This does not break the rule of thumb is

that a VIF of 10 or more.

Figure 2.2 refuses the methodology in this research is suitable for evaluating the

determinants of dividends policy because the adjusted R-square is -0.022 which is

worse than the value in figure 1.2. This research model can explain 0 percents of the

variance in the dividend yield. Six testable factors are seemed to have no explanatory

power to the dividend yield in 2002. Furthermore, figure 2.2 shows the statistical

significance of F-ratio for the model is greater than 0.05 that means the regression

equation at this stage cannot explain a significant proportion of the variance in the

dividend yield. Thus the methodology and the model in the research cannot be

approved by the data from 2002.

The data from 2001 generate the regression results (figure 1.2) to support the factors

of dividends policy and the use of methodology. Unfortunately, the findings in 2002

(figure 2.2) has rejected the model for evaluating the determinants of dividends policy

effectively. If the model and methodology are incorrect, the next thing we conserve is

why two year data generate two quite different results. One possible answer is some

factors are affected deeply or these six independence variables are not the

determinants of the dividend policy in 2002.

29
Ignoring the problem of the prediction power of the model, figure 2.2 provides the

result from the regression for the data from 2002. We see that all factors are still not

significant to the dividend yield. The major difference between figure 1.2 and figure

2.2 is except the log of revenue and stock price volatility remain unchanged and

additionally both are all satisfied the assumption of the research, most factors are not

fulfilled the research expectation. Firstly, dividend volatility is consistent with the

regression result of 2001(figure 1.2) but the sign of dividend volatility is opposite to

the expectation of the research. The assumption of the research to dividend volatility

does not hold again that implies research assumption may be defined in the wrong

direction.

Earnings volatility is with positive sign in 2002. The reason of the change may be

some companies want to compensate the low dividend paid in last year, thus firms

paid a higher dividends in 2002. Another reason may some firms had a lower

profitability in 2001, in order to capitalise continually in the market, companies were

willing to pay much dividends to their investors that was also a signal to investors

companies’ future were secured.

Cash flow volatility cannot reach the research expectation this time which rejects the

finding in the regression result of 2001(figure 1.2). Due to the different results are

shown in 2001 and 2002, the effect of this factor cannot be foreseen, then the overall

performance needs to be depending on remaining regression results.

At this stage, the only conclusion is the model in the research cannot evaluate the

determinants of the dividend policy effectively in the year of 2002.

30
Figure 2.1 Correlations of 2002

CFVOL SPVOL
DY 02 FE 02 EVOL 02 DVOL 02 LOG 02
02 02

Correlation DY 02 1 0.0356 0.0371 -0.0796 0.0258 -0.0066 0.0250

FE 02 0.0356 1 -0.1111 -0.0662 -0.0175 0.0276 0.1945


EVOL 02 0.0371 -0.1111 1 -0.1210 -0.0904 -0.0854 -0.1294
DVOL
-0.0796 -0.0662 -0.1210 1 -0.0966 0.0672 0.0449
02
CFVOL
0.0258 -0.0175 -0.0904 -0.0966 1 0.1838 -0.0569
02
SPVOL
-0.0066 0.0276 -0.0854 0.0672 0.1838 1 -0.0627
02
LOG 02 0.0250 0.1945 -0.1294 0.0449 -0.0569 -0.0627 1
Sig.
DY 02 . 0.3117 0.3042 0.1355 0.3610 0.4638 0.3649
(1-tailed)
FE 02 0.3117 . 0.0620 0.1801 0.4046 0.3517 0.0034
EVOL 02 0.3042 0.0620 . 0.0469 0.1057 0.1187 0.0364
DVOL
0.1355 0.1801 0.0469 . 0.0907 0.1765 0.2678
02
CFVOL
0.3610 0.4046 0.1057 0.0907 . 0.0052 0.2158
02
SPVOL
0.4638 0.3517 0.1187 0.1765 0.0052 . 0.1931
02
LOG 02 0.3649 0.0034 0.0364 0.2678 0.2158 0.1931 .
DY= Dividend yield; FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility;
CFVOL= Cash flow volatility; SPVOL= Stock price volatility; LOG= Log of revenue

31
Figure 2.2 Hierarchical Regression Analysis

Standardized coefficients - β
Dividend yield
Independent
Variables
β Sig. Tolerance VIF

FE 02 0.0299 0.6907 0.9450 1.0582


EVOL 02 0.0375 0.6181 0.9446 1.0587
DVOL 02 -0.0718 0.3363 0.9586 1.0432
CFVOL 02 0.0248 0.7422 0.9428 1.0607
SPVOL 02 -0.0021 0.9773 0.9496 1.0530
LOG 02 0.0285 0.7049 0.9400 1.0639

Model summary
R2 0.010
2
Adjusted R -0.022
F 0.299
Sig. 0.937

FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility; CFVOL= Cash flow
volatility; SPVOL= Stock price volatility; LOG= Log of revenue

32
4.3. Analysis of the results of 2003
The results are found in 2001 and 2002 which confirm some of the research

expectations between six testable factors and the dividend yield but some research

assumptions do not hold. Moreover, the significance levels of testable factors are not

fit to the research expected. For further investigation, the results found in 2003 may

indicate other insight to dividends policy.

4.3.1. Result of correlation of 2003

Figure 3.1 shows the relationship between the testable factors and the dividend yield

and the inter-relationship to those testable factors themselves. The notable factors are

earnings volatility and stock price volatility since these two factors are inconsistent

with the correlation result of 2002 (figure 2.1).

Stock price volatility is the first time with a positive sign to dividend yield; however it

is not statistically significant to the correlation of dividend yield. By the review of the

results in 2001 and 2002 (figure 1.1 and figure 2.1), the significance level are all

greater than the critical value and the assumed relationship to the dividend yield is

likely not to be broken because two of three correlation results provide an equal view.

Earnings volatility in figure 3.1 tell us the negative relationship to the dividend yield

is existed, which is confirmed the result in 2001 (figure 1.1) and reached the research

expectation. The finding in future earnings confirms the previous year result and also

matches with the research expectation.

Above three variables can be classified as the unstable factors to the dividend yield at

this stage since two of three years results confirm the research assumption, however

33
the results cannot be unified. Further investigation to these three variables is necessary

in later.

Cash flow volatility in figure 3.1 is shown a positive value that is against the research

expectation but the result is consistent with the correlation result of 2002 (figure 2.1).

If future earnings, stock price volatility and earnings volatility may be unstable factors,

then the volatility of cash flow should be unknown factor in this research

Dividends volatility is shown a negative effect to the dividend yield. The result in

2003(figure 3.1) is matched with the correlation results in 2001 and 2002. Three years

results find out the similar outcome to the dividend yield. The research assumption for

dividend volatility is incorrect can be arguable.

Log of revenue in figure 3.1 is a positive value and this result is matched with the

correlation results of 2001(figure 1.1) and 2002(figure 2.1). All correlation results

prove the relationship to the dividend yield is positive which totally reaches the

expectation of the research and the size factor is likely constant every year.

In addition, no variable is highly correlated to other variables, multicollinearity is not

basically found in figure 3.1. Nevertheless, no correlation to the dividend yield is

statistically significant.

4.3.2. Result of regression analysis of 2003

The value of VIF for all independence variables is not break the rule, thus the problem

of multicollinearity does not existed that refers to no independence variable need to be

deleted.

34
In figure 3.2 of regression analysis, the adjusted R-square value is negative value of

-0.013; the result is similar to the regression result of 2002(figure 2.2) and the

statistical significance of the F-ratio for the model is greater than 0.05 which means

the model cannot explain a significant proportion of the variance in the dividend yield.

The methodology is likely to invalid for year if 2002 and 2003. It may indicate some

factors may be missed in the regression equation for evaluating the dividends policy

in 2002 and 2003

Figure 3.2 provides a little different result to figure 2.2. As the column of the beta

value, future earnings have a positive sign to the dividend yield which is same as the

result of 2002 in figure 2.2. It proves the assumption in the research merely but not

significantly. In addition, the significance level in figure 3.2 is larger than the critical

value; it means the importance of future earnings to dividends policy is no longer

existed. Dividends volatility is still not matched with the expectation in this research

because the negative value is shown again but the negative value is consistent with

previous year’s results.

Log of revenue is a positive value to the dividend yield that implies the assumption of

the size factor is correct. Regression results from 2001 to 2003 are likely unified

which provide a strong evidence to the research assumption for the size factor.

The beta value of earnings volatility is on negative sign which is satisfied to the

expectation of the research. This also confirms the finding in figure 1.2. Cash flow

volatility and stock price volatility have positive value in the column of beta value.

35
Both are not qualified as the research expectations because all variables are not

significantly influenced to the dividend yield, no variable can be the major

determinants of the dividend policy theoretically, nevertheless, six variables do have

an influence to the dividend policy in real life merely.

36
Figure 3.1 Correlations of 2003

CFVOL SPVOL
DY 03 FE 03 EVOL 03 DVOL 03 LOG 03
03 03

Correlation DY 03 1 0.0580 -0.1047 -0.0063 0.0488 0.0179 0.0522

FE 03 0.0580 1 -0.0495 -0.0391 0.0685 -0.1370 0.0122


EVOL 03 -0.1047 -0.0495 1 -0.0347 -0.0730 0.1000 -0.0678
DVOL
-0.0063 -0.0391 -0.0347 1 -0.2022 0.0934 0.0261
03
CFVOL
0.0488 0.0685 -0.0730 -0.2022 1 0.1326 0.0710
03
SPVOL
0.0179 -0.1370 0.1000 0.0934 0.1326 1 -0.0284
03
LOG 03 0.0522 0.0122 -0.0678 0.0261 0.0710 -0.0284 1
Sig.
DY 03 . 0.2084 0.0710 0.4650 0.2473 0.4009 0.2327
(1-tailed)
FE 03 0.2084 . 0.2443 0.2921 0.1689 0.0272 0.4325
EVOL 03 0.0710 0.2443 . 0.3135 0.1535 0.0805 0.1711
DVOL
0.4650 0.2921 0.3135 . 0.0021 0.0953 0.3576
03
CFVOL
0.2473 0.1689 0.1535 0.0021 . 0.0312 0.1603
03
SPVOL
0.4009 0.0272 0.0805 0.0953 0.0312 . 0.3456
03
LOG 03 0.2327 0.4325 0.1711 0.3576 0.1603 0.3456 .
DY= Dividend yield; FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility;
CFVOL= Cash flow volatility; SPVOL= Stock price volatility; LOG= Log of revenue

37
Figure 3.2 Hierarchical Regression Analysis

Standardized coefficients - β
Dividend yield
Independent
Variables
β Sig. Tolerance VIF

FE 03 0.0549 0.4513 0.9727 1.0281


EVOL 03 -0.1005 0.1681 0.9743 1.0264
DVOL 03 -0.0060 0.9351 0.9386 1.0654

CFVOL 03 0.0290 0.6997 0.9150 1.0929

SPVOL 03 0.0335 0.6524 0.9335 1.0712

LOG 03 0.0437 0.5449 0.9882 1.0119

Model summary
R2 0.018
Adjusted R2 -0.013

F 0.585
Sig. 0.742

FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility; CFVOL= Cash flow
volatility; SPVOL= Stock price volatility; LOG= Log of revenue

38
4.4. Analysis of the results of 2004

For three previous years’ results, we can definitely confirm log of revenue is satisfied

the research expectation. Future earnings, earnings volatility and stock price volatility

are fit to research assumption reasonably. Dividends volatility is out of the research

expectation and cash flow volatility is always challenging the assumption of the

research In order to confirm the research expectation to dividends policy, results of

2004 play an important role to confirm or reject the research assumptions.

4.4.1. Result of correlation of 2004

Figure 4.1 provides information about the correlation relationship between six factors

and the dividend yield as a dividends policy. Future earnings are changed to negative

sign but it still not statistically significant to the dividend yield. Log of revenue is with

a positive sign and the correlation is significant this time. Stock price volatility in

figure 3.1 is positive. In figure 4.1, we can see the value turns to negative which is

matched with the correlation results of 2001 and 2002. The value of the dividend

volatility still is negative and the notable place is that the significance level is smaller

than the critical value of 0.05, which means the correlation to the dividend yield, is

statistically significant. Earnings volatility is now matched with the finding in

2003(figure 3.1). The real surprise is the volatility of cash flow, its value is became

negative after positive results in 2002(figure 2.1) and 2003(figure 3.1)

4.4.2. Result of regression analysis of 2004

The column of VIF tells us whether the multicollinearity problem is occurred or not.

By the rule of VIF, all variable values are smaller than 1.1, then this can conclude all

six variables are unique and not grouped into same factor.

39
In figure 4.2, the adjusted R-square of the model is 0.053 that means all six factors

together explain 5.3% of the variance of the dividend yield. It confirms the use of the

methodology. The model in Barclay, Smith, and Watts (1995) and Casey, Dickens, and

Newman (2002) look like effectively in 2004.The statistical significance of the F-ratio

for the model is 0.012, which is lower than the critical value of 0.05. It explains a

significant proportion of the variance in the dividend yield that means the model in

this research can be confirmed and to evaluate the determinants of dividends policy

effectively.

In figurer 4.2, the beta values of the factors are all negative sign except the log of

revenue. Future earnings do not fulfill the expectation in 2004. The result in earnings

volatility is consistent to the regression result of 2003(figure 3.2). Dividend volatility

is on negative sign and the level of significance is 0.003 which tells us dividend

volatility is one of the determinants of the dividend policy in 2004. Cash flow

volatility has a negative value in the beta column which confirms the expectation of

the research; however it cannot conclude the research assumption is correct because it

is fifty-fifty probability from 2001 to 2004. Stock price volatility is reached the

expectation this time. Except the volatility of dividend, above discussed variables are

not significant to the dividend yield that implies these variables are not the major

factors of the dividend policy in 2004.

Log of revenue keeps constant in 2004 and it has a significance influence to the

dividend yield. This point out the size factor can be the determinant of the dividend

policy in 2004.

40
Figure 4.1 Correlations of 2004

CFVOL SPVOL
DY 04 FE 04 EVOL 04 DVOL 04 LOG 04
04 04

Correlation DY 04 1 -0.0681 -0.0323 -0.2159 -0.0586 -0.0823 0.1617

FE 04 -0.0681 1 -0.0120 0.0110 0.0744 -0.0889 0.0140


EVOL 04 -0.0323 -0.0120 1 0.0358 0.0029 -0.0700 -0.0775
DVOL
-0.2159 0.0110 0.0358 1 -0.1159 0.1497 -0.0268
04
CFVOL
-0.0586 0.0744 0.0029 -0.1159 1 -0.0825 -0.1421
04
SPVOL
-0.0823 -0.0889 -0.0700 0.1497 -0.0825 1 -0.0923
04
LOG 04 0.1617 0.0140 -0.0775 -0.0268 -0.1421 -0.0923 1
Sig.
DY 04 . 0.1703 0.3259 0.0011 0.2060 0.1245 0.0114
(1-tailed)
FE 04 0.1703 . 0.4332 0.4387 0.1487 0.1064 0.4226
EVOL 04 0.3259 0.4332 . 0.3085 0.4838 0.1635 0.1388
DVOL
0.0011 0.4387 0.3085 . 0.0520 0.0177 0.3537
04
CFVOL
0.2060 0.1487 0.4838 0.0520 . 0.1241 0.0229
04
SPVOL
0.1245 0.1064 0.1635 0.0177 0.1241 . 0.0978
04
LOG 04 0.0114 0.4226 0.1388 0.3537 0.0229 0.0978 .
DY= Dividend yield; FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility;
CFVOL= Cash flow volatility; SPVOL= Stock price volatility; LOG= Log of revenue

41
Figure 4.2 Hierarchical Regression Analysis

Standardized coefficients - β
Dividend yield
Independent
Variables
β Sig. Tolerance VIF

FE 04 -0.0678 0.3328 0.9859 1.0143


EVOL 04 -0.0178 0.7986 0.9854 1.0148
DVOL 04 -0.2104 0.0033 0.9630 1.0384

CFVOL 04 -0.0618 0.3851 0.9541 1.0481

SPVOL 04 -0.0501 0.4827 0.9495 1.0531

LOG 04 0.1423 0.0458 0.9609 1.0407

Model summary
R2 0.081
Adjusted R2 0.053

F 2.82
Sig. 0.012

FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility; CFVOL= Cash flow
volatility; SPVOL= Stock price volatility; LOG= Log of revenue

42
4.5. Summary of 4 years results

Figure 5 provides the summary for 4 above regression results from 2001 to 2004. The

results of log of revenue provide a solid evidence to prove the research expectation

and confirm the empirical evidence. The variable of the size factor is the only one

which is totally satisfied the research expectation and the empirical evidence.

The expectation for future earnings is to have a positive relationship to the dividend

yield. In figure 5, there has no adequate evidence to meet the research expectation

since 2 of 4 results indicate the negative relationship is existed but positive

relationship to the dividend yield is proved by remaining results. Therefore, future

earnings can be assumed as an unstable factor to the dividend policy. It means this

research does not find out evidence to show future earnings can be the determinant of

the dividend policy for UK companies. It only points out future earnings give an

influence to the dividend policy but not reasonably. If the sign is positive, the research

assumption is reached. If the sign is positive, one possible is companies expect the

better future economy or market share, and then companies like to keep higher level

of reserve retention in order to expand their competitive later on. Therefore, the

inverse relationship is existed. This view can explain why positive and negative

relationships to the dividend yield are found in the results. This end result is fit to the

empirical evidence.

The results of earnings volatility tend to meet this research expectation because

negative values can be found in 3 of 4 results. However, the importance of this factor

seems to be not significantly. The relationship can be ascertained but UK companies

do not concern the earnings volatility as much as the empirical expect.

43
Dividend volatility is always with a negative sign that confirms the relationship to the

dividend yield is negative not positive in UK. First three years results tell us the

negative relationship to the dividend yield but all are not significant to the dividend

yield from 2001 to 2004. In the year of 2004, it has a significance influence to the

dividend yield. One possibility to interpret the negative relationship is risk level

cannot apply into the dividend volatility. The finding in this research is matched up

the empirical evidence simply.

Cash flow volatility has a similar result to the result of future earnings and the

significance levels are all greater than the critical value of 0.05. Same conclusion is

made at this stage, the relationship to the dividend yield is questionable but it still can

affect the dividend policy for UK companies.

Stock price volatility likely reaches this research expectation since 3 of 4 regression

results confirm the empirical evidence. Nevertheless, the significance of stock price

volatility cannot be proved, it has a little effect to the dividend yield only.

By the results from 2001 to 2004, most factors are not consistent, specially the

relationship to the dividend yield. Only two variables keep constant in 4 years results

which are dividend volatility and log of the revenue. All six testable factors are

concluded as the major determinants of the dividend policy by the empirical.

Nevertheless, the findings in this research do not support the empirical evidence

deeply but it ascertains the findings in the empirical.

44
Figure 5 Summary of 4 years regression results

Standardized coefficients - β
Dividend yield
Independent Variables
β Sig.
01 02 03 04 01 02 03 04
FE -0.0993 0.0299 0.0549 -0.0678 0.1704 0.6907 0.4513 0.3328
EVOL -0.0781 0.0375 -0.1005 -0.0178 0.2799 0.6181 0.1681 0.7986
DVOL -0.1024 -0.0718 -0.006 -0.2104 0.1572 0.3363 0.9351 0.0033*
CFVOL -0.0508 0.0248 0.029 -0.0618 0.4836 0.7422 0.6997 0.3851
SPVOL -0.0582 -0.0021 0.0335 -0.0501 0.4204 0.9773 0.6524 0.4827
LOG 0.084 0.0285 0.0437 0.1423 0.2482 0.7049 0.5449 0.0458*

Model summary
01 02 03 04
2
R 0.041 0.01 0.018 0.081
Adjusted R2 0.01 -0.022 -0.013 0.053

F 1.332 0.299 0.585 2.82


Sig. 0.245 0.937 0.742 0.012*

FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility; CFVOL= Cash flow
volatility; SPVOL= Stock price volatility; LOG= Log of revenue

*= the value is significance

45
4.6. Overall correlation result for all observations

The reason for testing four years data individually is to investigate six factors from

empirical evidence whether they are consistent annually or not. However, there has no

evidence to show those six factors that can consistent each year since the determinants

of dividend policy tend to be changed every year and also no evidence to point out

which is or are the most importance to dividends policy. At this stage with the above

evidence, this research cannot confirm these six factors are the determinants of

dividends policy certainly. However, this research finds stock price volatility; and

earnings volatility has a negative relationship to dividends policy. This finding is

matched with the research methodology. In addition, there has considerably evidence

to show log of revenue which is a size factor has a positive relationship to dividends

policy. It is also fit to the research expectation. Oppositely, dividends volatility seems

to have a negative relationship to dividends policy which is out of the assumption of

the research. Future earnings and cash flow volatility can be viewed as the unknown

factor because there has no adequate evidence to prove neither they have a positive

nor negative relationship. In the following part, the traditional testing method is used

in the research which is using the same regression equation to test all observations

together in order to find any evidence to prove the empirical evidence and may find

some differences between previous 4 years results.

4.6.1. Result of correlations for all observations

Figure 6.1 shows the interrelationship between the dividend yield and six testable

factors. Firstly, the assumption of future earnings holds in this case. The positive

relationship to the dividend yield is proved by the evidence of top 250 UK companies.

The significance value of future earnings is greater than 0.05 which is 0. 4, the

correlation is not statistically significant. This result is different to the findings in

46
Casey, Dickens, and Newman (2002) which is future earnings is in unexpected sign to

the dividend yield. Moreover, the result in figure 6.1 does not support the evidence

from Moh’d, Perry, and Rimbey (1995) that their research supports the idea which is

companies with higher future growth tend to set a lower dividends because firms

likely maintain the stability of dividends and use much earnings to invest more

opportunities.

Earnings volatility is with a negative value that approves the findings in the result

from 2001 to 2004. In case of cash flow volatility as the unknown factor, the negative

relationship to the dividend yield is found in figure 6.1. Therefore, the research

expectation can be met. Stock price volatility has the negative relationship to the

dividend yield and confirms the expectation of the research as well.

Above three variables are not significantly correlated to the dividend yield because

the significance level of these three variables are all greater than 0.05.

Dividend volatility is once again with negative sign, the research assumption for

dividend volatility does not hold from the beginning to the end. The significance level

of dividend volatility shows the correlation to the dividend yield is statistically

significant. Log of revenue is the only one factor which provides strong evidence to

the research expectation and to the empirical evidence. The notable is its significance

level shows log of revenue is correlated significantly.

4.6.2. Result of regression analysis for all observations

In figure 6.2, the values in the column of VIF for all variables are satisfied the

47
convention rule requirement, multicollinearity cannot be detected in this case.

The adjusted R-square has a positive value of 0.007; this provides strong evidence to

confirm the methodology of this paper and Barclay, Smith, and Watts (1995) and

Casey, Dickens, and Newman (2002). The statistical significance of the F-ratio for the

model is 0.066, which is less than the critical value. This implies the model can

explain a significant proportion of the variance in the dividend yield. On the other

hand, the model in this research can be confirmed and to evaluate the determinants of

dividends policy effectively.

The beta value of future earnings in figure 6.2 is on expected sign that concludes the

research assumption of future earnings is correct since there has other 2 individual

years results obtain a positive relationship to dividend yield. However, the

significance level cannot say future earnings to be the major determinants of the

dividend policy.

The sign of earnings volatility confirms the research expectation which is negative

relationship to dividend yield. Nevertheless, the significance level is larger than the

critical value, therefore it is not the major elements of the dividend policy but earnings

volatility still can be the factors of dividend policy.

The beta value of dividends volatility is a negative value that challenges the research

assumption. In addition, similar results can be found from 2001 to 2004. As the result

of figure 6.2, the significance level is also similar to the regression result of 2004

48
The value of cash flow volatility is consistent with every individual result. By the

results from 2001 to 2004, negative value in 4 years results are consistent, then it

evidences negative relationship between cash flow volatility and dividend yield is

existed. The significance level is larger than the critical value which means cash flow

volatility does not affect dividend policy considerably. This implies that empirical

evidence does not fit to the determinants of dividend policy in UK.

The negative sign is on stock price volatility that the relationship to dividend yield

assumed by research is ascertained. However, the significance level is larger than 0.05

which is not significant to dividend yield as dividend policy.

Log of revenue has a positive value in the term of beta value. This also matches with

the expectation of the research and same results are also found in Barclay, Smith, and

Watts (1995) and Casey, Dickens, and Newman (2002). Nevertheless, none of the

results from 2001 to 2004 and the regression of total observations say log of revenue

as a size factor have an explanatory power to dividend yield as dividend policy.

49
Figure 6.1 Correlations

DY FE EVOL DVOL CFVOL SPVOL LOG

Correlation DY 1 0.0091 -0.0454 -0.0869 -0.0023 -0.0313 0.0688

FE 0.0091 1 -0.0358 -0.0101 0.0426 -0.0665 0.0461


EVOL -0.0454 -0.0358 1 -0.0375 -0.0430 0.0086 -0.0716
DVOL -0.0869 -0.0101 -0.0375 1 -0.1095 0.0856 0.0233
CFVOL -0.0023 0.0426 -0.0430 -0.1095 1 0.0476 0.0036
SPVOL -0.0313 -0.0665 0.0086 0.0856 0.0476 1 -0.0467
LOG 0.0688 0.0461 -0.0716 0.0233 0.0036 -0.0467 1
Sig.
DY . 0.4002 0.1023 0.0075 0.4744 0.1913 0.0271
(1-tailed)
FE 0.4002 . 0.1584 0.3886 0.1170 0.0314 0.0987
EVOL 0.1023 0.1584 . 0.1476 0.1146 0.4052 0.0225
DVOL 0.0075 0.3886 0.1476 . 0.0011 0.0083 0.2577
CFVOL 0.4744 0.1170 0.1146 0.0011 . 0.0917 0.4594
SPVOL 0.1913 0.0314 0.4052 0.0083 0.0917 . 0.0960
LOG 0.0271 0.0987 0.0225 0.2577 0.4594 0.0960 .
DY= Dividend yield; FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility;
CFVOL= Cash flow volatility; SPVOL= Stock price volatility; LOG= Log of revenue

50
Figure 6.2 Hierarchical Regression Analysis

Standardized coefficients - β
Dividend yield
Independent
Variables
β Sig. Tolerance VIF

FE 04 0.0028 0.9383 0.9907 1.0094


EVOL 04 -0.0443 0.2164 0.9903 1.0098
DVOL 04 -0.0899 0.0128 0.9773 1.0233

CFVOL 04 -0.0135 0.7078 0.9805 1.0199

SPVOL 04 -0.0192 0.5927 0.9826 1.0177

LOG 04 0.0668 0.0626 0.9905 1.0096

Model summary
R2 0.015
Adjusted R2 0.007

F 1.979
Sig. 0.066

FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility; CFVOL= Cash flow
volatility; SPVOL= Stock price volatility; LOG= Log of revenue

51
4.7. Overall summary

Firstly, the results from individual year and overall observations tell us that the

research methodology and the model can use to evaluate the determinants of dividend

policy but this research model only explain a less about the dividend policy, at least

the model can say something to dividend policy. However the factors of dividend

policy are not consistent each year. No matter we can observe the factors have a

negative or positive relationship to dividend policy or not. The particular result only

mentions the particular year and the results only support the empirical evidence

merely.

The expected relationship between future earnings and dividend yield can be found,

the empirical evidence of US companies is approved by the sample of top 250 UK

companies. This result is different to the findings in Casey, Dickens, and Newman

(2002) which is future earnings is in unexpected sign to the dividend yield. Moreover,

the results do not support the evidence from Moh’d, Perry, and Rimbey (1995) that

their research supports the idea which is companies with higher future growth tend to

set a lower dividends because firms likely keep a higher retention rate and use much

earnings to invest more opportunities.

Earnings volatility in this research does not prove it is the major concerns of the

dividend policy. Nevertheless, it still can be viewed as one of the factors of

dividends policy since the relationship supports the idea Moh’d, Perry and Rimbery

(1995) which is a company with an unstable earnings, then the company is not willing

to pay a high dividends. On the other hand, companies with higher expected earnings,

companies would like to maintain the level of dividends paid as before. In addition,

the survey of Pruitt and Gitman (1991) also prove the volatility of earnings is the most

52
concern for most US companies and investors. Moreover, it is a signaling effect in

term of the prediction the stability of future earnings. Most companies and investors

pay much attention on the earnings amount. If the volatility of earnings is always at a

high level, firms may like to pay fewer dividends taking an advantage for future

deficits. Since higher expected earnings is viewed as signal of companies running

business in a good direction. If companies have a major change in dividends in a

particular year, it will signalize companies who have a good faith to keep the

performance steadily. However, future is full of uncertainties. Once companies give

an optimal signal to the public, if companies do not fulfill their expected target to pay

higher dividends, the value of companies must be reduced. The sign of earnings

volatility confirms the research expectation which is negative relationship to dividend

yield. Nevertheless, the significance level is greater than the critical value, therefore it

is not the major elements of the dividend policy but earnings volatility still can be the

factors of dividend policy. This means the conclusion of the survey of Pruitt and

Gitman (1991) cannot be proved in UK.

The sign of cash flow volatility supports the research expectation since it is the

uncertainty and should take this factor into account for making a decision to dividends

policy. This view is also found from Bradley, Michael; Capozza, Dennis R.; Seguin,

Paul J. (1998) and the survey in Baker, H. Kent; Powell, Gary E (2000). In order to

maintain the stable dividends paid, management must consider the cash flow of

companies to prevent any unexpected condition that can influence the target dividends

paid. Furthermore, higher cash flow volatility can be made by external financing but it

implies the wealth of investors is significantly affected by outsider such as loan lender.

In addition, investors are undertaking more risk because of the priority of receiving

the benefits. These problems can directly and seriously influence the dividends policy.

53
The negative sign of stock price volatility in the result is matched with the empirical

evidence. Baskin (1989) also suggests the stock with a high the dividend yield will be

less fluctuation. The conclusion of Miller and Rock (1985) suggest that dividends

policy can change or manage the volatility of stock price by means of dividends

policy. The findings in this research confirm the assumption which is low the dividend

yield may display more stock price volatility and vice versa. This indicates stock price

volatility has considerably influence to dividend yield which is also fit to empirical

evidence.

Dividend volatility is a negative sign which is out of the research expectation. It

indicates companies with higher dividends volatility are willing to pay lower

dividends in term of ignoring the risk level of investors. By comparison of all

regression results, all are shown a negative sign on dividends volatility that provides

an adequate evidence to show dividends volatility is completely against the research

assumption of dividends volatility. The research assumption for dividend volatility

is in term of risk level, this means UK companies do not take the view of shareholders

into account for evaluating the dividend policy. Another possibility is higher

dividends volatility may be the earnings of companies are not guaranteed and then

companies will reserve part of the earnings for benefiting next year performance,

companies are not willing to put themselves in danger in this case. Since it is a signal

to the public that companies tend to do more investments in future, then dividends

should be paid for a lower amount. If succeed, future dividends may be increased.

Otherwise, companies still can keep dividends at a lower level, it seems no

disadvantage to companies themselves. As the result of the significance level, this can

conclude the stability of dividends may be concerned by UK companies and it is a

main factor to determine the dividend policy.

54
Log of revenue is on a positive sign and to ascertain the findings from previous results.

In addition, it also confirms the findings from Barclay, Smith, and Watts (1995) and

Casey, Dickens, and Newman (2002). In case of top 250 UK companies, the positive

relationship to the dividend yield can be secured but the size factor does not play an

importance role in the dividend policy.

By comparison of individual results and overall result, the consistence of the dividend

policy factors is doubtful. 4 of 6 variables do not have constant pattern but dividend

volatility and log of revenue are same in every year. This concludes the dividend

policy is not only being depended on those importance factors all the time. The

determinants of the dividend policy can be changed by other criteria such as the

macro environment and the policy of particular companies.

As the regression model results, the model does not have adequate power to evaluate

the dividend policy for UK companies by using 6 empirical factors. The reason why

the model does not fit to evaluate the determinants of dividend policy is some factors

may be missed in the regression. Beside, surveys from Pruitt and Gitman (1991),

Farrelly, Baker, and Edelman (1986) and Baker, Farrelly, and Edelman (1985) point

out there at least fifteen factors which are influencing the dividend policy. Only six of

them are used in the model, therefore the model cannot be satisfies for evaluating the

determinants of dividend policy every year.

5. Limitations

Firstly, in this research, only top 250 companies are taken account into the

qualification and these 250 companies are sorted by the amount of turnover which

does not say the selected firm is definitely in the group of top 250 businesses in the

55
UK. In addition, some observations from top 250 are not in the database because parts

of top 250 firms do not trade their stock in the London Stock Exchange as a main

exchange channel. This means the outcomes of the research cannot fully reflect the

dividend policy to all top 250 UK companies.

Secondly, every individual firm has different listing period that allows the database

cannot be standardized. Due to time consuming, it is impossible to choose which

companies can be qualified to be a sample. In addition, in order to standardize the

database, it needs to observe all UK companies not only top 250 firms because

companies are listed in the different period of time. If setting a range of time period in

top 250 firms, the total qualifications is less than 100. Since the database is not

standardized, the value of six independence variables are also be affected.

Thirdly, the database is made by the search engine that is named as Fame. However,

the search engine provides a limit source of financial statements. Due to this inherent

problem, the gap of the database is filled by exploring every individual financial

statement on their official websites. Nevertheless, the examination period of the

database is from 1996 to 2004. Unfortunately, some official websites do not provide

their early financial statements, and then the one possible way to refresh the database

is to leave it blanket in the relevance part. Zero cannot be replaced the space since it

will affect the value of the coefficient of variation. If the completeness of the database

can be ascertained, then the accuracy of the end results must be influenced.

The forth limitation is only six factors which are tested in this research but there is

over 15 factors in the empirical evidence. This means this research provides an insight

to these 6 testable factors to UK companies only. The model in the research is testing

56
UK companies, and then the end results may not match with the empirical evidence

considerably especially for US corporations.

The fifth limitation is the research approach is different to the empirical because this

research tests the examination year by year and then evaluates all observations again.

Thus, the outcome of this research may be different to those research which are only

ran the regression equation for all observations once.

6. Conclusions

One of the purposes of the research is to investigate any difference is existed between

US and UK companies in term of the factors of the dividend policy because most

empirical are using US companies as bases. In order to achieve this goal, 6 variables

are selected by the importance of the dividend policy from the empirical. Another

objective of the research is to find out whether the consistent of the dividend policy is

existed or not. This research has been tested the dividend policy for top UK

companies in two different way. The first approach is to evaluate 6 determinants of

the dividend policy year by year in order to find out whether there has a

pattern/consistence or not. The consistence of the determinants of the dividend policy

is arguable, however log of revenue has constant finding in all results and the

volatility of dividend have unified pattern as well. Secondly, all observations are

tested by the same regression equation. The end result is that 5 of 6 variables can be

confirmed their relationship to the dividend policy in term of the dividend yield. The

empirical evidence is ascertained by this research. Only dividend volatility is

definitely against the research expectation.

57
This research provides basic view of the dividend policy determinants for UK

companies and evaluates those 6 factors’ effect to the dividend policy. The end results

show variables have some meanings to the dividend policy but the significance does

not meet the expectation of the empirical evidence. Further investigations may be

required in the future.

58
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