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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
In order to evaluate which factor(s) is or are affecting the dividends policy, this paper
dividends policy. Six factors are 1) Future earnings 2) Size factor in this paper is
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
1
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
I would like to thank the Business School of the University of Nottingham for their
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
For the supports from my family, I appreciate my family supports last twelve months.
completion.
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Content
Abstract
Acknowledgements
1. Introduction…………………………………………………………………….5
2. Literature review………………………………………………………………..6
3.1. Data……………………………………………………………………..11
3.3. Methodology……………………………………………………………16
4. Results…………………………………………………………………………..22
3
4.6.1. Result of correlation for all observations………………………46
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
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
most studies do not focus on UK companies. This paper is going to find out
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
policy are the level of current and expected future earnings and the pattern or
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
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
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
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
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
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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
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
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
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
As the preview of the empirical evidence, most researches used similar methodology
for testing the dividend policy, however, there has a question between these
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
outcomes of researches cannot fully reflect other firms who are not in US. 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
3.1. Data
Data source is come from search engine which is called “Fame” to get financial
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 1.2 shows the total observations distribute in four different groups.
Table 1.2 The distribution of the sample in four main categories
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
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
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
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
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 followings tables show the basic statistics from 2001 to 2004 and the all set of
data.
Statistics of 2001
Table 2
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Statistics 2002
Table 3
Statistics of 2003
Table 4
Statistics of 2004
Table 5
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Statistics of all observations
Table 6
Since the database includes a wide range of data in different variables, for the
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
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
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
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
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
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
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
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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
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
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.
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
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
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.
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
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DY 2004 = FE 2004 + LOG 2004 + SPVOL 2004 + DVOL 2004 + EVOL 2004 + CFVOL 2004 + e
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
DY all = FE all + LOG all + SPVOL all + DVOL all + EVOL all + CFVOL all + e
4. Results
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
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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.
The interrelationship of correlation is shown in figure 1.1, there has no single factor is
which is not existed in the data of 2001. In order to check the multicollinearity, the
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
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
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(2002), and then the result confirms the robustness of their findings and supports the
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
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.
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Figure 1.1 Correlations of 2001
CFVOL SPVOL
DY 01 FE 01 EVOL 01 DVOL 01 LOG 01
01 01
26
Figure 1.2 Hierarchical Regression Analysis
Standardized coefficients - β
Dividend yield
Independent
Variables
β Sig. Tolerance VIF
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
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
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
Cash flow volatility is changed from negative to positive. However, it cannot prove
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
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
28
quite different to the correlation result of 2001(figure 1.1) except the significance
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
Figure 2.2 refuses the methodology in this research is suitable for evaluating the
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
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
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
willing to pay much dividends to their investors that was also a signal to investors
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
At this stage, the only conclusion is the model in the research cannot evaluate the
30
Figure 2.1 Correlations of 2002
CFVOL SPVOL
DY 02 FE 02 EVOL 02 DVOL 02 LOG 02
02 02
31
Figure 2.2 Hierarchical Regression Analysis
Standardized coefficients - β
Dividend yield
Independent
Variables
β Sig. Tolerance VIF
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
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
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
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
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.
statistically significant.
The value of VIF for all independence variables is not break the rule, thus the problem
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
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
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
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
36
Figure 3.1 Correlations of 2003
CFVOL SPVOL
DY 03 FE 03 EVOL 03 DVOL 03 LOG 03
03 03
37
Figure 3.2 Hierarchical Regression Analysis
Standardized coefficients - β
Dividend yield
Independent
Variables
β Sig. Tolerance VIF
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
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
2003(figure 3.1). The real surprise is the volatility of cash flow, its value is became
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
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
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
41
Figure 4.2 Hierarchical Regression Analysis
Standardized coefficients - β
Dividend yield
Independent
Variables
β Sig. Tolerance VIF
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
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
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
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
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
Nevertheless, the findings in this research do not support the empirical evidence
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
FE = Future earnings; EVOL= Earnings volatility; DVOL= Dividend volatility; CFVOL= Cash flow
volatility; SPVOL= Stock price volatility; LOG= Log of revenue
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
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
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
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
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
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
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
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
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
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
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
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
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
49
Figure 6.1 Correlations
50
Figure 6.2 Hierarchical Regression Analysis
Standardized coefficients - β
Dividend yield
Independent
Variables
β Sig. Tolerance VIF
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,
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 volatility in this research does not prove it is the major concerns of the
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
particular year, it will signalize companies who have a good faith to keep the
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
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
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.
indicates companies with higher dividends volatility are willing to pay lower
regression results, all are shown a negative sign on dividends volatility that provides
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.
disadvantage to companies themselves. As the result of the significance level, this can
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
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
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
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
Secondly, every individual firm has different listing period that allows the database
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
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
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
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
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
the dividend policy year by year in order to find out whether there has a
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
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
58
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