Dividend Policy of Pakistans Oil Sector

Dividend constitution of Pakistans petroleum SectorINTRODUCTIONCorpo site dividend indemnity is one of the near debated topics in merged finance. Many look intoers run through devised theories and allowd experiential induction regarding the determinants of a loadeds dividend policy. The dividend policy issuing, however, remains take over unresolved as due to the point that there argon so many vari competents depending upon the type of company, its financial conditions, its patience etc that no single formula could be applic open. Clear guidelines for an optimal net income fall prohibited policy set close non yet emerged despite the voluminous literature. We still do not reserve an meetable write up for the observed dividend behavior of companies.During the endure fifty years several theoretical and empirical studies have been do leading to mainly cardinal issuecomesThe increase in dividend bear forth alters the securities industry cheer of the solid. The decrease dividend payout adversely adverts the food market place note value of the wet.The dividend policy of the self-colored does not affect the riotous value at all.However, we buttocks say that empirical picture on the determinants of dividend policy is unfortunately very complex. Basis on which corpo rations pay out dividends to the sh atomic number 18 holders is still an unresolved puzzle. First big(a) workplace that appe bed in the literature of finance regarding dividend policy was that of Miller and Modigliani (1961) where they express that there be no deception in a amend and a rational economic environment. This was the starting point for otherwise queryers to seek dividend payout policy phenomena. Al almost all interrogationes that followed referred back to Miller and Modigliani (1961). Various researches were carried out by many tecs to explore the determinants of dividend payout policy, both(prenominal) of them focuse on profit magnate, some on s izing of the firms, some on harvest-festival rate of the firm musical composition others on post lives. For good example researches carried out by Nissim et el (2001), Brook et el (1998), Bernheim et el (1995), Kao et el (1994), and Healy et el (1988) found out a unequivocal association mingled with increase in dividend payout and emerging gainfulness. Kalay et el (1986) and Asquith et el (1983) found out that bourgeon returns is positively associated with dividend changes. Sasson et el (1976) conclude that the payout ratio is positive association with average rates of return. On the other hand, studies of Benartzi et el (1997) and DeAngelo et el (1996) find no support for the blood amidst prospective profitability and dividend changes.On Other side most debated factor affecting dividend policy arguably is potency cost. Jensen (1986). Agency cost argument draw outs that cost is simplification by dividend payments and great(p) ex risquetail it Rozeff (1982). Resear ches carried out by Jensen et el (1992), and Lang et el (1989) back up this delegation cost hypodissertation, while others such as Lie (2000), Yoon et el (1995) and Denis et el (1994) found no support for this surmise. surface of the firm is another factor which seems to have an sham of dividend payout policy. familys large in size argon considered to have to a greater extent ability to payout dividends to its sh atomic number 18 holders. Lloyd et el (1985), and Vogt (1994) pointed that firm size plays a role in clarifying the dividend-payout ratio of firms. They argued that because larger firms are mature and have informal chafe to heavy(p) markets thus they are not really much(prenominal) dependant on cozyly generated funding which enables them to payout higher dividends.The purpose of this research is to investigate the dynamics and determinants of dividend policy of oil gas sector firms in Pakistan. The in qualified shiftings selected from the literature include mar ket capitalization, profitability and annual rate of growth of total assets. Analysis of these variables should reveal there exist an impact of these variables on dividend payout policy of the firms and very nature of the kin.The remaining part of this thesis is organized as follows. In section 2 brief reviews of theories close the dividend impart be presented. In section 3 this thesis discusses the cultivation and possible variables that hind end act as proxy for different influences for compendium .In section 4 this thesis will establish the model. Section 5 will provide details of methodology used. In section 6 thesis will establish depth psychology and interpretations and section 7 will present resultant roles and draw a oddment.CHAPTER IILITERATURE REVIEWthither are discordant theories which provide insight on how a firm pays the dividends.2.1 Miller and Modigliani speculation harmonise to Miller and Modigliani (of Merton Miller, Franco) (1961) dividend do not affe ct firms value in perfect market. Shareholders are not concerned to receiving t inheritor exchange flows as dividend or in shape of capital gain, as farther as firms doesnt change the enthronisation policies. In this type of situation firms dividend payout ratio affect their residual free cash flows, when the free cash flow is positive firms decide to pay dividend and if cast out firms decide to issue shares. They as well as conclude that change in dividend may be conveying the learning to the market about firms future cabbage.ExampleIts a common cerebrate that dividend policy is created by stockholder himself for example if a person has 10,000 PKR and wants income of 3,000 PKR a year from that portfolio, simply 3000 PKR money value disregard be exchange by a person this amount as dividend income does not accept by him. This theory says, Who is anxious about dividends??MM explains that under true assumptions including rational investors and a perfect capital market, the market value of a firm is independent of its dividend policy.Smirlock Marshall, (1983) stated that birth amid the Dividend and Investment Decisions indicates that no causality between the dividend and investing decisions of the firm. The fact that the firm-specific data conclusively supported the separation principle is specially convincing. This is the first application of causality tests to a large sample of firms.2.2 The bird in the hand theoryInvestors eer favor cash in hand instead hence a future promise of capital gain due to minimizing risk Gordon (1963).Gordon believes that he is anxious about investing in dividends and dividend stocks. Gordon say that when he is paying(a) hard cash by the company, he knows that the company is not incisively telling him that it is fashioning money but the fact it that it is really making money . This is the idea that cash payment is valued by the investors in their hands over the hope of future cabbage.2.3 The theatrical perfo rmance theoryTraditionally, collective dividend policy has been examined under the assumptions that the firm is one homogenous unit and that the managements intention is to maximize its value as a whole. The agency cost address differs from the traditional approach mainly in this appearance that it explicitly recognizes the firm as a collection of groups of individuals with conflicting enlivens and self-seeking motives. According to the agency theory, these behavioral implications cause individuals to maximize their own utility instead of maximise the firms wealth.The agency theory of Jensen and Meckling (1976) is found on the conflict between managers and shareowner and the percentage of justness controlled by sponsor possession should influence the dividend policy. The theory focuses on the relationship between an agent of the hint (companys managers) and a principal (shareholder) .Jensen and Meckling (1976) in corporations, agency problem arise from out-of-door debt an d remote honor. Jensen and Meckling (1976) study that how firm value is affected by the distribution of monomania between inside shareholders and outside shareholders who gutter consume perquisites, and who cannot. Within this frame ladder, increased managerial ownership of equity alleviates agency difficulties by reducing incentives to consume perquisites and divest shareholder wealth. Jensen and Meckling (1976) argue that equity agency costs would be pee in firms with larger similitudes of inside ownership. Managers are breach understanding their interest with stockholders when they increase the shareholders ownership of the firm.Dividends are believed to play an central role in reducing conflicts between managers and stockholders. Any dividend policy should be designed to calumniate the sum of capital, agency and timeation costs.According to Bathala (1990), in the agency costs and dividends, two lines of thought can be found explaining cross-sectional variations in payout ratios.First viewHolds that a firms optimal payout ratio is the results of a trade-off between a reduction in the agency costs of external equity and an increase in the dealings costs cerebrate with external support resulting from dividend payments as the payout ratio increases.Second viewArgues that inside ownership and external debt are substitute mechanisms in mitigating agency costs in a firm.Basic study for the first line of thought is based on Rozeffs (1982) propositions. He give notices that dividend payout ratios may be explained by reduced agency costs when the firm increases its dividend payout and by increased to a greater extent expensive external capital.Easterbrook (1984) gives further explanation regarding agency cost problem and says that there are two forms of agency costs one is the cost monitoring and other is cost of risk aversion on the part of directors or managers.The agency theory is tie in with resolving two issues that can be held in an agency relationship.PROBLEMSThe desire of the principal and agent conflict and it is expensive or complicated for the principal that it cannot check that the agent has behaved appropriately.Risk sharing is a problem that occurs when the agent and principle have different behavior towards hazard. The issue here is that the principal and the agent may prefer reissue actions because of the separate risk preferences.According to (Naceur, Goaied, Belanes, 2006) fat firms with much stable requital can pay larger dividend. Whenever they are growing very quick, dividend policy doesnt own any impact from financial leverage and ownership concentration. Also the liquidness of stock market and size cast outly impacts the dividend payment.Oskar kowalewski and Ivan Stetsyukand Olesksandr Talavera (2007) study that how corporate politics settle downs dividend polices in Poland. They have established for the first time, quantitative measures on the spirit of corporate governance for 110 non- fi nancial listed companies. Their result suggested that large and more than(prenominal) profitable companies have higher dividend payout ratio .Furthermore, risky and more obligated(predicate) firms prefer to pay overturn dividend s. The results finally, based on the outcome of 1998-2004, Reveals that dividend policy is quite important in the valuation process of companies, but the issues still remain scantily investigated in transition countries. A study on the determinant s of dividend policy and its association to corporate governance in a transition economy both offers an interesting subject and complements the breathing corporate governance literature.The agency theory points that dividend may mitigate agency costs by distributing free cash flows that otherwise would be spent on unprofitable projects by the management. It is argued that dividends expose firms to more frequent analysis by the capital markets as dividend payout increase the likelihood that a firm has to issu es new common stock. On the other hand, scrutiny by the market helps alleviate opportunistic management behavior, and thus, agency costs. Agency cost, in turn, is related to the strength of shareholders rights and they are associated with corporate governance. Furthermore, agency suggested that shareholders may prefer dividends, particularly when they fear expropriation by insider. They test the determinants of dividend policy in a denary regression framework to control for firm specific characteristics other than governance. all(a) the variables enter the regressions with evaluate signs. size and return on assets are positively associated with variable cash dividend. Leverage is opposely associated with variable cash dividend. Their results provide evidence that in Poland listed companies where corporate governance practices are high and as a result shareholders rights are for strong payout higher dividend.Jianguo Chen and Nont Dhiensiri(2009) suggest that relationship between dividend pay-out ratio (POR) with the pro Cash flow discrepancy (CFV), ownership dispersion, insider ownership, free cash flow, collateral stable assets, Past growth (GROW1), future growth (GROW2), stable dividend policy and imputation credit (IMP). They analyze the determinants of the corporate dividend policy utilize firms listed on New Zealand buy in switch .They examined that firms traditionally have high dividend pay-outs compared with companies in the US. They find that their is a negative relationship between dividend payout ratio and CFV, Insider, Beta ,growth and positive relationship between ownership dispersion ,free cash flow, collateral stable assets stable dividend policy and imputation credit. Their conclusion provides strong support to the agency cost theory and partially supports transaction cost and residual dividend theory. They do not have any evidence to support the dividend stability theory and the signaling theory.2.4 Signaling theoryThe explanation about t he signaling theory given by Bhattacharya (1979) and John, Kose and Williams (1985) dividends allay information symmetric between managers and shareholders by delivering inside information of firm future prospects.2.5 Effect of tax preferences theoryMiller and Scholars (1978) find that the effect of tax preferences on clientele and conclude different tax rates on dividends and capital gains lead to different clientele.Tax Preference theoryInvestor gave an important consideration to the taxes. This should by keep in mind that the dividends are taxed at a higher rate than the capital gains. As such, capital gains are preferred by the investors as compared to the dividends. This is known as when the investments are rattling sold only then the capital gains are paid. When capital gains are realized reverses can control, but dividend payments are un controllable by them and the related company controls the dividend payment. In an estate situation, capital gains are not realized.For exa mpleIf a stock is purchased by an investor 50 years ago and is held by him until his or her death, when it is passed on to an heir after he is expired. Now that heir does not have to pay taxes on stocks appreciation.2.6 Life Cycle possiblenessLife Cycle Theory and Fama and French (2001) states that the firms should follow a disembodied spirit cycle and reflect managements assessment of the importance of market imperfection and factors including taxes to equity holders, agency cost asymmetric information, floating cost and transaction costs.2.7 supply theoryAccording to Baker and Wurgler (2004) in Catering theory suggest that the managers in order to give incentives to the investor according to their get hold ofs and wants and in this federal agency cater the investors by paying smooth dividends when the investors by not pay when investors prefer non payers but put stock price premium on payers.2.8 Lintners ModelJohn Lintner (1956) initiates with his theory relies on two importa nt things that he studied about dividend policy1) According to the amount of positive net-present-value (NPV) projects the companies tend to set long-run target dividends-to-earnings ratios.2) wage increases are not everlastingly bearable. As a result, until managers can see that new earnings directs are bearable, dividend policy is not changedAs regards the empirical literature the roots of the literature on determinants of dividend Policy is related to Lintner (1956) seminal work after this work the model is extended by The Samy ben naceur, Mohamed goaied and Amel belanesthe (2006) during the period (19962002) on the Tunisian Stock Exchange listed study the dividend policy of 48 firms. Lintners model is applied using static and dynamic panel data regressions. They examined that Tunisian firms rely more on veritable earnings that past dividends to fix their dividend payments in the way that dividends tend to be more sensitive to current earnings kinda than prior dividends. Any inconsistency in the level of dividends is directly reflected in the earnings of the corporation.Samy ben naceur, Mohamed Goaied and Amel belanesthe (2006) focused on the relationship between dividend and ownership, liquidity, return on assets (ROA), profitability, investment, leverage ratio, size. The results indicate that highly profitable firms with more stable earnings can afford larger free cash flows and thus pay out larger dividends. Moreover, fast-growing firms distribute larger dividends so as to demand to investors. On the other hand, ownership concentration does not have any impact on dividend payment. In fact, being closely held Tunisian firms witness less agency conflicts and shareholders do not resort to dividends in order to reduce managerial discretion and protect their interests. The liquidity of the stock market has a negative influence, which confirms that the implementation of the electronic transaction schema in the TSE has facilitated the realization of capit al gains, which has reduced the need for dividend payments. At last, the negative coefficient on size found in the full sample has disappeared when regulate firms are excluded, which reduces the strength of this factor. Researchers have proposed many different theories about the factors that affect a firms dividend policy.Kanwal Anil and Sujata Kapoor (2008) analyzed that The Determinants of Dividend Payout Ratio-A Study of Indian Information engineering science Sector. The period under study is 2000-2006 as it is known that the period of 5 to 6 years covers both recession and booming of IT industry. They stated that profitability has always been considered as a primary indicator of dividend payout ratio. There are numerous other factors other than profitability also that affect dividend decisions of an constitution namely cash flows, corporate tax, bargains growth and market to control value ratio. They suggest that dividend payout ratio is positively related to profits, cash f lows and it has inverse relationship with corporate taxes, exchanges growth and market to book value ratio. Statistical techniques of correlation and regression have been used to explore the relationship between key Variables. consequently, the main theme of this study is to recognize the various condition that effect the decision of dividend payout policy of IT firms in India.In unawares factors influencing the corporate dividend policy, according to them, may substantially vary from pastoral to country because of inconsistency or variations in legal, tax and accounting policy between countries.In view of these facts, the present study aims at identifying the variables influencing corporate dividend policy in Pakistan.CHAPTER IIIDEPENDENT AND INDEPENDENT VARIABLESObjective of this study is to determine factors that have an impact on dividend of Oil Gas Exploration and Oil Gas Marketing sector of KSE. Dividend yield is dependent variable and the tierce independent variable ar e size, profitability and growth. These variables are discussed here.3.1 Dividend yield (DY)Arthur A Thompson in his book Crafting and Executing Strategy says that the measure of the return that shareholder receives in the form of dividend is called dividend yield (DY). A typical dividend yield is 2 -3%, the dividend yield for fast growth companies in often below 1%(may be even 0) and the dividend yield for slow-growth companies can run 4-5%.Dividend yield can measure by annual dividend per share divided by current market price per share.Samy ben naceur et el(2006)The DY (dividend yield ) as our measure of the dependent variable equals to dividend per share to price per share, payout ratio cannot be used as a measure of dependent variable because sample contains firms with negative earnings.Khamis Al-Yahyaee et el (2006) and Hafeez et el (2009) also used dividend yield (DY) as the dependent variable.CHAPTER IVEXPLANATORY VARIABLESThis thesis selected 3 variables used by different re searchers Samy ben naceur et el (2006) and Hafeez et el (2009).4.1 Firm SizeHafeez et el (2009) The firm size has been work out as the total assets of the firm because a posiyive coefficient is expected from this variable as there is a very low chance of bankruptcy in large more diversified firms and it can sustain higher level of debt.Scott and martin (1975) found that the size of the firm is very important factor which can affect the firms dividend policy and debt policy.A negative impact has been found by market capitalization and size of the firms on dividend payout policy which clearly shows that the firms prefer to invest in their assets rather than pay dividends to its shareholders. The financial characteristic of size has been explained by Market capitalization and the size of the firm. According to the null supposition for this financial characteristic there is no relation between the market capitalization and size with dividend payout ratio but the results show that ther e is a inverse and substantial relationship between dividend payout and MV. thus null supposition is rejected. The evidence supported by the finding of Belans et al (2007), Jeong (2008) deviate from Avazian et al (2006).Samy ben naceur et el (2006) the size of the firm by total market value (LNSIZE) and it is expected to be positively tally with dividend paid. The literature suggests that size may be inversely related to the probability of bankruptcy (Ferri and Jones 1979 Titman and Wessels 1988 Rajan and Zingales 1995). In particular, larger firms should have an easier access to external capital markets and can borrow on better terms, Moreover, larger firms tend to be more diversified and their cash flows are more regular and less volatile. Thus, larger firms should be more ordain to pay out higher dividends. Even the conflicts between creditors and shareholders are more severe for smaller firms than the larger ones.Khamis Al-Yahyaee et el (2006) they measure size of the firm fr om Log of sales. Firms dividend policy is influenced by variables such as size. There is an profitable position for larger firms to raise external funds in the capital markets and are less dependent of internal funds. Therefore there is a negative relationship between dependence on internal financing and the size of the firm. Moreover, there is a chance of lower berth bankruptcy probabilities in larger firms and thus they are able to pay more dividends.Thus as per this research the hypothesis isH1= Firm size is positively associated with dividend payouts.4.2 Firm profitabilityEmpirical research found that there is a positive relationship between dividend yield and profitability. The more profitable the firms are, the more internal financing they will have, and thus are able to afford larger dividends. almost of them are as follow.Khamis Al-Yahyaee et el (2006) measured profitability by earnings before interest and taxes to total assets as our surrogate for profitability. Hence a positive relationship between profitability and dividend is expected. Since the annual profits pay the dividends therefore its logical that more dividends are paid by profitable firms.Samy ben naceuret et el (2006) measure the profitability by the return on assets (ROA) net income/total assets and it is positively correlated with dividend payments. Firms with high profitability can afford larger free cash flows and hence new investment opportunities. Therefore, paying higher dividends does not disturb them. In the same vena and according to the pecking order theory, firms prefer using internal sources of financing first, then debt and finally external equity obtained by stock issues. The more profitable the firms are, the more internal financing they will have, and thus are able to afford larger dividends.Hafeez et el (2009) measured favourableness Net Earnings and Earning Per Share after tax. The net earnings show the positive relationship with the dividend yield. The net earnings after interest, depreciation and after tax have been used as the explanatory variable to examine the role of earnings to pay dividends.Thus as per this research the hypothesis isH2= There is a positive relationship between a firms profitability and dividend payouts.4.3 Firm appendageSamy ben naceur et el (2006) measure investment and growth by MBV (market value of equity/ book value of equity) and annual rate of growth of total assets. Firms omen higher growth, when they establish lower dividend payout ratio because growth entails higher investment expenditures. When firms retain higher proportion of earning to finance future investment need due to high cost of external financing, their dividend pay out in anticipation of future growth stands reduced. Hence, a negative relationship between dividend payout and expected growth is expected.Khamis Al-Yahyaee et el (2006) measure the growth opportunities through market-to-book ratio. A negative relationship is expected between growth o pportunities and dividend. Large additions of capital are required by the firms experiencing substantial success and rapid growth. Consequently, lower dividend payout policies are expected by growth firms. Similarly, the pecking order theory predicts that more earnings are retained by the firms having a high proportion of market value followed by growth opportunities hence they are able to minimize the need to raise new equity capital. Free cash flow theory also predicts that their will be a lower free cash flow and lower dividend is paid by the firms with high growth opportunities.On the other hand Hafeez et el (2009) argued with the above researcher. According to the signaling theory the higher the firm grows, the higher they pay dividends to shareholders. The shareholders get signals from the growth of the firms having high growth opportunity. The sales growth has been used as proxy of Growth in the empirical analysis of the study and has been used as percent age change in sales every year as proxy of the growth.Whereas Kanwal Anil et el (2008), measured growth and investment by sales growth and MTBV. Hafeez Ahmed et el (2009) measures investment as slow up = accumulated retained earnings/ total asset.Thus as per this research the hypothesis isH3= Firm growth is negatively associated with dividend payouts. dining table 1 compendious of Proxy Variables and Research HypothesesH1 SizeMCAP = market capitalizationPositiveH2 ProfitabilityROA= net income/total assetsPositiveH3 GrowthGROWTH = sales growthNegativeCHAPTER VMETHODOLOGYDATA COLLECTION METHODThe data is collected from Securities Exchange Commission of Pakistan, State Bank of Pakistan and the Karachi Stock Exchange. The variables of the study are calculated from the Audited Annual Accounts of 6 firms for the period of 2001 to 2008 resulting in about 240 observations for each variable and as such it is a long period enough to smooth out variable fluctuations. (Rozeff, 1982)SAMPLESample Size consists of six companies from oil and gas exploration and marketing sectors in Pakistan, listed on Karachi Stock Exchange (KSE) Total of six companies listed on Karachi Stock Exchange (KSE). Data collected from year 2001 to year 2008.STATISTICAL TEST bilinear Regression test was performed to analyze data. Dividend yield is a dependent variable and growth, size and profitability are taken as independent variable. lapse MODELThis study uses multiple regression analysis. This thesis estimate thatY= X0 + X1 + X2 + X3 + eY = Dividend yield.X0 = Intercept of the equation.X1 = Firm size.X2 = Firm profitability.X3 = Firm sale growth.e = Error Term.CHAPTER VIDATA ANALYSIS AND INTERPRETATION gameboard 2MODELR SQUAREFSig.1.2233.917.015(a)Table 2 above shows F Ratio for the regression model is substantial which indicates that regression model is a best fit. Total variation in the dependent variable explained by the regression model as indicated by R square is .223 i.e. 22.3% change in dividend yield is ex plained by these three independent variables.Table3UNSTANDARDIZED COEFFICIENTSTANDARDISECOEFFICIENTtSig.BStd. ErrorBeta(Constant)0.0660.0115.8260Size-1.10E-060-0.503-2.8790.006*Profitability0.160.0940.2691.7090.095**Sale growth2.17E-0700.4843.0380.004**Significant at 1%**Significant at 10%Table 3 reports the ordinary bicycle least square results of the regression analysis.Results indicate that size of the firm is significant as shown in table 3 and shows that size is negatively correlated with dividend at 1% .As researcher taken in its own hypothesis that the size will present positive relation but its coefficient is negative which rejects researcher hypothesis. Since the size is also statistically significant but the hypothesis for this thesis shows that the growth is negatively related to dividend hence this hypothesis rejected.Some researcher result find out size as positive. Fama and French (2000 and 2001) concluded that more dividends are payable by large and more profitable fi rms.Lloyd and Jahera (1995 cited on holder 1998) concluded that those larger firms have easier access to capital markets which are more mature hence allowing for higher dividend pay-out ratios and reducing their dependence on internally generated funding.Aneel Kanwer (2002) measured size with total sale and researcher find out that size is positive related to dividend yields. littler company gives lower dividend as compared to larger company.Oskar kowalewki et el (2007) made a research in Poland and they measured size with total assets .they find out that size is positively related to dividends because more dividends are paid by companies which are larger in asset and size..Some researcher result find out size as negative .The result of the research by Hafeez Ahmed et el (2009) on KSE (non financial firms) is similar to this thesis result. they measure size with natural logarithm of total assets This results indicates that the size of the firms have the negative impact on dividend p ayout policy which shows that the firms prefer to invest in their assets rather than pay dividends to their shareholders ..Samy Bin Naem et el (2006) made their research on the firms of the Tunisian Stock Market and They measured the size with logarithm of stock market capitalization. They concluded that there is a negative relationship between size and dividend, but the negative relationship disappeared when regulated firms are removed.Since the result of the researcher Fama and French (2000 and 2001) , Lloyd and