MFC 199 Sawicki

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An Investigation into the Dividend Policy of Firms in East Asia

Julia Sawicki

Abstract

This study investigates the determinants of dividend policy at the firm, industry and country levelin seven countries in East Asia: Taiwan, South Korea, Thailand, Malaysia, Hong Kong,

Singapore, Indonesia and Japan. The findings indicate that past and expected revenue growth,

cash flow adequacy, leverage collateralizable assets and (unexpectedly) systematic risk are

positively related to payout ratio. Inter-industry and -country differences are related to

legislation, tax and ownership structure, and socio-cultural and political influences.

Keywords: dividend policy, emerging markets

JEL classification: G32

Julia Sawicki

Nanyang Technological University

School of Business

Nanyang Avenue

Singapore 639798

(65)790.4669

[email protected]

The author would like to acknowledge gratefully research assistance of :Ho Jie Ying, Lee Seet

Ling and Teo Harn Kiat.


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Introduction

For nearly four decades, researchers have been grappling with the dividend puzzle, trying to

understand the determinants of dividend policy. Most studies focus on US firms. We expand the

investigation by studying dividend policy from an Asian perspective focusing on firms in 8

representative countries of East Asia namely Taiwan, South Korea, Thailand, Malaysia, Hong

Kong, Singapore, Indonesia and Japan. We measure the relationship between dividend payout

and seven variables: expected growth, historical revenue growth, firm size, leverage, cash flow

adequacy, collateralizable assets and systematic risk. We also investigate industry and country

differences.

The results regarding firm-level differences are consistent with prior work indicating a

positive relationship between dividend payout and expected growth, historical revenue growth,

cash flow adequacy, and collateralizable assets. Interestingly systematic risk is also positively

related to payout ratio, which contradicts the results of prior work. The results for firm size are

mixed with the direction of the relationship to dividend payout differing for different countries

and industries.

Finally, we find inter-industry and inter-country differences. The former can be attributed

to the nature of the industries as well as the legislation unique to certain industries, while inter-

country differences in dividend payout are due to tax structure, ownership structure and socio-

cultural and political influences.

Background

Miller and Modiglianis (1961) seminal theoretical paper demonstrates the irrelevance of

dividend policy and demonstrates in perfect market conditions that dividend payout does not

affect firm value. In a frictionless world with no agency costs, information asymmetry, taxes and

transaction costs, investors are indifferent between capital gains and dividends.


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However such assumptions are unrealistic in the real world. Among the many studies on

dividend policy, most investigate the underlying dynamics of dividend policy, investigating

questions like: What are the various factors in the real world that affect dividend policy? Do firm

characteristics affect dividend policy? How and why do these determinants affect dividend

policy? The examination into the effect of dividend policy on firm value examines: the role

dividend policy plays in a firm; the informational value of dividend change; investors reaction

to dividend changes. A discussion of studies focusing on the determinants of dividend policy

follows.

Firm-level Effects on Dividend Policy

Rozeff (1982) proposes an optimal dividend payout model, which appeals to two market

imperfections: agency cost and the transaction cost associated with external financing. He argues

that due to agency costs, dividends are increased but on the other hand this raises the costs of

external financing. The sum of these two opposing costs determines an optimal payout ratio. The

firms beta, past and expected future growth rate of sales as proxy for the transactions associated

with external financing He argues that beta is a surrogate for the firms operating and financial

leverage, and firms with a high leverage will lower the dividend payout to lower the cost of

external financing. Dividend payments are quasi-fixed charges, which are substitutes for other

fixed charges. For the other two proxies, he concludes that firms experiencing or anticipating

higher revenue growth will lower dividend payout ratios. Firms, in this case would tend to retain

funds to avoid external financing. Lastly, he uses the percentage of common stock held by

insiders and the number of common stockholders as proxy for agency costs. Firms pay out more

dividends when a lower fraction of the equity and or a greater number of stockholders own the

outside equity.

Jensen (1992) examines the determinants of three policy choices within a system of

equations. The three policy choices are insider ownership, debt and dividend policies. In the


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dividend equation, which examines the determinants of dividend payout ratios, he finds that

investment, insider ownership, debt ratio, growth, and business risk are negatively related to

dividends while only profitability is related positively related to dividends.

In Mohd (1995), firm size and industry representation function as control variables. Firm

size is employed as a control variable for both the transaction cost and agency cost proxies.

Industry representation was also used as a control variable as it is an important factor in the

payout decision. It was found that dividend payout is positively related to firm size, the amount

of institutional holdings, and number of shareholders. It is negatively related to past and future

growth, operating and financial leverage risk, intrinsic business risk, and insider shareholdings.

Chirinko (1998) exploits the unique initial homogeneity of seven regional phone

companies which are created from AT&Ts local operating. This is a result of an anti-thrust libel

against AT&T. As the firms originate from the same corporation, there are reasonable grounds

for compensation of subsequent heterogeneity in dividend policy of the 7 firms. It is found that

investment opportunities and dividend payout are negatively related. Also, increased

indebtedness leads to increased contacts with external financial sources, which results in closer

monitoring and an increased dividend payout.

Fama and French (2000) find that larger and more profitable firms are likely to pay more

dividends. This is due to their ability to sustain the high payout. Mollah et. al. (2000) report that

the number of common stockholders, the level of collateralizable assets, and free cash flow is

positively related to dividend payout ratio. Insider ownership on the other hand is positively

related to dividend payout ratio.

Inter-industry Effects on Dividend Policy

Lintner (1956) argues that there is be positive correlation between dividend policies of

firms in the same industry and certain factors within the industry. More than a decade later,


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Harkins (1971) also posits a relationship among dividend of firms in the same industry due to

their comparable investment opportunities.

Michel (1979) uses data from 13 industries in America over the period 1967-1976, to

determine if a systematic relationship exists within an industry. The null hypothesis, that

dividend yield are generated from the same population or identical populations, was rejected on

the basis of significant differences in dividend payout ratios across industries.

Michel (1986) did an inter-industry analysis of US and Japan to find out if a systematic

relationship exists between a firms dividend policy and the industry it is in. The null hypothesis

that across-industry dividend yields are generated from the same population is rejected for both

the USA and Japanese samples. The results conform to those reported by Michel (1979). This

present study however, suggests that industry-influence phenomenon also exists in Japan.

Baker (1988) updates Michel (1979) study by using data from 1977 to 1981, which he too finds

support for industry effects on dividend payout.

Collin et. Al. (1996) and Saxena (1999) recognize the differences in dividend policy between

regulated firms and unregulated firms. Collins focuses on agency-cost and monitoring

explanations for the relevance of dividend and examines the role of insiders in determining

dividend policy for unregulated firms, utilities and financial firms. Saxena, on the other hand,

investigates if determinants of dividend policy differ between regulated and unregulated firms.

He concluded that some of the determinants of dividend policy are different for regulated and

unregulated firms. Specifically, the percentage of common stock held by insiders and expected

future growth rate do not play a key role in a regulated firms payout ratio as compared to an

unregulated firm.

Inter-country Effects on Dividend Policy

Michel (1986) investigates whether a systematic relationship exists between a firms

dividend policy and the country it operates. The results indicate a difference in the payout ratios


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of US and Japan. Reasons cited include bank ownership of companies, growth rate of the

economy as well as accounting, tax and risk characteristics.

La Porta (1998) finds that firms in common law countries, where investment protection is

higher, tend to make higher dividend payout than those in civil law countries as investors in

protected countries use their legal rights to demand higher dividends.

Also, Buchanans (2000) study of the G7 countries reports that there is a relationship

between the dividend policy and the country in which the firm operates. One reason cited is that

the corporations in one country may be leveraged differently from their counterparts in another

country.

Kang (2001), it is argues that institutional structure may be a reason for differences in

dividend payout in different countries, noted that the corporate governance systems in UK and

the US are characterized as a market based system while the governance systems in both

Australia and France are governed by relationship-based system. UK and US firms generally

have lower insider ownership and agency problems may be more widespread, thus the firms have

relatively higher dividend payout ratios.

HYPOTHESIS: Relationship between firm characteristics and payout ratio.

Expected Growth: negative

Firms establish lower dividend payout ratio when they anticipate higher growth, presumably

because growth entails higher investment expenditures. Due to the high cost of external

financing, firms will retain a higher proportion of earnings to finance future investment needs,

hence reducing their dividend payout in anticipation of future growth.

Hence, a negative relationship between dividend payout and expected growth is expected.

Historical Growth: negative

In order to support rapid past growth, firms would have retained more funds for investment to

generate the growth as opposed to raising the more costly external funds. Hence, this implied that


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firms would have adopted a low payout ratio in periods when past growth was high. Hence, it is

hypothesized that dividend payout is negatively related to historical growth.

Firm Size: positive

As the size of a firm increases, shareholders are not able to monitor the firm effectively and there

is a higher tendency of agency problems. Thus, shareholders will demand higher dividend

payout, which acts as an indirect monitoring tool. Firms in current or potential need of external

financing will use their funds more prudently as they will be monitored by both existing and

potential creditors.

Leverage: positive or negative

On one hand, firms trade off dividend payments with fixed financial charges. A highly leveraged

firm would tend to lower its dividend payout ratio because of high fixed financial commitments.

On the other, increased indebtedness leads to increased contacts with external financial sources,

which results in closer monitoring and an increased dividend payout. Hence, we do not expect

any particular direction of relationship between leverage and dividend payout.

Cash Flow Adequacy: positive

A firm will not be able to distribute cash dividends without the means to do so. Also, a firm with

high cash flow may tend to have higher agency problems if the cash are misused in improper

ways. A higher dividend payout will reduce the free cash flow, and in turn reducing the agency

problems.

Collateralizable Assets: positive

Shareholders may expropriate wealth from bondholders by paying themselves dividends.

Bondholders try to contain this problem through restrictions on dividend payments in the bond

indenture. However, fewer restrictions are placed on the firm if debt can be collateralized as the

borrower is restricted to use the funds for a specific project. Hence, a positive relationship

between collateralizable assets and dividend payout is expected.


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Systematic Risk: negative

Beta is a proxy for systematic risk. Risky firms tend to have higher volatility in their cash flows.

In this case, the firms reliance on external financing would be increased. A firm with high beta

would tend to adopt a lower dividend payout to avoid costly external financing. Hence, a

negative relationship between systematic risk and dividend payout is expected.

Industry-specific Differences in Dividend Payout

Dividend policies and certain factors like sales volume, internal funds flow may be positively

correlated for firms in the same industry, indicating some relationship between industry and

dividend payout. Due to the structural characteristics of an industry, it is likely firms within the

same industry faced comparable investment opportunities while firms in different industries may

have different investment opportunities. The extent of regulation may also have an impact on

dividend payout as regulated firms face a different set of factors from unregulated firms in the

determination of dividend payout. Due to the difference in structural characteristics and

investment opportunities, we expect that dividend payout among industries would exhibit

differences. Hence, we propose the hypothesis that there are industry-specific differences in

dividend payout.

Country-specific Differences in Dividend Payout

Although there are limited previous studies on inter-country differences, we expect some

differences in the typical dividend payout in different countries due to the fundamental

differences in these countries. Examples of fundamental differences include legal frameworks,

culture and political environment.

DATA

Data Source

All the financial data used in our study are obtained from the PACAP database.


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Sample Coverage

Our study covers a period of 10 years from 1989-1998.

We have included firms from 8 countries including:

Hong Kong

Indonesia

Japan

Malaysia

Singapore

South Korea

Taiwan

Thailand

Furthermore, we have grouped these firms into 32 industries including: Agriculture, Forestry & Fishery

Apparel & Textiles

Automobile

Building Materials

Chemicals, Petroleum & Plastics

Computer & Computer Services Conglomerate

Construction

Electronics & Electrical Appliance

Entertainment & Recreation

Finance

Food & Beverage

Footwear & Leather Products

Healthcare Services

Hotels & Travel Services

Household Goods

Machinery & Equipment

Metal Products

Mineral Products

Mining

Miscellaneous (Consumer)

Miscellaneous (Industrial) Miscellaneous (Services)

Paper Products

Pharmaceuticals

Printing & Publishing

Property

Retail

Telecommunications

Transportation & Logistics

Utilities

Wood Products

Sample Selection Criteria

Our sample only consists of dividend-paying publicly listed firms. A sample firm must have a

typical dividend payout ratio ranging from 0 to 1. Data for calculating all the variables must be

available for that firm.

METHODOLOGY

Objective 1

Statistical Test

This particular objective will be tested using multiple regressions on three different sets of

samples namely:

(1) pooled [No. of sample = 1],


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For the pooled regression, we have excluded firms in the finance industry due to fundamental

differences of these firms. One of the independent variables for the regression is free cash flow to

assets ratio. However, for finance firms, the balance sheet and income statement of such firms

are structured in a different manner and there are certain comparability issues which we found

hard to overcome.

(2) country specific [No. of samples = 8]

For the country specific regressions, we have also similarly excluded finance firms in the

regressions

(3) industry specific [No. of samples = 32]

Regression

divpay = 0 + 1 (tobinq) + 2 (histgrwt) + 3 (mktcap) + 4 (leverage) + 5 (fcf) + 6 (colasset) +

7 (beta) + e

Dependent Variable: Dividend payout ratio (divpay)

In order to prevent the problem of multi-collinearity between the independent variables, we run a

correlation test between the independent variables. No instance of high correlation is found

between the independent variables. [Refer to Correlation Matrix in Appendix A: Objective 1]

Independent Variables & Hypothesis

No Expected Direction

Independent Variable Abbreviation

Leverage leverage

H0 : i = 0

H1 : i ? 0

Expected Direction : Positive


Market capitalization mktcap

Free cash flow to assets ratio fcf


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Fixed assets to assets ratio colasset

H0 : i = 0

H1 : i > 0

Expected Direction : Negative


Tobins Q tobinq

Historical revenue growth histgrwt

Beta beta

H0 : i = 0

H1 : i < 0

Control Variables

We have also introduced certain qualitative variables in our regression model to control for some

factors which we would like to isolate from our research.

CONTROL VARIABLES

Pooled Regression

Year

Age

Industry

Country

Country-Specific Regression

Year

Age

Industry

Industry Specific RegressionYear

Age

Country

Variables that are qualitative in nature are quantified into n-1 binary variables where n refers to

the number of categories existing for the qualitative variable.

- Year refers to the financial year of that particular observation and there are 10 categories

consistent to the period covered by our study.


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- Age refers to the age of the company and we have grouped this variable into 3 categories,

namely: old (age>= 24), medium (5


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H1: Not all the means of dividend payout ratios of the different countries are equal.

Assumptions

(1) We assume independent random sampling from each of the r populations.

(2) We assume r populations under study are normally distributed, with means i that may or

may not be equal, but with equal variances 2.

Populations

For objective 2, there are 32 populations, which adhere to the number of industries in our study.

For objective 3, there are 8 populations, which adhere to the number of countries covered in our

study. The financial firms are excluded from the populations due to incomparability issues.

Level of Significance

The level of significance used in the ANOVA tests is 5%

Kruskal Wallis

We also use the non-parametric alternative of ANOVA- Kruskal Wallis test to find out if the

populations have the same distribution.

Hypothesis

Ho: All k populations have the same distribution

H1: Not all k poupulations have the same distribution

Assumptions

(1) The k samples are random and are independently drawn from the respective populations.

(2) The random variables under the study are continuous and the measurement scale used is at

least ordinal.

Populations

As mentioned earlier, there are 32 populations for objective 2 and 8 populations for objective 3.


The level of significance used in the Kruskal Wallis tests is 5%


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Turkey Pairwise Comparisons

If Ho of the ANOVA test is being rejected, we can only conclude that not all the means are the

same but cannot conclude exactly which means are different. Thus, we have to carry out further

analysis to find out the exact pairwise differences.

Hypothesis

H0 : i - j = 0

H1 : i - j 0


The level of significance used in the Turkey tests is 5%

Limitations

There are 465 unique pairwise comparisons for objective 2 and 28 unique pairwise comparisons

for objective 3. Thus, we might not be able to comment on each and every significant pairwise

test. We will seek to summarize the results and provide certain general reasons to explain the

differences as well as homogeneity between certain populations.

RESULTS & ANALYSIS

Objective 1: To investigate the determinants of dividend policy.

Summary of Results

TABLE 1: REGRESSION SUMMARYVARIABLES

q histgr mktcap lev fcf asset beta Model Sig?

Expected Direction - - + ? + + -

Full Regression - - + + + YES

By Industry

1 Finance - + + YES

2 Property - - YES

3 Construction - + + YES

4 Utilities + + YES

5 Transportation & Logistics - + + + + YES

6 Telecommunications - YES

7 Agriculture, Forest&

Fishery

- YES

8 Mining + YES


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VARIABLES

tobinq histgrwt mktcap leverag

e

fcf colasset beta Model Sig?

Expected Direction - - + ? + + -

9 Computer & Comp Services - YES

10 Electronics & E Appliance - - + + + + YES11 Food & Beverage - + + + YES

12 Automobile - - + + YES

13 Household Goods + - YES

14 Apparel & Textiles - - + - + + YES

15 Footwear & Leather - YES

16 Wood Products - YES

17 Miscellaneous (Consumer) - + YES

18 Chem, Petroleum & Plastics - - + + + + YES

19 Machinery & Equipment - - + + + + + YES

20 Paper Products - - + - YES

21 Metal Products - - + + + YES22 Mineral Products - YES

23 Building Materials + YES

24 Misc (Industrial) - - YES

25 Entertainment & Recre - + + + YES

26 Healthcare Services + - - - YES

27 Pharmaceuticals - + YES

28 Hotel & Travel Serv - + NO

29 Printing & Publishing - - YES

30 Retail - - + + YES

31 Misc (Services) - + + + YES

32 Conglomerate + - + YES

By Country

1 Taiwan - - + + YES

2 Korea - - + + + YES

3 Thailand - + YES

4 Malaysia - - - + YES

5 Hong Kong - - YES

6 Singapore - - + + YES

7 Indonesia + + + YES

8 Japan - - + + + + YES

ScaleCell Entry

+/- Significant at 5% (1-tail except for

Leverage)

+ Positive Standardized

Coefficient

- Negative Standardized

Coefficient

Insignificant

+/- Different from

Expectation


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All the regression models are significant except for Hotel & Travel Services. Table 1

provides a summary of the direction of relationship between dividend payout and the

various independent variables. Only significant results are shown in the table. In the

following sections, we will elaborate on the results of each of these variables.

Expected Growth

TABLE 2: REGRESSION COEFFICIENTS OF TOBINS Q

Regression Standardized Coefficient p-value

Expected Direction (-)

Property

Agriculture, Forestry & Fishery-0.054

-0.189

0.099

0.071

Computer & Computer Services -0.279 0.007

Automobile

Electronics & Electrical Appliances

-0.075

-0.201

0.028

0.000Apparel & Textiles

Retail

Electronics & Electrical Appliances

Machinery & EquipmentMetal Products

Paper Products

Miscellaneous (Consumer)

Miscellaneous (Industrial)

Taiwan

Japan

-0.120

-0.213

-0.201

-0.130-0.081

-1.190

-0.260

-.0200

-0.173

-0.076

0.002

0.000

0.000

0.0000.091

0.009

0.008

0.014

0.050

0.000

Opposite Direction (+)

Healthcare Services 0.351 0.050

Conglomerate 0.106 0.009

Indonesia 0.224 0.001

Expected Direction

Table 2 illustrates the regression coefficients for Tobins Q which is the proxy for

expected growth in our study. The results obtained are analogous to our hypothesis that

dividend payout is negatively related to future growth due to investment needs for

sustaining growth and the costly external funding [Rozeff, 1982].


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Property firms that foresee growth will need to devote substantial amount of financial

resources for future property developments in order to meet future increase in demand for

property. Property development entails huge expenses in purchase of land as well as the

actual development of property. Hence, anticipation of future growth necessitates a low

payout ratio for property firms.

Firms in the Agriculture, Forestry & Fishery industry constituent the primary industries

that usually require huge capital outlays for land and equipment and other related

expenses. Thus, such firms will retain more earnings to finance their expenses incurred to

support future growth.

For Computer & Computer Services, Automobile, Apparel & Textile and Retail firms,

future growth corresponds to increased investments in inventory. It is vital that such firms

maintain an adequate level of inventory to meet demands and prevent loss of business

opportunities. Firms in the Computer industry, in particular, will require increased

investment in computer peripherals as well as specialized personnel to provide computer

services, both entailing large expenses. Hence, such firms will adopt a low payout ratio

to ensure that they have adequate liquidity for their financial needs.

For Electronics & Electrical Appliances, Machinery & Equipment and Metal Product

firms, a high growth rate is typically matched by high investment in long-term assets. In

addition, firms producing metal products are vulnerable to the price of metal, which is

their core raw material. Hence, in anticipation of future growth, such firms are likely to

retain more earnings to finance their long-term investments resulting in low payout ratio.


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For firms producing Paper Products, future growth may entail further investments in

long-term assets as well as increase in manpower requirements. In view of the increase in

financial needs, firms in this industry will adopt low payout ratio meet such needs.

Although there may exist fundamental differences in firms categorized under

Miscellaneous (Consumer) and Miscellaneous (Industrial), such firms would typically

need extra financing to invest in long-term assets or to support anticipated increase in

variable costs when they foresee growth. Hence, it may be reasonable to expect such

firms have low payout ratios in anticipation of future growth.

Capital gains are tax-free in Taiwan while dividends distributed from earnings are tax as

ordinary income and 25% withholding tax for local investors and foreign investors

respectively (Lin C.H. & Shui C.Y., 2003). Due to the above tax structure, we can infer

that most investors will prefer capital gains to dividend. Hence, Taiwanese companies

will have more incentive to retain more earnings to finance future growth.

It is commonly believed that the extensive holdings of industrial corporations by financial

institutions constituent a strong preference towards long-term capital appreciation and

less towards current (dividend) income [Michel and Shaked, 1986]. In view of this

preference, Japanese firms will tend to retain much of their earnings for investment rather

than distribute them as dividend.

Opposite Direction

The seemingly perplexing direction of relationship between dividend payout and future

revenue growth for Healthcare Services may be due to the small number of firms

included in sample. There are only 15 such firms out of the total of 3905 firms. Hence,

the results obtained may not be representative of the industry.


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For Conglomerate firms, there may be certain inconsistencies in the results due to

fundamental differences in the firms categorized under this grouping. Hence, such

inconsistencies may be the cause of the deviation of categorys results from the expected

results.

Indonesian firms rank banks to be the most important source of funds, followed closed by

retained earnings [Ang, Fatemi and Tourani-Rad, 1997]. This result may shed some light

on the puzzling relationship between future revenue growth and dividend payout.

Indonesia firms perceive that interest rates on loans are reasonable if not relatively low

and they believe that banks are committed to provide resources to the firm in the event of

insolvency. In addition, these firms may not want to place too much reliance on retained

earnings due to the uncertainty in future earnings. The extent of institutional ownership of

shares may be another possible explanation for the positive relationship between revenue

growth and dividend payout. However, this reason is not conclusion due to the lack of

ownership data of sample firms.

Historical Revenue Growth

TABLE 3: REGRESSION COEFFICIENTS OF 3-YR REVENUE GROWTH


Expected Direction (-)

Finance

Property

Construction

Transportation & LogisticsElectronics & Electrical Appliance

AutomobileMachinery & Equipment

Paper Products

Printing & Publishing

Telecommunications

Apparel & Textiles

Chemicals, Petroleum & Plastics

-0.126

-0.091

-0.202

-0.102-0.196

-0.270-0.286

-0.138

-0.198

-0.581

-0.083

-0.118

0.000

0.006

0.000

0.0030.000

0.0000.000

0.048

0.061

0.002

0.008

0.000

Metal ProductsMineral Products

-0.201-0.138

0.0000.053


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Healthcare Services

Hotels & Travel Services

Retail

Miscellaneous (Industrial)Conglomerate

Korea

Thailand

Malaysia

Hong Kong

SingaporeJapan

Taiwan

-0.609

-0.174

-0.097

-0.190-0.174

-0.156

-0.081

-0.059

-0.083

-0.149-0.276

-0.184

0.001

0.009

0.004

0.0310.000

0.000

0.020

0.046

0.002

0.0000.000

0.000

Opposite Direction (+)Household Goods -0.030 0.012

Expected Direction

As mentioned, firms establish lower payout when they experienced higher revenue

growth as this entails higher investment expenditures [Rozeff, 1982]. Firms do so to

avoid the more costly external funding. With reference to Table 3, there exists significant

evidence to support the hypothesis that dividend payout is negatively related to historical

growth.

Ability of Finance firms to pay dividend is restricted by laws pertaining to capital and

liquidity requirements to ensure the safety of investors funds. In addition, finance firms

would retain more earnings in historical periods of high growth to meet the increase in

demand for loans. Hence, payout ratio during such periods would be low.

To support past growth, property firms would have devoted substantial amount of funds

in property development activities, such as purchase of land and construction of property.

Due to the high cost of developing property, such firms would adopt low payout in

historical periods of growth.

Historical periods of growth for Construction firms would be translated into increased

financial commitments in raw materials and labour. This would explain their low payout

ratio during these past periods of growth.


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For firms in Transportation & Logistics, Electronics & Electrical Appliances,

Automobiles and Machinery & Equipment, Paper Products and Printing & Publishing,

past growth rates must be matched by substantial investments in long-term assets such as

machinery and equipment. In most instances, increase their manpower was also

necessary. Due to the increase in financing needs for investments and payroll expenses,

coupled with the high cost of external financing, these firms typically has a low payout

ratio when they experienced growth in the past..

Firms involved in Telecommunications would have devoted high non-recurring fixed

costs in the construction and upgrading of infrastructure, as well as investments in new

technology when faced with growth in past periods. Hence, this necessitates a low payout

ratio in these periods.

Firms in the Petroleum, Chemicals & Plastics, Metal Products and Mineral Products

maintain low payout in past periods of growth due to their dependence on raw materials

and their vulnerability to the volatility in the prices of raw materials, which makes up the

bulk of their variable costs. Labour cost would constituent another expense component,

particularly for labour intensive firms. Hence, these factors contribute to the low payout

by these firms in past periods of growth.

Firms in the Healthcare industry require specialised personnel to cater to the needs of

customers and such payroll expenses contribute the bulk of financial needs. Medical

supplies as well as investment in medical equipment also amount to a hefty sum for such

firms. Hence, a low payout ratio was observed in historical high growth periods in order

to finance such huge increase in these expenses.


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Firms in Hotel & Travel Services operate in a service industry that relies heavily on

human capital. For hotel operators, the cost outlay extends beyond payroll expenses to

include maintenance and construction or expansion of accommodation facilities. Hence,

these firms normally have a low payout ratio in periods of growth due to the huge capital

involved to support historical growth,.

For Retail firms as well as Apparels & Textiles, historical growth was matched by

increased investments in inventory. Hence, such firms have adopted a low payout ratio to

in order to finance the increase in inventory level.

Although there may exist fundamental differences in firms categorised under

Miscellaneous (Industrial) and Conglomerate, such firms would typically have devoted

extra financial resources for investment in long-term assets or for support of increased

variable costs in order to sustain historical growth. Hence, such firms have low payout

ratios in periods when they experienced growth.

All countries except Indonesia exhibit a negative relationship between dividend payout

and historical growth. This result is not surprising as there is overwhelming evidence

from Table 4 that indicate that firms that have experienced rapid historical growth

typically have low payout ratio. More than half (19 out of 33 groups) of the industrial

groups, representing about 81% of total sample, exhibit this trend. In addition, more than

65% of the firms in each country fall into the category of firms that exhibit this trend.

TABLE 4: BREAKDOWN OF COMPANIES

Industry/ Country Taiwan Korea Thailand Malaysia Hong

Kong

Singapore Japan Total

Finance 15 81 67 32 20 18 155 423

Property 0 1 27 33 80 21 28 191

Construction 9 39 0 32 4 12 154 258

Transport & Logistics 14 11 9 11 1 10 81 140

Telecommunications 0 2 5 0 1 1 9 18

Elec & Appliance 23 66 14 10 8 8 211 360


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Automobile 4 34 5 6 2 2 113 173

Apparel & Textiles 11 64 27 7 1 1 70 200

Misc (Consumer) 18 70 9 22 7 0 195 337

Machinery & Equip 6 39 4 2 4 0 156 213Paper Products 2 23 3 5 4 1 28 69

Metal Products 11 50 0 24 1 4 135 233

Mineral Products 3 33 0 2 0 0 18 56

Misc (Industrial) 0 0 13 0 6 1 27 47

Healthcare Services 0 1 10 2 1 1 0 15

Hotels & Travel 4 1 11 2 12 14 5 58

Printing & Publishing 0 3 8 4 3 1 14 33

Retail 0 8 7 21 0 4 119 161

Conglomerate 1 2 1 4 129 25 0 162

Total 121

(84%)

528

(83%)

220

(68%)

219

(67%)

307

(88%)

154

(81%)

1518

(83%)

3147(81%)

For Japan, due to preference for long-term capital appreciation as opposed to dividends

[Michel and Shaked, 1986], payout ratio tends to be low. This is particularly true when

Japanese firms need the financial resources to invest in various assets to support their

growth.

This same reasoning applies to Taiwan due to their tax structure as previously mentioned.

Due to the existence of tax on dividend, retained earnings would probably be a favored

choice in sustaining their historical growth, leading to the low payout in periods when

Taiwanese companies experience growth.

Opposite Direction

The inconsistent results yielded by Household Goods may be due to the small number of

firms grouped in that category. As only 20 firms out of a total of 3905 are categorized

under Household Goods, the results may not be representative for the industry.

Firm Size

TABLE 5: REGRESSION COEFFICIENTS OF MARKET CAPITALIZATION


Expected Direction (+)Utilities 0.173 0.002

Metal Products 0.058 0.038

Finance 0.128 0.000


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Transportation & Logistics 0.091 0.010

Machinery & Equipment 0.058 0.037

Opposite Direction (-)

Singapore -0.161 0.026Pharmaceuticals -0.137 0.051

Printing & Publishing -0.182 0.048

Chemicals, Petroleum & Plastics -0.085 0.000

Food & Beverage -0.084 0.003

Wood Products -0.310 0.044

Malaysia -0.117 0.000

Korea -0.052 0.010

Household Goods -0.635 0.003

Entertainment & Recreation -0.165 0.051Healthcare Services -0.443 0.056

Miscellaneous (Services) -0.175 0.009

Expected Direction

With reference to Table 5, firm size is positively related to dividend payout for five

industries namely Finance, Machinery & Equipment, Metal Products, Utilities and

Transportation & Logistics. As the size of a firm increases, information asymmetry may

increase due to increased complexity of the firm and increased dispersion of ownership.

[Kenneth, 1996] As such, shareholders are not able to monitor the large firms closely and

this results in weak control of the management. High dividend payout leads to the

increased need of external financing which in turn leads to increased monitoring of these

firms by both existing and potential creditors. [Mozes and Rapaccioli, 1995] Thus,

dividend payout acts as an indirect monitoring tool. [La Porta et al., 1998]

In addition, further expansions for existing large firms will be increasingly difficult. For

utilities firms in general, there is a limit to the consumer demand. Thus, when utilities

firms increase to a certain extent, the market becomes saturated and further expansion is

close to impossible. The same reasoning applies for metal products, which is basically a


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primary product.1The market demand for such metal products has been shrinking over

the years due to the increased usage of synthetic substitutes so the need for further

expansion is minimal.

Furthermore, there is also a reduced need for such firms to intensify their investments to

reinforce their market visibility. In fact, a further increase in size may be detrimental if

increased size leads to higher tax brackets or increased scrutiny by investors, legal

authorities and competitors. Finance firms, in particular, are governed by laws pertaining

to capital and liquidity requirements to ensure the safety of investors funds e.g. deposits,

insurance premiums, investment funds] in these firms.

Thus, large firms will choose to distribute a larger proportion of their earnings to

shareholders through dividends rather than pumping more financial resources into

expansion plans. The same reasoning holds for the Machinery & Equipment and

Transportation & Logistics industries that exhibit positive relationship between dividend

payout and firm size.

1Plastics served as substitutes for wood, glass and metal during the hardship times of World Wars I & II.

After World War II, newer plastics, such as polyurethane, polyester, silicones, polypropylene,

polycarbonate and polymethyl methacrylate joined polystyrene and PVC in widespread applications. By the

1960s, plastics were within everyone's reach due to their inexpensive cost. Plastics had thus come to be

considered 'common' - a symbol of the consumer society.

http://www.plasticsresource.com/disposal/life_cycle_feature/step1.html


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Opposite Direction

Dividend payout and firm size are negatively related for 3 countries namely Korea,

Malaysia and Singapore and 9 industries namely Food & Beverage, Household Goods,

Wood Products, Chemicals Petroleum & Plastics, Entertainment & Recreation,

Healthcare Services, Pharmaceuticals, Printing & Publishing and Miscellaneous

(Services).

In Singapore, many of the larger firms are actually government-linked companies. There

are already disclosure regulations in place to prevent misuse of funds so the problem of

information asymmetry in these larger firms is in fact a smaller problem. As a result, the

dividend payout ratio may be smaller for these large firms.

Pharmaceutical firms focus on research and development and are by nature large. A

natural line of argument following this is that larger pharmaceutical firms are more

reputable and thus have a larger customer base, which includes medical centers,

universities and research centers. This may lead to more R&D projects, which generally

require large amount of financial resources. Thus, dividend payout will be lower for

larger pharmaceutical firms.

The Printing & Publishing and Chemicals, Petroleum & Plastics industries require high

start-up costs due to the large amount of fixed costs required in developing such printing

press and chemical plants. As a result, the large firms dominate and may be involved in

greater scale production, and thus distribute less cash dividends as compared to their

smaller counterparts.

The Food & Beverage industry provide products, which are basic necessities to

consumers. In our study, Food & Beverage is ranked 6 th for comprising the largest


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number of firms. This industry constitutes numerous small firms. The larger firms might

be the stronger firms, which seek further expansion and thus leads to lower dividend

payout. The mean market capitalization for Food & Beverage is USD757 million whereas

the mean market capitalization for all firms included in our sample is USD1.36 billion.

Information asymmetry may not be a deciding factor in this industry as the average size

of these firms is rather small.

Similarly for the Wood Products industry, the mean market capitalization is only

USD329 million, which is a mere fraction of the mean market capitalization of all firms.

Thus, information asymmetry of larger firms might not be a big problem as the size of all

the firms are actually rather small when discussed in absolute terms. The same reasoning

applies for Malaysia and South Korea. The mean market capitalization is only USD474

million for Malaysia and USD178 million for Koreain our sample.

The seemingly perplexing direction of relationship between dividend payout and firm

size for Household Goods, Entertainment & Recreation and Healthcare Services may be

due to the small number of firms included in this particular regression. In our sample only

32 firms are categorized under Entertainment & Recreation, 21 firms under Household

Goods and 16 firms under Healthcare Services.

Lastly, for Miscellaneous (Services), there may be certain inconsistencies in the results

due to fundamental differences in the firms categorized under this industry grouping.


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Leverage

TABLE 6: REGRESSION COEFFICIENTS OF DEBT TO ASSETS RATIO


Negative Direction (-)Footwear & Leather -0.344 0.008

Malaysia -0.151 0.000

Positive Direction (+)Construction 0.273 0.000

Transportation & Logistics 0.274 0.000

Mining 0.320 0.017

Electronics & Electrical Appliance 0.132 0.000Food & Beverage 0.182 0.000

Automobile 0.211 0.000

Apparel & Textiles 0.181 0.000Miscellaneous (Consumer) 0.215 0.017

Chemicals, Petroleum & Plastics 0.148 0.000


Paper Products 0.143 0.016


Entertainment & Recreation 0.217 0.019

Retail 0.163 0.000

Miscellaneous (Services) 0.164 0.016

Korea 0.173 0.000

Japan 0.223 0.000

Negative Direction

It was found that firms trade off dividend payments with fixed financial charges. A

highly leveraged firm with a high level of fixed financial charges would lower its payout

ratio. Jensen (1992)

Dividend payments are then substitutes for these charges. A firm with higher fixed

charges depends more greatly on costly external financing, hence other things being

equal, this firm will choose to pay lower dividends. Rozeff (1982)

However, with reference to Table 6, only the industry of Footwear & Leather and

Malaysia yield this negative relationship.


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Positive Direction

Our results support the positive relationship between dividend payout and leverage.

About half of the industries (47%) yielded this positive relationship. Increased

indebtedness or leverage leads to increased contacts with external financiers, which

results in closer monitoring and an increased dividend payout. Greater external

monitoring pressures managers away from the consumption of perquisites and to use

corporate assets more efficiently. In this way, more cash is disgorged, and dividends

increase with indebtedness. Robert (1999)

The industries whose leverage is positively related to dividend payout are Construction,

Transportation & Logistics, Mining, Electronics & Electrical Appliance, Food &

Beverage, Automobile, Apparel & Textiles, Miscellaneous (consumer), Chemicals,

Petroleum & Plastics, Machinery & Equipment, Paper Products, Metal products,

Entertainment & Recreation, Retail, Miscellaneous (Services). The countries whose

leverage is positive related to dividend payout are Korea and Japan.

Cash Flow Adequacy

TABLE 7:

REGRESSION COEFFICIENTS OF FREE CASH FLOW TO ASSETS RATIO


Expected Direction (+)Machinery & Equipment 0.072 0.009



Japan 0.051 0.000Singapore 0.068 0.074

Taiwan 0.105 0.035

Chemicals, Petroleum & Plastics 0.051 0.016

Electronics & Electrical Appliance 0.077 0.000

Building Materials 0.138 0.001

Utilities 0.140 0.039

Opposite Direction (-)Apparel & Textiles -0.058 0.056


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Expected Direction

Cash flow adequacy is vital in deciding the dividend payout as a firm will not distribute

cash dividends without the means to do so. [Brigham and Daves, 2002] With reference to

Table 7, our study further affirms this logic.

Firms involved in Machinery and Equipment usually require high non-recurring fixed

costs in the acquirement of the assets but low daily cash requirements. If these firms have

no intention of acquiring new fixed assets in the near future, they may be left with large

amount of idle cash, which generally yield low returns. Firms can reduce their cash

balances by distributing cash dividends. This will lower the occurrence of the

management using idle cash in non value-adding investments, thus reducing agency

costs. [Mollah, Keasy and Short, 2000]

For the Entertainment & Recreation and Miscellaneous (Services) industries, the daily

cash exchanges are high, as most of these services are cash settled at the point of

purchase. Thus, there will be idle cash balances if these firms have more cash inflows

than outflows. Following the argument for Machinery and Equipment, these firms will

then choose to distribute cash dividends if they have no specific use for these cash to

prevent misuse of funds.

The same logic follows for the rest of the countries and industries that exhibit a positive

relationship between dividend payout and cash flow adequacy. There may not be a need

to pinpoint any special reason specific to the country or industry to explain this typical

relationship between dividend payout and cash flow adequacy, which adheres to past

literature.

Opposite Direction


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Firms in the Apparel & Textiles industry requires large variable expenses, which includes

wages, costs of materials etc to meet with their daily production. When the need arises,

these firms may need to temporarily increase working scale and time to meet with the

demand of customers especially during peak. Thus this is an industry which requires a lot

of flexibility. In light of this, the free cash flow to asset ratio may mean the firms are

intentionally pursuing such a high cash flow policy to maintain flexibility and meet with

customer demands. In order to maintain a high level of free cash, the firms distribute

fewer cash dividends. In the case of a positive relationship, our argument is based on the

assumption that there is no specific use for the free cash on hand which then increases the

likelihood of misuse of funds. However for the case of the Apparel & Textiles, a possible

conjecture is that there is a need for high free cash on hand and thus low dividend payout

is reasonable for firms with high cash flow adequacy.

Collateralizable Assets

TABLE 8: REGRESSION COEFFICIENTS OF

NET FIXED ASSETS TO ASSETS RATIO


Expected Direction (+)Transportation & Logistics 0.168 0.000

Electronics & Electrical

Appliance

0.045 0.058

Food & Beverage 0.081 0.003Apparel & Textiles 0.135 0.000

Chemicals, Petroleum &

Plastics

0.057 0.015



Hotel & Travel Services 0.143 0.047

Retail 0.083 0.013


Conglomerate 0.086 0.030

Taiwan 0.169 0.006

Korea 0.078 0.000

Thailand 0.077 0.046

Malaysia 0.167 0.000Singapore 0.091 0.055


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Japan 0.075 0.000

Opposite Direction (-)

Paper Products -0.098 0.095

Expected Direction

The above results support the positive relationship between dividend payout and

collateralizable assets. If a firm holds more collateralizable assets, they have fewer

agency problems between their bondholders and stockholders because these assets may

serve as collateral against borrowing and consequently pay more dividends. Mollah,

Kevin and Helen (2000)

Fixed assets are long-term tangible assets held for business use and not expected to be

converted to cash in the current or upcoming fiscal year, such as manufacturing

equipment, real estate and furniture.

With reference to Table 8, the industries whose dividend payout are positively related to

collateralizable assets are Transportation & logistics, Electronics & Electrical Appliance,

Food & Beverage, Apparel & Textiles, Chemicals, Petroleum & Plastics, and Machinery

& Equipment. The above industries largely belong to the manufacturing sector. Their

fixed assets are mostly in manufacturing equipment.

The other industries which yield significantly positive relationship between

collateralizable assets and dividend payout are Entertainment & Recreation, Hotel &

Travel Services, Retail, Miscellaneous (Services). This category of industries has a high

level of fixed assets in real estate Hotel properties, amusement parks, retail stores,

servicing centers.


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As for the last industry conglomerate, which comprises of holding companies and

companies which deal with many businesses, would generally have a much higher level

of fixed assets due to their nature of multi-business.

Seven out of the eight countries except Hong Kong, under our study show similar

significantly positive relationship with collateralizable assets and dividend payout.

Opposite Direction

Only one industry shows a negative relationship between dividend payout and

collateralizable assets which is the Paper Industry.

Systematic Risk

TABLE 9: REGRESSION COEFFICIENTS OF BETA


Expected Direction (-)Healthcare Services -0.569 0.003

Hong Kong -0.068 0.020

Opposite Direction (+)Finance 0.057 0.006

Construction 0.128 0.000Transportation & Logistics 0.122 0.000

Electronics & Electrical

Appliance

0.070 0.001

Food & Beverage 0.055 0.048

Automobile 0.153 0.000

Apparel & Textiles 0.093 0.005

Chemicals, Petroleum &

Plastics

0.142 0.000



Pharmaceuticals 0.122 0.040

Korea 0.034 0.063Indonesia 0.108 0.052

Japan 0.096 0.000

Expected Direction

Higher betas are a reflection of the presence of high operating and financial leverage. A

firm with higher operating and financial leverage would have higher transaction costs.

They pay lower dividends to avoid the costs of external finance. Rozeff (1982) With


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reference to Table 9, only Healthcare services and Hong Kong yielded this negative

relationship.

Opposite Direction

Our results support the positive relationship between dividend payout and beta, which is

contrary to past literature results. It might be due to increased external monitoring, an

increase in dividends, and a reduction in agency problems.

With reference to Table 8, the industries whose beta is positively related to dividend

payout are Finance, Construction, Transportation & Logistics, Electronics & Electrical

Appliance, Food & Beverage, Automobile, Apparel & Textiles, Chemicals, Petroleum &

Plastics, Machinery & Equipment, Metal Products, and Pharmaceuticals. The countries

whose beta is positive related to dividend payout are Korea, Indonesia and Japan.

Objective 2: To investigate if there are industry-specific differences in

dividend payout.

Summary of Results

TABLE 10: ANOVA OUTPUT FOR INTER-INDUSTRY DIFFERENCES

With reference to Table 10, statistically significant differences in dividend payout are

observed between the thirty-two industries, analogous to previous studies done on inter-

ANOVA

DIVPAY

29.527 31 .952 17.299 .000

1118.676 20317 .0551148.203 20348

Between Groups

Within GroupsTotal

Sum of

Squares df Mean Square F Sig.


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industry differences2. Five industries have shown radical differences in dividend payout,

namely Utilities, Transport & Logistics, Telecommunications, Pharmaceuticals and Hotel

and Travel Services, of which three are regulated industries. In contrast, some industries

show little inter-industry difference in dividend payout. These comprise of the ten

industries that have five or less significant results. The Finance industry, contrary to our

expectations, shows only moderate inter-industry difference in dividend payout

considering the vast difference that exists between the financial and the other sectors.

With reference to the means and medians of the dividend payout of various industries,

utilities yield the highest payout of 54%. This observation yields little surprise as

previous studies3

have recognized this phenomenon and have derived various reasons to

explain it.

2 Michel (1979) finds statistically significant differences in dividend payout ratio among 13 different

industries during the late 1960s to mid-1970s. Baker (1988) updates the Michel study using data from 1977

to 1981, and finds support for industry effects on payout ratio.

3Under the Smith hypothesis [Smith, 1986], utilities possess larger payout than unregulated firms. In 1992,

Moyer, Rao & Tripathy (1992) test the Smith hypothesis and explore the reasons for the high observeddividend payout. They suggest that such high payout is due to the fact that utility companies use dividend

policy as a mechanism for controlling or responding to regulatory risk.


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Industry Mean of

dividend

Median of

dividend

No. of significant

resultsFinance 0.391806 0.337823 11

Property 0.402232 0.354947 7

Construction 0.36983 0.312274 12

Utilities 0.536339 0.564625 26

Transport & Logistics 0.482685 0.446071 18

Telecommunications 0.271076 0.227884 25Agriculture, Forestry & Fishery 0.486396 0.484776 14

Mining 0.415857 0.359001 3

Computer & Computer Services 0.356678 0.298968 7

Electronics & Electrical Supplies 0.387022 0.335267 11

Food & Beverage 0.427265 0.387466 9

Automobile 0.426454 0.389807 9

Household Goods 0.411156 0.369632 2

Apparels & Textile 0.394848 0.351105 9

Footwear & Leather Products 0.44968 0.395319 2

Wood Products 0.382669 0.283947 5

Miscellaneous (Consumer) 0.416936 0.374379 4

Chemicals, Petroleum & Plastics 0.435113 0.386351 12

Machinery & Equipment 0.397202 0.345498 9

Paper Products 0.424869 0.382442 4

Metal Products 0.386466 0.335799 11

Mineral Products 0.405554 0.384349 6

Building Materials 0.465742 0.442404 13

Miscellaneous (Industrial) 0.427362 0.408209 3

Entertainment & Recreation 0.422899 0.361752 3

Healthcare Services 0.479747 0.499024 2

Pharmaceuticals 0.280738 0.237071 29

Hotel & Travel Services 0.506741 0.477972 20

Printing & Publishing 0.375193 0.345831 6

Retail 0.415177 0.353149 8

Miscellaneous (Services) 0.418192 0.356548 5

Conglomerate 0.441585 0.417368 10

With reference to Table 11, Telecommunication and Pharmaceutical industry yields the

lowest dividend payout of 27% and 28% respectively.

TABLE 11:

SUMMARY OF DIVIDEND PAYOUT FOR DIFFERENT INDUSTRIES


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Reasons for Vast Differences

There are certain pairs of industries, which show huge difference in their dividend

payout, and we seek to provide probable reasons for this phenomenon.

Extent of Regulation

One of the reasons proposed to explain the reasons for the radical differences in payout

policy among the various industries is the extent of regulation on the industries. A

number of studies have been conducted on dividend policies of regulated versus

unregulated firms4 and there seem to be a consensus that difference does exist between

their dividend policies. Past literature suggests that a different set of factors determine

dividend policy for regulated firms than that for unregulated firms. This is probably the

reason why the dividend payout for the three regulated industries is so radically different

from the regulated firms.

The mean dividend payout for regulated firms is significantly larger than that for

unregulated firms [Saxena, 1999], which is consistent from the results obtained where

utilities and transport & logistics yield a high payout ratio of 54% and 46% respectively.

Telecommunications, on the other hand, yield a low payout ratio of 27%.

The specific reasons for such low payout will require further research but we feel that it

may be due to the unique nature of the industry or is a result of regulations.

Investment Opportunities

4 Collins, Saxena and Wansley (1996) recognizes the potential differences in dividend policy between

regulated and unregulated firms and focus on agency-cost and monitoring explanations for the relevance of

dividend. Atul (1999) proceed further to explain the possible differences in the dividend policy of both

regulated and unregulated firms.


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Another possible reason for the difference in payout ratio between industries may be the

investment opportunities available for each industry. Michel (1979, p. 24) suggests that

investment opportunities within industries may account partially for the industry effect.

Firms or industries that have good investment opportunities typically have lower

dividend payout ratio. This phenomenon can be explained by the pecking order which

firms exhibit greater preference for retained earnings rather than external source of funds.

However, regulated firms have their growth prospects determined by regulators, who

directly or indirectly, dictate how much dividend the firm can pay [Saxena, 1998]. Since

regulated firms do not base their dividend payout in relation to their growth opportunities,

it is no surprise that their payout ratio is exceptionally different from unregulated firms.

The pharmaceutical industry is characterized by their heavy investments in R&D, which

differentiates it from other industries. Vast investment opportunities that exist in this

industry probably led to low dividend payout.

Cyclical Nature of Industry

The cyclical movements of investment opportunities and earnings also affect the dividend

policy of firms. [Dempsey, Laber and Rozeff, 1993] Firms in the Hotel & Travel Services

industry operate in a cyclical environment, which involves peaks and off-peak periods in

their demand. Hence, this probably explains the reason behind the industrys vast

difference in dividend payout.

Reasons for Homogeneity

On the other hand, certain industries maintain typical payout ratios which are not

significantly different from other industries when pairwise comparisons are made.

Number of Firms in Category


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Certain industries that exhibit minimal inter-industry differences in dividend payout may

be due to the fact that the firms included in these industries are relatively small and may

not be representative of the industry. Five out of the ten such industries comprises of less

than 30 firms in each category, with Healthcare and Mining firms not even exceeding

twenty. Thus, the mean dividend payout of the industry is likely to be of a typical range,

not too different from the rest of the industries.

Fundamental Differences of firms within industries

For the three miscellaneous categories, namely for consumer, industrial and services, the

minimal inter-industry differences in their dividend payout with respect to other

industries may be due to the fundamental differences in firms classified under such

categories. Since firms of the firms categorized under these categories might have a

mixture of characteristics of other industries, there is unlikely to be huge inter-industry

differences.

Individual firms in the Paper Products and Wood Products industry may be very different

with regards to their range of products and/or the type of customers they serve. Thus, the

mean dividend payout of the industry will not be too extreme after the averaging of the

dividend payout of all the firms in that industry. The pairwise comparisons of such

countries with the rest of the industries will naturally show insignificant results.

Conclusions

In conclusion, our results show that differences in dividend payout among industries do

exist. However, it is not possible to go into details to account for the differences among

each and every industry. We have identified those industries either exhibit vast


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differences or minimum differences and did a closer examination to propose some

reasons resulting in the two extremes.

The main reasons we proposed that cause the vast differences are the extent of

regulations, investment opportunities and the cyclical nature of industry. As for the

industries that show little difference in dividend payout, the reason may be that the firms

included these industries are relatively small in number or have fundamental differences

among them.

Objective 3: To investigate if there are country-specific differences in

dividend payout.

Summary of Results

Significant inter-country differences in dividend payout are found between the countries

at 5% level of significance. Table 12 summarizes the mean difference of the dividend

payout between the various countries.

TABLE 12: SUMMARY OF MEAN DIFFERNCE BETWEEN COUNTRIES

Significance of Mean Difference

Taiwan Korea Thailand Malaysia Hong Kong Singapore Indonesia Japan

Taiwan 0.000 0.043 0.001 0.613 0.097 0.000 0.132

Korea 0.000 0.000 0.000 0.000 0.000 1.000 0.000

Thailand 0.043 0.000 0.000 0.000 0.000 0.000 0.000

Malaysia 0.001 0.000 0.000 0.024 0.925 0.000 0.036

Hong Kong 0.613 0.000 0.000 0.024 0.777 0.000 0.945

Singapore 0.097 0.000 0.000 0.925 0.777 0.000 0.974

Indonesia 0.000 1.000 0.000 0.000 0.000 0.000 0.000

Japan 0.132 0.000 0.000 0.036 0.945 0.974 0.000

With reference to Table 13, Thailand displayed interesting results, having the highest

mean dividend payout ratios among all the countries in our study. Also, its dividend

payout ratio is significantly different from all the other countries at 5% level of

significance.


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TABLE 13: SUMMARY OF DIVIDEND PAYOUT OF DIFFERENT COUNTRIES

Country Mean of dividend payout Median of dividend payout


Korea 0.313 0.266

Malaysia 0.406 0.357

Singapore 0.420 0.378

Japan 0.429 0.374

Hong Kong 0.436 0.407

Taiwan 0.460 0.423

Thailand 0.503 0.497

Indonesia and South Korea exhibit homogeneity in their dividend payout ratios. The two

countries have the lowest mean dividend payout ratios. Also, their dividend payout ratios

are significantly different from all other countries except between themselves.

Tax Structures

In order to explain the differences in dividend payout of these different countries, it is

essential to look at the tax structures of these 8 countries. [Table 14]

TABLE 14:

SUMMARY OF APPROXIMATE TAX RATES OF DIFFERENT COUNTRIES

Tax RatesCountry Capital Gains Tax Dividend Taxes

Taiwan Ordinary Income(


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In South Korea, capital gains are tax-free. Dividends are taxed at a flat rate of 21.5%.

Thus, investors in South Korea will definitely favour capital gains over dividends. [Table

15]

In Indonesia, deemed gains on sale of shares traded on Indonesian Stock Exchange are

subject to 0.1% of the transaction value. On the other hand, dividends are not taxed.

Although this might suggest a higher dividend payout, the difference in tax rates between

dividends and capital gains is rather insignificant. Moreover, capital gains are taxed only

when the shares are sold. Thus, with a long-term horizon, capital gains might still be

preferred over dividends, which constitute current income. Investors will need to re-

invest their dividend income and might even incur more transaction costs than it would

be if the dividends are not distributed and used to generate long-term capital gains which

will only be taxed at the end of the investment horizon.

TABLE 15: RELATIVE ADVANTAGE OF CAPITAL GAINS OVER DIVIDENDS

Tax Korea Indonesia

Dividend (Max) 21.5% 0%

Capital Gains (Min) 0% 0.1%

Advantage 21.5% -0.1%

Dividend (Min) 21.5% 0%

Capital Gains (Max) 0% 0.1%

Advantage 21.5% -0.1%

In Thailand, there is no tax imposed on dividends. With the exception of Hong Kong and

Indonesia, the tax-free dividends are very much favourable as compared to all the other

countries. Thus, higher dividend payout observed in Indonesia is justifiable.

Hong Kongs mean dividend payout is significantly different from that of Malaysia.

Hong Kong is a tax haven with no taxes on both dividends and capital gains. Whereas in

Malaysia, capital gains are not taxed but dividends are taxed as normal income. Thus,


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higher dividend payout observed in Hong Kong is a logical outcome with comparison of

the various tax rates on relative grounds.

TABLE 16: APPROXIMATE MAXIMUM TAX RATES

Country TH HK ID KS TW SG MY JP

Dividend Taxes [max] 0% 0% 0% 21.5% 25% 26% 28% 35%

Subscribing to the same reasoning, the significant difference in dividend payout between

companies in Taiwan and Malaysia is due to the different tax rates on dividends. In

Malaysia, the maximum tax rate on dividends is 28% whereas in Taiwan, a flat rate of

25% at the corporate level is imposed. [Table 16]

Block Holdings

Another probable reason behind the difference in dividend payout ratio might be due to

the difference in ownership structure in these various countries. As such information is

considered proprietary, they may not be readily available especially when there is no

regulation for the companies to disclose such information. We have thus chosen to take a

closer look at the available information summarized by the various sources.

TABLE 17: CONTROL OF PUBLICLY LISTED COMPANIES IN 1996

Percentage of Control

Countries No. of

sample

companies

Family Widely

Held

The State Widely Held

Financial

Institutions

Widely Held Non-

Financial

Corporations

Indonesia 178 67.3 6.6 15.2 2.5 8.4

Korea 345 24.6 51.1 19.9 0.2 4.3

Malaysia 238 42.6 16.2 34.8 1.1 5.3Thailand 167 51.9 8.2 24.1 6.3 9.5Weighted by market capitalization

As shown in Table 17, many of +the public listed companies in East Asia are family-

held. It is especially so in Indonesia with 67.3% held by family and only 6.6% widely

held. Since shareholders are made up of family members, they are most likely to be the


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management of the companies as well. Assuming there is no expropriation and moral

hazard, it can be argued that there will be little agency problem. These companies will

have a lower dividend payout, which constitutes current income and focus more on long-

term growth, which comes in the form of capital gains. Thus, the low dividend payout in

Indonesia might be due to the high concentration of family owned corporations.

TABLE 18: OWNERSHIP CONCENTRATION

Concentration Ratio(Percent)

Country Largest

Shareholder

Top Five

Shareholders

As of End of the

Year

Company Coverage

Indonesia 48.2 67.5 1997 All PLCs

Korea 20.4 38.5 1998 81 non-financial PLCs

Malaysia 30.3 58.8 1998 All PLCsThailand 28.5 56.6 1997 All PLCsConcentration ratio is defined as the percentage of total outstanding shares of an average PLC owned by

the largest or top five shareholders. The percentages are not weighted by market capitalization

Also, the ownership is highly concentrated with top shareholders owning a large

proportion of the companies. Thus, this further illuminates the high decision power of the

family who holds ownership of these companies. [Table 18]

In the case of Singapore, the mean dividend payout is not significantly different from

other countries with the exception of Indonesia, South Korea and Thailand mentioned

earlier. Many of the large companies are actually government-linked companies. Thus,

there are reasonable monitoring tools and legislation governing such companies. With

this in mind, the dividend payout ratio may assume a more typical range and will not be

as low as that of Indonesia or as high as that of Thailand as the reasons supporting the

extreme dividend payout ratios may not be that relevant in the Singapore context.

Socio-Cultural & Political Influence


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We must bear in mind that socio-cultural has a great deal of influence on the way the

corporations are structured. In the East Asian context, political and cultural influences are

important factors that may explain the differences in dividend payout.

In Japan, there is a unique system whereby firms and banks- kereitsus have close banking

relationships. In contrast there is no such practice in Malaysia. Thus, additional financing

might be easier for companies in Japan as compared to Malaysia due to the established

banking relationships in Japan. As a result, firms in Japan are able to distribute higher

cash dividends, as there is greater ease of obtaining funds when the need arises.

Another interesting observation is that the 3 countries with extreme dividend payout

namely Thailand, Indonesia and South Korea are the worst hit countries during the Asian

financial crisis. These countries have considerable less conservative lending practices e.g.

directed loans. In the case of Thailand, due to the relaxed lending practices, the

companies might have less consideration about their ability to maintain the high dividend

payout since they will be able to get loans easily. As for Indonesia and Thailand, it will

be illogical to use the same line of reasoning since they have the lowest dividend payout.

A possible explanation might be due to the overall lack of monitoring of these

companies. Thus, the shareholders do not actually demand a higher dividend payout to

exert indirect monitoring by creditors as the indirect monitoring mechanism simply does

not work.

Thus, we conclude that there are indeed differences in the general dividend

payout adopted by firms in different countries. It is impossible to explore the differences

that lie between each and every country by the sheer number of possibilities but we seek

to summarize our findings and provide some probable explanations that generally explain


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these differences. The 3 main reasons we propose are tax structure, ownership structure

and lastly socio-cultural & political


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CONCLUSION

Summary of Findings

This study examined the relationship between dividend payout and several

variables including expected growth, historical revenue growth, firm size, indebtedness,

cash flow adequacy, collateralizable assets and market risk. Our uniqueness lies in the

East Asian context of our study. Past studies have rarely investigated dividend policy

with regards to the East Asian context and do not usually extend their sample to eight

countries as we have done in our study.

The results show that there are significant relationships between dividend payout

and the tested variables. However, the degree of significance for different variables varies

among countries and industries. Interestingly, the proxy for market risk- beta has a

positive relationship with dividend payout contrary to that found in previous studies. One

probable reason cited is that investors will demand more monitoring on firms with high

firm risk. However, it might be inequitable for each individual investors to monitor the

firm risk on their own especially if they do not own large stakes in the risky firms. Thus,

indirect monitoring tools such as a high dividend payout may prove to be useful in

serving this purpose.

Other tested variables such as firm size and cash flow adequacy showed

inconsistency in their directions of relationship with dividend payout for different

countries and industries. This seemingly puzzling observation can be explained by the

unique characteristics of these countries and industries. With respect to past literature,

indebtedness proves to have different directions of relationship with dividend payout in


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different studies. Our study has shown that indebtedness is positively related to the

dividend payout.

Our inter-industry study of dividend payout showed that there are significant

differences in the dividend payout of different industries. Inter-industry differences are

due to the different operating nature as well as degree of government surveillance of

these firms. Dividend policy has been viewed as an indirect monitoring tool and its

usefulness in serving this purpose has to be weighted against the fundamental nature of

these industries. Certain monitoring systems may be in place for certain industries. Also,

certain industries may have other more important objectives in mind, thus choose a

certain suitable level of dividend payout.

Similar tests carried out for inter-country differences also showed significant

results. Such differences are attributed to the different tax rates, institutional structures

and socio-cultural and political influences. Among the countries in our study, Indonesia

and South Korea displayed the lowest dividend payout whereas Thailand showed the

highest dividend payout. Interestingly, we have made a side remark that these three

countries with extreme dividend payout are the worst hit countries during the Asian

Financial Crisis.

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