An Empirical Study on the Determinants of Dividend Policy of Firms

The advent of liberalization, globalization, and privatization of Indian economy since July 1991 has made finance managers of different enterprises in India face intense competition from both domestic and foreign firms. In such a corporate environment, dividend decision is one of the most important decisions in finance. In this paper, an attempt is made to identify the factors influencing the dividend policy decisions of firms by using Bombay Stock Exchange (BSE) Sensex firms as sample for the period 1989-90 to 2007-08. The study finds that profit before interest and taxes (PBIT) to total assets, lagged dividends, depreciation to net fixed assets, lagged PBIT to total assets and net worth to capital employed (NW/CE) are the significant explanatory variables positively influencing the dividend policy of companies in case of pooled data. The study strongly supports a positive and significant relationship between LD/P and current dividends at the company-level.