3.2.2. Explanatory Variables

These are constructed on the theoretical framework of (Aivazian et al. 2003b) and an extensive literature review conducted herein. Apart from the sector, the remaining 12 explanatory variables have been broadly divided into the following three measures: operating measures (5), debt measures (3), and summary measures (4).

Sector. The Nifty 500 companies have been classified into 16 sectors. Classification into these 16 sectors is based on the CMIE classification of industry groups, as discussed in the previous sub-section. On the basis of the literature review conducted in the previous section, it is hypothesized that dividend policy differs significantly across industrial sectors.

Apart from the three operating measures as defined by (Aivazian et al. 2003b)—tangibility, business risk, and scale of operations (log of sales)—this study also considers two more operating measures—operating profit and size (log of market capitalization). The three debt measures include debt ratio, interest coverage ratio, and current ratio. Summary measures are further sub-divided into profitability, growth, and liquidity. To measure profitability, in addition to the return on equity (ROE), this study also considers the return on investment (ROI), following Reddy and Rath (2005). Mehmood et al. (2019) have also used both accounting measures, ROE and ROI, to measure profitability. Price to book value is used as a proxy for growth measure. Cash flow per share is used to measure liquidity, following Bhat and Pandey (1994) and Mohamed et al. (2012).

Table 2 defines each of these explanatory variables, now referred to as factors influencing dividend payout policy, and gives the nature of the relation expected with dividend payout policy.
