4.3.3. Summary Measures

We found another positive relationship between profitability and dividend policy. Although this study uses two variables (ROE and ROI) to measure profitability, we found a significant positive impact of ROI in 14 sectors, but ROE shows a significant positive impact in three sectors only (MEHH, S-OTH, and LOGISTICS). In the MEHH and S-OTH sectors, the ROI variable is found to be insignificant. The analysis thus indicates that firms having a higher profitability in these sectors are likely to distribute higher dividends. These findings support Jensen (1986)'s free cash flow hypothesis, and are consistent with prior studies e.g., (Fama and French 2001; Benito and Young 2003; Aivazian et al. 2003b; DeAngelo et al. 2004; Mitton 2004; Reddy and Rath 2005; Baker et al. 2007, 2013; Bostanci et al. 2018). However, the profitability measure may differ for each sector.

We found that the price-to-book value (P/B) ratio is significantly positively related to the dividend policy for four sectors only (AUTO, TEXTILE, LOGISTICS, and FINSER). This is consistent with studies such as (Nizar Al-Malkawi 2007; Foroghi et al. 2011; Al-Shubiri 2011; Imran 2011; Yusof and Ismail 2016). However, it is significantly negatively related to the dividend policy for the BANKING-sector only. This is in line with our expectation, and also in line with prior studies (Auerbach 1982; Easterbrook 1984; Jensen 1986; La Porta et al. 2000b; Bhole 2000; Fama and French 2001; Benito and Young 2003; Mitton 2004; Reddy and Rath 2005; Bhole and Mahakud 2005; Li and Lie 2006; Ferris et al. 2006). Information on the P/B ratio was not available for all companies of the AGRO and PHARMA sector, hence it was excluded for the panel regression estimation of these sectors.

As anticipated, we found that liquidity will be either positively or negatively related to dividend policy, depending upon the industry. Our panel regression estimates show that there is a significant positive impact of CFPS on payout policy for the CONSGDS and S-OTH sectors. This signifies that firms with a higher liquidity are likely to pay higher dividends in these sectors. However, results are opposite for the MINING, AUTO, and M-OTH sectors. This implies that companies in these sectors continuously distribute dividends, although they have fewer cash flows. Bhat and Pandey (1994) have found that in India, as companies prefer to follow a stable dividend policy, the availability of cash is not a significant factor for evaluating payout policy. The agency theory also explains the payment of dividends through borrowed funds in case of the non-availability of cash. Information on the P/B ratio was not available for all companies of the AGRO, TEXTILE, and PHARMA sector, hence it was excluded for the panel regression estimation of these sectors.

Generally, we can conclude that the factors influencing dividend policy differ across sectors in India. For the LOGISTICS sector firms, tangibility, LgMCap, debt ratio, interest coverage ratio, current ratio, ROE, ROI, and P/B ratio significantly impact the dividend policy. For the AUTO-sector firms, operating profit, LgMCap, current ratio, ROE, ROI, P/B ratio, and CFPS significantly influence payout policy. For the BANKING-sector, tangibility, business risk, debt ratio, interest coverage ratio, current ratio, ROI, and P/B ratio significantly influence the dividend policy. For the MINING-sector, firms, tangibility, operating profit, debt ratio, current ratio, ROI, and CFPS influence the dividends. In the CONSTR sector companies, tangibility, business risk, LgMCap, debt ratio, current ratio, and ROI are important dividend determinants. For the AGRO and ENGG sectors, tangibility, current ratio, and ROI influence the firms' dividend policy. Additionally, the debt ratio is an important dividend policy determinant in the AGRO sector, and LgMCap in the ENGG sector. In the CONSGDS sector, tangibility, LgMCap, ROE, ROI, and CFPS influence the dividend decision, whereas for the M-OTH sector, operating profit plays an important role instead of ROE for determining the dividend policy. For the MEHH sector, the operating profit, LgMCap, debt ratio, current ratio, and ROE influence the dividends. In the POWER sector, only four factors—operating profit, debt ratio, current ratio, and ROI—are important dividend policy determinants. For the TEXTILE sector, also only four factors—tangibility, interest coverage ratio, ROI, and P/B ratio significantly influence the payout policy. Moreover, for the S-OTHS-sector, only three factors (business risk, ROE, and CFPS), and PHARMA-sector, only two factors (LgMCap and ROI), significantly influence the payout policy. A possible explanation could be that macro-economic factors rather than firm-specific factors influence the payout policies of these sectors. Lastly, the sectoral regression results show that the scale of operations as measured by LgSales does not significantly influence the payout policy for any of the sectors in India.
