REVIEWING THE RELATIONSHIP BETWEEN DIVIDEND AND FREE CASH FLOW OF NON-FINANCIAL FIRMS OF KSE 100

Abstract

In this research, we have worked toward two main objectives. Firstly, we have worked upon the measures of long-term and short-term investments, and lastly, we have checked whether the dividend payout of the small fifty and big fifty firms is indifferent or not regarding free cash flow. For this research, the sample size we took was all the listed companies in the KSE 100 Index of the Pakistan Stock Exchange; further, we divided them into financial and non-financial firms and did our testing only on the non-financial firms (64 companies in total) between the time period starting from 2009 to 2018. We developed four regression models in total to test our arguments and bifurcated our models into two series. In our first series, we checked the random effect, and in the subsequent series, we checked the fixed effect.In the end, our results came out as expected, and we have been able to concur with our defined objectives. We can conclude that, firstly, there is a strong relationship between long-term and short-term investments, and that when it comes to the payment of dividends, the firms are different depending upon their size.

Keywords

• Free Cash Flow
• Dividend
• KSE-100
• Non-Financial Firms
• Regression Analysis

References

1. Agrawal, A. and N. Jayaraman, (1994). The dividend policies of all‐equity firms: A direct examine of the free cash flow theory. Managerial and decision economics, 15(2), 139-148.
2. Baker, M. and J. Wurgler, (2004). A catering theory of dividends. The Journal of finance, 59(3), 1125-1165.
3. Berglöf, E. and E.L. Von Thadden (1994). Short-term versus long-term interests: Capital structure with multiple investors. The quarterly journal of economics, 109(4), 1055-1084.
4. Brigham, E.F. and J.F. Houston (2016). Fundamentals of Financial Management, 14th Ed. Boston, MA: Cengage Learning.
5. Brush, T.H., P.Bromiley and M. Hendrickx (2000). The free cash flow hypothesis for sales growth and firm performance. Strategic management journal, 21(4), 455-472.
6. Chen, X., Y. Sun and X. Xu (2016). Free cash flow, over-investment and corporate governance in China. Pacific-Basin Finance Journal, 37, 81-103.
7. De Hoyos, R.E. and V. Sarafidis (2006). Testing for Cross-Sectional Dependence in Panel-Data Models. The Stata Journal: Promoting Communications on Statistics and Stata, 6(4), 482–496. https://doi.org/10.1177/1536867x0600600403
8. DeAngelo, H., L. DeAngelo. and D.J. Skinner (2004). Are dividends disappearing? Dividend concentration and the consolidation of earnings. Journal of financial economics, 72(3), 425-456.

9. Deng, L., S. Li, M. Liao and W. Wu (2013). Dividends, investment and cash flow uncertainty: Evidence from China. International Review of Economics & Finance, 27, 112-124.
10. Denis, D.J. and I. Osobov (2008). Why do firms pay dividends? International evidence on the determinants of dividend policy. Journal of Financial economics, 89(1), 62-82.
11. Greene, W.H. (2008). Econometric Analysis., Upper Saddle River, N.J.: Prentice Hall,
12. Fatemi, A. and R. Bildik (2012). Yes, dividends are disappearing: Worldwide evidence. Journal of Banking & Finance, 36(3), 662-677.
13. Faulkender, M. and R. Wang, (2006). Corporate financial policy and the value of cash. The Journal of Finance, 61(4), 1957-1990.
14. Fuller, K. and B.M. Blau (2010). Signaling, free cash flow and “nonmonotonic” dividends. Financial Review, 45(1), 21-56.
15. Guizani, M. (2018). The mediating effect of dividend payout on the relationship between internal governance and free cash flow. Corporate Governance: The International Journal of Business in Society.
16. Harford, J. (1999). Corporate cash reserves and acquisitions. The Journal of Finance, 54(6), 1969-1997.
17. Jensen, M.C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American economic review, 76(2), 323-329.
18. Karpavičius, S. and F. Yu (2017). How institutional monitoring creates value: Evidence for the free cash flow hypothesis. International Review of Economics and Finance, 52, 127-146.
19. Kato, H.K., U. Loewenstein and W. Tsay (2002). Dividend policy, cash flow, and investment in Japan. Pacific-Basin Finance Journal, 10(4), 443-473.
20. Lang, L.H. and R.H. Litzenberger (1989). Dividend announcements: Cash flow signalling vs. free cash flow hypothesis?. Journal of financial economics, 24(1), 181-191.
21. Manning and Napier (2016). Free Cash Flow and Dividends: How A Focus on Yield Can Help Investors Provide for Today and Prepare for Tomorrow. [online] Manning and Napier. Available at: https://www.manning-napier.com/insights/blogs/research-library/free-cash-flow-and-dividends-how-a-focus-on-yield-can-help-investors-provide-for-today-and-prepare-for-tomorrow [Accessed 16 Mar. 2020].
22. Mougoue, M. (2008). An empirical re-examination of the dividend–investment relation. Quantitative Finance, 8(5), 533-546.
23. Naudé, W.A. and A. Saayman (2005). Determinants of tourist arrivals in Africa: a panel data regression analysis. Tourism Economics, 11(3), 365-391.
24. Nguyen, T., C.X. Cai, and P. McColgan (2017). How firms manage their cash flows: an examination of diversification’s effect. Review of Quantitative Finance and Accounting, 48(3), 701-724.
25. Opler, T., L. Pinkowitz, R. Stulz and R. Williamson (1999). The determinants and implications of corporate cash holdings. Journal of financial economics, 52(1), 3-46.
26. Redding, L.S. (1997). Firm size and dividend payouts. Journal of financial intermediation, 6(3), 224-248.
27. Richardson, S. (2006). Over-investment of free cash flow. Review of accounting studies, 11(2-3), 159-189.
28. Sayar, G., M.L. Erdas and G. Destek (2020). The Effects of Financial Development, Democracy and Human Capital on Income Distribution in Developing Countries: Does Financial Kuznets Curve Exists?. Journal of Applied Economics and Business Research, 10(2).
29. Webster, I.M. (2016). Relationship between free cash flows and stock prices of non-financial firms listed at the Nairobi securities exchange (Doctoral dissertation, University of Nairobi).
30. Zhang, D., H. Cao, D.G. Dickinson and A.M. Kutan (2016). Free cash flows and overinvestment: Further evidence from Chinese energy firms. Energy Economics, 58, 116-124.
31. Zhou, N., W.Y. Shum, S.N Chan and F Lai (2017). Credit Expansion, Free Cash Flow and Enterprise Investment: An Empirical Study Based on Listed Companies in China. International Journal of Economics and Finance, 9(9), 70-82.