Planteamiento del m´etodo propuesto

22

3.4.1 Cash Dividend Model

To examine the cash dividend payout, we begin with the classic model of dividend payout by Lintner 24

(1956) who found that earnings are an important factor that changes dividend payout. The model is 25

given as follows: 26

𝑫𝒊𝒕= 𝒂 + 𝒃𝑷𝒊𝒕+ 𝒄𝑫𝒊(𝒕−𝟏)+ 𝒆𝒊𝒕 (3.16)

1

where, 𝐷𝑖𝑡 and 𝐷𝑖(𝑡−1) represents the dividend payout at time t and t-1, respectively, and 𝑃𝑖𝑡 is the

2

firm’s profit after tax. This is one of the earliest models used to measure the relationship between 3

earnings and dividend payouts. 4

To answer research objectives 1, 2 and 5, the current study includes variables used in Lintner’s 5

equation (3.16). Our model differs from Lintner’s (1956) model, however, as we include adjusted 6

earnings, denoted as dividend-adjusted earnings (profits after tax and after dividend declared). This 7

enables us to mitigate the potential multicollinearity problem between the dependent variable 8

(dividend) and earnings. We rebuild Afrifa’s (2016) model and formulate the following equation: 9 𝑪𝑫𝒊𝒕= 𝜷𝟎+ 𝜷𝟏𝑪𝑫𝒊(𝒕−𝟏)+ 𝜷𝟐∆𝑾𝑪𝟐𝒊𝒕+ 𝜷𝟑∆𝑾𝑪𝒊𝒕+ 𝜷𝟒𝑫𝒊𝒗 − 𝒂𝒅𝒋 𝑬𝒂𝒓𝒏𝒊𝒕+ 𝜷𝟓𝑻𝒂𝒙𝒊𝒕+ 10 𝜷𝟔𝑰𝒏𝒗𝒊𝒕+ 𝜷𝟕𝑮𝒆𝒂𝒓𝒊𝒏𝒈𝒊𝒕+ 𝜷𝟖𝑴𝒕𝑩𝒊𝒕+ 𝜷𝟗𝑺𝒊𝒛𝒆𝒊𝒕+ 𝜷𝟏𝟎𝑹𝒆𝒑𝒊(𝒕−𝟏)+ 𝜷𝟏𝟏𝑫𝒖𝒎(𝒇𝒔)𝒊𝒕+ 11 𝜷𝟏𝟐𝑮𝑫𝑷𝒈𝒊𝒕+ 𝜷𝟏𝟑𝑰𝒏𝒇𝒊𝒕+ 𝒆𝒊𝒕 (3.17) 12

where, 𝐶𝐷𝑖𝑡 and 𝐶𝐷𝑖(𝑡−1) represent the cash dividend payout at times t and t-1, respectively, ∆𝑊𝐶2𝑖𝑡

13

and ∆𝑊𝐶𝑖𝑡 are changes in working capital squared and changes in working capital at time period t,

14

respectively. 𝑅𝑒𝑝𝑖(𝑡−1) is the stock repurchase at time period t-1 (last year’s repurchase). The definition

15

of variables for equation (3.17) is presented in Table 3.7. 16

To further explore how trade receivables and trade payables may affect firm dividend payouts, 17

we split the variable ∆𝑊𝐶𝑖𝑡 into ∆𝑇𝑃𝑖𝑡 and ∆𝑇𝑅𝑖𝑡 along with other control variables to answer research

18

objectives 1, 3 and 5. The model can be expressed as follows: 19 𝑪𝑫𝒊𝒕= 𝜷𝟎+ 𝜷𝟏𝑪𝑫𝒊(𝒕−𝟏)+ 𝜷𝟐∆𝑻𝑷𝒊𝒕+ 𝜷𝟑∆𝑻𝑹𝒊𝒕+ 𝜷𝟒𝑫𝒊𝒗 − 𝒂𝒅𝒋 𝑬𝒂𝒓𝒏𝒊𝒕+ 𝜷𝟓𝑻𝒂𝒙𝒊𝒕+ 20 𝜷𝟔𝑰𝒏𝒗𝒊𝒕+ 𝜷𝟕𝑮𝒆𝒂𝒓𝒊𝒏𝒈𝒊𝒕+ 𝜷𝟖𝑴𝒕𝑩𝒊𝒕+ 𝜷𝟗𝑺𝒊𝒛𝒆𝒊𝒕+ 𝜷𝟏𝟎𝑹𝒆𝒑𝒊(𝒕−𝟏)+ 𝜷𝟏𝟏𝑫𝒖𝒎(𝒇𝒔)𝒊𝒕+ 21 𝜷𝟏𝟐𝑮𝑫𝑷𝒈𝒊𝒕+ 𝜷𝟏𝟑𝑰𝒏𝒇𝒊𝒕+ 𝒆𝒊𝒕 (3.18) 22

where, ∆𝑇𝑃𝑖𝑡 is the change in trade payables; ∆𝑇𝑅𝑖𝑡 is the change in trade receivables, and 𝑅𝑒𝑝𝑖(𝑡−1) is

23

the stock repurchase at time period t-1 (last year’s stock repurchases). The definition of variables for 24

equation (3.18) is presented in Table 3.7. 25

26

3.4.2 Stock Dividend Model

Unlike cash dividend analysis, stock dividend patterns are rarely discussed in the literature. Most of 28

the dividend policy studies (Koch and Shenoy, 1999; Fukuda, 2000; Huang et al., 2011) either omit or 29

exclude stock dividends or adjust other financial data in regard to stock dividends. We retain most of 30

the explanatory variables in order to test whether the working capital variables are significant in our 1

stock dividend model. To answer research objectives 4 and 5, our model follows equation (3.17). The 2

stock dividend model can be expressed as follows: 3 𝑺𝑫𝒊𝒕= 𝜷𝟎+ 𝜷𝟏𝑺𝑫𝒊(𝒕−𝟏)+ 𝜷𝟐∆𝑾𝑪𝟐𝒊𝒕+ 𝜷𝟑∆𝑾𝑪𝒊𝒕+ 𝜷𝟒𝑹𝑶𝑬𝒊𝒕+ 𝜷𝟓𝑬𝑷𝑺𝒊𝒕+ 𝜷𝟔𝑻𝒂𝒙𝒊𝒕+ 4 𝜷𝟕𝑮𝒆𝒂𝒓𝒊𝒏𝒈𝒊𝒕+ 𝜷𝟖𝑴𝒕𝑩𝒊𝒕+ 𝜷𝟗𝑺𝒊𝒛𝒆𝒊𝒕+ 𝜷𝟏𝟎𝑹𝒆𝒑𝒊(𝒕−𝟏)+ 𝜷𝟏𝟏𝑫𝒖𝒎(𝒇𝒔)𝒊𝒕+ 𝜷𝟏𝟐𝑮𝑫𝑷𝒈𝒊𝒕+ 5 𝜷𝟏𝟑𝑰𝒏𝒇𝒊𝒕+ 𝒆𝒊𝒕 (3.19) 6

where, 𝑆𝐷𝑖𝑡 and 𝑆𝐷𝑖(𝑡−1) are the stock dividend payouts at times t and t-1, respectively.

7

Similarly, we divide the change in working capital into the change in trade receivables and trade 8

payables for our stock dividend model. However, we made several adjustments due to the natural 9

differences between stock dividends versus cash dividends. Equation (3.19) can be rewritten as: 10 𝑺𝑫𝒊𝒕= 𝜷𝟎+ 𝜷𝟏𝑺𝑫𝒊(𝒕−𝟏)+ 𝜷𝟐𝑻𝑷𝒊𝒕+ 𝜷𝟑∆𝑻𝑹𝒊𝒕+ 𝜷𝟒𝑹𝑶𝑬𝒊𝒕+ 𝜷𝟓𝑬𝑷𝑺𝒊𝒕+ 𝜷𝟔𝑻𝒂𝒙𝒊𝒕+ 11 𝜷𝟕𝑮𝒆𝒂𝒓𝒊𝒏𝒈𝒊𝒕+ 𝜷𝟖𝑴𝒕𝑩𝒊𝒕+ 𝜷𝟗𝑺𝒊𝒛𝒆𝒊𝒕+ 𝜷𝟏𝟎𝑹𝒆𝒑𝒊(𝒕−𝟏)+ 𝜷𝟏𝟏𝑫𝒖𝒎(𝒇𝒔)𝒊𝒕+ 𝜷𝟏𝟐𝑮𝑫𝑷𝒈𝒊𝒕+ 12 𝜷𝟏𝟑𝑰𝒏𝒇𝒊𝒕+ 𝒆𝒊𝒕 (3.20) 13

Following Dittmar (2000), the first lag of stock repurchase is added into equations (3.19) and 14

(3.20) to test the significance of the substitution hypothesis, between stock repurchase and stock 15

dividend. It is noted that the current EPS would be affected by previous stock repurchases since stock 16

repurchases decrease the number of shares outstanding, resulting in an increase in earnings per 17

share. 18

Compared to equations (3.17) and (3.18), we remove 𝐼𝑛𝑣𝑖𝑡 in equations (3.19) and (3.20).

19

Earnings per share (EPS)22 _{measures earnings as well as equity, therefore the dividend-adjusted}

20

earnings in equations (3.17) and (3.18) are removed as well. We also use ROE (return on shareholders’ 21

equity) to control for profitability.23 _{The main reason for making these adjustments in equations (3.19)}

22

and (3.20) is that issuing a stock dividend is a channel for using equity finance. We believe that such 23

adjustments, along with the retention of liabilities variables (such as gearing, which is an indicator of 24

debt finance), may capture the impact of issuing stock dividends on a firm’s capital structure. The 25

definition of the variables for equations (3.17) and (3.18) are presented in Table 3.7. 26

22 _{The current EPS would be affected by previous stock repurchases since stock repurchases decrease the}

number of shares outstanding, resulting in an increase in EPS.

23_{There are several accounting ratios for measuring firm profitability, including gross profit ratio, return on}

assets, and return on equity. Most of the dividend related literature adopts the ROA to control for firm profitability. Following Gordon (1962), Booth and Cleary (2003), ROE is used to measure the profitability of firms in our stock dividend models. Another reason is that stock dividends involve issuing additional shares. Such behaviour is more equity based.