Dividend Policy and Its Relationship to Investment and Financing Policies: Empirical Evidence

Abstract

INTRODUCTIONEver since the publication of Miller and Modigliani's 1961 paper, dividend policy has been a controversial topic in the literature of finance. This paper presents empirical evidence relevant to one area of the controversy, the relationship between dividend, investment and financing decisions. The empirical evidence is based upon the results of a questionnaire survey which was used to elicit senior managers' perceptions of the dividend policies of 93 large Australian companies.' Previous research in this area has largely relied on econometric analysis of published financial data. The questionnaire approach therefore presents a marked contrast to the previous work, providing an opportunity to examine the perceptions of those managers who actually formulate dividend policy. There have been previous surveys of dividend policy (Lintner, 1956;Plattner, 1969;and Harkins and Walsh, 1971), but these studies provided relatively little information about the relationship between dividend, investment and financing decisions, and there was no testing of responses for statistical significance.The paper is organised in the following way, first, the possible relationships between dividend and investment policies are examined and arguments are advanced in support of the proposition that the dividend decision will be nonresidual and usually independent of the investment decision. This is followed by a discussion of the method adopted to investigate this proposition together with an analysis of the questionnaire results. DIVIDEND INVESTMENT AND FINANCING POLICIESDividend payments are but one element in a system of interacting financial decisions. The over-riding constraint on all decisions is the funds flow identity 53 1 532 PARTINGTON managers can only make decisions about the resources which are available to them. The funds flow identity, that sources of funds must equal uses of funds, may be expressed as:A & + Di = AS, + ABi + K where: A I, = Net change in investment in period t AS, = Net change in external equity finance in period t AB, = Net change in debt finance in period t 0, = Dividends in period t V; = Earnings in period t

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