Why Do Managers Prefer to Pay Dividend in Cash? Essay -- Business, Sto

The study makes use of the financial data on Pakistani listed firms for 2001-2008 to look at the objective behind distribution of cash dividends. Based on the analysis it is found that poorly performing firms listed on Karachi Stock Market (KSE) having larger portion of non-tradable shares pay cash dividends. Because the holders of non-tradable shares (directors and block-holders) do not/cannot realize capital gains from positive change in the price of their holdings. The study finds that cash dividend distribution behavior of the poorly-performing firms is subjected to what the directors and block-holders prefer. The result advocates the findings of Faccio, Lang and Young (2006), Chen, Fung and Leung (2007) regarding cash channeling hypothesis. Key words: non-tradable shares; cash dividends; cash channeling hypothesis 1. Introduction Dividend policy for a firm means whether to pay or not pay; whether to pay in cash, in stocks or both in cash and stocks and how frequently to pay. Why do firms distribute cash dividends when they observe a decline in their earnings? Why not stock repurchases? Why not stock dividend? To look at this research issue, the research will evaluate the cash dividend distribution behavior of firms in light of different ownership structures having trading restrictions. KSE is a developing market of the region with not a sound regulatory framework. There is a shortage of managerial talent in the firms listed on the market. So it is reasonable to say that as compare to firms listed on the developed markets of United States and Europe, the firms listed on KSE do not observe good corporate governance practices generally. Louis Cheng, Fung Leung (2004). Moreover, to protect shareholder... ...ent variables i.e., Director Ownership, Financial institutions ownership, Block-holders’ ownership to examine the relation with the dependent variable which is Cash-Dividend-to-assets. But there are some other variables that also affect the cash dividend distribution behavior of a firm. To control for that effect the study include those variables in the model. The control variables are Debt-to-Assets, Free Cash Flow per Share, Free Cash Flow to Assets, Earning per Share, Size of the firm and Return on Assets. 4. Results and Discussion 4.1 Descriptive Statistics Table 4.1 provides summary statistics of Cash Dividend to Assets, Director Ownership, Financial institutions ownership, Block-holders ownership, Free Cash flow to Assets, Earnings per Share Debt-to-Assets ratio, Return on Assets and firm size (LnAssets) of the sampled firms for the period 2001 to 2008.