Dividend Payment Decision and Earned/Contributed Capital Mix: A Test of Life Cycle & Catering Theory

Abstract

Purpose of this research is to examine the effects of catering incentives and earn contributed capital mix on propensity to pay and decision to change dividend for Pakistani manufacturing concerns. Basic intent is to validate the most recently developed dividends theories with respect to Pakistani sample i.e. catering theory and Life Cycle Theory.

This research is conducted on Pakistani non-financial companies duly listed on Karachi stock exchange from 1998 to 2009. Catering theory is measured by dividend premium, life cycle theory is measured by earned contributed capital mix, while the proxy used to measures dividend payment decisions are propensity to pay, and decisions to change dividend.

Company’s age, Growth prospects, Market to book ratio, profitability, cash holding have positive impact on dividend increasing companies and negative to dividend decreasing. While catering incentives, taxation and leverage has negative impact on dividend paying companies vice versa for Decreasing and dividend omitting companies. Results confirm that catering theory holds in developing economy like Pakistan while life cycle theory provides little evidence. Pakistani stock exchange crises pose little effects on investors mind.