The dividend relevance pay-out model in the context of an emerging economy

Abstract

Orientation: The dividend pay-out policy remains one of the key functional areas of corporate finance, more so in that it is through the receipt of dividends that shareholders can at least share in the profits of their investments.

Research purpose: Because of the importance of the dividend decision (especially for emerging economies) as well as its possible link to value creation, the present study sought to providing results with recommendations on pay-out policy to improve dividend decision-making and establish a more defined link between dividends and value creation for management and shareholders alike.

Motivation for the study: The endeavours of the current study lie in its contribution to the pay-out debate as it taps into a research area that has been explored minimally in emerging markets, yet it is still among the very topical functional areas of financial decisions.

Research design, approach and method: The panel data of 110 Johannesburg Stock Exchange (JSE) listed sample companies for the period 2006–2018 were used. The sample was further grouped into value and growth companies. Dynamic panel estimators were used to analyse data.

Main findings: The study confirmed results of similar previous research and identified further trends relating to the South African corporate setting. Specifically, the study found that companies have target pay-out ratios, which they adjust towards. Furthermore, managers are reluctant to change (increase) dividends, which may have to be cut again later, and in their endeavour to create and maximise value, they may have to sacrifice paying dividends. These trends are evident more with growth companies.

Practical implications: These results mirror those of developed markets. Furthermore, the results present South African financial managers with an enhanced platform to create and maximise value for shareholders, relatively the same way as their counterparts in developed markets.

Contribution/value-add: This study includes value-based variables among the explanatory variables. It is submitted that this process will enhance the endeavours of financial managers in creating values for shareholders through dividend pay-out.