This study aims to examine dividend policy from the perspective of institutional investors in India. It focuses on the level of importance these investors attach to the dividend policy of their investee firms, the level of influence they exercise in shaping such firms’ dividend policies and their reactions to changes in dividends. This study also reports how institutional investors view various explanations for paying dividends.
A mail survey provides a profile of respondents and their firms, as well as responses to 29 closed-ended questions involving various explanations for paying dividends and 22 closed-ended questions on various dividend issues.
The evidence shows that Indian institutional investors attach substantial importance to dividend policy and prefer high dividend payments. Their reactions to dividend changes are asymmetric. Taxes are a major driver for why they seek dividends, whereas liquidity needs to play little role in shaping their preferences. The two most commonly used methods of active monitoring are selling shares and communicating concerns to investee companies.
The number of responses limits the ability to test for statistically significant differences between the various competing hypotheses.
The findings support multiple explanations for paying cash dividends and provide new evidence supporting the positive relation between inflation and dividend payments.
This study provides the first survey evidence on the views of institutional investors on dividend policy in India.
