TABLE OF CONTENTS

List of Tables i
List of Figures iv
Abstract v
Key Terms ix
CHAPTER-1
Introduction
1.1 Introduction to Dividends 1
1.2 A Short History of Dividend Policy 6
1.3 Dividend Policy 9
1.4 Economic Rationale to Dividends 12
1.5 Dividend Policy and its Linkages with other Financial Policies 15
1.6 Pure Vs Smoothed Residual Dividend Policy 16
1.7 Dividend Declaration Process 17
1.8 Alternative Forms of Dividends 18
1.8.1 Stock Repurchases or Share buy Backs 19
1.8.2 Bonus Shares 19
1.8.3 Stock Splits 20
1.9 Declarations and Distribution of Dividends by a Company under Indian Law 20
1.9.1 Legal Regime 21
1.9.2 Mode of Declaration 21
1.9.3 Prohibition 22
1.9.4 Steps Involved in the Process of Declaration and
Distribution of Dividend 22
1.10 Dividend Payment Patterns across the Life Cycle of a Firm. 24
1.11 Dividend Distribution and its Impact on Shareholders Value 26
1.12 Dividend Payments: An Indian Scenario 29
1.13 Dividend Policy: The Global Perspective 36
1.13.1 Dividend Size and Frequency across the World 36
1.13.2 Institutional Features 37
1.13.3 Tax Differences 37

1.13.4 Dividend Payout Patterns around the World 39

1.14 Relevance and Scope of the Study 40

1.15 Chapter Plan 41
1.16 Conclusions 42

CHAPTER 2
Literature Review

2.1 Modigliani &Miller Approach (Dividend Irrelevance Proposition) (1961) 44

2.1.1. Conclusion 46
2.2 Dividend Policy and Agency Problems 47
2.2.1. Overview 47
2.2.2 Shareholders versus Debt Holders 47
2.2.3 The Differtial Impact of Dividends on Various Claimholders 49
2.2.4. Similar Conflicts 50
2.2.4.1 Shareholders versus Managers 51
2.2.4.2 Ownership versus Control 51
2.2.5 The Easterbrook Analysis (1984) 51
2.2.6 The Jensen Analysis (1986) 53
2.2.7 Other Empirical Studies on Agency Conflicts: 54
2.2.8 Conclusions 59
2.3 Dividend Policy and Asymmetric Information 60
2.3.1. Signaling Models 61
2.3.2. John and Williams Model (1985) 62
2.3.3. Bhattacharya Model (1979) 63
2.3.4. Miller and Rock Model (1985) 64
2.3.5 Other Theoritical Models 64
2.3.5.1 Dividend Smoothing 64
2.3.5.2. Dividend versus Share Repurchases 66
2.3.5.3 Choice of Signals 66
2.3.6. Announcement Effects 68
2.3.7. Changes in Market Expectations 72
2.3.8. Predictions of Future Earnings 72
2.3.9 Dividend Signaling Considering Investment
Opportunities and Insider Trading 74
2.3.9.1. Lang and Litzenberger Study 74
2.3.9.2. John and Lang Study 75
2.3.10 Conclusions 76
2.4. Models of Symmetric Information and Empirical Research 76
2.4.1. Dividends and Taxes 76
2.4.2. The Tax Environment in USA 77
2.4.3 Dividend Yields and Risk-Adjusted Returns 78
2.4.3.1. The Theory 78
2.4.3.2. The Evidence of the Brennan Model 78
2.4.3.3 The Black-Scholes Experiment 79
2.4.3.4. The Litzenberger and Ramaswamy Experiment 80
2.4.3.5. The Miller and Scholes Critique 80
2.4.4 The Ex- Dividend Day Studies 81
2.4.4.1 The Theory 81
2.4.5 Ex-Dividend Day and Cross-Sectional Studies 84
2.4.5.1 Kalay and Michaely (1993) 84
2.4.5.2. Tax-Induced Clienteles-Empirical Evidence 84
2.4.6 Conclusion 86
2.5 Corporate Dividend Policy Decisions 87
2.5.1. The Lintner Survey 87
2.5.2. Studies on Lintner Model across Different Countries 91
2.5.3. The Impact of Dividend Policy on Investment 92
2.5.4. Subsequent Dividend Model Research: Survey Researches 93
2.5.5 Survey Research on Payout Policy 96
2.5.6 Empirical Studies in India 97

CHAPTER 3
Overview of the Industry
3.1 Indian IT Sector 108
3.2 Industry Structure 108
3.3. IT Services, ITES BPO, Engineering and R&D Service Segment 110
3.4. IT-ITES Exports Share to Indias Services Export 111
3.5 Emerging Trends in the Indian It Services Industry 112
3.6. Large Deal Size 113
3.7. Growing Presence of MNCs 113
3.8. Changing Growth Drivers 113
3.9. New End Users 114
3.10 Issues And Challenges 114
3.11. Financial Analysis 116
3.12. Future Outlook 118
3.13. Indian IT-ITES Sector to Reach Rs 4,582.28 bn by 2011 119
3.14. Potential Growth Segment 120
3.15 FMCG Sector 121
3.15.1. The Indian Fast Moving Consumer Goods Industry Snap Shot. 121
3.15.2. Product Characteristics 122
3.15.3. Industry Segments 123
3.15.4. Industry Characteristics 123
3.15.5. Salient Features of the FMCG Sector 124
3.15.6. SWOT Analysis of the FMCG Sector: 125
3.16 Back ground 126
3.17 Recent Underperformance of the Indian FMCG Sector 128
3.18 Sector Revival in 2005 129
3.19 Positive Future Outlook 129
3.19.1 Growth Prospects 130
3.20 Indian Service Sector 130
3.21 Services Sector Powered Job Growth in India 131
3.21.1 The Hotel Space 131
3.21.2 The IT Space 131
3.21.3 Banking Boom 132
3.21.4 Insurance Sector 132
3.21.5 Education Space 133
3.22 Telecommunication Services 133
3.22.1 Outlook 133
3.22.2 Growth in Total Subscriber Base 134
3.22.3 Total Subscribers Expected to Reach 402.4
Millions at the End of 2008-09 135
3.22.4 Telecom Sector Sales Growth 135
3.22.5 Telecom Income Statistics 136
3.22.6 Major Investments in the Telecom Sector 136
3.22.7 Companies Driving the Sector Growth 137
3.23 Banking Industry Overview 138
3.24 Commercial Banking 139
3.24.1 Credit Deposit Ratio and Interest Rates 139
3.25 Outlook on the Sector 143
3.26 Industry Insights 145
3.26.1 Banks Group wise Major Balacesheet Components 145
3.26.2 Investment Group Wise 146
3.26.3 Performance: Assets, Net Profit and Total Income 146
3.26.4 Total Assets 147
3.26.5 Net Profit 147
3.26.6 Total Income 147
3.27 Groupwise Bank Deposits & Advances- A Two Year Comparison 148
3.27.1 Deposits 148
3.27.2 Advances 148
3.27.3 Listed Banks Net Profits Continue to Grow 149
3.27.4 Infrastructure, Branches, Staff and ATMs 149
3.28 Growth in Business 150
3.28.1 Return on Equity 150
3.28.2 Return on Assets 151
3.28.3 Net NPAs to Net Advances 151
3.28.4 Term Deposit to total Deposits 151
3.28.5 Credit Deposit Ratio 151
3.28.6. Capital Adequacy 152
3.29 Changing Market Share 152
3.30 Focus on Future 153

CHAPTER 4
Research Methodology
4.1. Introduction 154
4.2. Dimensions of the Study 154
4.3. The Data and Sample 155
4.3.1 Sectors 155
4.3.2 The Data 156
4.3.3 Assumptions Made for Data Analysis in Each Sector 157
4.3.4 Sample Period 157
4.3.5 The Sample 158
4.4 Models Developed and Techniques Used 158
4.4.1 Lintner Model 158
4.4.1.1 Panel Data Analysis 160
4.4.1.2 Fixed Effect Models 161
 4.4.1.3 Lintner Model Used 162
4.4.2 Corporate Dividend Policy Determinants:
Factor Analysis and Multiple Linear Regression Analysis 164
4.4.2.1 An Overview of the Factor Analysis and
Multiple Linear Regression Analysis 166
4.4.2.2 Factor Identification and Selection 168
4.4.2.3 Structural Breaks 168
4.4.3. Quadratic Polynomial Regression Analysis 169
4.4.3.1 Quadratic Polynomial Model 170
4.4.3.2 Linear Model 170
4.4.4. Event Study Approach 171
4.4.4.1 Event Study Methodology: A Brief Introduction 172
4.4.4.2 Application of Event Study Approach 174
4.4.5. Limitations of the Study 177

CHAPTER 5
Data Analysis of Lintner Dividend Model
5.1 Statistical Model developed to test Linter Dividend Policy Model 181
5.2 IT Sector 183
5.2.1 Data Interpretation 184
5.2.2 Conclusion 184
5.3 FMCG Sector 187
5.3.1 Data Interpretation 188
5.3.2. Conclusion 188
5.4 Service Sector 190
5.4.1 Data Interpretation 191
5.4.2. Conclusion 191

CHAPTER 6
Data Analysis: Corporate Dividend Policy Determinants
6.1 Leading Determinants of Dividend Policy 194
6.2 Data and Variable Construction 198
6.2.1 Key Variables that affect the Dividend Payout Ratio of a Firm 198
6.3 IT Sector 200
6.3.1. Kaiser-Meyer-Olkin Measure of Sampling Adequacy 200
6.3.2 Extraction Method 200
 6.3.3. Scree Plot 200
6.3.4 Factor Pattern Matrix: 202
6.3.5. Results of Regression on Extracted Factors 203
6.3.6 Conclusion 205
6.4. FMCG Sector 207
6.4.1. Kaiser-Meyer-Olkin Measure of Sampling Adequacy 207
6.4.2 Extraction Method 207
6.4.3. Scree Plot 207
6.4.4. Factor Pattern Matrix 207
6.4.5. Results of Regression on Extracted Factors 210
6.4.6. Conclusion 212
6.5. Service Sector 214
6.5.1. Kaiser-Meyer-Olkin Measure of Sampling Adequacy 214
6.5.2 Extraction Method 214
6.5.3. Scree Plot 215
6.5.4. Factor Pattern Matrix 216

6.5.5 Regression Analysis 219

6.5.6 Conclusion 220

CHAPTER 7
Data Analysis: Impact of Various Ownership Groups on Dividend Payout Ratios
7.1 Models Developed 224
7.1.1 Quadratic Polynomial Models 224
7.1.2 Linear Model 225
7.2 Information Technology Sector 225
7.2.1 Regression and Test Results 225
7.2.2 Data Interpretation 228
7.2.3 Conclusion 229
7.3 FMCG Sector 232
7.3.1 Regression and Test Results 232
7.3.2 Data Interpretation 235
7.3.3 Conclusion 236
7.4 Service Sector 237
7.4.1 Regression and Test Results 237
 7.4.2 Data Interpretation 239
7.4.3. Conclusion 239

CHAPTER 8
Data Analysis: Event Study
8.1 IT Sector 243
8.1.1 Pattern of AARs and MAARs 244
8.1.2 Pattern of CAARs 244
8.1.3 Conclusion 246
8.2 FMCG Sector 247
8.2.1 Pattern of AARs and MAARs 248
8.2.2 Pattern of CAARs 248
8.2.3 Conclusion 250
8.3 Service Sector 251
8.3.1 Pattern of AARs and MAARs 252
8.3.2 Pattern of CAARs 252
8.3.3 Conclusion 254

CHAPTER 9
Conclusions & and Future Research and Thinking
9.1 Conclusions 255
9.1.1 The Big Three Market Imperfections and
their Interaction with Little Frictions 257
9.1.1.1 Taxes 257
9.1.1.2 Agency Cost 258
9.1.1.3 Information Asymmetry 259

9.1.2 Strategies in dealing with Market Imperfections 261

9.2 Future Research and Thinking 274

10. References 279

11. Publications 304
12. Appendix 305