Economic reforms, determinants and stability of dividends in a dynamic setting

Purpose – This study aims to find whether the Indian private corporate sector follow stable cash dividend policies, whether dividends smoothen earnings, estimate the implicit target dividend ratio, and examine the determinants along with speed of adjustment of dividends towards a long run target ratio. Design/methodology/approach – The study uses the instrumental variable (IV) approach for dynamic panel data for 1971‐2010 periods controlling for economic reforms. The GMM‐in‐levels model, GMM‐in‐first‐differences and GMM‐in‐systems are alternatively estimated to include other lag structures. Findings – In the post‐reform period lower dividends are consistent with rapid growth in the economic environment and the tendency to smoothen dividends has considerably decreased over time. The estimated model suggests dividends substitute for less opportunity for internal growth and increased general likening to relatively retain their earnings and finance their growth, unlike the past. Research limitations/implications – Limitation to capture substitution, ownership and self selection effects stems up from data as the Annual Studies RBI does not include such variables, does not capture qualitative data and disallows identification of the firm. Practical implications – The paper documents long run trends and inter‐temporal dividend patterns controlling economic reforms for a relatively larger number of public limited firms nearing four decades for an emerging economy. Originality/value – This is a first attempt to take a holistic view of dividend using rich set of unexplored dynamic panel data on Indian firms controlling for reforms using contemporary econometric models and analyzes issues relating determinants, smoothening and stability of the corporate dividend structure.