Catering to Long Term Policy or Catering to Market Sentiment? Evidence from Dividend Policy

We examine the trend in probability to pay dividends and the level of payout for listed non-financial Indian firms between 2000 and 2015. We report four major findings. Firstly, we find a declining trend in both the payment probability and the level of dividends since the global financial crisis. We find that firms in a relationship with a scheduled commercial banks (SCB) are more likely to pay dividends, however, there is a great degree of heterogeneity in the level of payment by firms associated with SCB’s. Firms in a relationship with foreign banks pay the most amount of dividends and firms in a relationship with state-owned banks pay the least amount. Further, we find that risk does not completely explain the “disappearing dividend” puzzle. A major portion of variation in dividends is explained by firms’ catering to market sentiment, i.e. firms change dividend policy in response to market sentiment towards dividend paying firms. We find that firms with higher level of family ownership are not only more likely to pay dividends, but the level of dividends increases with increase in family ownership. Additionally, we find evidence of higher payout by firms affiliated with business groups.