Determinants of Dividend Payout Ratios : A Study of Swedish Large and Medium Caps

Abstract: The dividend payout policy is one of the most debated topics within corporate finance and some academics have called the company’s dividend payout policy an unsolved puzzle. Even though an extensive amount of research regarding dividends has been conducted, there is no uniform answer to the question: what are the determinants of the companies’ dividend payout ratios? We therefore decided to conduct a study regarding the determinants of the companies’ dividend payout ratios on large and medium cap on Stockholm stock exchange. The purpose of the study is to determine if there is a relationship between a number of company selected factors and the companies’ dividend payout ratios. A second purpose is to determine whether there are any differences between large and medium caps regarding the impact of the company selected factors. We therefore reviewed previous studies and dividend theories in order to conclude which factors that potentially could have an impact on the companies’ dividend payout ratios. Based on the literature, we decided to test the relationship between the dividend payout ratio and six company selected factors: free cash flow, growth, leverage, profit, risk and size. The data used in the research are secondary data collected during a time period of five years, between 2006 and 2010. The study follows a quantitative research method with a deductive approach and we have based the study on four dividend theories: the dividend irrelevance theory, the bird in hand theory, the signaling theory and the agency theory. In order to determine whether there is a relationship between the companies selected factors and the dividend payout ratio we conducted both an Ordinary least square (OLS) and a Tobit regression. Multicollinearity tests were also conducted in order to ascertain that no multicollinearity affected the results of the study. The results indicate that some of the company selected factors have an impact on the companies’ dividend payout ratios and there are some differences between large and medium caps. The dividend payout ratios of large caps have a significant relationship to free cash flow, growth and risk. While the dividend payout ratios of medium caps have a significant relationship to free cash flow, leverage, risk and size.