Patterns and Determinants of Payout Policy in the 21-st Century : A study of the Nordic Countries.

Abstract: Payout policies is one of the most discussed topics in corporate finance. Since Miller & Modigliani (1961) dividend irrelevance theory, which was based on perfect markets, many theories have been developed in order to incorporate market imperfections to payout decisions. Numerous scholars have been trying to explain why companies pay dividends, whether they should compensate investors with alternative methods such as share repurchases or not distribute cash at all. The theme has gained lots of attention during the 21-st century driven by the subprime financial crisis in 2008 and mostly recently, in 2020, due to economic impacts brought by the Covid 19 pandemic. Another important aspect that makes the study of payout policy relevant in the 21-st century is the unique impacts of unveiled trends such as globalization and volatile markets, increased importance of ecology and sustainability, emergency of fast growth firms (mainly in the Tech industry) and change characteristics of listed firms. Globally there is a tendency of reduction in the number of listed firms and also deterioration in the quality of earnings. Additionally, there is no consensus about which factors influence a firm propensity of distributing cash to shareholders, which makes the topic very intriguing. Previous research has been conducted mainly within US firms. Few studies have been conducted regarding payout policies in the Nordic countries and most of them give little attention to share repurchases and payout policy determinants. Therefore, we decided to conduct a study regarding the patterns and determinants of payout policy in the 21-st century with focus on the Nordic countries. The purposes of the study are: first, to understand the pattern of payout policies in the Nordic countries during the 21-st century and second determine if there is a relationship between a number of firm’s selected factors and firm’s payout policy. As a sub purpose we intend to examine whether the Covid 19 pandemic had any effect on Nordic firm’s payout policies. The factors investigated, namely: debt, profit, retained earnings, growth opportunities, cash holdings, size and age were identified through a detailed literature review. We collected data from Thomson Reuters DataStream Eikon covering the period between 2000 and 2020 for 1,153 firms from all Nordic countries: Denmark, Iceland, Finland, Norway and Sweden. The study follows a quantitative research method with a deductive approach, and we have based the theoretical framework on the following theories: Miller-Modigliani dividend irrelevance theory, Signaling theory, Agency theory, Life-cycle theory and Substitution and Flexibility hypotheses. In order to determine whether there is a relationship between the companies selected factors and the payout ratios we conducted ordinary least square (OLS) correlation analysis. Additional regression analysis was conducted to verify possible impacts of Covid 19 on Nordic payout policies. Results indicate that some firms’ selected characteristics such as debt, size and age have an impact on Nordic firms’ payout policy during the 21-st century. Larger firms with lower debt are more willing to pay cash dividends, while older firms tend to present higher levels of share repurchase. Firms’ characteristics showed no impact on changes in payout ratios during the initial period of Covid 19.