Determinants of Dividend Policy In Muscat Security Market - Sample

Question: Discuss about the Determinants of Dividend Policy In Muscat Security Market. Answer: Introduction: Dividend payout policy is regarded as a significant constituent of corporate financial policy. Many of the academic researchers has considerably studied the dividend payout policy. In the year 1956, Linter stated that payout policy is principally a function of earnings stability and earnings. However, this theory was further developed in the year 2012, by Myers and Lambrecht; who emphasized that dividend policy is based upon permanent income. In the year 1961, Modigilani and Miller instigated a debate over a topic i.e. value of dividends; and this topic is still debatable till now. A question is raised by these authors- Did dividends per se add value? Theses authors, anticipated that a firms policy of investment is fixed in perfect market and dividends are not important as investors would treat dividend capital gains and yield as same(hubbabubbabar, 2013). Few authors argued over the MM`s assumption that in perfect markets which are free from transaction costs, taxes as well as other constraints, value of firm is not affected by the dividends. Financial sector has played a vital role in Oman`s economic development. In subsequent to oil and gas, financial sector contributes to nation`s GDP at second place. The financial sector`s prominence can also be comprehended from its demonstration in the stock market; as in the year 2008, it represented 51% of market capitalization(Batainah , 2013). Highest liquidity can be seen in the financial sector in context to the trading of shares in the Muscat Securities Market (MSM). In year 2008, 59% of shares were traded by MSM listed firms with total profit of 45% in the financial sector. A number of significant institutional and economic features has made Oman an interesting and unique setting for examining the dividend policy`s stability(Read, 2014). Several reasons are there, which suggests that financial firms of Oman can adopt a smoothing policy in regards to dividends; whereas some other reasons suggest otherwise. Primarily, firms of Oman pay a huge percentage of their earnings through dividends. This aspect is quite different from the western countries in which moderate dividends are used to be distributed. The attitude of investors of Oman for dividends may possibly contribute to the greater payout ratio. In Oman, most of the investors deliberate that dividends are foremost factor of stock returns. Secondly, in Oman there is no tax charges on dividends. This aspect is also very different from the Western countries, as in these countries dividends falls under taxation at a higher rate in comparison to capital gains. Because of lack of taxation on dividends in Oman, there might be impact on stability of dividend. Managers gets motivation because of the personal income taxes for smoothing the payment of dividends. Smoothening of dividend increases the wealth for investors who pay their taxes, by decreasing the current value of investors estimated liabilities of income tax in future(Al-Yahyaee Pham, 2010). As a result, the absence of personal income taxes is anticipated to decrease the significance for stability of dividend in Oman. Third, companies of Oman depend heavily on bank financing. As the debt from bank reduces the agency problem as well as hazard problem. However, some authors argued that stability of dividend shall be less emphasized in countries like Oman which are more bank centric. As the debt from bank decreases the agency`s value usually fulfilled by payment of dividend. On the other hand, it is also believed by some authors that stability of dividend may not be crucial for firms which depends upon ban debt because of bank monitoring. Therefore, the dependence of Omani companies on financing through bank debt suggests that stability of dividend may not be significant for Omani companies(Batainah , 2013). In concern to corporate dividend policy, a number of rationales are being proposed in the literature, but then again there is little consent among researchers over the topic. For the most part, the literature emphases on several components of hypotheses of dividend policy. Modigilani and Miller`s model of dividend policy is criticized because of following limitations- There is no existence of perfect capital markets and taxes exists in the capital markets. MM`s theory postulates that there is no difference between external and internal financing. Though the flotation costs of new concerns are deliberated, it is false. This theory also believes that wealth of shareholder does not get affected by dividends. On the other hand, to make cash inflows, transaction costs are associated with selling of shares. This aspect motivates the investors to prefer dividends. The assumptions of this theory about uncertainty is unrealistic. The dividends are significant under the assured condition as well(Chesnokova, 2015). Despite the fact, the literature is capacious and is still changing the results remain to be unconvincing. In such context, Oman is an exceptional case to reconsider the issues related to dividend. There are no taxes on capital gains or on dividends in Oman. The nonexistence of taxes may perhaps responsible for an uncluttered or clinical environment to reassess the dividend puzzle. This paper has mainly three objectives, which are- To assess the factors which define the amount of dividends To study the decision in context to pay dividends To outline the prospective changes in dividend policy between non-financial and financial companies from year 2010 to year 2016. References Al-Yahyaee, K., Pham, T. (2010). Dividend stability in a unique environment. University of Wollongong. Retrieved from https://ro.uow.edu.au/cgi/viewcontent.cgi?article=2204context=buspapers Batainah , L. (2013, 11 25). How dividend policies look like. Retrieved from www.2016.omanobserver.om: https://2016.omanobserver.om/how-dividend-policies-look-like/ Chesnokova, M. (2015). Application of Modigliani-Miller Theorem to Banking Sector. diteur inconnu. hubbabubbabar. (2013, 6 7). MILLER AND MODIGLIANI DIVIDEND THEORY. Retrieved from hubbabubbabar.wordpress.com: https://hubbabubbabar.wordpress.com/2013/06/07/miller-and-modigliani-dividend-theory/ Read, C. (2014). The Corporate Financiers. Springer.