ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Dividend Behaviour of Indian Companies post Macroeconomic Policy Shock

The impact of the macroeconomic shock of demonetisation in 2016 on the dividend payout policy of Indian companies is examined. The analyses of 2,157 Indian companies’ data for the period from 2013 to 2018 find that both aggregate dividend payout ratio and the number of companies paying dividends dropped in post-demonetisation years. The results of the dynamic system generalised method of moments show that the long-term target dividend payout ratio declined by 9.31% post demonetisation. The study suggests that major macroeconomic shocks affect the dividend payout decisions of companies.


Authors are indeed obliged to the anonymous reviewers whose suggestions helped them tremendously in revising this paper. Authors would also like to thank the editorial team for the amazing support provided during the review process, that too during the time of COVID-19 pandemic.

The dividend payout decision is one of the most res­ear­ched themes in corporate finance. Boards of companies recommend the payment of dividends. The dividend payout policy being sticky, companies tend to follow conservative ­dividend payout policies and change the decision only when future profitability prospects alters. The Indian economy in recent years has experienced significant macroeconomic changes, including the 2016 demonetisation. It created a situation of lower economic growth and thereby lower expectation of future performance because of increased economic uncertainty, information asymmetry and increasing uncertainty of future expected cash flows (Dasgupta 2017; Daya and Mader 2018). Also, it impacted current liquidity, and companies were forced to look for options to finance their capital expenditures in the post-macroeconomic shock period. It is hypothesised that to meet these requirements, companies cut dividends to increase internal financing, instead of relying on external fin­ances as predicted by the pecking order theory (Myers and Majluf 1984). Companies rely more on internal funds by cutting or omitting dividends than raising new capital from external sources during macroeconomic uncertainty (Oliner and Redebusch 1996; Ranajee et al 2018). Also, in informationally opaque companies, there may be a preference for retaining internal than external funds as the costs may be different. Post-macroeconomic shock, companies would like to forgo paying dividends to build financial “slack” to finance future investment strategies and cut or omit dividend distribution if short-term cash flow projections cannot support the policy.

The objective of the study is to examine the impact of the macroeconomic shock on the dividend payout behaviour of ­Indian companies during pre- and post-demonetisation periods. The remainder of this paper is organised as follows. Following a review of literature, the paper presents the hypothesis and develops the empirical framework. Next, the data and methodology are discussed followed by the empirical results and concluding remarks.

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Updated On : 1st Sep, 2021
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