Dividend behaviour of Indian companies under monetary policy restrictions. Working Paper, Indian Institute of Management

In this study we examine the dividend behaviour of Indian companies. We use GMM estimator, which is the most suitable methodology in a dynamic setting. Our results show that the Indian firms have lower target ratios and higher adjustment factors. The most significant result is that the restricted monetary policies have significant influence on the dividend behaviour of Indian firms, causing about 5-6 percent reduction in the payout ratios. The significance of macro economic policy variable suggest that monetary policy restrictions do have impact on cost of raising funds, and the information asymmetry between lenders and borrowers increases that forces companies to reduce their dividend payout. Key Words: Lintner’s model; payout; information asymmetry; agency problems; signalling; GMM