Dividend policy in Turkey: Survey evidence from Borsa Istanbul firms

This study provides new survey-based evidence on how managers of dividend-paying BIST-listed firms view various theories/explanations for paying cash dividends and the most important factors affecting their dividend policy decisions. This survey evidence is important because it investigates the perceptions of managers of an emerging market after receiving greater flexibility in making dividend payment decisions. Previously, Turkish firms had strict mandatory dividend policy rules, which changed after Turkish authorities implemented major economic and structural reforms for market integration and abolished the compulsory dividend payout regulatory framework. The findings of this study lead to several conclusions about dividend policy. First, several studies conducted in early periods in Turkey report that Turkish-listed firms generally concentrated on the mandatory dividend payout ratio imposed by the regulations (Adaoglu, 2000; Aivazian et al., 2003a). Hence, managers based their cash dividend payments on the firm's current year earnings and the level of cash dividends reflected any variability in earnings. Consequently, dividend smoothing or stability was not a major consideration.t. Currently, however, dividend-paying BIST managers appear to follow managed dividend policies with a specific pattern of dividend payments that involves dividend smoothing. Consistent with Lintner (1956), they are conservative in making their dividend decisions; determining dividend payouts by sustainable earnings, using a target payout ratio, and making partial adjustments in current payout toward the target. Hence, these firms pursue stable dividend policies. These managers tend to cut dividends in extreme cases. The results further show that BIST managers perceive that dividend policy affects firm value and changes in dividends influence share prices and thus shareholder wealth. Accordingly, responding managers believe that they should set their firm's dividend polices to maximize shareholder wealth by formulating an optimal dividend policy that balances between current dividends and future growth. Respondents express strong support for the signaling, catering, maturity (firm life cycle) and bird-in-the-hand theories. However, the evidence offers little or no support for agency cost theory, substitute model of dividends, tax-related explanations, transaction cost theory, and residual dividend policy. The survey evidence favor multiple theories for paying cash dividends in the Turkish market, which is inconsistent with a universal or “one-size-fits-all” explanation for paying dividends. The survey evidence also shows that the most important factors affecting the dividend policy of BIST-listed firms relate to earnings; specifically, the level of current and expected future earnings, and the stability of earnings. Liquidity constrains such as availability of cash and the pattern of past dividends are other important factors identified by the responding managers. Comparisons between the views of BIST managers and their peers in other developed (TSE, OSE, NYSE, and NASDAQ) and emerging (NSE and IDX) markets on the dividend factors reveal statistically significant positive correlations. This finding suggests that after implementing major economic and structural reforms and abolishing mandatory dividend payment requirement, BIST managers follow similar dividend policy factors and patterns of dividend policy as managers in more developed countries. Finally, the factors related to earnings and past dividends appear to be the most highly ranked determinants for all seven markets, despite differing characteristics among these markets. These results lead to the conclusion that some factors are typically more important than others without claiming that they are a universal set of determinants applicable equally to all firms