Determinants of dividend policy

Sammanfattning: Dividend is a much-debated subject and has been compared to a puzzle with no sole solution to explain why firms pay dividend. Many academics have tried to determine what company variables determines a firm’s dividend policy. These studies have provided different explanatory variables to explain why firms pay dividends. Therefore, the main purpose of this study was to fill in a piece of the dividend puzzle by investigating the determinants of dividend policy for Swedish firms. The global financial crisis in 2008 caused the Swedish economy experienced the fastest deceleration in demand and production since World War II. This challenging event forced many firms to take considerable action to avoid the negative effect that followed. The lack of studies regarding the impact of the financial crisis made us want to test whether Swedish firms experienced any significant changes in the determinants of dividend policy. Using a quantitative and deductive approach, this study used the Irrelevance, Bird-in-hand, Signalling, Agency, Catering, Life Cycle and Pecking Order theory to examine the determinants. The sample was drawn from the NASDAQ OMX Stockholm Large cap list. There were three time periods employed, pre & post the financial crisis as well as one whole period. By using a random effects model we tested the relationship between the selected company determinants and the dividend payout ratio for the three time periods. The study found that profitability, size, risk, retained earnings, and firm value can be seen as determinants of dividend policy for Swedish firms since they are significant. This implies that Life cycle, Agency, Bird-in-hand, Catering and Pecking order theory is applicable to the Swedish firms. The study does not find any supporting evidence for Signalling or the Irrelevance theory. The results showed that there were no statistically significant changes in the determinants between the pre & post period, except for a minimal difference in firm value. This implies that the financial crisis did not affect Swedish firms dividend policy.