Investigating the relationship between cash dividends and income growth in companies listed on the Tehran Stock Exchange

Dissertation for Master's Degree in "MA"

Abstract

The present research was conducted in order to investigate the relationship between cash dividends and income growth in companies listed on the Tehran Stock Exchange and in the period from 1386 to 1391. For this purpose, 41 companies were analyzed by estimating 3 regulation models. The results of the hypothesis test showed that the dividend payout ratios have a significant relationship with the company's future income growth. Also, there is a significant relationship between the interaction period of interest payment ratio and investment growth assumptions. This relationship has also been observed for stock returns and dividend payout ratios.

Key words: payout ratios, future earnings growth, yield, cash dividends, panel

Forecasting is a key factor in economic decisions. Investors, creditors, management and other people rely on forecasts and expectations in making economic decisions. Since investors and financial analysts use profit as one of the main criteria to evaluate companies, and they tend to measure future profitability in order to decide whether to keep or sell their shares, they judge the state of a company by predicting profit, because it is basically the difference in these forecasts that determines the allocation of capital resources to different departments and business units. This issue is also important for potential investors. By predicting cash flows and future profits, they proceed to invest and allocate their capital resources (Jahankhani and Ghorbani 2014).

The dividend policy is one of the most important topics in financial management because the dividend represents the major cash payments of companies and is one of the most important options and decisions faced by managers. The manager must decide how much of the company's profits should be distributed and how much should be reinvested in the company in the form of retained earnings. Paying dividends directly benefits shareholders, and also affects the company's ability to accumulate profits in order to take advantage of growth opportunities. According to the type of taste, every investor buys shares of a company whose dividend policy he considers favorable. The amount of dividend proposed by the board of directors usually contains information about the managers' expectations about the future profitability of the company. Profit sharing can be discussed from two aspects: on the one hand, it is a factor affecting future investments and the growth of the company's income, which means that profit sharing reduces the company's internal resources and increases the need for external financial resources. On the other hand, many shareholders want to share the company's profits. Therefore, by maximizing the wealth of the company, the managers should always maintain a balance between their different interests and profitable investment opportunities. Therefore, the profit distribution decisions made by company managers are very important. Therefore, in this research, the effect of changes in the percentage of dividends paid on the income growth of companies listed on the Tehran Stock Exchange has been investigated (Mehrani, Sasan and Moradi, Mohammad and Iskandar, Hodi 1389).

The present research aims to investigate the relationship between dividend distribution and income growth in companies listed on the Tehran Stock Exchange in 5 seasons. The first chapter under the title of introduction deals with the statement of the problem, research objectives and assumptions as well as the operational definition of the variables.

1-2- Statement of the problem

If a company has a justifiable investment project that will be put into operation in the next few years, or if a company predicts that it will have financial needs in the next year, it will propose no distribution or low dividend distribution to the general meeting of shareholders. If the assembly agrees with the opinion of the board of directors, the profit will not be divided among the shareholders and will be transferred to the savings account or the accumulated profit, and after the operation of the project, the shareholder will be rewarded in the form of shares.

Several factors affect the company's profit distribution policy and sometimes limit the profit distribution. These factors are either determined within the framework of laws and regulations and mandatory for companies, or the company obliges them to comply with these factors.In general, these factors are divided into three categories: legal, contractual and internal.

Laws and regulations usually do not force companies to pay dividends, but rather refer to the conditions and cases in which dividends should not be paid. The main issues raised in the laws regarding the distribution of profits are:

Limitations related to capital, although they may be different in the business laws of different countries, but in most of these laws, the payment of dividends is prohibited if it causes a decrease in capital. Some laws have declared the capital as the nominal value of ordinary shares. For example, if the company's capital is 200 million Rials and its equity is 210 million Rials, the company cannot distribute 20 million Rials in dividends. unless it reduces the capital.

In the commercial laws of some countries, it is prohibited to pay cash dividends for companies that are facing a lack of liquidity. In this situation, the company's debts are more than its assets and the company is unable to fulfill its obligations to creditors. Therefore, the payment of dividends to shareholders is prohibited due to the protection of creditors.

The tax laws of some countries also prohibit excessive undivided profits. Although the definition of retained earnings is somewhat vague, it is usually defined as the retention of earnings in excess of the company's current and future investment needs. The purpose of the tax law is to prevent companies from not distributing profits to avoid paying taxes. If the tax collection department can detect a significant amount of undistributed profit, fines will be imposed on the company. Therefore, whenever a company creates a significant cash position for itself, it must provide the tax authorities with solid reasons for keeping these funds, otherwise it must distribute the additional funds to shareholders in the form of dividends. Laws may also impose other restrictions on the payment of interest. These restrictions may be reflected in the minimum dividend or may be raised in the form of restrictions on received loans based on determining the amount of dividend. Another legal restriction regarding preferred shares is that preferred shareholders have priority in receiving profits, and until the deferred profits of preferred shareholders are paid, the company cannot distribute profits.

According to that, it was stated that the main problem of this research is to examine the relationship between cash dividends and income growth in companies listed on the Tehran Stock Exchange, and the question is whether changes in profits can affect the company's income?

1-3- The importance and necessity of conducting research

The stock market has long been one of the favorite topics in financial research. In the meantime, dividend policy is one of the first fields that have been extensively researched, and in modern financial management, various models and theories have been presented to describe it, so that at any time, researchers try to solve the mystery of dividend payments using new theories and perspectives. Many factors should be considered by the company. to decide how much cash interest to pay. Since many investors want to have a correct forecast of their future investment and decide whether to hold or sell their shares in the future, one of the attractive aspects for them is the cash dividend of the shares. It is very useful to find methods that can show the effect of cash dividends on the income of the company and stocks. Therefore, this research will try to estimate and test this relationship through regression models.