The Determinants of Corporate Dividend Policy (Manuscripts‪)‬

ABSTRACT What factors determine a corporation's dividend policy? This study empirically examined the data for a sample of 483 firms taken from the Multex Investor Database to assess the impact of selected financial variables on the dividend decision using OLS Regression. Results of this study suggest that the higher the firm's PE, the lower its risk, and the higher the payout ratio. The greater the degree of insider ownership the lower is the dividend payout. These findings suggest that management in the firms examined have an incentive to reduce dividends in order to increase the expected value of their stock options received as executive compensation. The firms in the sample also seek to insure access to equity capital to fund growth by establishing a good reputation with stockholders through higher dividends. The importance of dividend cash flow as a signaling device to stockholders is also evident in the sample since even with high growth, the firm is willing to increase debt to fund increasing dividends. The firms in the sample desire to "put their money where their mouth is" by sending a strong positive signal to institutional owners to enhance reputation and maintain access to capital.