Determent of dividend

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Dividend Payout Determinants for Australian Multinational and DomesticCorporations

Shumi Akhtar* #

JEL CODES: G37, F23, H20Keywords: Dividend payouts, Multinational, Imputation tax system.

All errors and omissions are my own.

# Please direct all correspondence to [email protected] , School of Finance and Applied Statistics, College of Business andEconomics, The Australian National University, ACT 2606, Australia. Ph: (+61) 2 6125 4723 and Fax: (+61) 2 6125 0087.
mailto:[email protected]:[email protected]


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Abstract

This study investigates the determinants of dividend payments using a sample of Multinational Corporations(MCs) and Domestic Corporations (DCs) listed on the Australian Stock Exchange. Six different measures of

dividend payout ratios are investigated and four international factors (multinationality, political risk, foreignexchange risk, and diversification) are employed in addition to traditional firm specific factors. We find: MCspay significantly less regular cash dividends, special cash dividends, total dividends and net dividends relative toDCs; the degree of foreign involvement is important in determining special cash and net dividend payments;Australian MCs are comparatively more active than DCs in dividend increasing activities and the factors thatenable MCs to increase dividend payments are dependent on earnings received from a safer politicalenvironment, availability of cash in hand and firms size; and Australian MCs are significantly less likely to be adividend payer relative to DCs and this is due to tax disadvantages coupled with unfavourable foreign risk exposures.


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1. Introduction

While dividends have received considerable attention in the academic literature, few studies have examined the

determinants of various modes of dividend payments while distinguishing between Multinational corporations

(MCs) and Domestic corporations (DCs). 1 Yet this difference is important because MCs and DCs vary quite

significantly in relation to risk exposure, operational activities and financial activities all of which could affect

dividend payments. Typically, MCs are exposed to more risk (political, foreign exchange, different tax laws and

legal requirements) and are relatively more disperse in their operational activities (both geographically and

industrially diffused) relative to DCs. Also MCs have easier access to multiple markets and in the event of

financial need this may have a significant impact in determining the style of dividend payout. However, little is

known about, not only what factors determine the various dividend payout modes, but also, if those determining

factors vary across dividend payment modes for MCs and DCs.

The literature investigating dividend payout behaviour not only makes no distinction between MCs and DCs but

mostly uses U.S. data and thus is limited to dividend payout behaviour under a classical tax system. Australia

however, given its unique imputation tax system, provides a good case study to investigate the significance of

multinationality of a firm when considering modes of dividend payout. Its distinctive tax system favours

shareholders by eliminating double taxation on dividend income (compared to classical tax regimes). Pattenden

and Twite (2008) is the only Australian study that investigates the determinants of dividend payout ratios but the

distinction between MCs and DCs is not considered in their study. Hence, it is not known if an imputation tax

system plays any significant role in explaining various dividend payout ratios across MCs and DCs and the

difference that exists between these two types of firms.

In light of this, we use a sample of 973 Australian MCs and 1776 Australian DCs listed on the Australian Stock

Exchange to determine the extent to which the imputation tax regime plays an important role between cash,

share repurchase and other forms of dividend payout decisions. Six different measures of dividend payout ratios

1 The word corporations, firms and companies are used interchangeably.


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are investigated and four international factors (political risk, foreign exchange risk, geographical diffusion and

diversification) are employed in addition to traditional firm specific factors.

Four main findings are reported in relation to various dividend payout measurements. i) Australian MCs pay

significantly less regular cash dividends, special cash dividends, total dividends and net dividends in comparison

to their counterpart DCs. This difference is mostly explained by Australian MCs being unable to offer tax credit

benefit to shareholders due to the imputation tax law which prohibits companies offering any tax credit on the

overseas income that is distributed as dividends; ii) foreign exchange risk and political risk, geographical

diversification and industrial diversification factors, not considered in past empirical research, are highly

important in explaining dividend payout ratios; iii) the degree of an Australian firms foreign connection is

reasonably important in determining special cash and net dividend payments. Interestingly, Australian MCs are

comparatively more active than DCs in dividend increasing activities and the factors that enable MCs to increase

dividend payments are dependent on earnings received from a safer political environment and availability of

cash in hand. iv) Australian MCs are significantly less likely to be a dividend payer relative to DCs and this

could be due mainly to tax disadvantages coupled with unfavourable political and foreign risk exposures that are

faced by Multinationals more so than their counterpart DCs.

Current theories do not provide a unique prediction on the firms decision between cash dividends, Off-market

and On-market share repurchase, special and other forms of dividends payments across domestic and

Multinational corporations. So, the extent to which different methods of dividend payments and the impact of

Multinationality of a firm has important implications for many of the existing finance theories. This is examined

below using ordinary least square and logistic regression analysis.

The rest of the paper proceeds as follows: section 2 describes the motivation and hypotheses. Section 3 explains

sample selection and methodology. Section 4 analyses the findings of the empirical univariate and multivariate

tests results and section 5 concludes the paper.


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2. Theoretical Background and Hypotheses

Corporations distribute returns to their shareholders primarily via cash dividends. In addition, corporations

sometimes distribute dividends through share repurchases 2, regular script dividends 3, bonus share plans 4, special

cash dividends 5 and special script dividends. Under an imputation tax regime, it is not known what impact

multinationality of a firm has on various forms of dividend payment. However, multinationality is important to

recognise since it influences the level of risk and diversity of a firms operational activities and hence is

important for both managers and shareholders.

2.1 Dividend Imputation Tax System and Dividend Payouts

The imputation tax system allows companies to pay dividends that carry credits for income tax paid by the

company. Such dividends are known as franked dividends 6 and the tax credits can be used by resident

shareholders to reduce income tax. The tax preference for the distribution of franked dividends following the

introduction of a dividend imputation tax system suggests that regular dividend payments by all firms will

increase (Pattenden and Twite, 2008). In Australia, while most dividends are paid in the form of regular semi-

annual cash payments, share repurchase type and other forms such as regular script dividends, bonus share plans,

special cash dividends and special script dividends are also adopted by firms from time to time. The imputation

tax system does not impose any discrimination between various types of dividend payments.

Grullon and Michaely (2002) argue that cash dividends and share repurchases should be a substitute payout

method holding all other things constant. However, they also argue firms can always adjust their sources of

2 The word Share repurchase and buy back and repurchase are used interchangeably.3 Some companies offer a script dividend alternative, where shareholders are opted to receive extra shares in a company instead of thecash dividend. 4

Bonus shares issued under the Bonus share plan are generally not treated as income under Australian taxation law and not subject toimputation arrangements in the hands of the shareholder. Such shares are regarded as having been acquired at the same time as theexisting holding for no extra cost and the cost of the existing holding then becomes the cost of the aggregate of the existing holding andthe new shares. 5 A non-recurring distribution of company assets, usually in the form of cash, to shareholders. A special dividend is larger compared tonormal dividends paid out by the company. Also referred to as an extra dividend. Generally, special cash dividends are declared afterexceptionally strong company earnings results as a way to distribute the profits directly to shareholders. Special cash dividends can alsooccur when a company wishes to make changes to its financial structure or to spin off a subsidiary company to its shareholders. 6 Dividends paid from earning that have been taxed the full corporate tax rate are referred to as franked dividends. Franked dividends arepaid out of the companys franking account. Dividends paid from earnings that have not attracted corporate tax are refereed to asunfranked dividends. A dividend payment that includes both franked and unfranked dividends is referred to as partially franked dividends.


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funds, and therefore it is possible that cash dividends and share repurchases are determined independently. For

example, it is possible that cash dividends are determined together with investment, as Miller and Rock (1985)

suggest, and that repurchases are determined independently.

Shares can be repurchased through on-market or off-market and by an offer to all shareholders or a particular

group of shareholders. The tax treatment of on-market and off-market offers differs. With on-market offers the

total purchase price is subject to tax, just as if the share had been sold by the shareholder. In on-market

repurchase there is no dividend component, only a capital component. In contrast, off-market repurchase has

both dividend and capital components. In Australia, off-market share buy backs are sold at discount (while in

U.S. they are usually sold at premium). We admit that it makes more sense to include off-market share buy back

in dividend payout analysis because companies can designate a portion of the repurchase price (off-market) as a

dividend and, providing the company has franking credits in its franking account balance, imputation tax credit

can be attached to that portion (Brown, 2007). This provides an advantage to the shareholders especially when

the off-market buyback price can be fully franked dividend in a large portion and capital component is a small

portion (incurring a capital loss given share is sold at discount). However, for a thorough investigation of share

repurchase, in this study both types of share repurchase are considered. Further, for a detailed investigation of

various dividend payout methods between Multinational and Domestic corporations, a multiple aspect of

dividend distribution (eg., regular script dividends, bonus share plans, special cash dividends and special script

dividends) is considered.

In relation to whether a difference exist in distribution of any of these various modes of dividend payments

between Multinational and Domestic corporation is an empirical issue.

2.2 Why do Multinational and Domestic Corporations have different payout policies?

Many of the factors that have been shown to influence dividend policy and firm value have been developed

through empirical research on listed corporations mainly in the U.S. Regard for whether the corporations are

DCs or MCs has not been considered. This is surprising given that the factors that have been identified as


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determinants of dividend policy could differ substantially between these two different types of corporations.

Firms come in a multitude of different sizes and forms and one important distinction is between DCs and MCs.

Also, MCs control considerable amounts of assets and wealth, and obtaining evidence on their approach to

dividend policy is an area of research that is severely lacking. MCs have characteristics that are often very

different from DCs and it may be these differences that have driven the results. Obtaining a better understanding

of the differences in dividend policy in these two types of firms will shed light on and add to the existing body of

literature in relation to factors that may be influential in determining dividend pay outs between these two types

of firms. As a result, this study considers five new variables in addition to previously developed dividend policy

determinants theories and they are multinationality, political risk, foreign exchange risk, geographical and

industrial diversification.

2.2.1 Mulinationality

To identify the determinants of dividend payout ratios for MCs and DCs it is necessary to categorise

corporations as either MCs or DCs. This can be achieved by considering what constitutes a Multinational

Corporation. The remainder can then be regarded as Domestic Corporations. Several criteria have been

suggested in the literature to define MCs, including foreign sales ratio (Geyikdagi, 1981; Errunza and Senbet,

1984; Fatemi, 1988; Kim and Lyn, 1986; Shaked, 1986), foreign tax ratio (Lee and Kwok, 1988; Burgman,

1996; Chkir and Cosset, 2001) and the number of countries in which the firm operates through subsidiaries

(Errunza and Senbet, 1984; Kim and Lyn, 1986; Michel and Shaked, 1986; Shaked, 1986). The foreign sales

ratio has been popular but it does not differentiate between firms that earn income through export or firms that

generate foreign source income through subsidiary operations. We argue that to capture the combined effect of

all risk exposures and possible benefits from being an MC, it is important to know if foreign sales are generated

through export or through subsidiaries existence. If foreign sales are generated through export, then the exposure

of risks and benefit will be relatively lower than if the sales are generated through the existence of subsidiaries.

This is because when a foreign country experience unpleasant economic or financial crisis then it is easier and

less costly for the exporter to withdraw sales income as opposed to closing down an entire subsidiary in that


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country. Therefore, in this study, we are cautious in defining an MC. In this paper MCs are defined as

corporations that have at least two subsidiaries in another country (other than the domicile country) in which a

firm operates and earns income from sales (Tallman and Li, 1996), earns profit and holds assets in those

subsidiaries. Domestic corporations (DCs), being the remainder. The importance of distinguishing

multinationality of a corporation from domestic corporations mainly lies in their uniqueness of operation; MCs

typically operate under multiple tax regimes and have easier capital market access.

2.2.1.1 Uniqueness of operational activities

Holding all other things constant, MCs operational risks are deemed to be different from DCs as they operate

in an international environment. Various risks that MCs subsidiaries face may lead the total business risk to be

higher (Burgman, 1996; Bae and Noh, 2001) which would not exist for corporation operating predominantly in a

domestic market.

MCs are also characterised by greater operational costs and operational complexity which may affect dividend

payouts. Monitoring, bonding and auditing costs are agency-related and are higher for MCs because of the

diversity of geographical locations, cultural differences, higher auditing costs, differing legal systems, and

language differences. These national differences increase the complexity of such standard tasks as generating

multi-country financial statements, hiring multi-country auditors and/or multiple auditors, and completing

consolidated balance and income statements (Burgman, 1996; Reeb et al., 2001) and there are complexities of

their operations as compared to DCs. According to Wright et al. (1997), these costs are due to the distance and

the difference in the corporate and national culture between the parent and the subsidiaries as well as the

difference in the level of economic development between the parent and the subsidiary host countries. Hence,

these characteristics of MCs may limit the amount of dividend they can pay out to shareholders.

Michael and Shaked (1986) evaluate the differences in financial characteristics and performance between MCs

and DCs. Their results show that while DCs have superior risk-adjusted, market-based performance to MCs,


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MCs are more capitalised and less risky than DCs. 7 Hines (1996) argues that in the 1980s U.S. corporations paid

dividends at very high rates out of their after-tax profits, and that an unusually high fraction of those profits came

from foreign profits (non-U.S.) sources. Further, Hines (1996) argued that multinationals pay higher dividends

than domestic counterparts and their findings suggest MCs pay three times higher than DCs. So, the risk and the

benefit of diversification may have more of an impact on MCs dividend policy than their domestic counterparts.

2.2.1.2 Different tax regime

Any differential tax treatment of capital gains reltive to dividends might influence investor after-tax returns and,

ain turn, affect their demand for dividends (Lease et al., 2005). MCs operate in multiple countries meaning

income is earned in different types of tax environments. For example, an imputation tax system encourages

companies to pay more dividends to the shareholders since it is less taxable than the capital gains. As for MCs,

if firms are paying higher tax for their earnings in overseas countries then paying dividends out of profit might

be costly. Therefore, MCs will pay fewer dividends. Alternatively, it can be argued that if subsidiaries pay less

tax on the profit they make overseas then MCs are in a better position to pay higher dividends than DCs.

2.1.1.3 Easier capital market access

MCs are relatively in a better position to get access to international capital markets to raise debt than the DCs

due to their international operation and involvement. This means that in an economic crisis year in the home

country, MCs can borrow money (if necessary) overseas at a favourable rate to maintain the dividend policy with

the shareholders, which indicates MCs should have higher dividends than DCs (Hines, 1996). Following this,

MCs are expected to pay relatively higher dividends than domestic counterparts. However, if the borrowing rate

is unfavourable, then MCs may not pay higher dividends than DCs.

2.2.2 Political risksJodice (1985) suggests that political risk can be defined as changes in the operating conditions of a firm that

arise out of a political process, either through war, insurrection, or political violence, or through changes in

7 The average standard deviation of stock returns and the average systematic risk (beta) of DCs are significantly higher than those of MCs.


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government policies that affect the behaviour of firms and their financial decisions. Political risk can be

conceptualised as events in the national and international environments that can affect the profit level, physical

assets, personnel, and operations of firms. Such adverse effects often take place through constraints on the way

in which the MCs operate in foreign countries.

Kim and Mei (1994) and Bailey and Chung (1995) suggest that political risk has a significant impact on firms

profitability. Market volatility increases during political election and transition periods. Bailey and Chung

(1995) also document that political risk can have a significant effect on firms profit level and profit distribution

to its shareholders. This means that firms with significant foreign financing, foreign suppliers or customers, or

other international transactions or assets are relatively exposed to adverse changes in currency controls, capital

flow barriers and other laws and regulations that constitute political risk.

Examples of political risk attributes are host government appropriation, fund remittance control, differences in

governmental and cultural practices, greater tax uncertainty and regulations affecting only MCs (Mahajan,

1990). Therefore, depending on MCs and DCs earnings exposure to political risks in the domicile country and

foreign countries, it will affect their dividend payments accordingly. This exposure can have positive or

negative effects on dividend payout and this depends on whether the exposure is acting as a natural hedge to

their earnings. Given the fact that MCs are usually more exposed to international environments due to the nature

of their business, MCs are expected to have higher positive or negative effects to exposure to political risks and

therefore will have a subsequent effect on their dividend payout relative to DCs.

2.1.3 Foreign exchange risk

More exposure to foreign exchange fluctuations systematically increases the variation of foreign returns in

domestic currency. In a floating exchange rate regime, where the purchasing power parity does not hold

perfectly, an MC faces exchange rate risk (Solnik, 1974). MCs and DCs that are exposed to foreign exchange

risk affect the demand and supply of their products, prices and costs (Adler and Dumas, 1984; Jorion, 1990;

Bartov et al., 1996). Further, Black (1990) also suggests that all firms face foreign exchange exposure. The

more sensitive the firms are to foreign exchange rate fluctuations, the greater the chance of price fluctuations,


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which ultimately shocks the profit level figures and cash flows from which dividends usually get distributed.

The greater the fluctuations of cash flows, the more the expected cost of bankruptcy risk increases and business

risk and consequently leads to generating less profit and therefore the lower the dividend payment to its

shareholders.

The effect of foreign exchange exposure can have positive or negative effects on both DCs and MCs depending

on the amount and type of foreign transactions (expenditure vs. revenue or assets vs. liability) they are dealing

with. However, in the international finance literature, it has been argued that MCs are more involved with

international operations than their DCs counterparts. As a result, MCs may have higher exposure to foreign

exchange risk than DCs, and depending on the favour or disfavour of the exposure on firms business operation

this will lead MCs to pay higher or lower dividend payments than the DCs.

2.1.4 Diversification

Diversification arguments can be explained in an industrial and geographical context. Cornell and Shapiro

(1987) explain the diversification influence on dividend payouts from stakeholder theories point of view.

Stakeholder theory predicts that firms that have both high potential implicit claim values and the desire to pay

those claims will attempt to distinguish themselves before stakeholders make the claims (Holder et al., 1998).

Shapiro (1990) indicates that managers signal their ability to honor implicit claims by paying lower dividends.

This keeps more cash in the firm to pay implicit claims and reduces the risk of a possible dividend cut.

Therefore, as Net Organizational Capital (NOC) 8 becomes higher, dividend payout should be lower. Valuation

of implicit claims is very difficult. However, Cornell and Shapiro (1987) note that this valuation is related to the

level of spillovers that a firm has across product lines, business lines and business divisions. 9 A firm that is

more diversified or has many divisions will have less spillover effects. Stakeholders recognize that focused

8 When a firm sells its goods and services that have comparatively larger amounts of implicit guarantees, the ability to fulfill these obligations increases thevalue of the firms equity in the market. The belief is that the value, or price, stakeholders are willing to pay exceeds the ac tual costs that the firm willincur to meet these promises. Therefore, the reduction of stakeholder risk has a greater value than the firms cost of reducing this risk. The result is thatthe firm creates an organizational assets that exceed the organizational liabilities is the level of Net Organizational Capital (NOC) which accrues to theshareholders.9 For example, if a firm chooses to identify all of its products under a single brand name or business lines and those products are similar, then changes inthe value of implicit claims of one product can have considerable effects on the other products.


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firms have more to loose when they default on an implicit claim. Therefore, stakeholders will place higher value

on an implicit claim for a focused firm than on that of a diversified firm. Holder et al. (1998) also suggest that a

less-focused firm is diversified into more business segments and likely to have fewer spillover effects. Of

course the relatedness of the business divisions across countries will impact the spillover relationship, but

overall, the more business lines a firm has, the less likely spillover will occur. The firms with low spillover

effects will then have lower NOC than will a firm that is more focused, since defaulting on implicit claims is less

injurious to less focused firms. This suggests that as corporate focus increases (less diversified), NOC should

also increase. This should lead to a decrease in the payout ratio for the more focused firms.

It is important to note that mixed findings have been reported regarding the diversification concept. For

instance, some researchers argue that international diversification brings benefits while others argue the

contrary. 10 Further, Hymer (1976), Eun and Resnick (1988), Eun et al. (1991) and Reeb et al. (2001) argue that

firms engage in foreign investments in order to exploit firm-specific advantages and to earn high returns on

investment and in exploiting these firm-specific advantages, MCs may get exposed to higher level of foreign

exchange risk, political risk, agency costs and information costs

Following the above diversification arguments, the impact of diversification on firm performance and dividend

distribution is an issue calling for additional empirical investigation. Given MCs operate across countries in

multiple business lines and usually their operations are more diverse than the DCs counterparts, a significantly

different positive or negative relationship is expected with dividend payout ratios between MCs and DCs

(depending on the costs and benefits of industrial and geographical diversification benefit).

10 Geographic diversification is valuable when the benefits from the c reation of intra-firm markets for the transfer of firm-specific intangible assets relatedadvantages across borders, that bypass incomplete or non-existent external markets, exceed the organizational and agency costs associated with doingbusiness in foreign countries (Kim et al, 2009). In support of this notion, Morck and Yeung (1991), followed by many others, found that intangiblesassociated with consumer goodwill and technical expertise increase the value of multinational firms (Morck and Yeung, 1992; Allen and Pantzalis, 1996;Pantzalis, 2001). Others (Buckley and Casson, 1998; Kogut and Zander, 1993) have argued that MNCs derive benefits from operating a geographicallydispersed network of subsidiaries that enable them to absorb shocks and take advantage of growth opportunities not available to their local competitors inforeign countries. These networks provide MNCs with operating flexibility and are sources for an array of valuable real options (Pantzalis, 2001). On theother hand, it is a well known tenet in finance (Brealey and Myers, 1996) that firms cannot add value by diversifying since investors can do that betterthemselves in a developed capital market. Furthermore, various studies in the U. S. have indicated that corporate diversification tends to destroy valueperhaps because of loss in focus. For example, Lang and Stulz (1994) and Berger and Ofek (1995) concluded that the stock market puts lower values ondiversified firms.


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2.3 Controlling for Other Determinants

Much of what we know about dividend policy originates from a series of interviews conducted by Lintner

(1956). At a theoretical level Miller and Modigliani (1961) showed that dividend policy is irrelevant to firm

value. However, relaxing the assumptions associated with their model has shown that dividend policy may

affect firm value and is influenced by several firm specific factors. Research thus far has shown that dividend

policy can be explained by some firm specific factors such as tax (DeAngelo and Masulis, 1980, Pattenden and

Twite, 2008), earnings volatility (Asquith and Mullins, 1983; Miller and Rock, 1985), cash flow related agency

problem (Jensen, 1986; Jensen and Meckling, 1976), debt (Litzenberger and Ramaswamy, 1979; Fama and

French, 2002), growth opportunities (Rozeff, 1982; Smith and Watts, 1992; Schooley and Barney, 1994),

profitability (Barlett and Ghoshal, 1989; Fama and French, 2001), firm size (Barlett and Ghoshal, 1989; Fama

and French, 2001) and firm maturity (Grullon et al., 2002).

2.3.1 Tax

Differential taxes on dividends and capital gains alter the preference of individual investors for receiving income

in one form or the other. In July 1987, a full imputation system was introduced which eliminated the double

taxation of company income. Prior to this, company income distributed as dividends was taxed twice, thus

making returns in the form of dividends less attractive than other returns. This may have distorted investors

portfolio allocations away from equity. Prior to the introduction of dividend imputation, company tax was levied

on profits earned and after-tax profits distributed as dividends were taxed again in the hands of shareholders.

Dividend imputation ensures that company profits paid out as dividends are taxed only once. Companies credit

their franking accounts with the amount of income that can be distributed as franked dividends. Credits arise

mainly from tax payments made or from receiving franked dividends from the companys shareholdings.

Shareholders receive franking credits to the extent that company tax has already been paid on dividends

received. They are then able to offset these credits against taxable income that is derived from any source, not

just dividends. Therefore, it is very important that one controls for this issue in determining dividend payout


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ratios. Given dividend imputation is seen as an advantage from shareholders point of view a positive

relationship is expected with dividends.

Callen et al. (1992) suggest that for overseas investors, the withholding tax is not imposed on fully franked

dividends. This extends the benefits of imputation to overseas investors. However, because the amount of the

withholding tax on a dividend will be less than the value of the imputation credit, overseas investors do not

receive the full benefits received by domestic investors. Further, any foreign income on which corporate tax has

been paid in the foreign country is not part of the imputation system (Pattenden and Twite, 2008). 11 This means

that the Australian MCs paying tax overseas are not counted as part of imputation tax credit. Therefore,

shareholders getting paid from overseas after tax income will not be able to claim tax credit on their dividends.

Based on this arguments, as for Australian MCs, given their subsidiaries are located in multiple countries, the

shareholders of MCs taking advantage of imputation credit are lower than domestic investors, and hence a less

positive effect is expected for MCs relative to DCs in determining dividend payout ratios.

2.3.2 Leverage

Debt can play a disciplinary role. 12 Theoretical studies based on international environmental factors predict that

MCs will have lower debt ratios than DCs (Shapiro, 1978; Burgman, 1996). However, it has been documented

that Australian MCs hold higher debt ratios than DCs (Akhtar, 2005). Therefore, it is expected that leverage will

have higher magnitude of negative relationship in explaining MCs dividend ratios than DCs.

11 Although, Cannavan et al. (2004) describes a scenario where imputation credit may be valuable to non-resident investors if the credits can be effectivelysold to a resident individuals and institutions. However, Officer (1988) concludes that franking credits would be fully valued but for the transaction costsassociated with their transfer. This is an argument based on the assumption that all investors benefit from imputation, either directly or indirectly byselling the credits to reduce tax liabilities or indirectly by selling tax credits to investors who can use them. 12 For example, by increasing the debt level, the free cash flow will decrease (Grossman and Hart, 1982; Jensen, 1986 and Stultz, 1990). Indeed,shareholders may expropriate wealth from bondholders by paying themselves dividends at the expense of bondholders who try to deal with this problemthrough debt covenant restrictions (Jensen and Meckling, 1976; Kalay, 1982). The debt covenant hypothesis predicts that firms will decrease or notincrease dividends after debt issues. It is found that the stockholders of leveraged firms choose to pay dividends under debt contracts. Consistent with thedebt covenant hypothesis, DeAngelo and DeAngelo (1990), Jensen et al. (1992), and Long et al. (1994) find an inverse relationship between dividends anddebts. Therefore, the leverage ratio should have a negative impact on dividend payout ratios.


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2.3.3 Cash

The principal agent problem is that managers may pursue their own goals at the cost of obtaining lower profits

for the owners (stockholders). 13 Dividend payouts can be used to reduce discretionary cash under managers

control that could be wasted in negative NPV projects. Therefore, a positive relationship is expected indicating

the reduction in agency related cash flow problem in the dividend payout decision. MCs operations in multiple

countries can increase the risks of agency costs. The agency risk of MCs is a potential decrease in the ability to

monitor managers multiple countries (Lee and Kwok, 1988). Monitoring these overseas agents is harder due to

the geographical constraints, cultural differences, timing issues, costly communications, and so forth. Also,

international market imperfections may also decrease the ability of the market for corporate control to discipline

international managers. As monitoring foreign operations becomes more difficult and less effective, the risk

(fluctuations) of anticipated cash flows from overseas operations may increase. Based on this argument, MCs

will have higher agency costs then DCs counterparts and therefore will pay less dividends.

2.3.4 Collateral value of assets

Collateral value of asset is seen as a buffering to mitigate an agency problem between shareholders and

bondholders. It can be argued that if a firm has to rely on external source of finance to maintain the dividend

payments, then it would be easier for firm to raise money if the firm holds substantial amount of fixed or

tangible assets. 14 In relation to MCs and DCs, it is found in Akhtar and Oliver (2009) that Australian MCs has

13 There are many ways of reducing agency costs. Dividend payments serve as one means of monitoring or bonding management performance. Greaterdividend payments to shareholders may force the firm both to raise capital by selling new shares and to go to the capital market more frequently. Agencycosts are reduced as a result of the increased scrutiny the capital market places on the firm (Easterbrook, 1984; Jensen, 1986). Jensen and Meckling (1976)suggest that managers can allocate resources to activities that benefit them privately, but that are not in shareholders best interest. Easterbrook (1984)

views dividend payments as a potential solution to agency conflicts. Dividend payments force managers to raise funds in the external financial markets andthus subject managers to scrutiny by outside professionals such as investment bankers, lawyers, and public accountants. Recognising the monitoring valueof external financial markets, shareholders will insist that managers pay dividends. Also, Jensen (1986) points out that managers have incentive to growtheir firms beyond optimal size as growth increases managers power by increasing the resources under their control.

14 Tangible assets are likely to have an impact on the borrowing decisions of a firm because they have greater value than intangible assets in case of bankruptcy. Further, moral hazards risks are reduced when the firm offers tangible asset as collateral, because this constitutes a positive signal to the debtholder. Therefore, an inference can be drawn on the basis that if collateral value of asset assists to raise external debt which helps to maintain stabledividend payout ratios then a positive relationship is expected with dividend payments; however one could argue that if there is not enough collateral valueof asset is available for external financing then raising debt externally to meet the dividend payment may become very costly and in that case the positiverelationship may not be observed. Therefore an expected direction is unclear.


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significantly less collateral value of asset than DCs. However, it is an empirical question whether collateral

values of asset play any role in determining MCs and DCs dividend payout ratios.

2.3.5 Risks

Firms facing high levels of earnings uncertainty are likely to pay low dividends, fearing cash shortfalls in the

future. In order to fund profitable future investment projects, firms with high earnings uncertainty will choose to

hoard cash today by keeping dividends payments low. 15 DCs operate mainly in only one economy while MCs

have affiliates located in multiple economies. The performances of these multiple countries economies are not

perfectly correlated, giving rise to diversification opportunities for the MCs. Given this opportunity, the overall

cash flow variability reduces the probability of bankruptcy and expected bankruptcy costs. This in turn will also

enable MCs to pay higher dividends to its shareholders relative to DCs counter parts. On the bother hand, it can

also be argued that foreign exchange rate fluctuations and political risk will increase MCs variability of cash

flows. In contrast, Reeb et al. (2001) counter that even foreign exchange and political risks specific to MCs may

be eliminated through international diversification. Based on these conflicting arguments, nevertheless, scholars

of international finance tend to give more weight to the benefits of international diversification. As a result,

MCs are expected to have less negative effect in explaining the dividend payout ratios than DCs.

2.3.6 Profitability

Fama and French (2001), document that the probability of a firm paying dividends is positively related to

profitability. 16 MCs have better opportunities than DCs to earn more profit mainly due to having access to more

than one source of earnings and better chances to have favourable business conditions in particular countries

15 Moreover, firms with unstable or volatile earnings may have to resort to external financing more often. In general, external funds are more expensivethan internal funds, but this is more so for firms with high earnings uncertainty; these firms generally have low credit ratings, a result of volatile earningsstreams, and thus must pay premium interest to raise money. Firms with high earnings uncertainty will thus pay lower dividends because of their greaterneed to rely on internal funds (Pettit, 1972; Asquith and Mullins, 1983; Miller and Rock, 1985). Based on this discussion, it is expected that dividendpayouts will be negatively related to earnings volatility. This argument echoes survey evidence by Brav et al. (2005). They report that more than two-thirds of chief financial officers of dividend-paying firms say that the stability of future earnings is an important factor affecting dividend decisions.Beaver et al. (1970), Michael and Shaked (1986), Glen et al. (1995) and Baker et al. (2001) argue that the uncertainty of a firms earnings may lead it topay lower dividends because the existence of large fluctuations in earnings materially increases the risk of default. 16 The intuition is that higher profitability and greater size imply a greater capacity to distribute cash, whereas greater growth indicates superior investmentopportunities, thus a stronger incentive to retain cash. More profitable firms are expected to hold less debt, since it is easier and more cost effective tofinance internally and consequently pay higher dividends.


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(Kogut, 1985a; Barlett and Ghoshal, 1989). Consequently, MCs being more profitable than DCs are expected to

have higher dividend payout than DCs after controlling for the other variables.

2.3.7 Size

Research by Lloyd et al. (1985) and Vogt (1994) indicates that firm size plays a role in explaining the dividend

payout ratio of firms. 17 It is often argued that MCs are larger than DCs. On this basis, MCs are expected to be

larger in size then DCs and therefore will enable MCs to pay higher dividends than DCs.

2.3.8 Age

Dividends tend to be paid by mature, established firms, plausibly reflecting a financial lifecycle in which young

firms face relatively abundant investment opportunities with limited resources so that retention dominates

distribution, whereas mature firms are better candidates to pay dividends because they have higher profitability

and fewer attractive investment opportunities. 18 MCs are claimed to be more mature than DCs (Akhtar and

Oliver, 2009). As a result, it can be hypothesised that MCs will pay higher or lower dividends than DCs

counterparts.

2.3.8 Future growth

Firms with many good investment opportunities have high cash needs, which may lead them to payout a low

fraction of earnings to shareholders as dividends (Smith and Watts (1992); Gaver and Gaver (1993); La Porta et

al. (2000)). If this is the case, a negative relationship is expected between investment opportunities and

payouts. 19 The value of future growth opportunities is augmented as far as a firm can exploit imperfections in the

17 They find that larger firms tend to be more mature and thus have easier access to the capital markets, which reduces their dependence on internally-generated funding and allows for higher dividend payout ratios. It is argued that firms that are large have greater access to capital markets and they caneasily able to switch between debt and equity and take advantage of lower transaction costs, which allows for more stable and possibly higher dividendpayments of the firm. Hence a positive relationship is expected between the size and dividend payout ratio (Ali et al., 1993). 18 Fama and French (2001), Grullon et. al (2002), Grullon et al. (2002), DeAngelo and DeAngelo (2006) all advance lifecycle explanations for dividendsthat rely, implicitly, on the trade-off between the advantages (e.g. flotation cost savings) and the costs of retention (e.g. agency costs of free cash flow).The trade-off between retention and distribution evolves over time as profits accumulate and investment opportunities decline, so that paying dividendsbecomes increasingly desirable as firms mature. However, one could also argue that as firm approaches to its maturity phase, the need for higher dividendpayment to attract new investors is not necessarily important for established firms because these firms can raise capital without relying on issuingsecurities. Also, a firm needs to pay higher dividends during the growth phase of its business cycle to attract investors and also to be able to raise capitalthrough equity issues as external borrowing might be bit risky due to not having enough creditworthiness in the capital market. 19 Alternatively, some others argue that the relationship between investment opportunities and dividend is in fact positive (Brav et al., 2005). Surveyevidence suggests that firms are highly reluctant to cut dividends, and increase dividends only when sustainable higher earnings are expected (Lintner,


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products and capital markets. MCs tend to be in a better position than DCs for taking advantage of such market

imperfections (Homaifer et al., 1998). Kim and Lyn (1986) report higher MB ratios for MCs than for DCs,

which indicates that the existence of monopoly rents. The gain from multinationalism, according to Kogut

(1985b), stems from the ability to exercise options not available to domestic corporations. Example of these

options is the ability to arbitrage institutional restrictions such as taxes, antitrust laws, and economies of scale

gained in distribution, marketing, and manufacturing. Since these options are only available to MCs, they

become a source of monopoly rents (Homaifer et al., 1998). Based on this argument, a more negative growth

opportunity relationship is expected for MCs than DCs in explaining dividend payout ratios.

Finally, industry effect 20 and time effect 21 will be also controlled for since these two elements have been argued

to be important in distribution of dividends.

3. Data and Method3.1 Sample Selection

Table 1 presents the process of sample selection. Initially, all firms (6785 in total) listed on the Australian Stock

Exchange for each year from 1995 to 2008 are selected. For each firm, four databases have been used to extract

relevant data for this study. Segmental (industrial and geographical) data is obtained from OSIRIS 22. Further,

OSIRIS and Compustat (global) have been used to extract annual balance sheet and income statement data.

Datastream has been used to get share price, market index (all ordinaries) and trade weighted index data. Lastly,

1956; Brav et al., 2005). This argument suggests that only firms with a variety of good investment projects pay high dividends today because the cashflows earned from future projects support high dividends in the future. Given these two conflicting arguments on the relation between investmentopportunities and dividend payments, it is left to empirical tests results to determine which is indeed the more likely for Australian firms. 20 Industry may affect a firms dividend policy (Baker and Powell, 2000 and Michael and Shaked, 1986). Although variation in dividend payouts amongfirms appear to be affected by firm-specific variables such as investment requirements and earnings variability, Lintner (1953) hypothesises that dividendpolicy also is influenced by an industry effect. Such an industry effect, if it exists, presumably stands apart from other firm-specific variables that affectpayout decisions of the member firms within an industry and causes them to have varying dividend policies (Dempsey et al.,1993). Some evidence

suggests that there is significant variation in dividend payout ratios among industries (Michael, 1979; Baker, 1988). Richardson et al. (2003) confirm thatindustry affiliation is a strong determinant of dividend and share repurchase policy. Several studies specifically examine the potential effect of industryaffiliation on dividend policies. Research by Michel (1979) and Baker (1988) among others suggests a positive relationship exists between industryclassification and dividend policy. 21 It is important to examine the effects of time-varying information and determinants on the dividend payout. Firstly, time series evidence of dividendpolicies is relatively more plausible than cross-sectional evidence as time series analysis captures the dynamic changes of dividend payout policy acrosstime. Secondly, it would provide evidence on the robustness of the disappearing puzzle. Thirdly, it allows conducting a further test of the timedependence variable changes. For example, when investment and dividend payment is primarily financed with internal funds, worsening conditionsshould not have as larger an impact as when external funds account for the bulk of financing. Since this only happens in financial markets which areimperfect (i.e. if internal and external funds are not perfect substitutes), the differential impact should be stronger when financing frictions are moreprevalent (Braun and Larrain, 2005). 22 https://osiris.bvdep.com/version-2009512/cgi/template.dll?product=20


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political risk rating data were purchased from The PRS country ratings. 23 For each year, if a firm reported

business activity (sales earnings) from other than an Australian source (that is, non-Australian geographical

segment) and have at least two overseas subsidiaries, it is coded as multinational otherwise it is coded as a

domestic corporation.

Table 1Sample Selection ProcedureDeleted Sample Description Observationsfor MCs

Observationsfor DCs

Initial sample 2789 3996

a. Less foreign Multinationals -690 0b. Less repurchase due to takeover, pure capital returnwinding up, subsequently delisted. Also, repurchased forconvertible purpose.

-281 -398

c. Less Investment, Bank, Insurance and Trust -478 -285

d. Less inefficient sample period (minimum 3 years) -177 -1112

e. Less lack of detailed reporting of relevant Information -129 -336

f. Less different reporting period -61 -89

Total final samples 973 1776 Table 1 presents the summary of the total sample and data selection processes for Australian multinational corporations (MCs) anddomestic corporations (DCs). The first column lists the detailed description of the data selection process while the second and thirdcolumns contain the number of observations for Australian DCs and MCs.

There are 973 MCs and 1776 DCs selected across 14 years. Foreign countrys MCs listed in the Australian

Stock Exchange are excluded because we are only studying Australian MCs that are incorporated in Australia.

Companies were also excluded if they completed off-market repurchase in response to a takeover or as an

alternative to a pure capital return when winding up, or if they subsequently became delisted. Further,

companies that issued publicly traded rights to participate in the repurchase activities and companies that

repurchased ordinary shares for convertible notes were also excluded.

Firms in the financial and regulated industries have dividend payout and capital structures that are determined by

levels of deposits and financial regulation. Determinants of dividend payout and capital structure for these firms

23Since 1979, Political Risk Services has been known worldwide as the original system for quantifying and rating political risk, using methodology

developed by Professors William D. Coplin and Michael K. OLeary during 20 years of research at the Maxwell School of Citizenship & Public Affairs,Syracuse University. Political Risk Services is the most widely accepted system of completely independent political risk forecasting. All publicationsbased on this system are included in the Political Risk Services product line. This methodology and research produce 100 Country Reports (soldseparately and also grouped into Regional Services and the World Service, available online as PRS Online).


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are considerably different from other firms, and as a result are excluded (Fama and French, 2002; Flannery and

Rangan, 2006). The number of financial organisations excluded under this criterion are shown at (c.) in Table 1.

A minimum of two years of data was necessary for some variables. Firms with less than five years of data for

estimation of these variables are excluded as shown at (d.) in Table 1. Other firms are excluded as the reported

figure duration is less than 12 months. Since all the proxies required a full year of observation to be consistent

across other variables, a full year of reporting was important. This is indicated by (e.) in Table 1. Finally, two

important statistical conditions are also applied so that the final sample size is statistically valid to use in the

multiple regressions. The conditions include a reasonably large sample selected at random from large

populations which is, on average, representative of the characteristics of that population. Secondly, it is

statistically advisable that large groups of data show a higher degree of stability than a smaller data set. The

final sample resulted in selection of 973 MCs and 1776 DCs (on average 70 MCs and 127 domestic firms per

year).

Table 2 presents the number of MCs and DCs in each year for the samples. There has been a general increase in

DCs and MCs although a decline in numbers of DCs and MCs are observed since 2006 but it is due to meeting

the sample selection criteria not because there is a reduction in the numbers of firms in the ASX listings.

Overall, in the sample there are more listed DCs than MCs in any given year. Note that in year 2008, not many

data for firms were available at the time of the data collection, however, it is still an acceptable representation of

2008 ASX listed MCs and DCs.

Table 2 Sample Distribution across YearsYear MCs DCs Total

1995 51 74 125

1996 53 79 132

1997 66 105 1711998 78 123 201

1999 79 127 206

2000 69 159 228

2001 74 167 241

2002 82 158 240

2003 85 153 238

2004 76 148 224

2005 74 141 215


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2006 69 129 198

2007 61 113 174

2008 56 100 156

Total 973 1776 2749Table 2 presents the summary of the total sample and data selection across 14 years for Australian multinational corporations (MCs) anddomestic corporations (DCs). The first column of the table lists the detailed description of the yearly observations for MCs and DCs.

Table 3 reports the sample distribution of each GICS 24 industry classification for MCs and DCs. It shows an

almost equal distribution of sample selection across industries between MCs and DCs with the exception of two

industries namely, Energy and Materials. For example, industries except Energy and Materials make up

approximately 70% of the DCs sample while the proportion of MCs in the other eight industries make up 64% of

the MCs sample. This table also shows that higher proportions of Australian MCs belong to the Materials

industry while the least number of industries that MCs are involved in is Utilities.

Table 3 Sample Distribution across GICS Industries

MCs % DCs % Total %Energy (10) 48 5 198 11 246 9Materials (15) 299 31 341 19 640 23Industrials (20) 115 12 299 17 414 15Consumer Discretionary (25) 222 23 424 24 646 23Consumer Staples (30) 97 10 106 6 203 7Health Care (35) 71 7 149 8 220 8Financials (40) 0 0 0 0 0 0Information Technology (45) 75 8 188 11 263 10

Telecommunication Services (50) 34 3 23 1 57 2Utilities (55) 12 1 48 3 60 2Total 973 100 1776 100 2749 100Table 3 provides the Global Index Classification System (GICS) for industry distribution of MCs and DCs including the proportion of thetotal sample. The codes that are used in the GICS classification are reported in parenthesis. GICS has 10 main industry categories whichare: Energy; Materials; Industrials; Consumer Discretionary; Consumer Staples, Health Care; Financials; Information Technology;Telecommunication Services and Utilities.

Table 4Various dividend payment frequencies: 1995 - 2008

RegularCashdividends

Off-market

On-market

Regularscriptdividend

Specialcashdividends

Bonusshareplan

Dividendreinvestmentplan

Special scriptdividends

1995 112 0 00

0 0 20 0

1996 118 0 00

2 0 21 0

1997 167 0 00

6 0 19 1

1998 179 2 70

7 0 21 0

1999 205 4 60

6 1 21 0

2000 229 4 100

13 0 25 2

24 GICS stands for Global Industry Classification Sectors. This classification has been acceptable globally than any other industryclassification. Therefore, for comparison reasons, GICS classification approach has been adopted.


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2001 240 8 130

14 1 34 0

2002 241 8 80

8 2 38 0

2003 232 8 80

10 2 39 1

2004 224 4 110

12 1 39 0

2005 205 12 130

14 1 37 2

2006 197 8 14 0 11 1 43 0

2007 170 7 130

9 1 48 1

2008 167 5 40

8 1 50 0

Total 2686 70 107 0 120 11 455 6This table provides number of companies that paid various form of dividends across years: 1995 - 2008. Various forms of dividendspayments are: regular cash dividends, off-market share repurchase, on-market share repurchase, regular script dividends, special cashdividends, bonus share plan, and special script dividends. Cash dividends are defined as the regular dividends that paid every year. On-market share repurchase is the amounts that are used to buy back share from its shareholder at any given year. Off-market sharerepurchase is the amounts that are used to buy back share from its shareholder at any given year. Special cash dividend is the amount thatis paid by the company to its shareholder in some year. Regular script dividend is a form of dividend that is paid to the shareholder as ashare instead of cash payment. Bonus share plans is to allow shareholders to renounce their right to the dividend in favour of a bonusissue. Dividend reinvestment plan plans allows allow shareholders to reinvest the dividends.

Table 4 details the number of companies that paid various forms of dividends per year. The results in Table 4

show that the number of firms pays regular cash dividends increased by two fold from 1995 to 2001 and then it

gradually declined. This decline may be justified with an increase in both off- and on-market share repurchase

activities and dividend reinvestment plan over the sample period. This is consistent with the argument that firms

catering to the increased demand for the distribution of imputation tax credits following the inclusion of pension

funds in the imputation tax system (Pattenden and Twite, 2008). From taxation point of view, dividend

reinvestment plan is treated as if the cash dividend upon receipts by shareholder was immediately applied to the

purchase of new shares.

3.2 Method

The following ordinary least square regression model is proposed to test the determinants and multinationality

effect on different measures of dividend payout ratios. The model attempts to isolate the multinationality effect

which is argued to capture the unique factors that cannot be quantified otherwise. The model also distinguishes

the difference across the explanatory variables between DCs and MCs. The test of industry influence and time

influence on dividend payment behaviour is also investigated by extending this model with 0 and 1 dummy

variables. Also, note that the independent variables are in lag terms. The justification for using lag terms of the


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independent variable are justified by the fact that managers of any firms making a dividend payout decision this

year does rely on last years financial structures and firms financial stability. Also, all regression results are

conducted controlling for industry and time effects.

*, 0 1 2 , 1 3 , 1 4 , 1

5 , 1 6

- 2

i t i t i t i t

i t

DIV Multinationality Political risk Foreign Exchange risk Geographical diversification Industrial diversification digit Industrial diversificati

, 1 7 , 1

8 , 1 9 , 1 10 , 1 11 , 1 12 , 1

13 , 1 14 , 1

- 4

+

i t i t

i t i t i t i t i t

i t i t

on digit Effective tax rate

Long term debt Cash Collateral value of asset Risk Profitability

Size Age

15 , 1 ,- - i t i t Market to book value Where Multinationality i,t represents the multinationality feature of a firm. This is the base model and various

extensions will be implemented to cater for various aspect of different theory testing purposes. In addition to

ordinary least square regression technique, Probit regression is considered specially when dependent variable

takes a form of 0 or 1 to indicate dividend payer vs. non-payer dividends and also dividend increase vs.

decrease.

4. Results4.1 Summary StatisticsTable 5 (Panel A and Panel B) presents summary statistics. It shows that cash dividend payments for MCs are

39% of net income on average and for DCs it is 42%. This difference is statistically significant at the 5%

significance level. MCs having lower cash dividend relative to their counterpart DCs may be an indication that

Australian MCs face more risks through international operations leading to more volatile cash flows to distribute

as cash dividends. We observe a lesser proportion of off-market share repurchase, on-market share repurchase

and special cash dividend type dividend payments executed by MCs in comparison to DCs. The result of the

political risk factor shows that Australian MCs are experiencing relatively more uncertainty than DCs (75.99 vs.

82.66). The average diversification figure for MCs is 2.54, which is statistically higher than DCs (0.04).

However, no significant difference is detected between MCs and DCs for 2-digit and 4-digit industry level

diversification. Consistent with Akhtar (2005), on average Australian MCs have significantly lower long term

debt than (0.27 vs. 0.36). Profitability and firm age variables indicate that Australian MCs are more profitable

than their counterpart DCs and also more mature. Similarly, Australian MCs on average experience more

growth opportunities than DCs.


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Panel B, shows individual linear relationships each variable has with the dependent variables and also within the

independent variables. No harmful multicolinearity is observed and correlations are reasonably within the

acceptable range of the correlation bench mark (Keller, 2008).


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Panel B

C a s

h D i v i d e n

d [ 1 ]

O f f M a r

k e t [ 2 ]

O n

M a r

k e t [ 3 ]

S p e c

i a l c a s

h d i v i

d e n d

[ 4 ]

T o t a l

d i v i

d e n d

[ 5 ]

N e t

D i v i d e n

d s [ 6 ]

P o l

i t i c a l r i s k

[ 7 ]

F o r e i g n e x c h a n g e r i s k

[ 8 ]

G e o g r a p

h i c a

l d i v e r s i

f i c a

t i o n [ 9 ]

I n d u s t r y

d i v e r s

i f i c a t

i o n

( 2 d i g i t ) [ 1 0 ]

I n d u s t r y

d i v e r s

i f i c a t

i o n

( 4 d i g i t ) [ 1 1 ]

E f f e c

t i v e

t a x

[ 1 2 ]

L o n g

t e r m

d e b t [ 1 3 ]

C a s

h [ 1 4 ]

C o l

l a t e r a

l v a l u e o f a s s e

t s [ 1 5 ]

[1] 1.00[2] -0.04 1.00[3] 0.30 0.59 1.00

[4] 0.57 -0.21 -0.15 1.00[5] 0.83 0.79 0.73 0.90 1.00[6] 0.60 0.68 0.66 0.59 0.64 1.00[7] 0.05 0.09 0.12 0.04 0.05 0.04 1.00[8] -0.06 0.22 -0.18 0.07 -0.05 -0.01 0.05 1.00[9] -0.03 -0.12 -0.12 0.09 -0.01 -0.01 -0.36 0.00 1.00[10] -0.07 0.06 0.06 0.07 -0.06 -0.10 -0.02 0.03 -0.03 1.00[11] -0.06 0.05 0.05 0.07 -0.04 -0.02 -0.01 0.06 -0.07 0.64 1.00[12] 0.04 -0.04 0.11 -0.26 0.03 0.00 0.04 -0.01 0.01 -0.01 -0.01 1.00[13] 0.03 -0.10 -0.08 -0.07 0.00 0.14 0.06 0.00 -0.02 -0.03 -0.04 -0.03 1.00[14] -0.25 0.27 0.30 0.00 -0.18 -0.09 -0.04 0.03 0.04 0.06 -0.06 -0.03 -0.19 1.00[15] 0.02 -0.26 -0.19 -0.07 -0.01 -0.02 0.02 -0.02 -0.01 -0.07 0.01 -0.02 0.22 -0.50 1.00

[16] -0.32 -0.07 -0.03 0.06 -0.27 -0.15 0.06 0.13 -0.01 0.09 0.08 -0.07 0.08 0.30 -0.05 1.00[17] 0.03 -0.02 0.16 0.29 0.02 0.02 0.01 -0.01 -0.01 0.00 0.00 -0.01 0.00 -0.03 0.00 -0.03 [18] 0.30 -0.13 -0.07 -0.19 0.25 0.21 -0.05 -0.06 0.21 -0.30 -0.27 0.05 0.19 -0.40 0.33 -0.51 [19] 0.14 0.04 -0.18 -0.03 0.12 0.11 -0.04 0.02 0.13 -0.18 -0.14 0.00 0.03 -0.12 -0.03 -0.15 [20] -0.03 0.35 0.13 -0.13 0.00 0.05 -0.04 -0.01 0.07 -0.07 -0.09 0.00 -0.34 0.22 -0.16 -0.05


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4.2 Regression Analysis4.2.1 Does multinational of a firm matter across different payout ratios and what are the determinants?

The regression analysis presented in Table 6 shows six sets of regression results on a pooled sample of MCs and

DCs. To observe whether multinationality of a firm has any impact in explaining the difference of firms

various forms of dividend payout methods, a dichotomous variable of MULT i,t (1 being multinational, 0

otherwise) has been employed. Interestingly, the results shows that Australian MCs pay significantly less cash

dividends (t=-1.96), special cash dividends (t=-2.50), total dividends (t=-2.03) and net dividends (t=-2.41) to its

shareholders relative to DCs but a similar significant result is not observed for off-market and on-market share

repurchase types of dividend payments. 25 multinationality effect on dividend payments can be multidimensional

(eg., the risks and benefits of holding assets in foreign countries, earning income through foreign sales and

having foreign subsidiaries in multiple countries) and this multidimentionality may be explained by the slope

difference of chosen international and firm specific factors; hence Table 7 investigates the slope difference of

each of the estimated coefficients. Continuing with Table 6 results, the significant determining factors across

different method of dividend payout vary. For example, political risk explains cash dividends (t=2.89), total

dividends (t=2.35) and net dividends (t=2.00) while foreign exchange risk is a significant determinant in

explaining cash dividend (t=-1.98), on-market share repurchase (t=-1.67) and total dividends (t=-2.36). Among

other variables, cash, collateral value of assets, risk and size factors became consistently significant in explaining

most methods of dividend payments.

The significant positive coefficient of political risk factor suggests that an increase in the ratings (indicating a

safe zone) assist firms to significantly increase cash, total and net dividends respectively (t=2.89, t=2.35 and

t=2.00). This result is consistent with Kim and Mei (1994) and Bailey and Chung (1995). They argue that

political risk has significant effect on firms profit level and profit distribution to its shareholders. The positive

significant estimate explain that Australian firms dividend distributions are complemented in a positive way by

their foreign countries subsidiaries when they are able to operate and earn income in politically safe

25 A further explanation of this result is investigated in Table 7 which will explore the determining factors that play role to produce suchresult.


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environment which are not adversely affected by the political changes such as expropriation, civil disorders,

currency controls, investment restrictions, and other laws and regulations.

Consistent with the theoretical arguments, an increase in foreign exchange exposure has significant negative

effect in the paying cash, on market and total dividends (t=-1.98, t=-1.67 and t=-2.36) and this is consistent with

Adler and Dumas (1984). This result indicates that firms operations are affected by exchange rates, especially

when their input and output prices are influenced by currency movements. This suggest that Australian firms are

sensitive to foreign exchange rate fluctuations which shocks the profit level figures and consequently effects

profit distribution as cash dividends, on-market share repurchase and total dividends. Results also shows that the

greater the foreign exchange risk exposure the more it will have negative impact on dividend distributions. The

regression analysis of on-market share repurchase activities presents some instinctive results for Australian

firms. Negative significant coefficient of foreign exchange risk exposure (t=-1.67) indicate that when the foreign

exchange risk exposure is high, it leads a reduction in on-market share repurchase activities. This may imply

that shareholders may become sceptical about the true price of the share and as a result their participation in on-

market share repurchases declines.

Long term debt has significant negative (t=-1.53, t=-2.93 and t=-2.95) relationship with off-market, on-market

share repurchase and special cash types of dividend payments. This may indicate that when firms are engaged in

raising long term debt, the firm significantly reduce their both type of share repurchase activities as well as

special cash dividend payments. Alternatively, it may also imply that share repurchase financed through

external borrowing may be costly and therefore we observe this significant negative impact in explaining

variation in both off-market and on-market share repurchase.

Although it has been argued in the literature that dividend payout can be seen as a technique to reduce agency

costs by distributing cash in hand (Easterbrook, 1984 and Jensen, 1986), the results in this paper produce an

opposite outcome to this argument. The significant negative result of cash availability may imply that, for

Australian firms, an increase in cash in hand may not help in reducing dividend related agency costs. This


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indicates that managers may involve themselves in increasing their wealth at the costs of shareholders when it

comes to a point of making any form of dividend payments (t=-5.69, t=-2.31, t=-2.67, t=-6.26 and t=-8.62). This

finding may support the results found by Jensen and Meckling (1976).

A significant negative coefficient of collateral value of asset and its negative impact on various forms of

dividend payments can be explained from bondholder and shareholders related agency costs point of view. For

example, if there is not enough cash available to distribute regular cash dividends, managers may rely on

external financing to meet the dividend payment obligation. This action may impose a strenuous impact on the

collateral assets, leading to create a significant negative relationship across all six modes of dividend payments

(t=-5.33, t=-1.67, t=-1.98, t=-2.78, t=-6.25 and t=-7.86).

Earnings variation is captured through standard deviation of stock return. This coefficient has significant

negative association across all six different types of dividend payments (t=-7.24, t=-2.46, t=-2.73, t=-2.47, t=-

6.70 and t=-12.36). This result is consistent with the argument of firms facing high levels of earnings volatility

are likely to pay low dividends (Asquith and Mullins (1983); Miller and Rock (1985) and Brav et al. (2005)).

This result is also consistent with recent findings of Glen et al. (1995), and Baker et al. (2001) among others. A

negative significant relationship of stock return variation with off-market and on-market share repurchase type of

dividend payments implying that when a firms market performance becomes volatile, there will be a significant

reduction in share repurchase activities.

A strong positive relationship is observed with size variable and most of the dividend payment methods (t=6.20,

t=3.37, t=-4.16, 6.93 and t=8.40) except special cash dividends. This finding supports the arguments that as firms

become larger, they have greater access to capital markets and they can easily able to switch between debt and

equity and take advantage of lower transaction costs which in turn allows for more stable and possibly higher

dividend payments (Lloyd et al. (1985); Ali et al. (1993); Vogt (1994)).

Firms age can be a sign of firms maturity. The age coefficient shows a significant positive (t=1.79, t=1.70 and

t=2.46) relationship in explaining off-market share buy back and special cash dividends. This result may suggest


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that as Australian firms mature, they tend to increase off-market type share repurchase activities and increase

special cash form of dividend payments.

Market to book-value has significant positive relationship (t=2.20) with on-market share repurchase. From

signalling theorys perspective, this may indicate that on-market share repurchase activities have positive

information content. For example, this result may show a supports for the signalling hypothesis argument that

management by repurchasing their own shares, they signal to the market that their shares are undervalued and

they have inside information supporting the higher value of their outstanding shares.

Overall, the significance of the regression model appears moderately significant (eg., the adjusted R-square

ranging between 25% to 35%) across various types of dividend payments. Also, the estimated coefficients

discussed above are obtained after controlling for time and industry effects.

Table 6Dividend payment determinants across various dividend payout measurements and impact of multinationalityFollowing model is used to achieve the results:

*, 0 1 2 , 1 3 , 1 4 , 1

5 , 1 6

- 2i t i t i t i t

i t

DIV Multinationality Political risk Foreign Exchange risk Geographical diversification

Industrial diversification digit Industrial diversificati

, 1 7 , 1

8 , 1 9 , 1 10 , 1 11 , 1

12 , 1 13 , 1 14 , 1

- 4 i t i t

i t i t i t i t

i t i t i t

on digit Effective tax rate

Long term debt Cash Collateral value of asset Risk

Profitability Size Age

15 , 1 ,- - i t i t Market to book value

Cashdividend Off-market On-market Specialcash Totaldividend Netdividend

Coeff t-stat Coeff t-stat Coeff t-stat Coeff t-stat Coeff t-stat Coeff t-stat

C 0.32 1.61 -0.21 -1.06 -1.30 -1.58 0.00 0.02 0.44 1.95c 0.48 1.14

MULT -0.07 -1.96b

-0.03 -0.81 -0.04 -0.86 -0.09 -2.50b -0.08 -2.03

b -0.04 -2.41

b

PR 0.00 2.89a 0.00 1.04 0.00 1.52 0.00 1.41 0.00 2.35

b 0.00 2.00

b

FX -0.08 -1.98b 0.01 0.82 -0.04 -1.67

c -0.01 -1.00 -0.11 -2.36

b -0.01 -0.72

G_DIVER -0.02 -1.27 0.01 0.65 0.01 0.36 0.05 1.36 -0.01 -0.63 0.00 -0.40

I_2_DIGIT 0.14 0.92 0.11 0.69 1.25 2.04b 0.17 1.42 0.11 0.65 0.08 0.72

I_4_DIGIT -0.03 -0.25 -0.04 -0.82 -0.08 -1.03 -0.12 -1.80c -0.04 -0.35 -0.10 -1.33

ETR 0.00 0.42 0.00 -0.65 0.00 -0.22 0.00 -1.02 0.00 0.33 0.00 0.43

LTD -0.01 -0.22 -0.04 -2.53b -0.06 -2.93

a -0.04 -2.95

a -0.02 -0.62 0.02 0.89

CASH -0.76 -5.69a -0.06 -0.84 -0.24 -2.31

b -0.32 -2.67

a -0.86 -6.26

a -0.57 -8.62

a

CVA -0.41 -5.33a -0.10 -1.67

c -0.17 -1.98

b -0.17 -2.78

a -0.52 -6.25

a -0.32 -7.86

a

RISK -3.30 -7.24a -0.75 -2.46

b -0.75 -2.73

a -1.00 -2.47

b -3.37 -6.70

a -3.08 -12.36

a

PROF 0.00 0.94 0.00 1.46 0.00 0.97 0.00 0.71 0.00 0.58 0.00 1.92c

SIZE 0.07 6.20a 0.05 3.37

a 0.06 4.16

a 0.01 1.15 0.08 6.93

a 0.05 8.40

a

AGE 0.03 1.62 0.02 1.70c 0.01 0.56 0.04 2.46

b 0.01 0.40 0.01 0.76

MB 0.00 -0.51 0.01 0.84 0.02 2.20b 0.00 0.60 0.00 0.28 0.01 3.12

a

Industry effect Yes Yes Yes Yes Yes Yes

Time effect Yes Yes Yes Yes Yes Yes


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Adj R-sqr 0.33 0.29 0.25 0.28 0.34 0.35

No. Of obs 2749 2749 2749 2749 2749 2749The ordinary least square regression is conducted using full sample of 2749 of which 973 are MCs and the remaining being MCs (1776).The dependent variable DIV takes six different dividend payment measurements. For example, regular cash dividend is defined asregular cash to net income; off-market is calculated as the total amount spent on off-market share repurchase in the entire financial yearscaled by on-market is calculated as total amount spent on on-market share buyback for the financial year scaled by net income; and totaldividend is calculated as sum of regular dividends, off-market share repurchase, on-market share repurchase amount for the financial year,special cash dividends, bonus share plan, special cash dividends and scaled by net income and finally net dividend I calculated as totaldividends minus new equity issue (via dividend reinvestment plans, right issue, public issues or private placements). The independentvariables are: Multinationality - this effect is measured where it takes a value of 1 when a corporation is a multinational otherwise it is 0.It takes a place of unity (1) if a firm has foreign sales, foreign assets and at least two number countries involvement at any given year,otherwise it is coded Zero (0) to represent domestic corporations. Political risk is the sum of all the MCs subsidiaries countries politicalrisk ratings exposed to the proportion of each sale that a subsidiary makes overseas. Foreign exchange risk FX is proxied by regressioncoefficient of trade weighted index. The regression is performed on every firms weekly (52 observations per year) against all ordinariesindex and trade weighted index. Geographical diversification is measured as ln(Foreign sales proportion times by total number of subsidiaries across countries). Industry level diversification is measured as 1 minus the Harfindahl index and this procedure is followedfor both two digit GICS code industry level diversification and four digit GICS codes industry level diversification. Effective tax rate ismeasured as tax paid scaled by pretax income. Leverage is measured as the total debt to total debt and market value of equity. Leverageis measured as the total debt to total debt and market value of equity. Cash is estimated as proportion of cash to total assets. Collateralvalue of asset is measured as fixed asset to total assets. Risk is measured as standard deviation of firms stock return over a year using

weekly observations. Profitability is measured as net income over total assets. . Size is calculated as ln(total asset). Firms age is thenatural logarithm of the age of the firm in years from date of incorporation. Market-to-book is sum of market value of equity and book value of equity scaled by book value of total assets. Mult* indicates slope variables for multinationalcorporations for each independent variables. Note: a, b and c represents significance level of 1%, 5% and 10% for two tailed test.

4.2.2 The slope difference of determinant factors that explains the difference of dividend payoutratios across MCs and DCs

Table 7 is an extension analysis of Table 6. The extension of the analysis is to identify the explanatory factors

that are liable in explaining the difference between MCs and DCs various forms of dividend payments.

The slope difference indicates that the interaction variable of effective tax rate and profitability have significant

negative relationship with regular cash dividend payments (t=-2.47 and -1.92, respectively). The negative

significant interaction slope variable of effective tax rate indicates that Australian MCs shareholders are not in

as good position as DCs shareholders to benefit from the dividend imputation tax credit. The resident

shareholders of Australian MCs are worse off in receiving cash dividends since they miss out in claiming tax

credit on the tax payments made in overseas countries. This result is consistent with the argument that

Australian MCs tax expense payment in the overseas countries cannot be part of the tax credit. As a result an

increase in the proportion of tax to its pre-tax income for MCs provide less benefit to its shareholders and

consequently it leads MCs to pay significantly less dividends to its shareholders in comparison to DCs. This

finding is very important and this supports the true benefit of how the dividend imputation tax system operates.


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Further, given 97% of the sample MCs subsidiaries are located in classical tax countries, and earning profit

from those countries are less useful to the shareholders because the dividends that are paid out of those profit has

no tax credit components to it. Negative significant effective tax rate and profitability is also observed for

Australian Multinationals in payment of special cash dividend, total dividends and net dividend (t=-1.74 and t=-

1.98; t=-2.52 and t=-1.95; and t=-2.58 and t=-2.37). Further, the finding of this tax implication on dividends is

reliable because all the sample companies incorporated in this study pay fully franked dividends which means

the tax credit argument that has been used to justify results are valid.

The negative significant interaction variable of profitability implies that the Australian MCs receiving higher

profit than DCs has significantly negative impact on regular cash dividends, special cash dividends, total

dividends and net dividends. This finding is consistent with the effective tax rate arguments discussed above.

This result may suggest that from MCs point of view, receiving higher profit from overseas subsidiaries do not

add any additional benefit to attract shareholders because the tax that MCs subsidiaries pay in overseas countries

cannot be claimed as a tax credit by its shareholders. As a result, Australian MCs pay significantly lower

dividends to its shareholders relative to DCs counterparts.

Interestingly, no significant slope difference is found in explaining the variation of off-market share buy back

between MCs and DCs. However, for on-market share repurchase, a number of slope estimates became

significant. For example, geographical diversification (t=-1.98), industrial diversification (t=3.51) and size

(t=2.07). These results indicate that Australian MCs geographical expansions can significantly reduce their on-

market share repurchase activities relative to DCs counterparts. This may imply that Australian MCs find it

costly to involve in on-market share repurchase activities as they become more geographically dispersed relative

to DCs. Industrial diversifications- especially 2 digit level GICS, however, produce an opposite result for

Australian MCs. It shows that Australian MCs benefit in the 2-digit GICS industrial dispersion which assist

them to involve more in on-market type share repurchase activities in comparison to DCs. Also, Australian MCs

are significantly larger than DCs which also aids to increase in on-market share buy back activities. Lastly,

political risk factor explains the difference of MCs and DCs total dividend payments. The positive significant


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slope estimate of political risk factor (t=2.03) implies that foreign subsidiaries sales earnings coming from safer

foreign countries helps Australian MCs to pay significantly higher total dividend relative to DCs. Finally, the

adjusted R-square across six different measurement of dividend payment shows a plausible fit of the regression

coefficient analysis.

Table 7Interaction effects in dividend payout decision for Multinational corporationsFollowing model is used to achieve the results:

*, 0 1 , 2 , 1 3 , 1 4 , 1

5 , 1 6

- 2i t i t i t i t i t

i t

DIV Multinationality Political risk Foreign Exchange risk Geographical diversification

Industrial diversification digit Industrial diversific

, 1 7 , 1

8 , 1 9 , 1 10 , 1 11 , 1

12 , 1 14 , 1 15 ,

- 4

Pr

i t i t

i t i t i t i t

i t i t i t

ation digit Effective tax rate

Long term debt Cash Collateral value of asset Risk

ofitability Size Age

1 16 , 1 17 , , 1

18 , , 1 19 , , 1 20 ,

- - *

* * * - 2i t i t i t

i t i t i t i t i t

Market to book value Mult Political risk

Determent of dividend

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