Comparison of DP of UK and US Banks 2003-2007

8/3/2019 Comparison of DP of UK and US Banks 2003-2007

1/82Electronic copy available at: http://ssrn.com/abstract=1321451

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A Comparison Of Dividend Policy Of UK And US

Banks Over The Period 2003 2007 From

Shareholders Point Of View

Kingston University, London

Kingston Business School

M.Sc in Accounting and Finance

Zahid Nawaz Ghauri

K0731305

October 2008


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Abstract:

In my research study, I compared the relationship between the dividend policy of UK

banks and the USA banks from the shareholders point of view. The shareholders are free

to invest everywhere in the world. There is no legal or economical constrain on them to

invest only in their home country. They are absolutely free to invest their money

wherever they want. In my research study, I examined whether it is beneficial for the

shareholders to invest either in UK banks or in the USA banks.

The analysis of my research study consists of 11 UK banks and 15 USA banks. So the

total numbers of banks in my research study are 26 banks. My analysis of the research

study consists on the data from the year 2002 2007. To analysis the shareholders

wealth for the specific year t, I used the data of the previous year t-1 in my research

study. To get the result of my data, I used multiple regression analysis. The statistical

techniques which I used in my research are p-value, t-statistics, and coefficient

correlation and adjusted R2. To broaden the research study, I considered three more

independent variables in my multiple regression analysis. I also used dummy variable 0

for all UK banks and 1 for all the USA banks.

The evidence of my research study shows that in UK banks there is more relationship between

the shareholders wealth and the dividend policy than in the USA banks. By considering the 4

independent variables used in the research study, the adjusted R2

value of UK banks is more than

the USA banks with respect to the dependent variable, which shows the more relation between

the shareholders wealth and the dividend policy in UK banks than the USA banks.


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Declaration:

I declare that this dissertation is all my own work and the sources of information and

material I have used (including the Internet) have been fully identified and properly

acknowledged as required.


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Acknowledgement:

I wish to thank my supervisor, Dr Natalia Isachenkova, for her excellent guidance.


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Contents Page

Abstract i

Declaration ii

Acknowledgements iii

Contents of the research Study

Chapter 1: Introduction ................................................................................... 1

Chapter 2: Literature Review................................................................................. 3

2.1.1 Dividend Policy .................................................................................... 3

2.1.2 Shareholders wealth ............................................................................ 4

2.2 What are the factors which may affect the dividend policy .................... 4

2.2.1 Free Cash flow............................................................................ 4

2.2.2 Government Regulations............................................................. 4

2.2.3 Investment Opportunities .................................................. 5

2.2.4 Productivity of Manager............................................................... 5

2.2.5 Corporate Governance.................................................................. 6

2.2.6 Hesitation to Cut the Dividend........................................... 7

2.2.7 Dividend Reinvestment Plans (DRIPs)....................................... 7

2.2.8 Maturity and Stability of the Company....................................... 7

2.3 Is the dividend policy related with the shareholders wealth? ................... 7

2.3.1 Abnormal Dividend ................................................................. 8

2.3.2 Share Repurchase .................................................................. 8


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2.4 Decision for Dividend size (Amount)...................................................... 9

2.5 How do the shareholders get return from the dividend policy? .............. 10

2.6 How to compute the shareholders wealth .............................................. 10

2.7 Dividend Policy Theories......................................................................... 13

2.7.1 Miller & Modigliani.................................................................. 13

2.7.2 Dividend Policy in an imperfect market...................................... 14

2.7.2.1 Dividend as Residual ................................................. 14

2.7.2.2 Clientele Effect ........................................................... 14

2.7.2.3 Dividend as Signal ..................................................... 15

2.7.2.4 Tax Consideration ....................................................... 15

2.8 Is dividend policy affected by contagion?.................................................. 16

2.9 What is the trend of dividend in USA and UK from 1981 to 2002?........ 17

2.10 Is there any similarity of dividend policy in USA or European countries?18

2.11 Credit Crunch ........................................................................................ 19

Chapter 3: Methodology.......................................................................................... 20

3.1 Empirical Design........................................................................................ 20

3.2 Component of Research Methodology.................................................... 21

3.3 Regression Analysis.................................................................................. 23

3.4 Design the research method .................................................................... 25

3.4.1 Hypothesis for the Research..................................................... 26

3.4.2 Sample for the research............................................................. 26

3.4.3 Proxies for the hypothetical determinants................................. 27


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Chapter 4: Results ................................................................................................... 33

4.1 Meanings of the indicators....................................................................... 35

4.2 Results of the hypothesised regression model.......................................... 37

4.2.1 Discussion of the univariate results from the full sample........... 37

4.2.2 Credit Crunch Effect for univarite analysis................................ 40

4.3 Discussion of the multivariate results from the full sample .................... 42

4.3.1Credit Crunch Effect on multivariate Analysis .......................... 45

4.3.2 Discussion and comparisons of the multivariate results of UK

and the USA banks dividend policy and shareholders wealth .......... 47

Chapter 5: Summary and Conclusion....................................................................... 49

References................................................................................................................. 51

Financial Data ............................................................................................................. 66


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Chapter 1: Introduction

The purpose of my research study is to compare the dividend policy of the overall UK

banks and the USA banks with reference to the shareholders point of view from the year

2003 - 2007. This research will help to find which countries dividend policy is more

attractive for the shareholders. Should the shareholders go to invest in the USA banks or

in UK banks to maximize his/her return on the investment? My research study is

concerned with an analysis of data on UK and the USA banks from 2003 2007 for the

impact of dividend policy on shareholders wealth.

To compare the dividend policy of UK and the USA banks, my investigation time period

consists of 5 years which is from the year 2003 2007. To compare the dividend policy

of these both countries, I took the data of 11 banks of UK and 15 banks of the USA from

the year 2003 2007. The names of the banks of the both countries are shown in chapter 3.

In my research study, I used market-to-book value ratio to measure the shareholders

wealth and to analyse the dividend policy I used dividend payout ratio. To consider the

dividend policy in depth and its effect on the shareholders wealth, I also included three

more ratios in my research study i.e. return on assets ratio, leverage ratio and the net

margin ratio. I used dividend payout ratio, return on assets ratio, leverage ratio and net

margin ratio as the independent variable and market-to-book value as the dependent ratio

in my research study.

In my research of comparing the dividend policy of UK and the USA banks from the

shareholders point of view from 2003 - 2007, I used some statistical descriptions like

mean, median and standard deviation and also used some statistical techniques like p-value, t-statistics, coefficient correlation, adjusted R

2and multiple regression analysis.


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I divided this research studies into 5 chapters. Chapter 1 is for the introduction of my

research. Chapter 2 elaborates the literature review associated with the title of the

research. In this chapter, I interpreted the theories, polices and the models related with

the dividend policies from the shareholders point of view. In Chapter 3, I explained the

methodology of my research studies i.e. how did I collect the data, which methods I used

for the research, which techniques I used and how did I applied these techniques on the

data to get the results. In Chapter 4, I reported all the results from the statistical

techniques, explained what these techniques stand for and then explained all the results

from the shareholders point of view. The Chapter 5 is the conclusion chapter of my

research study and it summarizes and concludes all the findings of the research study.


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2.1 Chapter 2 (Literature Review):

There are a range of theories and models in efforts to provide explanation for the

dividend policy of the companies and how it is related with the shareholders wealth.

Some of these theories use qualitative data and others use quantitative data to explain the

policy of the dividend from the shareholders point of view. In this chapter, I explained

the dividend policies and models from the shareholders point of view. But before

describing these models and the theories of dividend policy from the shareholders point

of view, first of all we should know what is meant by the dividend policy and the

shareholders wealth?

2.1.1 -Dividend Policy:

Dividend Policy is defined as Dividend policy is the determination of the proportion of

profits paid out to shareholders usually periodically. (Arnold, 2005, P1010) and its

the board of the directors who set the dividend policy of the business (Brealey & Myers,

2003).

It is also the part of the dividend policy of a corporation to decide whether to pay direct

cash dividend to its shareholder and, if so then how much to pay and how ofen (i.e.

monthly, quarterly, semiannually or annually) to pay or increase the shareholders wealth

by purchasing the shares from the market i.e by increaseing the price of the shares in

market (Canina, Advani, Greenman, & Palimeri, 2001).

There is a misconception regarding the dividend policy that each company has to pay

dividend every year as the return on the investment of its shareholders. To make the point

clear, there is no obligation on the firm to pay dividend every year to its shareholders.

The common stock shareholder bears more risk than the bondholders as the bondholders

receive fixed income irrespective of the operations and profits of the business and the

common stockholder has no promised for any payments in future (Emery, D.Finnerty, &

Stowe, 2007).


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According to Canina, Advani, Greenman, & Palimeri (2001) there are a large numbers of

variables which may affect the dividend policy, such as whether to pay dividend via

share repurchase or specially designated dividends rather than dividends on a regular

basis.

2.1.2 - Shareholders wealth:

Shareholders wealth is the discounted value of after-tax cash flows paid out be the firm.

After-tax cash flows available for consumptions can be shown to be the same as the

stream of dividends, Divt , paid to shareholders (Copland, Weston, & Shastri, 2005,

P.20)

2.2 What are the factors which may affect the dividend policy?

The dividend policy of financial institutions depends on the following factors which may

affect the shareholders wealth.

2.2.1Free Cash flow available in business. If there is free cash flow then it is better for a

business to pay higher dividend as the higher dividend removes free cash from the hands

of the managers and they have less money and resources to waste (Bhattacharyya &Winnipeg, 2003). This dividend policy is successful where the shareholders do not take

much interest in the business and the business has a very large number of shareholders as

well as free cash in business. According to Jensen (1988), if the firm is to be efficient

and to maximize value for the shareholders then the firm must be paid free cash flow to

its shareholders. But, on the other hand, this free cash flow reduces the resources which

are controlled by the management, thereby reducing the power of managers and

potentially subjecting them to monitor capital markets that occur when a firm needs new

capital in future (Jensen, 1988).


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2.2.2 Government Regulations: Sometimes government also regulates for the limit of

dividend payment to maintain the sustainable growth in the shareholders wealth.

Government interferes in the dividend policy of the financial institutions by making

rules, regulations and the corporate laws for the security of the shareholders and for the

economical conditions of the country. For example Once in Japan, the Dividend

guideline (the guideline) issued by the Ministry of Finance (MOF) of Japan, restricted

dividend payment by Japanese banks within 40% of their net income (Kato, Kunimura

& Yoshida, 1997, P 2). According to Burkart, Panunzi, & Sheleifer (2003), one of the

crucial factors which helps in shaping the attractiveness of the delegated management is

the legal protection for the outside shareholders from expropriation of the business by the

insider. So the rules, regulations and laws also play vital role in developing and choosing

the dividend policy for the security and the return of the shareholders wealth. If the

government has no rules, regulations and corporate law then the financial institutions

may give dividends to the shareholders by borrowing the money.

2.2.3 Investment Opportunities: The other important factor which may affect the

shareholders wealth is the investment opportunities for the operations of the business.

Mostly businesses have ample profitable investment opportunities in the early stages of

their life cycle so in such a situation they retain all funds for more investment because

internal financing is cheaper than external financing (DeAngelo, DeAngelo & Stulz,

2005). Due to this dividend policy, the shareholders do not get the high dividend cash

and the company seeks to increase the price of the shares in the market so that the

shareholders may get the capital gain. According to C.Higgins (1972), for the investment

purpose the dividend should be paid as a residual i.e. if and only if the internal funds and

the accompanying borrowing are sufficient enough to finance all the investment needs of

the firm. This dividend policy would not increase the shareholders wealth immediately

but it will increase the shareholders wealth in a considerable amount in the coming

years.


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2.2.4Productivity of Manager:The amount of the dividend policy is also dependent on

the productivity of the managers. A manager with a higher productivity would invest in

the business more than a lower productivity manager. Similarly a manager with a lower

productivity would invest in the business less than a higher productivity manager

(Bhattacharyya & Winnipeg, 2003). So this dividend policy also affects on the

shareholders wealth. From the shareholders point of view, a manager with a lower

productivity will create more wealth for the shareholder. According to this dividend

policy, most of the companies do not pay cash dividend to the shareholders on the regular

terms/basis and they pay low cash dividend as compared to the other companies.

2.2.5Corporate Governance: The other factor which may affect the dividend policy of

the business is the agency cost. If a business wants to reduce its agency cost and to

increase the shareholders wealth then the business should pay the high dividends to its

shareholders. High dividends can reduce agency costs by attracting institutional

investors. This also reduces the level of information asymmetry as well. High dividends

attract institutional investors (Khang & King, 2002, P2). According to Brailsford,

Oliver, & Pua, (2002), it is the managerial share ownership that has been suggested as a

mechanism which reduces the agency conflict by keeping the balance in the interest of

the shareholders wealth and the management. Actually dividend policy is a vehicle for

the long-term relations between the managers and the shareholders wealth which may be

used to address the agency problems arising from incomplete contracting and the

information asymmetry between the two parties (Faccio, Lang, & Young, 2001).

According to Pinkowitz, Stulz, & Williamson (2006), in the presence of good corporate

governance, the management finds it more beneficial to increase the shareholders wealth

than to expropriate the minority shareholders.

According to Li (2006), the entrepreneur is wealth constrained and it is not possible for

him to hold the total firm. The entrepreneur has to give incentives to the shareholders to

share the profit. The amount of profits, he diverts actually depends on the level of the

shareholders protection and the percentage of the shares he owns in the business. The


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more shares he owns in the business it is better for the shareholders protection as he

would not divert more portion of the profit towards the private benefits.

2.2.6Hesitation to Cut the Dividend: The other factor which may affect the dividend policy is

the hesitation to cut the dividend. Mostly firms feel reluctance to reduce the historical

dividend rate. This is because the reduction in dividend payout is considered as a

negative signal in the market and for the shareholder (R.Emery, Finnerty, & D.Stowe,

2007). From shareholders point of view, reduction in the dividend payout means that

now the company is not as financially strong as it was before and that is why the business

has reduced the dividends.

2.2.7 Dividend Reinvestment Plans (DRIPs): The other factor which may affect the

dividend policy of the business is the use of DRIPs. The large companies use DRIPs, in

which the stockholders may reinvest the dividends in the stock of paying corporation by

themselves (F.Brigham & Houston, 2004). By this dividend policy, the business does not

sell its shares in the open market to the new shareholders but invites its existing

shareholders first to purchase the new shares. In this dividend policy, the company gives

preference to its existing shareholders over the new shareholders for investment in the

business. From the shareholders point of view, if the business is paying better dividends

than the other companies then the shareholders would be attracted towards the DRIPs.

2.2.8 Maturity and Stability of the Company: The dividend policy is also dependent on

the maturity and the stability of the companies. Mature companies, with stable earnings,

generally payout a high proportion of earnings. (Brealey & C.Myers, 2003, P437)

2.3Is the dividend policy related with the shareholders wealth?

According to Hall & Brummer (1999), the goal of the firm should be focus soundly on an

increasing the shareholders wealth. While making the financial policies, including the

dividend policy, the management should always consider the shareholders wealth and


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the value of the business. Whatever the dividend policy is adopted by the business, it

should not decrease the value of the business and the shareholders wealth.

2.3.1 Abnormal Dividend: According to Faulkender, Thakor and Milbourn (2006) if a

business is paying abnormal dividend to diminish free cash, only then these dividends will

increase the value of the firm and the shareholders wealth. Otherwise, abnormal dividend

will not only decrease the value of the firm but it will also decrease the shareholders

wealth as well as the working capital of the business. (Faulkender, Thakor & Milbourn,

2006)

According to Blair (2003), there is another theory regarding the dividend policy that the

wealth created by the firm would be captured by the other participants (like the lenders

and the Government) not only by the shareholders, who actually provide the financial

capital for the business. So at the time of making the dividend policy one should consider

only the wealth of the shareholders i.e. how to maximize the shareholders wealth instead

of diverting wealth towards the other participants.

2.3.2Share Repurchase: The rise of share repurchase programs does not explain the

decline in cash dividends, since Grullon and Ikenberry and others find that similar types

of firms pay dividends and repurchase shares. In other words, empirical evidence shows

that repurchases and dividends are complements, not substitutes. (Eije & Megginson,

2007, P7).

According to Galai & Schneller (1978), in analysing the effects of a dividend policy of

the company, one should examine the impact of the dividend policy on the current wealth

of the shareholders. The main aim of the dividend policy should be to increase the

shareholders wealth. The dividend policy (part of the financial policy) affects on the

total value of the business and to the shareholders wealth. So while making dividend

policy one should always prefer to increase the value of the firm and how it may be

benefited to the stockholders.


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2.4Decision for the dividend size (Amount):

The actual amount of the dividend paid from cash flow is purely decided by the

management of the company. While making the decision they should have only one thing

in mind i.e. how to maximize the shareholders wealth. According to Baker, Veit, &

Powell (2001), these are the managers, specifically CEO or CFO of the firm, who pay

fully consideration on chosing the dividend policy for the firms.

According to Emery, D. Finnerty & Stowe ( 2007), it is the board who choses between

either to pay dividend from earning or to reinvest the money in to the business. The

simplest way to describe the dividend policy is the computation of the dividend payout

ratio. Dividend payout ratio is the proportion of the dividend to the total earnings. The

payout ratio is expressed as the cash dividend as a proportion of its earnings and

mathematically it is fournd as:

Dividend Payout Ratio = Annual dividend

Net Income (Porter & Norton, 2004)

The decision of the dividend payout ratio (i.e. the dividend policy) also differs from the

private banks to the public banks. According to Cloyd, Robinson, & Weaver (2005), A

comparison of the dividend response for private versus public firms around a reduction in

dividend taxes provides a unique opportunity to test the extent to which (1) individual

taxation discourages corporations from paying dividends and (2) dividend policy is

influenced by nontax considerations (Cloyd, Robinson, & Weaver, 2005, P1). So the

dividend policy is very dependent on the income tax (in case of getting cash dividend) as

well as the capital tax (tax on making profit while selling shares). If the income tax for

the shareholders is less than the capital tax then to increase the shareholders wealth it is

beneficial for the company to give more dividend to the shareholders instead of

repurchasing or increasing the value of the shares. In private banks these both tax rates

are considered more important factors than in public banks. The reason is this that in

private banks there are less shareholders. If the private banks issue dividends then the

shareholders have to pay more income tax on the amount of money received as dividends.


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2.5 How do the shareholders get return from the dividend policy?

Companies provide investors with returns in two different ways: a regularly schedule

dividends or a probabilistic capital gain or loss (Fuller & Goldstein, 2003, P1). Most of

the companies pay dividend quarterly on a regular cash basis, but occasionally these

regular dividend is supplemented by a special dividend (Brealey & C.Myers, 2003).

Sometimes companies also repurchase their own shares and as a result of repurchasing

the shares from the market, the price of the shares rises. This process of repurchasing

share is an alternative way to distribute cash to its shareholders in contrast to a dividend

payout. (Arnold, Gillenkirch, 2002). Due to the repurchase of the shares, the price of the

shares increases and this increment in the share price is a capital gain for the

shareholders/investors. According to Ofer & Thakor (1987), when the dividend is paid in

the form of cash it is payable to all the shareholders including the managers of the

business. As the dividend is received by the managers, it is part of the managers

investment portfolio received the dividend and it can be reinvested in the business if it

suits to his/her risk preferences. But only to the tendering shareholders cash distribution

accrues through a stock repurchase (Ofer & Thakor, 1987).

2.6How to compute the shareholders wealth?

According to Baker, Veit, & Powell (2001), most financial practitioners and manyacademics experts concluded with surprise that a properly managed dividend policy has a

significantly positive impact on the share prices and the shareholders wealth. The

dividend policy has a direct impact on the price of the shares and the shareholders

wealth. Good dividend policy has a positive impact on the price of the shares of the

business while the bad dividend policy not only decreases the price of the shares but it

also discourages to the shareholders and they withdraw money from the business.

The research which was published in the working paper series of European Central Bank(September 2006), Castrn, Fitzpatrick and Sydow found that it is the market prices of

the bank securities like equities that provide important information for market

participants, for central bank (who are also responsible for financial responsibilities) and

for bank supervisors, from the following perspectives. First of all, that banks equity


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price effectively indicates the public information which is available from the bank. Then

the working under the efficient-market (a market where information is available to all the

users) hypothesis, banks securities prices at any point in time have a forward looking

component in that they incorporate expectations of both future earnings prospects (i.e.

positive and negative). Then the share price of the bank is available at much higher

frequency compared with the accounting information and the last perspective is that if

there is a financial disturbance in one bank then this disturbance spreads through various

channels and this may be reflected in the stock markets. So it is very important to know

to what extent the individual banks stock prices are driven by common versus bank

special components. (Castrn, Fitzpatrick & Sydow, 2006)

The other factor which may affect the wealth of the shareholder is the announcement of

the splitting the stock. According to F.Brigham & Houston (2004), when the company

announces a stock split or the company announces the dividend for the shares, then the

prices of the company share rises. This increase in share price actually increases the

shareholders wealth. The stock prices are also dependent on the spliting stock or

dividend. The price of the stock after the split can be found by the following formula

Price After = Pricebefore = Price before

1 + % stock dividend stock split factor(Emery, D. Finnerty, & Stowe, 2007, P535)

While according to E.Copland, Weston, & Shastri (2005),Friend and Puckett (1964)

tested the effect of dividend payout on the share value by using cross section data. Friend

and Puckett calculated a normalized earnings variable based on a time-series and found

the following equation

(NI/P)it = ai + bit + it(NI/P)kt

Where: (NI/P)it = earnings/price ratio for the firm


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(NI/P)kt = average reanings/price ratio for the industry

t = a time index it = the error term

but unfortunately, no one tested to see the performance of this equation. (E.Copland,

Weston & Shastri, 2005)

The other factor which may affect the wealth of the shareholders or the value/price of the

stock is the stream of the present value of the dividend. There may be three types of cases

which explain the value of the stock or the shareholders wealth.

1- According to Megginson, Smart, & Lucey (2008), the simplest approach ofdividend valuation where the dividend does not grow and the amount of the

dividend remains the same every year, the value of the stock can be find the

amount of dividend paid divided by the present value. Mathematically, it is

expressed as

P = D

r

2- But, the shareholders/investors want to invest their investment in such a businesswhere the return on their investment has an increasing trend or there is a growth

in the return of their investments. Shareholders are also interested in the growth

rate of a firm and its impact on the stocks value (Emery, Finnerty, & Stowe,2007). To find the value of such stocks, according to F.Brigham & Houston

(2004), if the firm increases the amount of the dividend with the constant growth

rate then the value of the stock can be found by the following equation:

P = D ( 1+g) + D (1+g)2

+ D (1+g)3

+ .............. D (1+g)

1+ks (1 + ks)2

(1 + ks)3

(1 + ks )

P = D0(1 + g ) = D1 .

ks -- g ks -- g


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3- According to F.Brigham & Houston (2004), the value of the stock today can befound by the calculating the stream of the present value of the dividend.

Mathematically it is shown as the following equation

Value of the Stock = D1 + D2 + D3 + .......... D

(1+ r) (1 + r)2

(1+r)3

(1+r)

2.7 Dividend Policies Theories:

The dividend policy theory may be explained under two market situations i.e. perfect and

imperfect market. In perfect market situation we have Miller and Modigliani theory

which is explained as follows:

2.7.1 - Miller & Modigliani (M & M) (1961): According to M&M dividend policy

theory Share holders in business with financial gearing will expect a return that is equal

to the returns expected from investing in a similar ungeared business plus a premium

which arises in direct proportion to the level of gearing (Atrill, 2003, P 266 ). Its mean

whether the shareholders invest in a geared company or in ungeared company, the

shareholders will always get the same return on their investment. M&M states that the

rate of return on the investment is independent on the dividend policy; i.e. the investor is

indifferent between the capital gain and getting the dividend (Brigham & Ehrhardt,

2005). The shareholders wealth is not affected by the capital structure of the business as

the shareholder will get the same return whether the company has geared or ungeared

capital structure.

The M & M theory based on the following four assumptions:

a) Perfect Capital Market: Its mean that there is no share transaction cost for the

shareholders as well as for the company and company may borrow money as

much as it requires at the same rate of interest. (Atrill, 2003,)

b) No bankruptcy cost: Its mean that the shareholders will receive the sameamount of cash, which would be equal to the value of their shareholding, if a

business liquidates. Businesses do not have to pay any legal or administrative fee


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to sale its assets. (Atrill, 2003)

c) Risk: It is assumed that businesses exist that have identical operating risks but

which have different levels of borrowing (Atrill, 2003, P270)

d) No Taxation means that business is working in tax free environment i.e. no

corporate tax on the business or no personal income tax on the shareholders.

(Atrill, 2003)

2.7.2 Dividend Policy in an imperfect market:

2.7.2.1 Dividend as Residual: The other important dividend policy is the Dividend

as residual. Actually, the most desirable payout ratio of the business depends on the

following factors:

a) What are the investors preferences for dividend versus capital gains?

b) What are the firms investment opportunities?

c) What is the targeted capital structure of the firm? And

d) How much external capital is available and at what cost?

According toBrigham, Gapenski and Ehrhardt (1999), dividend as residual theory is the

combination of the last three points. According to this theory, it is also assumed that there

is no possibility for adopting external finance because it is too expensive for business to

improve or maintain the shareholders wealth. The shareholders wealth is measured as

market-to-book value. According to Emery, Finnerty, & Stowe (2007), a high ratio of

market-to-book value shows that the firm has created more wealth in market value than

the GAAP rules have recorded in book value.

2.7.2.2 Clientele Effect:

Clientele effect explains the preference of shareholders to invest either in high-cash-

dividend stocks or in low-cash-dividend stocks (Emery & Finnerty, 1991). According to


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Lumby & Jones (2003), the theory of the dividend irrelevancy is applicable only in

perfect capital market. But there are also many imperfections in the market like the

transaction costs, the presence of absolute capital rationing, different tax rates and the

difference rates of interest. All these factors impact the dividend policy of the company

(Lumby & Jones, 2003). From the shareholders wealth point of view it is the important

factor because if the tax rate of capital tax is more than the tax rate of income tax then the

shareholders will prefer to invest their investment in the company who has the high-cash-

dividend policy. Similarly, if the tax rate of capital tax is less than the tax rate of income

tax then the shareholders will prefer to invest their investment in the company who has

low-cash-dividend policy. In the same way, if the capital tax rate of one country is less

than the other countrys captial tax rate then the shareholders will move to invest their

money in that country where the capital tax rate is less than the other country. So due to

this clientele effects, the dividend policy plays important role in measuring the

shareholders wealth.

2.7.2.3 Dividends as Signal:

The other imperfection in the capital market is the decision of dividend regarding the

need for information in an uncertain world. The signal effect of the dividend declaration

plays an important role for companies. Research has shown that the increase or decrease

the expected level of dividend precipitates a rise or fall (respectively) in the market share

price. It shows that the declaration of divided has a major impact on the share price while

considering the decision (Lumby & Jones, 2003). So this signal effect which is derived

from the dividend policy has a great impact on the shareholders wealth. A good signal

derived from the dividend policy impacts a good effect on the shareholders wealth. On

the other hand, a bad signal derived from the dividend policy effect badly on the

shareholders wealth.

2.7.2.4 Tax Consideration:

The other factor of the imperfect market is the taxation and specially differential rates of

personal income tax, a taxation distinction between income and the capital gain (Lumby

& Jones, 2003). According to Ross, Westerfield, & Jaffe (1999), the dividend received as

cash is treated as an ordinary income in tax. One the other hand, capital gains are mostly


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taxed at somewhat lower rate. The major problem with the presence of taxation is that it

can interfare with the values equivalence between the retained earnings and the

dividends. As some shareholders may prefer home-made dividends because the capital

gain tax rate is mostly lower than the marginal income tax rate (Lumby & Jones, 2003).

2.8Is dividend policy affected by contagion?

It is well-established notion that stock prices respond to new information. Numerous

studies over the past 30 years have documented the stock markets reaction to corporate

announcements such as earnings, dividends and security offerings. (Bessler & Nohel,

1999, P1). Although such announcements are firm-specific but they may contain value-

relevant information about other related non-announcing firms causing the stock prices of

those firms to react to the same news. (Bessler & Nohel, 1999)

Contagion effects also play important role in forming the dividend policy of the business.

For example information of the bankruptcy announcements, change in the value of the

seasoned equity issues and the dividend change policy of the companies in the same

industry also influences the dividend policy of the business. (Bessler & Nohel, 1999)

Bessler and Nohel (1999) tested the contagion effect on banking sector. They tested

contagion effect on non-announcing money centre banks and large regional banks. In the

research, Bessler and Nohel they found that non-announcing money-centre suffers

negative abnormal returns when rival money-centre banks announce dividend cuts.

They also separately tested contagion effect in non-announcing money centre banks and

large regional banks. They found non-announcing money-centre banks suffer negative

abnormal returns when the rival money-centre banks announce dividend cuts. The

correlation of assets (loan portfolios) i.e. the correlation of private information, are banks


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implies that the revelation of private information through a managerial announcement

should trigger contagion effects if investors have the ability to identify the correlation of

private information across banks. (Bessler & Nohel, 1999, P3)

In the research of Bessler and Nohel (1999), they found that some Eastern money-centre

banks cut their dividend in late 1990 and early 1991. Among these banks some of them

were cutting dividend first time in 50 years. The contagion was so effective that some

western money-centre banks followed suit in the rest of 1991 following Eastern money-

centre. (Bessler & Nohel, 1999)

In the end of the research of Bessler and Nohel (1999) they found that the investors are

able to identify the nature of the correlation of asset returns across banks. Specially, they

found that the abnormal returns of non-announcing banks are systematically related to

risks common to both announcing and non-announcing banks. (Bessler & Nohel, 1999)

2.9What is the trend of dividend in the USA and UK from 1981 to 2002?

Following is the data (quantitative) of UK and the USA from 1981 to 2002 which shows

the percentages of firms paying the dividends and the percentages of companies not

paying the dividends. The table 2.1 shows the trend of dividend paying and non-paying

companies in UK and in the USA prior to my research study period. In the table 2.1 P

shows the percentages of the firms paying the dividend and NP shows the percentages

of the firms not paying the dividend.

(The following data is the derivative (calculated percentages for the original data) of the

data available in the research of Denis and Osobov (2007, P37). In the table I took the

values of only two countries i.e. UK and the USA.)


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Table 2.1

(Trend of dividend paying and non-paying companies in UK and in the USA from

1981 - 2002)

Source: (Denis and Osobov, 2007, P37)

From the above table, it is clear that in UK the percentage of firms paying dividend is

always more than the USAs percentage of firms paying dividend. However, in UK, from

the year 1981 to onward there was a decreasing tendency of the percentage of paying the

dividend.

2.10 Is there any similarity of dividend policy in the USA or European countries?

In the research of Eije & Megginson (2007), they made unique new contributions by

either documenting differences between Europe and America or by examining the factors

not considered in the U.S. context. In the research, Eije & Megginson found that oldercompanies and those companies who have headquartered in a common law country are

more likely to pay dividends, while higher leverage and more liquid company stocks

reduce the propensity to pay. On the other hand, they also found that companies with

more liquid stocks pay more dividends, and higher dividends are paid when these are

subject to favourable tax treatment (Eije & Megginson, 2007). In our research study both

countries have common law.

Countries

1981 --- 1985 1986 --- 1990 1991 --- 1995 1996 ----- 2002

% Of P

firms

% of

NP

firms

%

OF P

Firms

% of

NP

Firms

% OF P

Firms

% of

NP

Firms

% OF P

Firms

% of NP

Firms

UK 97 3 94 6 86 14 73 27

USA 60 40 63 37 47 53 23 77


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2.11 Credit Crunch: In the mid of 2007 in UK, the financial markets got lots of

attraction of the media because of the widespread speculation in the cause and effects on

the so-called credit crunch. This credit crunch was so swerve that the Bank of England

had to issue a paper in the first quarter of 2008 in which the Bank of England addressed

the causes and effects and provided remedies to solve these problems and to avoid any

further distress in the financial market. (Katz, 2008)

On the other hand, just four years before the year 2007 in the USA, the booming

macroeconomic, liquidity and the ideal financial environment and the continuous process

of financial globalisation lead to reduce the risk aversion and market variation (Yiannaki,

2008). According to the Yiannaki (2008), the financial institutions and the banks wanted

the higher return and they were creating luring products to achieve the American

Dream. This financial crisis of 2007 2008 is directly related with the credit crunch. All

the teams of the risk management of banks and the boards of the directors in the USA

were focusing on the credit policies and its effects (Yiannaki, 2008). According to the

Yiannaki (2008), the important factors which caused the credit crunch were inflation rate,

increase in oil prices, depreciation of dollar and the bank interest rate.

From all the above, it is clear that there are many theories and models related with the

dividend policy of the business. Each business has its own policy for the dividend. There

are lots of factors which may impact on the dividend policy of the business as well as on

the shareholders wealth. There may be factors which may have greater impact on the

dividend policy in the specific industry or country and the same factors may have a very

small impact on the dividend policy in the other industry or country. In different

circumstances, different factors affect the dividend policy and the shareholders wealth of

the business. There is also a conflict between the dividend policies and the theories.

Some says that the high dividend payout ratio increases the shareholders wealth and

some say that it should not be higher as for the long term investment and to increase the

market value of the business in future.


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Chapter 3: Methodology:

I divided this chapter in to 4 sections. In section 1, I explained the purpose of my

research i.e. who are the beneficiary of this study and how may this research study help

them? In section 2, I explained the components of the research and the elements of the

researchs methodology. In section 3, I explained the statistical techniques of the

multiple regression analysis and define there about the multiple regression equations

and the variables used in the equations. In the concluding section, I explained the design

method of my research study. I divided this section in to further three subsections for

more clarification and explanation.

3.1 Empirical Design:

The purpose of this research is to analyse and to compare the dividend policy of UK

banks and the USA banks from the shareholders point of view. Every shareholder

invests in a business to get the maximum return on his/her investment. This return on

investment of the shareholder is dependent on the dividend policy of the firm. It is the

dividend policy of the business which decides whether to pay cash dividend or not. If yes

then, when to pay dividend, how to pay dividend and how much to pay dividend (as

discussed in Chapter 2). Shareholders will move towards those banks which give more

returns on their investment than the other banks. Every shareholder has his/her demand

on the money invested. According to Emery & Finnerty (1991), some shareholders give

preference to low-cash-dividend stocks while others prefer for high-cash-dividend stock.

Similarly, some shareholders may be interested in high dividends and others may be

interested in low-cash-dividend but increasing the price of the stock. There may be many

factors for this. As one of the major factors is the difference of tax rate between the

income tax and the capital gain. Similarly, the requirements of the shareholders are also

dependent on the needs of their lives. Like pension holders will purchase the stock of

those banks which pay high cash dividends and a shareholder who purchase the stock for

his/her new born child will invest in that bank which pays comparatively low cash

dividend but its stock price increases with high rate.


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The purpose of this research study is to analyse and compare the effect of dividend policy

of UK and the USA banks on shareholders wealth. Which countrys banks dividend

policy is more or less affected on the shareholders wealth? In other words, this research

may guide the shareholders to invest their money according to the demand on their

investment. Which countrys banks are more feasible for each shareholder to invest

his/her investment. The purpose of this research is also to find out the relationship

between the shareholders wealth which is measured as market-to-book value and the

dividend policy which is measured as dividend payout ratio. That is how the dividend

policy impacts on the shareholders wealth. What are the other factors which may affect

the shareholders wealth excluding the dividend policy? Are these factors have the same

effect in the USA and in UKs banking sector or there is a variation in the USA and in

UKs economy? Do the policy of paying dividend is the same in UK as in the USAs

banking sector from shareholders point of view? If they are different then in which way?

3.2 Components of Researchs Methodology:

To analysis and comparison of the dividend policy of the banks of the USA and UK from

the shareholders point of view, I used a quantitative research technique. Actually,

quantitative research approach is objective in nature and it concentrates on measuring the

undergoing phenomena. The quantitative approach involves both collecting andanalysing the numerical data and then applying the statistical tests on the collecting data

(Hussey & Hussey, 1997). I used the same structure of the researchs methodology in my

research. First of all, I collected the data from different sources then I analysed my

numerical data and arranged the data according to the names of the countries and time

period. At the end, I used different statistical techniques to get the results. In collecting

the numerical data, I used data stream, Thomson one banker, and for some banks, I

downloaded their annual reports from their websites and gathered the required numerical

data for the required period. To analyse and for calculating the data, I used Ms-word,SPSS and Ms-Excel. I used different spread sheets to analyse the full sample (i.e. data of

both countries banks from the year 2002 - 2007) and also analysed the numerical data for

each countrys bank separately. My analysis covers the period 2003- 2007. After looking


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at the description of the data, I applied some statistical techniques to get the results. In

applying statistical techniques, I used SPSS to get the results. To process my data, the

statistical techniques which I used are standard error, t- statistics, regression analysis, p-

value and adjusted R2.

The above statistical techniques which I used to analysis and comparing the dividend

policy of the banks of both countries, I did not consider the other factors (which may be

related to the dividend policy and the shareholders wealth) like difference in tax rates,

any subsidy taken back or given to the banking sector during the research period in both

the countries, economical factors of the both countries (like inflation rate, change in the

supply or demand of money, bank interest rate) or any financial crises related with any

major event.

In my research methodology, I also used qualitative research methods. Qualitative

research focuses on words and descriptions rather than facts and numbers. As a research

strategy it has three parts inductive, constructive and interpretive (Bryman & Bell, 2003).

In qualitative research methods, I described the figures of each statistical tool. First of all

in chapter 4, I described all the terminologies of statistics, which I used in testing and

then I explained what they actually indicates. In description, first of all I described and

explained all the statistical indicators which I used in the tables. For analysis the data, Ifound the coefficient between each independent variable with the dependent variable of

the full sample from the year 2003 2007 with the significant level and the standard

error (section 4.2.1) i.e the univariable analysis. Then, I did all the same calculations for

each country independently for the same period as well as by excluding the year 2007. In

section 4.3, I calculated the multiple regression of the full sample with the all the four

indepdents variables from the year 2003 2007. In the same section in table 4.7, I also

calculated the multiple regression of the full sample with the all four independent

variables from the year 2003 2006 (i.e by excluding the year 2007). Becuae the year2007 was the year of credit crunch year and all the financial institutions in UK and in the

USA were in a financial distress. In the same section, table 4.8 and table 4.9 show the


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individual multiple regression of UK and the USAs data respectively from the year 2003

- 2007.

3.3 Regression Analysis:

In my research study, I used multiple regression analysis. According to Cooper &

Schindler (2008), the processing of taking the one value of independent variable to

estimate the value of the dependent variable is called simple prediction. But when more

than one value of the independent is used to estimate the dependent value this process is

called regression analysis. Multiple regression analysis is a statistical method for

establishing an equation that allows a depndent variable to be estimated from two or

more explanatory variables. (Morse, 1993, P.723)

The dependent variable is shown as y and the independent variables are shown as xi in

the multiple regression equation. The model is represented by the following equations.

y = 0+ 1x1+ 2x2+ ....+ kxk +

where y is the dependent variable,x1,x2...xk are the independent variables, 0, 1, .... k

are the coefficients and is the error variable. The independent variables may actually be

functions of other variables. (Keller & Warrack, 2000, P.680)

In my research methodology, I used market-to-book value (shareholders wealth) as the

dependent value and took four variables (net margin ratio, dividend payout ratio,

leverage ratio and return on assets) as the independent variables.


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Table 3.1: (Symbols used in Multiple Regression Equation)

Symbols used in Multiple Regression Equation

Coefficient Symbols Variable Name of the Dependent/Independent

Variable

Y Dependent Market-to-book value1 x1 Independent Dividend Payout Ratio

2 x2 Independent Net Margin Ratio

3 x3 Independent Leverage Ratio

4 x4 Independent Return on Assets Ratio

In my research method, I used the following equations by using the above defined

symbols:

y = 0 + 1x1 + 2x2 + 3x3+ 4x4

In calculating the multiple regression equation, I included the constant. I am using this

statistical technique to find the relationship between the dividend policy and the

shareholders wealth. Then I compared this relationship on the data of the banks of the

both countries to get the result. To calculate the multiple regression equation of the

dependent variable at a particular year (t), I used the data of the previous years (t-1) of all the

independent variables. In my analysis of estimating the value of the dependent variable

(i.e. market to book value) from the each year 2003 to 2007, I used the data of all the

independent variables from the year 2002 to the year 2006 respectively. That is for the

market to book value of the year 2003; I used the data of the year 2002. Similarly for the

shareholders wealth of the year 2004, 2005, 2006 and 2007 I used the data of the year

2003, 2004, 2005 and 2006 respectively.

As the year 2007 was the year of the credit crunch as discussed in section 2.11. So while

calculating the multiple regressions, I did the calculations from the year 2003 -2007 and


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showed the results in table 4.6 and then again did all the calculations from the year 2003

2006 (i.e. excluding the year 2007) and showed the results in table 4.7. The table 4.7

shows the results excluding the data of the year 2007 because of the credit crunch effect

in both countries.

In the analysis of multiple regression equation, I used the dummy variables for UK and

the USA banks. I used 0 for all the UK banks and 1 for all the USA banks as shown

in the table at the end of the research.

As discussed in the last section of chapter 2, that in the year 2007 all the financial

institutions and banks were in a financial distress in UK as well as in the USA so in the

multiple regression analysis of the full sample, I analyzed the multiple regression from

the year 2003 2007 and then again analyzed the multiple regression from the year 2003

2006 i.e. by excluding the year 2007.

In my research, first of all I did univariate analysis and then I did multivariate analysis.

The reason to do the univariate analysis first is to know the actual understanding and the

relationship between each independent variable with the dependent variable. In doing

such a way, we are able to clearly analyse the relationship of each individual independent

variable with the dependent variable. After analysing the univariate analysis I did the

multivariable analysis. In multivariate analysis, I did the calculations to find the relation

between all the independent variables and the dependent variable.

3.4 Design the research method:

I divided this section into three sections. In section 1, I explained the hypothesis of my

research study. In section 2, I explained, how did I select the data and sample for my

research study and in the section 3, I explained the proxies which I used in the

hypothetical determinants.


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3.4.1 Hypothesis for the Research:

The hypothesis for the my research study is to find the differences of the dividend

policies of UK and the USA banks from the shareholders point of view during the period

2003 2007. Whether the dividend policies of the UK banks are more attractive to the

shareholders than the USA banks? In simple words, whether the shareholders wealth of

UK banks shareholders is more dependent on the dividend policy than the dividend

policy of the USA banks? The shareholders are interested in the return on their

investment. And the return on their investment is directly related with the dividend

payout ratio of the banks. So from the shareholders point of view, the shareholders will

seek which countrys banks have more dividend payout ratio than the other countrys

bank.

3.4.2 Sample for the Research:

To compare the dividend policy of the banks of UK and the USA, I collected the data of

15 banks of the USA and 11 banks of UK. The names of the banks are shown in the

Table 3.2

Table 3.2 (Names of the Banks used in research study)

UK Banks USA Banks

Allied Irish Bank Bank of America

Alliance & Leicester Bank of the West

Bank of Ireland Branch Banking & Trust Company

Barclays Comerica Bank

Bradford & Bingley Countrywide Bank

HBOS Fifth Third Bank

HSBC J.P Morgan Bank

Lloyds TSB PNC

Northern Rock Regions Bank

Royal Bank of Scotland Sun Trust Bank

Standard Chartered The Bank of New York

U.S BankUnion Bank of California

Wachovia Bank

Washington Mutual Incorporated


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Source:

Wikipedia (2008) (http://en.wikipedia.org/wiki/List_of_banks#Major_banks_12)

The New York Job Source (2008) (http://nyjobsource.com/banks.html)

While selecting the banks of the two countries, I made sure that they were operating

during my research period (i.e. from the year 2003 to the year 2007). I collected all the

data of all the banks from DataStream, Thomson ONE banker and some data I collected

from the annual reports of the banks available on their official websites.

My data is consists of 6 years time period (from 2002 2007). I collected the data of the

independent variables from the year 2002 to the year 2006 and collected the data of

dependent variable (i.e. market-to-book value ratio) from the year 2003 to the year 2007as I explained in section 3.3.

As the title of my research study covers the year 2007, so I did the calculations by

including the year 2007 as well as by excluding the data of the year 2007 to see the effect

of the credit crunch on the dividend policy of the banks of both countries as well as on

the shareholders wealth.

3.4.3 Proxies for the hypothetical determinants:

There may be a numerous determinants which may affect the shareholders wealth. But

in my research study, I am discussing only four independent variables. In my research

study, I measured profitability in two ways i.e. return on asset ratio and the net margin

ratio. The names, definitions, mathematical formulas and the brief description of each

independent variable are explained below.

Dividend payout ratio: Dividend payout ratio is the reflection of the dividend policy of


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any companay. Dividend payout ratio is defined as the annual dividend amount declared

by the company divided by the annual net income.Mathematically, it is denoted as

follows

Dividend Payout Ratio = Annual dividend

Net Income (Porter & Norton, 2004)

Higher the dividend payout ratio indicates that the business is high-cash-dividend and has

no long term plans for expansion and major change in the business. Similarly, the lower

the dividend payout ratio indicates that the business is low-cash-dividend and has long

term plans for expansion or development in the business. Mostly shareholders prefer high

dividend payout ratio.

Net Profit Margin: In the research of Fama & Babiak (1968), they used profitability as

the independent variable to see the effect on the dependent variable i.e the dividend

policy. The net margin ratio is defined as the percentage of net earnings to net sales. This

figure shows that how much is the proportion of net earnings in the net sales.

Mathematically net margin is defined as

Net Margin = Net Earnings ( X 100)

Net Sales (Sutton, 2000)

If the business A has more net margin ratio than the business B then it means that the

business A has more profitability than the business B and the business A has more

financial strength to pay dividend to its shareholders than the business B.

Return on Assets: According to the research of Yermack (1996), he used return on

assets as an independent variable to see the effect on the dependent variable (market-to-

book value). Return on assets ratio is defined as the measure of the success of a company

in earning a return for all the providers of capital. Mathematically, return on assets is the


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ratio of net income and interest expense divided by the average total assets and

mathematically it is denoted as

Return on Assets = Net Income + Interest Expense, Net of Tax

Average Total Assets

(Porter & Norton, 2007)

If the business A has more return on assets than the business B then it means that the

business A is more efficient in utilizing its resources than the business B.

Leverage Ratio: In the research of Cho (1998), he used leverage ratio as an independent

variable, in his multiple regression equation, to find the effect on the dependent variable

i.e tobin q ratio. Leverage Ratio is the proportion of the loan to the total of share capital

and the reserves. Mathematically, leverage ratio is denoted as

Leverage Ratio = Loans .

Share Capital & Reserves

(Marriott & Simon, 1990)

The more leverage ratio means that the business is using more loans in its business than

the share capital. Taking loans for running the business is an expensive way of running

the business than to arrange the money from issuing the share capital. The more leverage

ratio means that the company is utilizing more money of debtors than the shareholders inthe business.

Although Market-to-book value is not the determinants of the hypothesis yet it is

important to know about the market-to-book value to properly understand this research

study. Market-to-book value ratio explains the amount that shareholders are ready to pay

for the every value of the businesss net assets. Mathematically, it is the ratio of current

market price of common stock and the book value per share and it is mathematicallydenoted as:


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Market-to-book value = current market price of common stock

Book Value per share (Knapp, 1996)

The table on the next page shows the mean, median, standard deviation and the

correlation of the independent variable with the market-to-book value for the full sample

from the year 2003 - 2007.

Table 3.3 (Mean Median, Standard Deviation and Correlation with market-to-book

value of all the independent variables)

Independent

Variable

Mean Median Standard

Deviation

Correlation

with Market-

to-book value

Dividend

Payout Ratio

0.4251 0.4315 0.1718 0.89949

Return on

Assets Ratio

0.3 0.01465 0.6415 -0.19579

Net Margin

Ratio

0.1741 0.1483 0.2994 0.01610

Leverage Ratio 0.9092 0.9206 0.0896 -0.63634


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The table 3.2 shows that the values of the mean and the median of the dividend payout

ratio (independent variable) of the full sample are 0.4251 and 0.4315 respectively. These

values of the mean and the median are enough close to each other to have an idea for the

average. The standard deviation of the dividend payout ratio is 0.1718 which is not so big

figure and shows that the range of data or the data does not deviate more than 17% from

its mean/median. And the correlation of the dividend payout ratio with the dependent

variable (market-to-book value ratio) is 0.89949. This shows that it is highly correlated

with the share holders wealth. The change (increase or decrease) in dividend payout

ratio will affect almost 90% directly to the change in the value of share holders wealth.

In table 3.3 the correlation coefficient between dividend payout ratio and the market-to-

book value is the highest one among the other independent variables.

The values of the mean and the median of the return on asset ratio of the full sample are

0.3 and 0.01465 respectively. There is a big difference of the values of the median and

mean of return on assets ratio due to the extreme values of the four banks: Royal Bank of

Scotland (UK bank), PNC (USA bank), Fifth Third Bank (USA bank) and U.S bank

(USA bank). As a result the standard deviation of the return on asset ratio is 0.6415

which is very high in value. This shows that 64.15% of the data deviates from its

average. The correlation of the return of the assets ratio, the independent variable, with

the market-to-book value ratio, the dependent variable, is -0.19579. This figure showsthat there is a negative relationship between return on asset ratio and the market to book

value ratio for the full sample. Its mean that if the return on assets increases then the

shareholders wealth decreases. Similarly, if the return on assets decreases then the

shareholders wealth increases. The magnitude of the correlation shows that the change

in return on asset will affect almost 20% on the shareholders wealth.

The values of the mean and the median of the net margin ratio of the full data are 0.1741and 0.1483 respectively. There is a small difference between the values of the mean and

median. The standard deviation of the net margin ratio is 0.2994. This shows that almost


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30% of the data deviates from its mean. The correlation of the net margin, the

independent variable, with the market-to-book value ratio, the dependent variable, is

0.01610. This figure is very small as it shows that the effect of the net margin ratio on the

shareholders wealth is very small. This correlation between the dependent and

independent variable of the full sample is the least one among all the independent

variables.

The values of the mean and the median of the leverage ratio of the full data are 0.9092

and 0.9206 respectively. There is a very small difference between the values of the mean

and median of the leverage ratio of the full sample. As a result the standard deviation of

the leverage ratio is 0.0896. This shows that almost 9% of the data deviates from its

average. The correlation of the net margin, the independent variable, with the market-to-

book value ratio, the dependent variable, is -0.63634. This figure has negative sign which

shows that increase in the leverage ratio will decrease the shareholders wealth and the

decrease in the leverage ratio will increase the shareholders wealth. From the

shareholders point of view, the shareholder should invest in that country where the

banks have low leverage ratio. The magnitude of the correlation of the leverage ratio has

a considerable value. It shows that every change (increase or decrease) in the leverage

ratio will bring a change of 63% in the shareholders wealth.


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Chapter 4: Results

In this chapter, I explained all the results of the multiple regression analysis so as to

analyse and compare the relationship between the shareholders wealth and the dividend

policy of UK and the USA banks.

The table - 4.1 shows the result from the full data of the full sample. The table 4.2 and

table 4.3 show the result of the data of separately UK banks and the USA banks

respectively. The statistical techniques which I used in all the three tables are standard

error,p-value, t-statistics and the coefficient correlation. In all the three tables, i.e. table

4.1, table 4.2 and table 4.3 the first and second row of first column of each independent

variable show the values of standard error and t-statistics respectively. While the first and

second row of the second column of each independent variable show the value ofp and

the coefficient correlation respectively. The dependent variable in all the three tables is

market-to-book value ratio. There are four independent variables used in the multiple

regression equations which are the dividend payout ratio, net margin ratio, return on

assets ratio, and the leverage ratio. The table 4.1, table 4.2 and the table 4.3 show the

results of all the statistical techniques of each separate independent variable with the

dependent variable (market-to-book value ratio) that is the relationship of univariate. The

data for this research study is consisting of 11 UK banks and 15 USA banks. The nameof the banks of each country whose data is used in this research study is shown in table

3.2 in chapter 3.


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Table: 4.1(Univariate Analysis)

Dependent Variable: Market to Book value (Full Sample)

Independent Variables Standard Error p-value

(t- Statistics) (Coefficient)

Dividend Payout Ratio 0.35433 0.0123

(2.53851) (0.89949)

Net Margin 0.2083 0.9385

(0.07728) (0.016098)

Return on Assets 0.09568 0.042782

(-2.04623) (-.195791)

Leverage Ratio 0.693634 0.360652

(-0.91741) (-.636349)

N 130

Table 4.2 (Univariate Analysis)

Dependent Variable: Market to Book value (UK)

Independent Variable Standard Error p-value



(3.3563) (0.159727)

Net Margin Ratio 1.8798 0.1292

(1.540) (0.0248)

Return on Assets Ratio 0.2181 0.146

(-1.475) (0.02131)



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(-1.5472) (0.02516)

N 55

Table 4.3 (Univariate Analysis)Dependent Variable: Market to Book value (USA)




(0.39189) (-0.01157)


(0.533) (-0.009768)


(-0.8344) (-0.004121)


(2.080) (0.0430)

N 75

4.1 How to read the indicators:

In the above table, N shows the numbers of observations of UKs and USAs banks.

The total numbers of UKs banks are 11 and the time period consists of 5 years i.e. from

the year 2003 to the year 2007. So the total numbers of observations of UK are 55 and

N for UK is 55 as shown in the table 4.2. Similarly, the total numbers of banks chosen

from the USA are 15 and the time period is also of 5 years i.e. from the year 2003 to the

year 2007. So the total numbers of observations of USA are 75 and N for USA is 75 as

shown in the table 4.3. By combining the N of both countries (UK and the USA) thetotal number of observations of the full sample is 130 as shown in the table 4.1. To find

the multiple regression equation of the year 2003, I took the data of the year 2002.


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Similarly to find the multiple regression equation of the year 2004, I took the data of the

year 2003 and so on (as I explained in chapter 3). By doing this the total number of

observations would not change and it will remain the same i.e. 55, 75 and 130 for UK,

the USA and for the full sample respectively.

Regression analysis is a statistical technique concerned with finding a mathematical

formula or model that relates the values of one variable to those of the other (McGhee,

1985). The adjusted R2

helps us to measure the strength of the linear relationship,

particularly when we required comparing several different models. The statistical

technique which performs this function is called coefficient of determination and is

denoted as R2

(Keller & Warrack, 2000). The positive sign of R2

or the positive

correlation shows that the value of dependent variable will increase or decrease with the

simultaneously increase or decrease in the value of the independent variable respectively.

On the other hand, the negative sign of R2

shows that the value of the dependent variable

will increase or decrease with the simultaneously decrease or increase in the value of

independent variable respectively. The value of R2

is always between -1 to +1 (Thomas,

1997). If the value of R2

is zero then it shows that there is no relation between the

dependent variable and the independent variable.

A p-value is the probability of getting a value of the test statistic which is at least as

contradictory to the null hypothesis, as and supportive of the alternative hypothesis, as

the one which is computed from the data (Morse, 1993). The data would be at 1%

significant if the value ofp is 0.005.

T-statistic compares the difference between the sample means against the null hypothesis

difference and divides that by the pooled standard error (Smithson, 2000). The data

would be at 1% significant if the value of the t-statistics is more than 2.3732 and the data


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would be at 5% significant if the value of the t-statistics is more than 1.6634 but less than

2.3732.

Significant level is the probability we give to an outcome below which we consider it

unlikely. (Lee & Lings, 2008, P.305)

Independent Variables are variables which give information on the behaviour of the

dependent variables which are incorporated into the model as explanatory variables.

These variables are called independent variables (Rawlings, 1988). While a dependent

variable is the variable predicted or caused by independent variable(s) (Smithson, 2000,

P.88).

4.2 Results of the hypothesised regression model:

4.2.1 Discussion of the univariate results from the full sample:

The table 4.1 shows the results of all the statistical techniques (which are used in this

research) for each individual independent variables with the dependent variable (market-

to-book value ratio) for the full sample of the research study i.e. by combining the data of

UK banks and the USA banks. The table 4.2 shows the results of all the statistical

techniques (which are used in this research) for each individual independent variables

with the dependent variable only for UK banks. On the other hand, the table 4.3 shows

the results of all the statistical techniques (which are used in this research) for each

individual independent variables with the dependent variable only for the USA banks.

The coefficient between the dividend payout ratio (independent variable) and the market-


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to-book value (dependent variable) for the full sample is 0.89949, which is the highest

coefficient between the dividend payout ratio and the market to book value among all the

other independent variables as shown in table 4.1 which shows that the most effective

independent variable among all the independent variables on the dependent variable is

the dividend payout ratio for the full sample. In simple words, the dividend payout ratio

has more impact on the shareholders wealth than net margin ratio, leverage ratio and

return on assets for the full sample. The other independent variables have very small

values of coefficient so are not as important for the shareholders point of view as of the

dividend payout ratio which may affect their wealth.

Similarly, the value of the t-statistics of the dividend payout ratio of the full sample is the

highest among the others independent variables. The value of the t-statistics of the

dividend payout ratio is 2.53851 which is more than 2.3721 and shows that the level of

significant of the data is 1% and is highly reliable than the t-statistics of the other

independent variables. The t-statistics values of the full sample of the leverage ratio and

the return on assets are negative. In the same way, the p-value of the dividend payout

ratio is just 0.0123, which is the least one among the all other independent variables. This

shows that the data for the dividend payout ratio is the most reliable data among the all

the other independent variables.

So from all the above analysis of each individual independents and the dependent

variable, it is clear that the dividend payout ratio has the most significant impact on the

shareholders wealth than any other independent variables and the data of the dividend

payout ratio is the most significant than any other independent variables.


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The table 4.2 also shows that the most magnitude coefficient among all the independent

variables with the dependent variable is the dividend payout ratio. So from the

shareholders point of view, the shareholder should consider this particular independent

variable i.e. dividend payout ratio in depth before investing in UK banks as it has the

most significant impact on the shareholders wealth. Its p-value is 0.00416 which is

lower than 0.005 and indicates that the significant level of the data is 1% and can be

reliable. Similarly, the value of the t-statistics of the data is 3.3563 which is more than

2.3721. It again indicates that the significant level is less than 1% and the data is reliable.

So from the shareholders point of view, the shareholder should consider the dividend

payout ratio of UK banks carefully before investing in because the dividend payout ratio

has the most powerful impact on the shareholders wealth among all the independent

variables and it is the most reliable data.

On the other hand, the table 4.3 shows that the most effective coefficient independent

variable with the dependent variable is the leverage ratio and its value is 0.0430. In USA

banks, the most important and the effective coefficient of the independent variable

among all the others independent variable is the leverage ratio. So from the shareholders

point of view, the shareholders should consider the leverage ratio in depth before

investing in the USA banks as it has the most significant impact on the shareholders

wealth. Thep-value of the leverage ratio among all the other independent variables is the

least one which shows that it is the most reliable data among all the other independent

variables. Similarly, the t-statistics of the leverage ratio among all the other independent

variables is the least one which shows that is it the most reliable data among all the other

independent variables. So from the shareholders point of view, the shareholder should

consider the leverage ratio of the USA banks carefully not the dividend payout ratio

before investing in because the leverage ratio has the most powerful impact on the

shareholders wealth comparative to the other independent variables.


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4.2.2 Credit Crunch Effect for Univariate Analysis:

The table 4.4 and table 4.5 show the results of univariate analysis of the period 2003

2006 (i.e. excluding the period of credit crunch) for the UK and the USA banks

respectively.

Table 4.4 (Univariate Analysis: 2003 - 2006)

Dependent Variable: Market to Book value (UK)




(3.833) (1.4579)


(2.157) (4.458)


(-1.024) (-0.232)


(-0.89122) -0.6350)

N 44


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Table 4.5 (Univariate Analysis: 2003 - 2006)

Dependent Variable: Market to Book value (USA)




(0.5802) (0.3133)


(0.1608) (0.0304)


(1.14488) (-0.1253)


(2.1) (3.719)

N 60

From the table 4.4 it is clear that by excluding the data of the year 2007 from the sample

the coefficient of net margin ratio is the highest among the other independent variables.

The t-statistics of the net margin ratio of UK banks is 2.157 which show that the data is

relevant and highly significant.

On the other hand, by excluding the data of the year 2007 from the sample of the USA

banks leverage ratio has the highest coefficient among all the other independent variables

as shown in table 4.5. The p-value and the value of t-statistics also indicate that the data

is reliable and at significant level.


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4.3 Discussion of the multivariate results from the full sample:

Table: 4.6 (multivariate analys

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Comparison of DP of UK and US Banks 2003-2007

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