Journal of Poverty, Investment and Development - An Open Access International Journal Vol.1 2013 1 Dividend Paying Practices in the Non-Financial Sector of Pakistan: An Empirical Evidence from Karachi Stock Exchange M.Azeem, Muzammil Khurshid Azeem_pugc41@yahoo.com Muzammilkhurshid@yahoo.com Comsats Institute of information Technology, Lahore Campus Dokuz Eylul University, Izmir, Turkey Abstract The study intends to investigate the dividend paying practices in the non-financial sectors of the Karachi Stock Exchange. All the dividend paying sectors of the Karachi Stock Exchange were probed into for the period 2002- 2008. A well developed mixture of six variables along with the descriptive statistics were made the use of to scrutinize the dividend paying behavior of sectors. Inconsistency, reluctance and trivial average rate from 1.5% to 5% of the dividends were being paid by the sectors. The profitability was not functioning adequately regarding the dividends and the highly profitable sectors were also in the habit paying nominally. Most of the funds were noticed to be used for financing the growth opportunities and only the mature and highly profitable sectors were keeping pace with the growth opportunities and endeavoring to transform it to the shareholders. The market capitalization was observed to oppose the trend of the dividends in almost all the sectors but the lick of it varied with the rate of surge in the market capitalization numbers. All the sectors were having a trend to disburse and dwindle the rate of the dividend at the very beginning, middle and at last to make a drift in it during the last couple of years, particularly in 2008. The corporate governance should be strengthened in order to protect the rights of the individual shareholders. Keywords: Dividend Policy, Determinants and Paying Behavior. I. INTRODUCTION The dividends are the compensation to the shareholders for risk bearing on the investments (Shamsi, 2000).The process of paying the dividend is an amazing riddle of modern finance. Numerous studies have been carried out to resolve this mystery, but still the ball is destination ridden. It is normally considered to be as “Dividend puzzle” which is still unresolved (Black, 1976). More recently, Brealey & Myers (2005) discovered that the dividend was one of the top ten vital unresolved problems of the corporate finance. After no lapse of more than three decades, the situation is still baffling, one the much more empirical and theoretical researches are deemed to have developed a universal consenses on the dividend policy (Allen & Michaely, 2003). The scholars have endeavoured to resolve this issue by contributing to the existing body of litrature in the form of models and theories. Uptill now they have successed in developing five theories regarding the dividend policy. The most former theory emphasize the dividend payments instead of the capital gains (Gordon, 1963). A change in the dividend impact on the price of the stock as the investors perceive this change to be a statement about the expected future earnings (Miller & Modigliani, 1961).The dividend mitigates the information asymmetry between the management and the shareholders by transmitting same secret information about a firm’s future prospects (Bhattacharya, 1979).The dividend help curtail the agency costs associated with the separation of ownership and control (Jensen, 1986). The catering theory calls upon the managers to put a spur to the investors after their needs (Baker & Jeffrey, 2004). Along with these models, the defining factors (The determinants) of the dividend policy also are equally imperative. The empirical researches have been evolving numerous potential determinants of the dividend policy since 1956 which have a two way effect on the policy like. Some of them enforce dividend initiation while others the inflict omissions. Profitability is an important predictor of the dividend policy that initiates it. The current earnings are an important variable that defines the dividend policy, like as to how much portion is distributed or retained (Patsouratis, 1989; Eriotis ,2005). Baker at el. (2007) have argued that the current and the expected future earnings enforce more dividends. The size of the firm works as a catalyst in the dividend payments, large firms can afford more. Firm’s propensity to distribute squeezes with the small size and the low earnings (Fama, 2001). It seems that earnings only work for dividends but firms also have some strategic objectives that press for the accumulation of the earnings instead of paying the dividends. While defining the dividend policy, managers were confronted with a challenge like as to how much should be distributed or retained for the future needs (Linter, 1956). Radner & Shepp, (1996) narrated that a threshold characterizes an optimal dividend policy, whenever the retained earnings cross this threshold, the firms start to pay the dividend. Eije & Muggings (2006) the earnings preferably retained even some time at the cost of the shareholders. The earnings are retained to finance the growth opportunities through the internal cheap source of financing. (Myers, 1984; Kuwari, 2009). It is a bit controversial to cut down the dividend payments for fuel up the growth opportunities. Normally, the managements endeavor to solve this enigma on the basis of the projected returns (Décamps & Villeneuve, 2007). It has been mulled over that the earnings are the costal predictor of the dividend while on the other hand the retained the earnings are preferably mounted to finance growth brought to you by CORE View metadata, citation and similar papers at core.ac.uk provided by International Institute for Science, Technology and Education (IISTE): E-Journals