Impact of dividend on investment decision

Introduction

An investment decision is viewed as one of the most critical decisions for the growth and survival of companies. However, companies can be influenced by many factors one of them being dividend policy. According to Triani & Tarmid (2019), dividend policy can negatively impact investment decisions in organizations as a result of reduced liquidity and the distribution of a company’s internal resources among shareholders. Evidence also indicates that companies that mitigated their dividend have to provide investment opportunities and are under more financial pressure. Thus it is expected that cash dividend distribution has more negative effects on companies that have reduced their dividend. While the influence of a firm’s dividend policy on the wealth of shareholders remains a debatable issue, it is critical to conduct comprehensive research and provide accurate results based on both primary and secondary data.

Literature Review

Current literature reveals a significant link between dividend policy and critical investment decisions. According to a study conducted by Kusumanisita & Minanti (2021) dividend policy negatively impacts investment decisions because of the distribution of organizations’ internal resources among reduced liquidity and shareholders. The researchers conducted a survey on 20 companies of pharmaceuticals and technology industries in the United States between 2017 and 2020. They found that dividend policy was irrelevant to company value in a capital market. According to their hypothesis, dividend affects cash flows and changes play a crucial role in the collection of data. Dividend changes eventually lead to price changes and provide significant data about future investment and income with no effect on company value. One key explanation is that free cash flows are grounded on the reaction between investors and managers (Tajuddin & Endang, 2017). This suggests that dividend deals with managers’ investment problems by reducing available free cash flows. Thus, the hypothesis for free cash flow indicates that company investment and cash flows are significantly affected by dividend policy.

In another research, Saens & Tigero (2021) shows that companies that controlled their dividend are forced to give more investment opportunities and are under financial pressure. Using the continuous regression model and accounting data, the researchers demonstrate that there are no substantial dissimilarities between the investment decisions made by corporations that disbursing dividends and the ones that fail to pay. Furthermore, the research study results indicate that companies with the more likelihood of paying surplus dividends can significantly invest in more prospects and have more financial constrictions. Therefore, dividend policy impacts investor decisions through mandatory dividend regulation and cash flow privileges of marginal stockholders.

Studies of Ginanjar, Hasnawati & Fiska (2021) show that dividends mitigate the investment problems of managers by minimizing free cash flows available to them. Thus, dividend policy has a significant effect on companies’ cash flows and investments. According to the researchers, capital expenditure is positively and strongly linked to the level of free cash flow. This means that the higher the amount of cash flow a company has, the more investments the company is likely to engage in. Capital expenditure is connected to the influence of free cash flow on capital expenditure since it increases as the size of the firm decreases (Sihwahjoeni, Subiyantoro & Bili, 2020).). Companies tend to maximize their value by making investment decisions and this acts as a motivation to managers owning firm shares and are willing to invest in projects that contribute to their firms which is a future and long-term perspective compared to providing dividends to shareholders.

Bataineh (2020) conducted a study on 3, 800 firms and found that dividends have negative impacts on investment decisions since managers have remained reluctant in cutting dividends and they also view reaching dividends unreachable. The managers argued that they provide investment opportunities as a way of reaching dividends. The researchers also tested whether if dividend cut, increased external investment and reduced investment could provide the expected value of investment and dividend. They found that fewer companies cut their dividend. In similar research, Uzomah & Ihe (2021) found out that fewer organizations cut their dividend while many companies mitigated their investments according to their expected level. They also suggest that dividend is likely to lead to investment problems and has negative impacts on investment decisions in companies.

In another study, Agung, Hasnawati & Huzaimah (2021) found that investment expenditures by companies increased borrowings and led to positive impacts on financial performance. The researchers conducted their study on high-tech companies in China and Taiwan and their causal structures of corporate financial strategies. They employed directed graph models and path analysis and examined the causal relationships among financing, investment corporate performance, and financing dividends. Even though the researchers found that investment expenditures positively impacted financial performance in Taiwan, they also found that the same financial decisions positively affected capital expenditures in China. Bataineh (2020) in his research found that high quality financial reporting mitigated the impacts of dividends on investment designs. The mitigating effect is stronger in firms that have a growth value and R&D investments.

Progress of Data Collection

The data collection plan will focus on listed company’s annual reports detailing their dividends policies. This descriptive accounting research study is applied and correlational according to the objective terms. It is also categorized in the research category of quasi-experimental. Epistemologically, its reasoning and empiricist reasoning is deductive, and using historical information, it is an ex-post study. A plan will be created to visit the companies on the list to be surveyed. The population sample will consist of about 470 companies listed in the stock exchange chart of 2021. After deducting 172 companies and applying restrictions that will modify their activities and change their fiscal year and 65 firms and 52 banks and financial institutions whose fiscal year does not lead to April. Also, 30 firms that do not have a trade gap of over six months and access to information will be excluded from this research. The research population will include 154 firms that have been active since April 2021 and are listed in the stock exchange chart.

Information concerning the theoretical foundations, subject literature, and history of the companies will be collected from publications articles, library resources, internal and external sources, and through the study of books. Data and information needed to test and check the hypotheses will be derived from financial reports and statements submitted to the listed companies. The analysis is based on quantitative and statistical evaluation of the impact of the dividend policy and how it affects the share value, the performance in the stock exchange market for a given type of corporate stock. The research variables will include both dependent and independent variables. The investment will be the dependent variable and it will be obtained by dividend the total acquisition or creation of intangible or fixed assets or other total or long-term assets. The independent variable will be dividend share and it will be obtained through the division of the total ordinary dividend paid by the number of the shares.

Descriptive analysis will be used to provide an overview of the firms under study and the profile of the study through sample data. From here researchers can make conclusions on path analysis and general application. To test the research hypothesis, I will use the panel integration model since the dependent variable is normal and qualitative. Therefore, parametric statistical methods should be used including panel and pooled regression.

Strategy for Completing my Research

To complete my research, I will consider several steps. The first step is choosing my topic of interest, focus, and information. Since the impact of dividends on investment decisions is my topic of interest, I will conduct a preliminary search of information to find out if the existing sources will meet the needs of my research. If I  find too much information, I have to narrow my topic and if the information is limited will broaden my topic. Then, I will conduct thorough research on the topic by skimming through different resources and taking the most reliable. This will help me determine if there is enough data concerning the impacts of dividends on investment decisions and to set out my research context. I will look for the keywords such as dividend, investment decisions, and companies’ at appropriate places such as internet search engines, periodical databases, and catalog books After extensively gathering information, I will revise and expand my working outline and mind map by adding examples, explanations, and information. Next is organizing my research then coming up with research questions and hypotheses. With the chosen resources, I will note the critical information for my paper and identify the research problem.

After identifying the research problem, I must learn more about the problem under investigation. Thus, I have to review related literature. This step will give me foundational knowledge concerning the topic under discussion (Hennessy et al., 2019). Then I will draft my paper using supporting detail to systematically and logically validate my research questions. After completing the draft, I will read, and revise while making sure that all ideas are organized and that they answer the research questions. The last step is will be to proofread my paper and check for grammatical, punctuation, and language errors as well as incomplete sentences and other problems to make my research paper perfect.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Agung, G., Hasnawati, S., & Huzaimah, R. F. (2021). The Effect of Investment Decision, Financing Decision, Dividend Policy on Firm Value. Journal of Business Management 1(1), 1-12.  https://doi.org/10.23960/jbm.v17i1.189

Bataineh, H. (2021). The impact of ownership structure on dividend policy of listed firms in Jordan. Cogent Business & Management8(1), 1863175. https://doi.org/10.1080/23311975.2020.1863175

Hennessy, E. A., Johnson, B. T., & Keenan, C. (2019). Best practice guidelines and essential methodological steps to conduct rigorous and systematic meta‐reviews. Applied Psychology: Health and WellBeing11(3), 353-381. https://doi.org/10.1111/aphw.12169

Saens, R., & Tigero, T. (2021). Mandatory dividend rules and the investment decision: The case of Chile. The North American Journal of Economics and Finance56, 101373. https://doi.org/10.1016/j.najef.2021.101373

Sihwahjoeni, S., Subiyantoro, E., & Bili, M. R. (2020). Analysis Effect of Investment Decision, Financing and Dividend Policy on Value Company with Variable Business Risk as Mediation. International Journal of Research and Scientific Innovation (IJRSI)7(7), 261-269. https://www.rsisinternational.org/journals/ijrsi/d…

Tajuddin, R., & Endang, K. (2017). The effect of investment decision financing decision dividend payment policy and company size. Journal of Administrative and Business Studies3(2), 105-113. DOI: 10.20474/jabs-3.2.5

Triani, N., & Tarmidi, D. (2019). Firm value: impact of investment decisions, funding decisions, and dividend policies. International Journal of Academic Research in Accounting, Finance and Management Sciences9(2), 158-163. http://dx.doi.org/10.6007/IJARAFMS/v9-i2/6107 (DOI: 10.6007/IJARAFMS/v9-i2/6107)

Uzomah, I. A., & Ihe, J. (2021). Dividend policy as a determinant for an investment decision. Middle European Scientific Bulletin12, 192-201. https://cejsr.academicjournal.io/index.php/journal/article/view/539

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