Microsoft Word - 2777-10734-1-SM-writer2-new-final An E Receive doi:10.5 Abstra This stu compan profitab mature The fin dividen returns. between model explain pricing as portf for eme Keywo JEL cod Empiric ed: Nov. 28 5296/ajfa.v4 ct udy examin nies on the bility and re markets. Fu ndings can nd payouts a . A positive n payouts an is able to ed by CAP in the India folio manag erging mark rds: Profita de: C22, C3 cal Inve in t Professor o Srivid Assista SGTB K , 2012 A 4i2.2777 nes the profi BSE from eturns is em urther the ob be explaine and are ther e relationshi nd beta is o explain re M. Thus th an context. gers. The st kets. ability, Divi 33, G12, G1 estigati the Indi S of Finance, Univer dya Subrama ant Professo Khalsa Coll E-mail: sri Accepted: D URL: http itability ano January 19 mpirically c bserved rela ed by the f refore perce ip between obtained con eturns on p e profitabil Our finding tudy contrib idend payou 14, G15 347 ion of t ian Sto anjay Sehga Departmen rsity of Delh aniam(corre or, Departm lege, Univer ividyadse@ December 10 p://dx.doi.or omaly for th 996 to Dece confirmed w ationship is fact that m eived to be profitability nfirming ou profitability lity anomaly gs have stro butes to equ uts, Beta, CA Asian the Prof ock Mar al, nt of Financ hi, India esponding a ment of Econ rsity of Del @gmail.com 0, 2012 P rg/10.5296/a he Indian st ember 2010 which is in s robust to c more profitab less risky b y and payou r argument. y sorted po y does not p ong implica uity market APM, Fama n Journal of F fitabilit rket ial Studies, author), nomics, hi, India Published: D ajfa.v4i2.27 tock market 0. A negativ contrast to choice of pro ble firms te by investors uts and a ne . The three f rtfolios wh pose serious ations for ac t anomaly l a French mo Finance & Ac ISSN 19 2012, Vol. www.macrothi ty Anom December 1 777 t using data ve relation b o prior rese rofitability m end to give s resulting i egative rela factor Fama hich was n s challenge cademicians literature es odel ccounting 946-052X 4, No. 2 ink.org/ajfa maly 10, 2012 a for 493 between earch for measure. e higher in lower ationship a French not fully to asset s as well specially 1. Intro The lite anomal pricing. returns late 197 observe various earning well est multifac expecte rate are i.e. size power earning Howeve without momen Ritter, French, portfoli Asset p heavily compar relation firms h include controll They re firms h (slower and Vu returns. expecte the pro positive althoug market associat 1 Banz Jegadees oduction erature on s ies as emp . The CAPM was the ac 70s, empiri ed that that company c gs to price, p tablished th ctor asset p ed returns, w e explained e and value in explaini gs to price, l er recent st t weaknesse ntum (Fama 1995), (Ike , 2008). Fam ios sorted on pricing ano researched ratively less nship betwee have greate s various a ling for the elate profita have greate r)-than-aver uolteenaho ( . Fama and ed profitabil fitability an e relation b gh the hedge as a whol ted with the z (1981),Stattm sh and Titman stock marke pirical resu M which p ccepted para ical work a much of th characterist past returns hat beta is i ricing mode which sugge by sensitivi are firm sp ing major everage. tudies have es. For insta a & French, enberry, La ma and Fre n accruals, m omalies prim d for the dev s explored. E en profitabi r expected accounting, ese variable ability of a er potential rage future (2002) also French (20 lity implies nomaly exi etween pro e portfolio r e. Fitzpatri e lowest pro man(1980), B n (1993). et anomalie lts which a posits a pos adigm in th appeared th he variation tics could a s, leverage a inadequate t els. Fama an ests that exp ity to marke pecific, yet t anomalies e found tha ance, the m , 1996), acc akonishiok ench (2008) momentum marily mom veloped cap Existing lite ility and ret returns. T market an es more pro firm to its for future growth in o find that m 006) conclu s higher exp ts only in t fitability an returns are n ick and Og ofit quintile Basu (1983), 348 es is extensi are inconsi sitive and l he finance li hat exposed n in expecte affect stock and momen to explain r nd French ( pected retur et, size and they have p of the CA at even the model fails t cruals (Sloa & Vermae ) point out t m and net sto mentum, ac pital market erature on p turns. Haug They constru nd past retu ofitable firm growth po e growth. T a stock’s e more profit ude that giv pected retu the case of nd returns a nonexistent gden (2009) e and vice v Bhandari ( Asian ive and gro istent with inear relati iterature for d the shortc ed return is returns viz ntum (Fama returns and (1993) deve rns on a port d value facto proven to ha APM for in Fama and to explain r an, 1996), n elen, 1995) that the mo ock issues in ccruals and ts. It is the profitability gen and Bak uct a mode urn variable ms tend to h tential and This indica earnings and table firms ven BM and rns. Fama a f small stoc and presenc t in the case ) find that versa. Artm (1988), De B n Journal of F owing. Schw maintained on between r a long tim coming of t unrelated t z. size, book a & French, thus there eloped a thr tfolio in exc ors. The add ave an impr nstance size d French (1 returns on p net stock is )) and prof odel fails to n all size gro d net stock profitability anomaly es ker (1996) fi el of expec es and repo have greate posit that c tes the pro d dividends provide hig d expected and French cks. In thi ce of signifi e of big stoc the lowest ann, Finter ondt and Tha Finance & Ac ISSN 19 2012, Vol. www.macrothi wert (2003) d theories n beta and me. Howeve the CAPM to market b k to market , 1992)1.It w is need to ree-factor m cess of the r ditional risk ressive exp e, book to 1993) mode portfolios so ssues (Loug fitability (F o explain ret oups. k issues hav y anomaly w stablishes a find more pr cted return ort that ev er expected currently pr obability fo s. Cohen, G gher averag investment h (2008) rep is case they ficant hedge cks, tiny sto t future retu and Kemp aler, (1985, 1 ccounting 946-052X 4, No. 2 ink.org/ajfa ) defines of asset security er in the . It was beta and t equity, was then develop model for risk-free k factors lanatory market, el is not orted on ghran & Fama & turns on ve been which is positive rofitable s which ven after returns. rofitable or faster Gompers ge stock t, higher port that y find a e returns ocks and urns are f (2011) 1987) and find av profitab A possi they vis to great profitab financia bearing the per positive latter’s it to be counter risks. To eluc linked t retained Amidu capacity are imp positive (2003) dividen the infl (Gordon gain fro Shefrin want di theory s self con and do function compan may be will rea signific policy a profitab high. Dividen investor verage retu bility portfo ible explana sualise prof ter risk thu bility from al risk in m g. Neverthel spective of e alphas. W point of vie relatively l r argument t cidate our p to payouts d and reinv and Abor y to pay div portant in in e associatio find that f nd payments luence of c n, 1963) ar om future in and Statma ividends be suggests tha ntrol reason not want to n of divide ny, dividend e interpreted act positive cant positive and stock pr ble firm pay nd payouts rs perceive urns increas olios. ation for th fits as the re us resulting the firm’s p managing its ess the enti f the invest e thus purpo ew as follow less risky an to the existi point we h in form of vested by th (2006), “pr vidends”. Pr nfluencing d on between for emergin s. Given tha corporate di rgues that i nvestments t an (1984) d ecause of s at some inv ns or wish t o dip into ca ends. Since d increases d as the firm ely. Asqiuth e impact on rices was al ys a higher not only e high divid se as one he positive r eward for g in higher r point of vie operations re analysis or who is ort to expla ws. If a firm nd are henc ng explanat hypothesise f dividends he firm or p rofits have ruitt and Git dividends pa dividend p ng markets at higher pr ividend pol investors pr tomorrow. H develop a b elf control vestors wou o avoid reg apital. Also e managers signal a he m having g h and Mull n the firm’s lso shown b r dividend, enhance firm end paying 349 moves fro relation obt growth and returns. Thi ew. The fir and profits of stock ma in pursuit o ain the exist m is relative ce are willin tion to the p that risk (m s. Corporate paid out to been regar tman (1991 ayments. Y policy and p (including rofitable firm licies on st refer a divi Hence inve ehavioural and due to uld be willin gret. Investo there is em s have mor ealthy grow ood future lins (1983) stock price by John and investors w m values o g companies Asian om low pr tained by th innovation is explanati rm might ha s could be r arket anoma of trading ence of the ly more pro ng to accept profits as co measured b e profits ea shareholde rded as the ) show that Yiadom and profitability g India) hig ms pay high ock prices. dend today stors value theory in w o choices m ng to pay a ors finance mpirical evid re informat wing firm. A profitability find that t e. The posit d Williams ( would buy owing to the s as less ris n Journal of F rofitability he above stu , which exp ion is justif ave borne h regarded as alies has to strategies w profitability ofitable then t low return ompensation by beta) an arned by fir rs as divide primary in current and Agyei(201 y. Aivazian, gh profits t her dividen The bird i y to a highl high payout which they s made under premium fo consumptio dence to sup tion about An increase y and there the initiatio tive relation 1985). Con that stock eir informa sky it will a Finance & Ac ISSN 19 2012, Vol. www.macrothi portfolios udies could poses entrep fied if we e higher oper the reward be carried o which can g y anomaly f n investors p ns. This wo n for bearin nd share va rms may b ends. Acco ndicator of d past year’ 1) show sig , Booth and tend to me nds we next in the hand ly uncertain ut firms mor show that i r uncertainty for dividend on out of di pport the si the health in dividend efore its sha on of divid n between d nsequently i and drive i ation conten also result i ccounting 946-052X 4, No. 2 ink.org/ajfa to high d be that preneurs examine rating or d for risk out from generate from the perceive uld be a g higher alues are be either ording to a firm’s s profits gnificant d Cleary ean high explore d theory n capital re highly. nvestors y. Their ds due to ividends gnalling h of the d payout are news dend has dividend f a more its price nt but if in lower cost of the valu where X required That in evidenc Several and Me dividen inverse ceteris shows t Lernen risk and risky an states th investor This pa profitab the anom not the anomaly possible  Wh  Do  Can the slop  Can CAPM?  Are The obj 1. Is t 2. Do perspec equity/requ uation equat X is the ex d returns of nvestors per ce in the l l studies hav erville (197 nd payouts t relationship paribus firm the managem (1973) and d high divid nd hence inv hat high pro rs and henc aper has b bility anoma maly for th e investor. y in the In e explanatio hat is the rel more profi n profitabili pe of the ma n the Fama ? e there any jectives of t the profitabi es the rel ctive? uired return tion xpected stre f investors a rceive high iterature on ve explored 72) docume han the flow p between p ms with low ment’s perc d Gu and K dend payou vestors dem ofitable firm e they are w een motiva aly in the I e mature m To fill this dian stock ons. We spe lationship b itable firms ity anomaly arket factor a French m links betwe the study are ility anomal lationship b ns. This will am of divid and V is the h dividend n relationsh d the relatio ented that w of returns payouts and wer payout ception of u Kim (2002) ut. This wou mand a lowe ms pay high willing to ac ated by the Indian stock markets has b s void in t market, inv ecifically ex between firm pay higher y be explain bear a relat multi factor een Fama Fr e ly in returns between p 350 l positively V dends/cash e equity val paying com hip betwee onship of div investors a s obtained f d beta. Beav ratios are uncertainty w purport an uld mean th er premium. her dividen ccept lower e following k market th been analys the literatu vestigates th xamine the f m profitabili dividends? ned by CAP tion with div model exp rench size a s empiricall profitability Asian y impact firm flows to in lue. mpanies as en dividend vidends pay are assured from higher ver, Kettler more risky with respect n inverse re hat higher d . Thus we h nds which ar returns. g research hus far has n sed from the re this pap he reasons following pr ity and stoc M based m vidend payo plain returns and value fa ly validated and retur n Journal of F m values as nfinity, k is less risky d payments youts with m of the flow r stock price and Schole . This is be t to firm’s e lationship b dividend pa have a count re viewed a gaps. First not been co e point of vi per examine for its exis ropositions k returns? arket factor outs? s that are p actors and fi d in Indian c rns reflect Finance & Ac ISSN 19 2012, Vol. www.macrothi s one can s the cost of is reconfir s and mark market beta ow of return es. This lead es (1970) as ecause payo earnings. Br between sy aying firms ter argumen as less risky tly a study onducted. S view of the f es the prof stence and e r and therefo possibly mi irm payouts context? firm or ccounting 946-052X 4, No. 2 ink.org/ajfa see from (1) f equity/ rmed by ket beta. a. Logue ns from ds to the ssert that out ratio reen and stematic are less nt which y by the y of the Secondly firm and fitability explores fore does issed by s? investor 3. Can CAPM 4. Do The pap explain contain 2. Data The sam study u rights a index re trading represen used as the line percent Market shares o book va alternat calculat divided average Data on Thomso been us has bee We use ratio is total pro 3. Meth 3.1 Test We form t-1, the The ran monthly portfoli compan n the profi and Fama F the risk fac per is organ s the metho s summary, a mple used ses month e and stock sp epresents n activity, an ntative of m s the market es of S&P5 age return s capitalisati outstanding alue per sha tive measur ted as the i d by the aver e total assets n share pric onone datab sed as risk-f n obtained e the firm’s calculated ofit after tax hodology t the relatio m single sor securities a nked securit y excess ret io consisting nies with hi itability ano French? ctors bear a nised as fol odology fol , policy imp consists of end closing plits) from early 93% nd covers all market perf t proxy. It i 500 (USA). series for fu ion is used a g. Price to b are represen es for profi income ava rage commo s. ces, market base of Tho free proxy a from the RB dividend pa as equity d x. Data on t on between p rted portfol are ranked ties are then turns are es g of 20% o ighest attrib omaly be c fundamenta llows. Secti llowed. Sec plications an 493 compa adjusted sh Jan 1996 t of the total l 20 major i formance. T is a broad b The mont urther estima as the size p book (inver nts the secur ts viz return ailable to co on equity. R index all c mson Reute as is the sta BI monthly ayout ratio t dividend tha this has been profitability lios based o on the basi n classified timated for f companie bute under c 351 captured by al relation w ion 2 descri ction 4 give nd concludi anies that f hare prices ( to Dec 201 l market cap industries o The Bomba based value th end shar ation. proxy. It is c rse of BE/M rity price ov n on equity ommon stoc Return on as company ch ers. The im andard pract handbook o to represent at is paid to n obtained f y and return on each mea is of the pr d into five p these portf es with lowe consideratio Asian y standard with corpora ibes the dat es the emp ng remarks form part o (adjusted fo 10 (180 mo pitalization f the econo ay Stock E e weighted re price ser calculated a ME) is used ver a comp y and return ckholders f ssets is calc haracteristic plicit yields tice in finan of statistics t the divide o equity sha from CMIE ns asure of pro ofitability d portfolios P folios for th est attribute on. P1 and n Journal of F asset pricin ate payouts? ta and their irical result . of BSE-500 or capitalisa onthly obser on BSE, ac my. Hence xchange (B index which ries have b as the natura d as the val any’s book on assets. R for the mos ulated as ne cs has been s on 91-day nce literatur . nd decision are owners E-Prowess. fitability. In definition un P1 to P5 and e next 12 m e while P5 c P5 are refe Finance & Ac ISSN 19 2012, Vol. www.macrothi ng models ? r sources. S ts. The last 0 equity ind ation such a rvations). B ccounts for the sample BSE) -200 h is constru een conver al log of pri alue proxy. k value. We Return on e st recent fis et income sc n obtained f y treasury bi re. The data n. Dividends as a percen n December under consid nd equally-w months (t). P consists of t ferred hence ccounting 946-052X 4, No. 2 ink.org/ajfa such as ection 3 t section dex. The s bonus, BSE-500 95% of is fairly index is ucted on rted into ce times Price to use two equity is scal year caled by from the ills have a for this s payout ntage of r of year deration. weighted P1 is the top 20% eforth as corner p We def Decemb repeated In the fi portfoli 3.2 Rela To estim regressi is profit where profitab constru corner p 3.3 Asse CAPM version where R risk free Rmt – R et is the a (interc b is the The CA market signific If there CAPM 3.4 Rela The pur firms a individu return u portfolios in fine a year a ber of each d till we rea first step of o ios created, ationship be mate relatio ion where t ts. We estim λ0 is a co ble firms p cted profita portfolios. et pricing te regressions of the mark Rpt – Rft is e return (Rft Rft is the exc error term, cept) is a m sensitivity APM implie returns. H cantly positi e is a signi anomaly ex ation betwe rpose of est are perceive ual firm by using rollin n the study. as calendar h year beg ach Decemb our method and ascerta etween prof onship betw the dividend mate the foll nstant. A s pay higher ability sorte est - CAPM s are run on ket model e the monthly ft), cess market measure of ab coefficient es that exce Hence, the ive (negativ ificant posi xists. een beta and timating the ed to be le regressing ng three ye The portfol year from J ginning in ber 2009. dology we ob ain the relati fitability and ween divide d payout is lowing equa Payout significant dividends ed portfolio M n each of th equation. Rpt y excess ret return i.e re bnormal pro of market f ess returns expected ve) value of tive or neg d payouts e relation be ess risky by a firm’s ex ear regressio 352 lios are re-b January to D December bserve the u ionship betw d payouts end payout the depend ation t i,t = λ0 + λ1 positive va and vice v os and calc he five port – Rft = a + turn on the eturn on ma ofits and factor. on a portfo value of a f ‘a’ (interce gative inter etween beta y investors xcess month ons over th Asian balanced at December. S 1995 and unadjusted m ween profita ts and profi dent variable profits i,t + alue of λ versa. To c culated the tfolios usin b (Rmt – Rft portfolio i. arket factor m olio should a (the inter ept) implies cept in the a and payou . We first hly stock re he entire tim n Journal of F the end of D Sample secu d portfolio mean exces ability and r fitability we e and the ex ε t λ1 would in confirm the average pa ng the famil t) + et e. return on minus risk f be fully ex rcept term) s extra-norm e CAPM sp ts is to eval estimate st turn against me period. Finance & Ac ISSN 19 2012, Vol. www.macrothi December o urities are s formation ss returns ac returns. e run a pan xplanatory ndicate that ese results ayout ratio liar “excess n portfolio free return, xplained by ) should b mal profits pecification luate if high tock beta f t the excess The variab ccounting 946-052X 4, No. 2 ink.org/ajfa of year t. sorted in process cross the nel OLS variable (2) t more we also s of the s return” (3) P minus y excess be 0. A (losses). , then a h payout for each s market ble beta measure systema time ser where Y X is the α the in Once th the rela where b γ1 in thi relation and calc 3.5 Asse If a CA portfoli and Fre The FF Where LMHt i s and h The oth We esti split int the end stocks o for all t four po groups. year t to es the co atic risk of t ries regressi Yi is the exc e excess ma ntercept and he value of ation betwee beta is the e is equation s nship betwe culated the et pricing te APM anoma ios that are ench (1993) Model is g Rpt – SMBt is the s the month are the sens her two term imate the SM to two grou of Decemb of the comp the compani ortfolios viz Monthly e o December movement the equity s ion for each cess monthl arket return, d βi (beta) is beta is ava en beta and estimated y shows the r en beta and average bet est-Fama F aly exists th missed by specified a iven by: – Rft = a + b e monthly re hly return on sitivity coef ms are same MB and LM ups- big (B) ber of every panies inclu ies. The sto z. S/L, S/H, equally weig r of year t. of security security of f h firm in the Yi = α +βi X y return of the stock b ailable for e payouts usi beta i,t = γ0 + early beta f elationship d payouts, w tas of the co French (FF) hen we atte CAPM can as follows. . b (Rmt - Rft) eturn on the n the price-t fficients of as defined MH as follow ) and small y year in the uded. The p ocks are now , B/L, B/H. ghted return 353 y return wi firm i. The v e sample as X a firm i , beta for firm each firm ov ing panel O + γ1 payout from equati between be we construc orner portfo model empt to eva n be explain + s(SMBt ) e size mimic to-book mim SMBt and L in equation ws. In each (S) - based e sample pe price to boo w split into . from the i n series are Asian ith the ma value of βi follows m i. ver the enti LS in the fo ts i,t +ε t on 4 and γ0 eta and payo cted port olios. luate if the ned using th + h(LMHt ) cking portfo micking por LMHt n (3). year of the d on whethe eriod is abov ok equity ra two equal P intersection e calculated n Journal of F rket return is obtained re sample p ollowing eq 0 is the inte outs. To con tfolios on th excess retu he three fac )+ et olio, rtfolio, sample per er their mark ve or below atio is calcu P/B groups. n of the two for all por Finance & Ac ISSN 19 2012, Vol. www.macrothi n and is ca from the fo period, we quation ercept. The nfirm our re he basis of urns of the ctor model o riod t, the st rket capitali w the median ulated in thi . Then we c o size and t rtfolios from ccounting 946-052X 4, No. 2 ink.org/ajfa alled the ollowing (4) estimate (5) value of esults on payouts stylized of Fama (6) ocks are zation at n for the is month construct two P/B m Jan of The Fam of stock minus t minus b average the two price to The thir indepen If the in regressi sectiona sample i.e s and stocks characte the FF m 3.6 Rela We nex small an be mor value fa where γ factors size, P/B 4. Emp We beg unadjus Table 1 Panel A 2 Constr Morandi ma and Fren k returns2. T the risk-free big (SMB). e of the mon o small size o book it is f rd factor is ndent of size ntercepts fro ions are sig al patterns portfolio re d h for these with partic eristic patte model. ationship be xt evaluate nd low P/B e risky vis- actors with γ0 and γ3 are with divide B and comp pirical Resu gin the em sted returns . Unadjuste A. ROE sort ruction metho iere(2012). nch model u The first fac e return. Th To calculat nthly return e portfolios free from va LMHt whic e factor. om the FF r gnificant, th in average eturns to th e factors. W cular attribu erns in the s etween divid if FF size a firms tend -a-vis big a dividend pa e intercepts ends if any. pute the ave ults mpirical resu . ed average m ted portfolio odology for s uses three e ctor is the ex he second i te the mont ns of the tw (S/L, S/H) alue effects. SMB=(S/L ch is related LMH=(S/ regressions en this imp stock return e size and v We further v utes i.e. sm sample port dend payou and value f to pay low and high P/ ayouts respe Size i,t = γ0 P/B i,t = γ3 and γ1 an To confirm erage values ults by est monthly exc os size and valu 354 explanatory xcess mark is the risk thly return o wo big size p as this fact . L+S/H)/2-(B d to value. /L+B/L)/2-( are insigni plies that the ns that are value risk f verify if the mall (big) tfolios shall ut, size and v factors have wer dividend /B firms. ectively we 0 + γ1 payou 3 + γ4 payou nd γ4 would m these resul s of dividen timating the cess returns ue factors has Asian variables f et return wh factor in re of the SMB portfolios (B tor has abo B/L+B/H)/2 It is constru (S/H+B/H)/ ificant and t e FF specifi missed by factors is sh corner port size, low support the value factor e their track ds and hence To estimat estimate th uts i,t +ε t uts i,t +ε t indicate the lts we also c nd payouts f e relationsh s on profitab s been adopte n Journal of F for explainin hich is the m eturns relati B factor we B/L, B/H) f ut the same 2 ucted as fol /2 the intercep ication is ab CAPM. Gr own by hig folios (P1 a (high) P/B e strong per rs ks in firm p e are percei e the relati e two panel e relationshi construct po for corner po hip between bility sorted ed from Sehg Finance & Ac ISSN 19 2012, Vol. www.macrothi ng the cross market inde ing to size subtract the from the av e weighted- llows such t pts from the ble to captu reater sensi gher factor l and P5) com ratio. Suc rformance i payout ratio ived by inve ionship of s l OLS as fo ip of size an ortfolios bas ortfolios. en profitabi d portfolios gal, Subrama ccounting 946-052X 4, No. 2 ink.org/ajfa s section ex return – small e simple erage of -average (7) that it is (8) e CAPM ure cross tivity of loadings mprise of ch stock if any of s i.e. do estors to size and llows (9) (10) nd value sed on lity and niam and P1 Mean 0.023 Panel B P1 Mean 0.026 Table 1 less pro less pro p.a. and signific stocks. whereas Thus w results o Is it pos he is w informa one risk between Table 2 Payout β0 0.255* *Denot Results ROA) a lower p of other The ave ROE an sorted 3 The eq random e t- stat 2.461 B. ROA sor t- stat 2.789 1, Panel A s ofitable stoc ofitable and d hence is r cantly highe The lowest s the highes we find a neg obtained for ssible that th willing to a ation contai k factor wh n profitabili 2. Empirical i,t = β0 + β1 t(β0) 38.475 es significa of panel O are more li profits would r empirical erage value nd ROA) s portfolio i quation has b effects metho P2 Mean t- 0.017 2 rted portfolio P2 Mean t- 0.032 3 shows that cks as comp d more profi robust. Pan er for low t profitabili st profitabil gative relat r mature ma he Indian in accept lowe ined in prof hich could b ity and payo l results of t profitability ROE β1 0.032* ance at the 5 OLS regress ikely to pa d adopt low studies (B es of payou strengthen o is 20.12 % een estimated od based on W P3 -stat Me .205 0.0 os P3 -stat Me .141 0.0 the unadjus pared to mo itable stock el B shows profitability ity portfolio lity portfoli ion between arkets. nvestor find er returns? fits which c be linked to outs. the panel OL y i,t + ε t t(β1) * 3.222 5% level usi sion3 (table ay higher d wer payouts. Baker, Farre uts calculate our results. %( 18.01% d using fixed Wu-Hausman 355 ean t-stat 14 1.927 ean t-stat 21 2.554 sted returns ore profitab ks is 1% per s that sortin ty stocks as o produces io produces n profitabil ds high prof To answe could contr o dividend p LS regressio β0 2 0.24 ing a two ta e 2)show th dividends w . The results elly & Edel ed for corne We find th %) and for d effects pane statistic. Asian P4 t Mean 7 0.017 P4 t Mean 4 0.019 s on ROE s le stocks. T r month (t-s ng on ROA s compared an abnorm an abnorm ity and retu fitable stock r this ques ribute to the payouts. He on of payou t(β0 44* 18. ailed t-test at firm with while compa s appear to lman RB, 1 er portfolio hat average high ROE el OLS metho n Journal of F t-stat 2.459 t-stat 2.648 sorted portf The return d stat=2.01) w the averag d to that of mal return o mal return of urns which i ks to be less stion we w e risk argum ence we calc uts on profit ROA 0) β1 16 0.2 h larger pro anies that h be consisten 985, Pruitt s sorted on e payout for E (ROA) s od, which has Finance & Ac ISSN 19 2012, Vol. www.macrothi P5 Mean 0.015 P5 Mean 0.015 folios are la differential b which is abo ge returns a f high prof f 2.6 % pe f 1.5 % per is in contra s risky due t want to exp ment. We v culated the tability. t( 231* 2. ofits(both R have compa nt with the t & Gitman n profitabili r low ROE sorted port s been chosen ccounting 946-052X 4, No. 2 ink.org/ajfa t- stat 2.197 t- stat 2.215 arger for between out 12% re again fitability r month r month. ast to the to which lore the visualise relation β1) .074 ROE and aratively findings n, 1991). ity (both E (ROA) tfolio is n over the 29.67 % Current send a p Table 3 Panel a Portfolio P1 P2 P3 P4 P5 Panel B Portfolio P1 P2 P3 P4 P5 CAPM on ROE more pr a profit for less that les statistic large am sobered with tha per mo intercep presenc factor is and Me that inv findings indicate perspec hence s %( 31.14% t profits ma positive sign . Empirical . ROE sorte o A 0.0 0.0 0.0 0.0 0.0 B. ROA sorte o A 0.0 0.0 0.0 0.0 0.0 results (Ta E sorted por rofitable sto tability anom s profitable ss profitabl cally signifi mount of va d down due at obtained nth for les pt of the lo ce of a profi s able to ex erville (197 vestors per s of Scherr ed a negativ ctive who is hould provi %). Corpora ay contain nal leading l results bas ed portfolios 012 007 004 007 006 ed portfolios 014 020 009 009 004 able 3) show rtfolios is 1. ocks. The si maly within stocks(P1) e firms are cant which ariation in co e to the con for ROE. T s profitable ower profita fitability ano xplain part o 2) who find ceive profi rer and Ma ve relationsh s developin ide less retu ate dividend information to stock pri ed on one f s B 1.166 1.086 1.026 0.961 0.988 s B 1.177 1.124 1.125 0.994 0.930 w that the e .2% per mo ignificant in n the CAPM is higher a e more risk means that ommon stoc ntribution of The extra no e stocks and ability portf omaly withi of the profit d negative r itability as athison (199 hip between ng a trading urns. 356 d policy ten n about futu ice apprecia factor CAPM t(a) 2.07 1.81 1.24 2.37 2.00 t(a) 2.48 2.81 2.30 2.63 1.69 extra norma onth for less ntercepts of M framewor as compared ky. The be t the marke ck returns. W f beta. Resu ormal return d 0.4% per folio (P1) i in the CAP ability anom relation bet an “invers 96), Gu and n profitabili g strategy a Asian nds to vary ure profits ation. M 78 7 40 74 08 5 0 00 5 9 al returns (a profitable s f corner port rk. We how d to more p eta coefficie t return fac We find tha ults on ROA n (after adju r month for is statistica PM framewo maly. These tween profi se surrogate d Kim (200 ity and syst a highly pro n Journal of F y directly w and hence t(b) 17.810 23.961 23.269 24.803 30.003 t(b) 18.223 13.681 23.582 26.171 27.33 after adjustin stocks and 0 tfolios conf wever find th profitable st ent of both tor is impor at the alphas A sorted po usting for m r more pro ally signific ork. We rec e results are tability and e” of busin 02) and Le ematic risk. ofitable firm Finance & Ac ISSN 19 2012, Vol. www.macrothi with current large payo Adj. R 0.638 0.762 0.751 0.774 0.833 Adj. R 0.664 0.527 0.768 0.803 0.816 ng for mark 0.6% per m firm the pre hat the mar tocks(P5), s h portfolios rtant in cap s of P1 and ortfolios are market risk) ofitable stoc cant confirm confirm that e in line wit d beta. They ness risk. P ee and Jang . From an in m is less ri ccounting 946-052X 4, No. 2 ink.org/ajfa t profits. uts may R2 R2 ket risk) month for sence of rket beta showing s is also pturing a P5 have e in line is 1.4% cks. The ming the t market h Louge y reason Previous g (2006) nvestors isky and Table 4 beta i,t = *Denot The res dividen risky in more ri adequat that sinc Table 5 Value f Panel a Portfolio P1 P2 P3 P4 P5 Panel b. Portfolio P1 P2 P3 P4 P5 The FF ROE an that bot size an predom model a are robu 4 The e the fixed 4. Empirical = γ0 + γ1 pay γ0 0.967* es significa sults of pa nd payouts ( nvestments w isky. This te funds res ce beta show 5. Empirical factors. .ROE sorted o A -0.0 0 -0.0 0.00 0.00 . ROA sorte o A 0.00 -0.0 0 0.00 0 results (Ta nd ROA) o th SMB and nd value f minantly cap absorbs the ust to choic equation has d effects meth l results of t youts i,t +ε t t(γ0) 20.949 ance at the 5 anel OLS4 (table 4). F while firms is expected sulting in lo ws a negativ l Results fo d portfolios B 0053 1.066 1.024 002 0.969 02 0.927 01 0.997 d portfolios B 02 1.084 003 0.965 1.070 02 0.961 0.927 able 5) show owing to co d LMH coef factors in ptured by va e profitabilit e of profitab been estimate hod based on the panel OL γ 9 - 5% level usi show that Firms with h with persis d as firms ow/no divid ve link with r the three s S H 6 0.686 0 4 0.415 0 9 0.420 0 7 0.324 0 7 0.420 - S H 0.523 0. 1.090 0. 0.502 0. 0.371 0. 0.429 -0 w insignific ntribution o fficients are explaining alue factor a ty sorted re bility proxy ed using rand Wu-Hausman 357 LS regressio γ1 -0.074* ing a two ta market be high payou stently low which are dends are typ h payouts, it factor Fama H t(a) 0.522 -0.1 0.322 -0.1 0.284 -0.8 0.137 0.87 0.269 0.60 t(a) 554 0.367 827 -0.78 210 0.085 082 0.809 0.224 0.120 cant intercep of both size e higher for profitabilit and margina eturns that a y i.e. ROE a dom effects p n statistic. Asian on of beta o t(γ1) -3.235 ailed t-test eta is signi uts (profitab payouts (pr less profit pically mor t absorbs a p a French M t(b) 20 20.983 08 26.944 801 26.057 78 25.952 09 35.901 t(b) 7 20.776 80 23.239 5 26.922 9 28.403 0 32.142 pts for lowe e and value r P1 as comp ty based r ally by size are missed and ROA. panel OLS me n Journal of F on dividend A 0 ficantly neg bility) are p rofitability) table and h re risky (hig portion of r Model based t(s) 3 7.794 4 6.302 7 6.530 2 5.248 1 8.748 t(s) t 5.821 15.234 7.333 2 6.370 8.626 est profitabi e factors. FF pared to P5 returns. Th e factor. Hen by CAPM. ethod, which Finance & Ac ISSN 19 2012, Vol. www.macrothi payouts Adj.R2 .002 egatively re perceived to are perceiv hence do n gher beta). returns in CA on Market t(h) Ad 5.759 0. 4.742 0. 4.277 0. 2.159 0. -5.433 0. t(h) Ad 5.931 0.7 11.108 0.8 2.950 0.8 1.350 0.8 -4.341 0.8 ility portfol F regression 5 confirming he alpha o nce the thre . Further FF h has been cho ccounting 946-052X 4, No. 2 ink.org/ajfa elated to o be less ved to be not have We find APM. , Size & dj.R2 791 839 830 816 886 dj.R2 789 884 845 850 873 lios(both ns show g role of f P1 is ee factor F results osen over When w ROE an profitab relative distress give low Next we Table 6 dividen Size i,t = P/B i,t = γ0 22.817 Our pa payouts portfoli exhibit 19.17 % high P/B one mig instance their bu hand re and earn 5. Sum Prior re markets from en Our res robust t problem therefor between firms sh based a 5 For RO P5 is 22 for P5 is we investig nd ROA) w ble firms ar e distress s sed and sma wer dividen e try to dev 6. Empirical nd payouts = γ0 + γ1 pay = γ3 + γ4 pay t(γ0) 609.45 anel OLS re s and a wea ios formed o lower payo %and for bi B firms is 3 ght infer tha e small firm usiness and epresent rela nings growt mary and C esearch has s (see Fama ntrepreneur’ sults howev to choice of m from inve re are perce n dividend p hould prov anomalous p OE (ROA) so .53(23.92).Fo 8.09(8.81). gate the ave we find tha re relatively see Chan a all in size, i nd payouts a velop a risk s l results of p youts i,t +ε t youts i,t +ε t γ1 0.125 esults (tabl ak positive on the basis outs vis-a-v g firms is 3 30.64%). Ho at there cou ms are expo more liquid atively distr th rates (see Conclusion confirmed a and French ’s perspectiv ver confirm f profitabili estor’s persp eived to be payouts and vide lower r pattern in re orted portfolio or ROE (ROA erage size a at P1 is act y distressed and Chen( it is found and hence ar story for siz panel OLS t(γ1) A R 1.96 0 e 6) show relationshi s of size and vis big and 30.15%. Av owever in th uld be other osed to high dity risk ow ressed firms e Fama and ns a positive r h (2008)). T ve thus trea a negative ty measure. pective. Mo less risky d firm betas returns. It eturns could os the averag A) sorted por 358 and P/B5 fo tually small and smalle 1991)). Sin that small re perceived ze and value regression Adj R2 γ3 .001 3.13 weak posi ip between d P/B it is o high P/B f verage payo he absence o reasons for h operation wing to inve s as show b French (19 relation bet These result ating profits e relation be . This could ore profitab by investor s. In other w is equally d be explain ge values of m rtfolios the av Asian or the profit l size and l er in size (f nce less pr sized comp d to be mor e factors. of size on d t(γ3) 3.904 itive relatio P/B and p observed th firms (avera outs for low of any statis r the risk sto nal, financia stor neglect by weaker t 995)). tween profit ts can be ex as a reward etween pro d possibly b le firms ten rs. Thus a n words more important t ned by stand market cap (si verage value n Journal of F tability sort low P/B vi for use of P rofitable fi panies and l e risky by in dividend pa γ4 0.989 onship betw ayouts. Exa hat small and age payouts w P/B firms stically sign ory leading al risks owin t. Low P/B track record tability and xplained if w d for risk be fitability an be explained nd to pay hi negative rel profitable ( to know w dard asset p ize) for P1 is s of P/B for P Finance & Ac ISSN 19 2012, Vol. www.macrothi ted portfolio is-a-vis P5 P/B as a me irms are re low P/B co nvestors. ayouts and v t(γ4) 0.782 ween firm s amining the nd low P/B f s for small is 20.26 % nificant rela to these fac ing to the n stocks on t d of their pa d returns for we look at t earing. nd returns w d by exami igher divide lation is po (and higher whether prof pricing mod s 22.42 (22.53 P1 is -0.87(- ccounting 946-052X 4, No. 2 ink.org/ajfa os (both i.e. less asure of elatively mpanies value on Adj.R2 0 size and e corner firms do firms is % and for ationship ctors for nature of the other ast sales r mature the issue which is ning the ends and ostulated payout) fitability els. One 3) and for 0.88) and factor C Dividen between It is fu returns challeng howeve alternat The stu pricing There a profitab The pre markets Referen Ahmed researc Aivazia dividen http://dx Amidu, of risk f Artman sample Asquith shareho Baker , dividen Banz, R Journal http://dx Basu, S for NY 129-156 Beaver, The acc CAPM is nd payouts n payout an urther found that are mis ge to mult er do not tive explana udy has stro theory that are also im ble style bas esent resear s. nces , H., & Jav ch journal of an, V., Boo nd policies x.doi.org/10 , M., & Abo finance, 7(2 nn, S., Finte evidence fr h, P., & M older's wealt , H., Farrel nd policy. Fi Rolf W. (19 l x.doi.org/10 Sanjoy. (198 YSE Comm 6. http://dx. , W., Kettle counting rev partially a confirm the nd beta is em d that the F ssed by CA tifactor ass bear signif ations might ong implica can explain mplications sed trading rch contribu vid, A. (200 f finance an oth, L., & C s from U 0.1111/1475 or, J. (2006) 2), 136-145. er, P., & K rom the germ Mullins, D th. Journal lly , G., & inancial Ma 81).The Re of 0.1016/0304 83). The Re mon Stocks doi.org/10. er, P., & Sc view, 654-6 ble to exp e risk argum mpirically co FF size and PM. Hence set pricing ficant relat t be needed ations for a n prominent for investm strategies. utes to asse 09). Determ nd economic Cleary, S. ( US firms?. 5-6803.000 ). Determin http://dx.do empf, A. (2 man market D. (1983). of business Edelman R anagement, lationship b Financ 4-405X(81) elationship s: Further 1016/0304- choles, M. ( 82. 359 plain the al ment for the onfirmed. d value bas e the profitab framework tionship wi d to justify th academician t equity ma ment manag et pricing an minants of d cs, 29, 110- (2003). Do Journal 64 nants of divi oi.org/10.1 2011). Dete t. CFR work The impac s, 56, 1-12. h RB, H. (19 14(3), 1007 between Ret cial )90018-0 Between E Evidence. -405X(83)9 (1970). Ma Asian lphas on p e market fa ed factors bility anom k in Indian ith payout heir risk pre ns who are arket anoma gers who a nomaly liter dividend po -125. emerging of financi idend payou 108/152659 erminants o king paper, ct of initia http://dx.do 85). A surv 7-34. http:// turn and M Econom Earnings Yie Journal o 0031-4 arketing and n Journal of F profitability ctor as a ne absorb the maly does no n context. ratios, thu emiums. searching f lies and has are continuo rature espec licy in Paki market firm ial researc ut ratios in G 9406106485 of expected 10-01. ating divid i.org/10.108 vey of man /dx.doi.org/ arket Value mics, eld, Market of Financia d accounting Finance & Ac ISSN 19 2012, Vol. www.macrothi y sorted po egative rela profitabilit ot pose an em These risk us suggesti for a ration s a universa ously in pu cially for em kistan. Inter ms follow d ch, 26, 3 Ghana. The 580 stock retur dend paym 86/296187 nagement v /10.2307/36 e of Commo Marc t Value and al Econom g determine ccounting 946-052X 4, No. 2 ink.org/ajfa ortfolios. ationship ty based mpirical k factors ing that nal asset al appeal. ursuit of merging national different 371-387. e journal rns:large ments on views on 665062 on Stock. ch(3-18). d Return ics, 12, ed risks. Bhanda Evidenc http://dx Breen, and http://dx Chan, K firms. J Cohen, Journal http://dx De Bon 793-805 De Bon market http://dx Fama, Journal Fama, E and http://dx Fama, E Journal Fama, E anomal http://dx Fama, E financia Fama, E 63(4), 1 Fitzpatr Retriev financin Gu, Z., Journal ari, L. C. (1 ce. x.doi.org/10 W., & Lern return. x.doi.org/10 K.C., & Che Journal of fi R. 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Optim ematic risk: Finance & Ac ISSN 19 2012, Vol. www.macrothi Returns: E 43,5 et measures 8(2), 3 s of small a reacts to ca , 4 urnal of Fina rreaction an 42, 5 f expected 992.tb04398 he returns o 33, rnings and 1995.tb051 on of asset 51, returns. Jou .09.009 Journal of F e a commo mal investm : A reexam ccounting 946-052X 4, No. 2 ink.org/ajfa mpirical 507-528. s of risk 339-351. nd large ashflow. 409-462. ance, 40, nd stock 557-581. returns. 8.x on stocks 3-56. returns. 69.x t pricing 55-84. urnal of Finance, n link?. ment and mination. Haugen stock. http://dx Ikenber share http://dx Jegadee implica http://dx John, K journal Lee, J., Tourism Logue.D manage Loughr http://dx Pruitt, dividen http://dx Scheme review, Schwer Stultz (E Sehgal, stock re 4(4), 12 Shefrin Journal http://dx Sloan, R future e Stattma Selected Yiadom Interna n, R. A., & Journ x.doi.org/10 rry, D., Lak repurcha x.doi.org/10 esh, N., & ations for x.doi.org/10 K., & Willia l of finance, , & Jang, m managem D. 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A tional Journ 21 invetsor pr mics, rmation in 15 urns, The C nts of divide 99-108. n Journal of F the determ ics, 4 t underreact onomics, winners a of finan s:a signallin ts of the U tourman.20 market expe Journal of F the investm Review, or REIT inv onstantinide 47). search for nal of Econ reference fo 1984(13) accruals an Chicago MB end policy Finance & Ac ISSN 19 2012, Vol. www.macrothi minants of e 41, 4 tion to open 39, 1 and selling nce, 48, ng equilibriu US airline i 006.03.012 ectations. F Finance, 50 ment, financ 26(33), vestors. Rea es, M. Harr rational so nomics and for cash div ), 2 nd cash flow BA - A Jou of banks in ccounting 946-052X 4, No. 2 ink.org/ajfa expected 401-439. n market 181-208. g losers: 65-91. um. The industry. Financial 0, 23-51. cing and 409-30. al estate ris and R. urces of Finance, vidends. 253-282. ws about urnal of n Ghana.