Earnings Response Coefficient as a determinant of dividend policy: Testing Free Cash Flow Theory on non-ﬁnancial dividend paying ﬁrms in the Pakistan Stock ExchangeHamid Ullah and Anjum Ihsan
First published: 31 May, 2019
This study tests Jensen's free cash ﬂow theory which states that managers overinvest retained earnings in negative NPV projects. A data set of 238 ﬁrms listed on the Pakistan Stock Exchange for the period 1999 to 2016 is used. The results of the panel regression model show a signiﬁcant positive association of the earnings response coeﬃcient and dividend payout ratio, which supports the free cash ﬂow theory in listed Pakistani ﬁrms. Moreover, the imposition of the capital gains tax and the ﬁnancial crisis has further strengthened the positive relationship between ERC and dividend payout ratio.
Keywords: Free cash ﬂow · Dividend payout · Capital gains tax · Pakistani ﬁrms.