OBSERVARE
Universidade Autónoma de Lisboa
e-ISSN: 1647-7251
Vol. 13, Nº. 1 (May-October 2022)
204
THE RELATIONSHIP BETWEEN CASH DIVIDEND AND EARNINGS GROWTH OF
LISTED COMPANIES IN TEHRAN STOCK EXCHANGE
MASSOUD KHEIRANDISH
ecomkh@gmail.com
Department of Economic, Faculty of Humanities, Gonbad Kavous University, Gonbad (Iran).
MOHSEN MOHAMMADI KHYAREH
m.mohamadi@gonbad.ac.ir
Department of Economic, Faculty of Humanities, Gonbad Kavous University, Gonbad (Iran).
Abstract
Dividend policy is one of the most important financial decisions managers encounter. This
study contributes to empirical studies examining the relationship between cash dividends and
earnings growth of companies listed on the Tehran Stock Exchange during the period 2007-
2020. As a result, 131 companies have been examined with the multiple regression estimation
model. The findings show a significant relationship between cash dividends per share and
future earnings growth. Furthermore, there is a significant relationship interaction term
between the dividend payout ratio and the investment growth assumption. This relationship
is also observed for return on equity and dividend payout ratio.
Keywords
Efficiency; future earnings growth; dividend policy
How to cite this article
Kheirandish, Massoud; Khyareh, Mohsen Mohammadi (2022). The relationship between cash
dividend and earnings growth of listed companies in Tehran stock exchange. In Janus.net, e-
journal of international relations. Vol13, Nº. 1, May-October 2022. Consulted [online] on the
date of the last visit, https://doi.org/10.26619/1647-7251.13.1.13
Article received on November 6, 2021 and accepted for publication on March 16, 2022
JANUS.NET, e-journal of International Relations
e-ISSN: 1647-7251
Vol. 13, Nº. 1 (May-October 2022), pp. 204-218
The relationship between cash dividend and earnings growth of listed companies in
Tehran stock exchange
Massoud Kheirandish; Mohsen Mohammadi Khyareh
205
THE RELATIONSHIP BETWEEN CASH DIVIDEND AND EARNINGS
GROWTH OF LISTED COMPANIES IN TEHRAN STOCK EXCHANGE
MASSOUD KHEIRANDISH
MOHSEN MOHAMMADI KHYAREH
1. Introduction
Forecasting is a key factor in making economic decisions. The economic decisions of
investors, creditors, managers, and other parties depend on expectations and forecasts.
Since investors and financial analysts use profit as one of the main criteria for evaluating
a company, and they tend to evaluate future profitability to make decisions to maintain
or sell shares, they judge a company's performance based on profit because the
resources allocation to business units and divisions is made through profitability forecasts
(Shafai et al., 2019). It is also important to potential investors. They forecast future
earnings and cash flows based on the investment and allocation of capital resources
(Asadi and Oladi, 2015). Dividend policy is one of the most important issues in financial
management, because cash dividends represent the main cash payment of an enterprise
and are one of the most important choices and decisions faced by managers. The
manager should decide the amount that is considered to be distributed profit and the
amount that will be reinvested in the company in the form of retained earnings. Dividends
are paid directly to shareholders, and they affect a company's ability to accumulate
profits to take advantage of growth opportunities. According to his own belief, every
investor buys shares of companies with desirable dividend policies. Dividends proposed
by the board of directors often contain important information about managers'
expectations about the company's future profitability (Mehrani et al., 2010). In this
regard, this paper investigates the impact of changes in dividend payments on revenue-
growing companies listed on the Tehran Stock Exchange. When a company has
reasonable investments to be developed in the following few years or when a company
forecasts its financial needs for the following year, it provides distributions or dividends
to a general meeting of shareholders. If the general assembly agrees with the board, the
benefits are distributed among the shareholders, transferred to retained earnings or
savings accounts, and given to shareholders in the form of bonus shares after the project
has been run. Otherwise, profits are distributed among shareholders and then capital is
increased after the procedure if the management determines that the company needs
JANUS.NET, e-journal of International Relations
e-ISSN: 1647-7251
Vol. 13, Nº. 1 (May-October 2022), pp. 204-218
The relationship between cash dividend and earnings growth of listed companies in
Tehran stock exchange
Massoud Kheirandish; Mohsen Mohammadi Khyareh
206
cash financing (Jahankhani & Ghorbani, 2005). Several factors may affect a company's
profit distribution policy and may limit dividends. These factors are determined for the
company within the mandatory framework of laws and regulations, or the company
undertakes to provide the performance of these factors. Generally, these factors can be
divided into three categories: legal, contractual, and internal. The tax laws of some
countries also prohibit excessive non-profit dividends. While the definition of uncontrolled
dividends is somewhat ambiguous, it is generally defined as the maintenance of residual
income for current and future investment needs. The tax code is designed to prohibit tax
evasion by companies without dividends. Penalties will be imposed on companies if the
tax authorities detect a significant amount of relevant non-dividend tax. Therefore, when
a company reaches a large cash position, it must provide the tax authorities with a good
reason for maintaining these funds; otherwise, it should distribute additional funds to
shareholders in the form of dividends. The law may also impose additional restrictions on
the payment of dividends. These limits may be reflected in minimum dividends, or they
may be proposed as limits on loans received, which are determined based on dividends.
Additional legal restrictions are imposed on preferred shares; preferred shareholders
receive profits first, and the company may not distribute profits until the deferred
earnings of preferred shareholders have not been paid. With these clues, the main
question of this study is the relationship between cash dividends and earnings growth of
companies listed on the Tehran Stock Exchange. The question is whether the change in
benefits will affect the company's revenue.
2. Theoretical Foundations
2.1. The Concept of Dividend
The concept of profit has come under criticism in the development and management of
institutions in recent years, and economic theorists have replaced it with other concepts
such as utility. For this reason, profit is often rejected in criticism and claims that profit
is not the only reason for a company to be formed, but rather to introduce other welfare,
social, political, and economic reasons as the main goal of company formation (Flint et
al., 2010). Economists also know that capital formation is effective for growth and
economic development. Capital formation comes either from the government or from the
private sector. Governments consider factors in their investments such as infrastructure
projects, economic guidance policies, provision of facilities to participate in regulating the
supply and demand of goods and services... and profit in support of political and military
objectives.
The relationship between dividends and returns: As profits are distributed, companies
must pay higher fees for issuing stock to fund new investments. Dividend return theory
explains this aspect of dividend policy ambiguity. Since managers know more about a
company's future profitability than outside investors, they can have better business
prospects for dividend returns as dividends increase, and they can often experience
higher share prices in the market. Additionally, financial managers may use dividend
policies to determine the quality of earnings due to their informational content. In this
regard, since outside investors have less information about a company's future
JANUS.NET, e-journal of International Relations
e-ISSN: 1647-7251
Vol. 13, Nº. 1 (May-October 2022), pp. 204-218
The relationship between cash dividend and earnings growth of listed companies in
Tehran stock exchange
Massoud Kheirandish; Mohsen Mohammadi Khyareh
207
profitability, dividend performance is seen as information derived from expected future
cash flows, as stock prices in the market respond quickly to dividend decisions. Ross
(1987) studied the characteristics of dividend payments in signal models. In signaling
theory, cash dividends provide the prospect of a company's future profits. The company
is receiving cash dividends by paying to provide more information about the company's
future market profitability. Higher profits allow the company to leave more cash behind
through dividends; therefore, dividends reflect the company's steady state profitability.
2.2. Income growth
Income growth is the change in income over a specific period. Information asymmetry
related to growth opportunities is higher than that related to assets (Penrose and
Penrose, 2009). Thus, when all retained earnings have been made, hierarchy theory
(Fama & French, 2001, Myers & Majluf, 1982) predicts the debt priority of firms with high
growth opportunities. According to Roth (1977), creditors are aware of high growth
opportunities for companies, and they offer them ideal credit terms. Therefore, according
to signaling theory, the expected relationship between a firm's growth opportunities and
liabilities is positive. According to agency theory, the relationship between growth
opportunities and liabilities can be positive or negative.
2.3. Review of Literature
Parker (2005) showed that at the level of market indices in the United States, Canada,
and Australia, dividend payout ratios are negatively correlated with future earnings
growth, as stock profits and dividends are characteristic of large companies. Higher
dividend payout ratios lead to higher future profit growth, which was the weakest
relationship in Australia during the 1956-2005 period.
Sava (2006) studied dividend signaling theory on the Deutsche Börse, and he found some
evidence on the relationship between a reduction in cash dividends and a company's
future performance, but his findings did not verify that an increase in cash dividends has
an impact on future companies’ performance. Both studies (Mayers, 1984; Gul, 1999;
Gordon, 1962) confirm that high dividend payout ratios can be detrimental to future
income growth.
ap Gwilym et al., (2006) studied the relationship between future earnings growth and
dividend payout ratios and concluded that the dividend payout ratio is a broad topic for
researchers in theoretical modeling. Although the researchers ignored dividend payout
ratios, there was a positive correlation between dividend payout ratios and future
dividend growth. A delayed negative relationship or negative coefficient was found in
variable profit growth. According to free cash flow theory, dividend payments are
inversely related to the level of investment GDP and GDP.
Izadinia (2009) studied 11 factors to evaluate dividend policy. These variables are
company leverage, company size, last year's dividends, investment opportunities, cash
earned by the company's operating activities, expected profits for the following year,
JANUS.NET, e-journal of International Relations
e-ISSN: 1647-7251
Vol. 13, Nº. 1 (May-October 2022), pp. 204-218
The relationship between cash dividend and earnings growth of listed companies in
Tehran stock exchange
Massoud Kheirandish; Mohsen Mohammadi Khyareh
208
average interest paid by competing companies, inflation rate, percentage of free float,
and average profit growth over the previous five years rate and company earnings per
share. Significant relationships were identified for factors such as firm size, last year's
dividends, investment opportunities, following year's expected profits, and inflation, but
not for other variables.
Freshteh Eftekhar Nejad (2009) studied the effect of retained and distributed earnings
on future profitability and return on equity. This paper divides profits into two parts:
retained earnings and distributed dividends; then, it analyzes the effects of retained
earnings and distributed earnings on the future profitability and return on equity of
companies listed on the Tehran Stock Exchange. Retained earnings include current
operating accruals, non-current operating accruals, accumulated cash flow and
distribution income, including cash flow to shareholders and cash flow from debt. 50
companies listed on the Tehran Stock Exchange, companies in the period 2007-2012
were analyzed by multiple regression analysis and panel analysis (Eftekhar Nejad, 2009).
Dewasiri et al. (2019) identified the determinants of dividend policy in emerging and
developing markets. Their results showed that past dividend decisions, earnings,
investment opportunities, profitability, free cash flow (FCF), corporate governance,
country ownership, company size, and industry influence as key determinants of the
propensity to pay dividends. Additionally, past dividends, investment opportunities,
profitability and dividend premiums are identified as determinants of dividend payments.
Fakhari and Yousef Ali Tabar (2010) conducted a study titled "The relationship between
dividend policy and corporate governance of companies listed on the Tehran Stock
Exchange"; they studied the relationship between dividends and corporate governance
as a proxy for resolution problem tool. According to a checklist, they divided corporate
governance into eight categories: disclosure, business ethics, training, compliance with
legal requirements, auditors, ownership, board structure, management, asset and
liquidity ratios, calculations and divisions. The results show that stock companies use
dividends for reputation and prestige. Regarding the important relationship between
corporate governance and dividends, corporate governance has a lower impact on
dividends (Fakhari & Yousef Ali Tabar, 2010).
In their study Jahankhani and Ghorbani (2005) researched the determinants of DP in
companies listed on the Tehran Stock Exchange. They concluded that there was no
significant association between firm growth and development, ownership concentration,
and the amount of cash and dividend decisions, whereas increased risk, investment
opportunities, firm size, and increased debt in the capital structure were all significantly
lower the company's dividend payments.
Etemadi and Chalaki (2005) researched the relationship between the Tehran Stock
Exchange's performance indicators (operating cash flow, operating income, and earnings
per share) and cash dividends. The results show a significant relationship between a
company's current performance and its cash dividend payments. Based on the results,
the most important determinants of dividends appear to be EPS, operating income, and
operating cash flow, respectively.
JANUS.NET, e-journal of International Relations
e-ISSN: 1647-7251
Vol. 13, Nº. 1 (May-October 2022), pp. 204-218
The relationship between cash dividend and earnings growth of listed companies in
Tehran stock exchange
Massoud Kheirandish; Mohsen Mohammadi Khyareh
209
Mashayekh and Abdollahi (2011) examine the relationship between ownership
concentration, performance indicators, and corporate dividend payments. The results
show that ownership concentration can improve corporate performance, and the higher
the ownership concentration, the better performance indicators such as ROA and Tobin's
Q. Based on the second hypothesis, there is a positive relationship between firm
performance and payment policy. However, the results of the third hypothesis assert that
no significant relationship is observed between ownership concentration and dividend
decisions. This means that in Iran, most of shareholders cannot significantly influence
dividend payment decisions.
Abbaszadeh, Vadeei, and Pakdel (2012) examine the association of institutional
ownership, cash flow, and dividend policy. The results show a significant positive
relationship between levels of institutional ownership, active institutional ownership, and
dividend policy. However, the relationship between inactive institutional ownership and
payment policy is negative. Furthermore, the findings show a positive and significant
association between operating cash flow and corporate dividend decisions.
Asadi and Oladi (2015) studied 133 public companies from the 10-year period from 2001
to 2010 and showed that the most important dividend determinant is market risk, which
is negatively related, followed by market and book value, and firm size, which is positively
related.
Kheirkhah et al. (2019) studied the relationship between the market concentration and
power of the Tehran Stock Exchange and the company's dividend policy between 2010
and 2015. Their results showed that there is a significant positive correlation between
market concentration and the power of payment decisions. On the other hand, the
relationship between market power and concentration and the dividend payout ratio is
also statistically significant.
2. Research Methodology and Data
In terms of relevance and research methodology, this is post hoc quasi-experimental
research in the field of empirical accounting; it is a form of applied research because it
is conducted with real data and can be used to manipulate data. By its nature and
purpose, this study is practical. The research is based on real-world data from the stock
market, financial statements, notes to financial statements, and company meeting
reports. The necessary data to test hypotheses was gathered by pulling the required data
directly from financial statements, Tadbir Pardaz databases and stock exchange websites.
After screening and classification of industry sample companies, some calculations were
performed using Excel software. The classification of stocks is considered when grouping
companies in different industries. Multiple linear regression models were used for
statistical analysis; EViews and Stata software were used for data analysis.
JANUS.NET, e-journal of International Relations
e-ISSN: 1647-7251
Vol. 13, Nº. 1 (May-October 2022), pp. 204-218
The relationship between cash dividend and earnings growth of listed companies in
Tehran stock exchange
Massoud Kheirandish; Mohsen Mohammadi Khyareh
210
2.1. Data
The sample for this study is 131 companies from various industries active on the Tehran
Stock Exchange from 2007 to 2020, with the following characteristics:
1) Fiscal year ends on 30 December.
2) The company should not change its financial year;
3) The company should not be an industry company due to the nature of the industry
being different from other member companies;
4) Due to the need to roll back to 12 months, the securities (common shares) are traded
at intervals of 4 months from the beginning of the period.
5) Information should be available.
2.2. Developing Theoretical Hypothesis
This study uses the method reported by Zhou and Ruland (2006) to investigate the
relationship between dividend payout ratio and future income growth. Under a balanced
dividend policy, there is a significant positive relationship between dividend payments
and future income growth. Therefore, we introduce the Model (1) as follow:
EPSGRt + 1 = β0 + β1Payoutt + β2Sizet + β3ROAt+1 + β4Betait + β5AGt+1 + β6DivYieldt 7EPSGRt + et;
Where:
EPSGRt+1 is future earnings growth. It is the annual financial measure of common stock
from year t to year t+1 as the next revenue growth.
Payoutt is Dividend payout ratio. It is measured by dividing the ratio of the profits in
foreign exchange earnings from year t to year t+1.
Sizet is measured using the natural logarithm of total assets at end of year t;
ROAt is the forecasted return in year t+1; it is a proxy as an indicator when the first
quarter return in year t+1 is divided by the next quarter's total assets.
Betat is the market risk factor (e.g., the beta of an individual firm) for year t;
AGT+1 is future asset growth; it measures the annual growth rate of total assets in t+1;
DivYieldt is the dividend yield (dividend at the end of year t divided by the current stock
price). It is current income growth, measured as the annual increase in after-tax income
from common stock from year t-1 to year t.
Earnings per share (EPS), return on assets (ROA), and return on equity (ROE) are often
used to measure future income. Since EPS is familiar to most investors, this study takes
EPS as the priority, and selects ROA and ROE for strong testing (ap Gwilym et al., 2006).
In fact, researchers succeed when there is a positive correlation between dividend payout
ratios and future earnings growth. Therefore, the following model (2) is used to measure
JANUS.NET, e-journal of International Relations
e-ISSN: 1647-7251
Vol. 13, Nº. 1 (May-October 2022), pp. 204-218
The relationship between cash dividend and earnings growth of listed companies in
Tehran stock exchange
Massoud Kheirandish; Mohsen Mohammadi Khyareh
211
the interaction between dividend payout and dividend ratio. Earnings per share (EPS),
return on assets (ROA) and return on equity (ROE) are often used to measure future
income. Since EPS is familiar to most investors, this research gives priority to EPS and
selects ROA and ROE for robustness check. In fact, the researcher shown that there is a
positive correlation between dividend payout ratio and future earnings growth. Therefore,
the following Model (2) is used to measure the interactions between dividend payments
and the ratio of dividends:
EPSGRt + 1 = β0 + β1Payoutt + β2Sizet + β3ROAet + β4Betat + β5AGt + 1 + β6DivYieldt 7DivYieldt *Payoutt
+ β8Epsgrt +et;
where; DivYieldt *Payoutt is the interaction term between dividend yield and dividend
payout ratio. Combining the results of model (2), in this paper, we look for dividend
reasons for future earnings growth in model (3) a follow
EPSGRt + 1 = β0 + β1Payoutt + β2Sizet + β3ROAet + β4Betat + β5AGt + 1 + β6DivYieldt 7 Mt/At + β8 Mt/At
*Payoutt + β8EPSGRt +et;
where; Mt/At is the interaction term between dividend payout ratio and investment
growth opportunity. In fact, the above model examines the relationship between dividend
payments and stock income growth in two different directions.
3. Empirical Results
3.1. Descriptive Statistics
Table 1. Descriptive Statistics
Variables
EPSGRt+1
Payoutt
ROAt
Betat
AGT+1
SIZE
Future
revenue
growth
Dividend
payout ratio
Expected
return on
assets for
the year t+1
Market
Risk
Index
Asset
growth
in the
future
Firm
size
Mean
0.163
522
0.75
-0.0072
0.12
25125
Median
0.152
433
0.77
0.014
0.14
88966
Maximum
0.435
4000
0.87
2.307
0.15
22419
Minimum
0.115
0
0.65
-6.24
14
-84942
Std. Dev
0.81
166972
0.07
0.704
0.0042
41824
Jarque-Bera
2.56
622
2.25
1.5
1.73
2.1
Probability
0.32
433
0.38
0.56
0.47
0.41
Normality of the variables has been investigated in the last two rows of Table 1. It is
seen in the row of Jarque-Bera statistic that the level of scores are mentioned wether the
variables are normal or not normal. In the next row, or last row, the error probability of
each variable is stated to investigate the above hypothesis. In this regard, no variable is
normal at the probability level of less than 1 percent. It means that the null hypothesis
JANUS.NET, e-journal of International Relations
e-ISSN: 1647-7251
Vol. 13, Nº. 1 (May-October 2022), pp. 204-218
The relationship between cash dividend and earnings growth of listed companies in
Tehran stock exchange
Massoud Kheirandish; Mohsen Mohammadi Khyareh
212
is verified for all variables. Time-series regression method is used to test the research
hypotheses.
Normality of variables is investigated in the last two rows of Table 1. As can be seen, in
the Jarque-Bera statistic, the score level is mentioned whether the variable is normal or
Non-normal. In the next or last line, the probability of error for each variable is stated to
study the above hypothesis. In this regard, none of the variables are normal at probability
levels below 1%. This means that the null hypothesis is verified for all variables. Time
series regression methods are used to test research hypotheses.
3.2. Estimation Results of Model (1)
The first test aims to investigate effective measuring for dividend payout ratio in the
companies listed in Iran stock market. Its statistical hypothesis is defined as follows:
According to a balanced dividend policy, there is a positive relationship between dividend
payout ratio and future revenue growth.
H0: There is a positive relationship between dividend payout ratio and future revenue
growth at the company level in companies listed in Tehran Stock Exchange.
H1: There is no significant relationship between dividend payout ratio and future revenue
growth at the company level in companies listed in Tehran Stock Exchange.
The regression model (1) is used at the corporate level and the combined data for testing
the first hypothesis.
The first test aims to investigate a valid measure of the dividend payout ratio of
companies listed on the Iranian stock market. Its statistical assumptions are defined as
follows:
According to the balanced dividend policy, the dividend payout ratio is positively related
to future revenue growth.
H0: For companies listed on the Tehran Stock Exchange, the payout ratio is positively
correlated with future revenue growth at the company level.
H1: Among companies listed on the Tehran Stock Exchange, there is no significant
relationship between company-level dividend payout ratios and future revenue growth.
The regression model (1) was used at the firm level and the combined data was used to
test the first hypothesis. The estimation results reported in Table 2.
Based on the presented results, since t-statistics for every variable is 0.000, it is possible
to argue that all variables are verified at the level of below 1 percent; the null hypothesis,
indicating each variable is zero, is rejected. On the contrary, the main research variable
has a high t-statistics (2.88) indicating that companies’ dividends payment ratio affects
the future earnings growth at the error probability less than one percent; they have
positive relationship. Therefore, H1 hypothesis is verified, and one can assert that there
is significant relationship between dividends payment in the companies listed in Tehran
Stock Exchange and the company’s future earnings growth. As a result, the first
JANUS.NET, e-journal of International Relations
e-ISSN: 1647-7251
Vol. 13, Nº. 1 (May-October 2022), pp. 204-218
The relationship between cash dividend and earnings growth of listed companies in
Tehran stock exchange
Massoud Kheirandish; Mohsen Mohammadi Khyareh
213
hypothesis is verified at the 99% confidence level. In this manner, if paying dividends for
companies listed in Tehran Stock Exchange increases one percent, the company’s future
earning will increase with the rate of 2.6. There is a positive relationship between firm
size, predicting return on assets for the year ahead, and future asset growth to future
revenue growth of companies. There is a negative relationship between market risk index
and performance of dividend to companies’ future earnings growth.
Table 2: Regression result of model (1)
Dependent Variable: EPSGRt+1
Future revenue growth
Method: Pooled EGLS (Period weights)
Variable
Coefficient
Std. Error
t-Statistic
C Intercept
-5.62
4.0
-3.51
Payoutt
2.6
0.9
2.88
SIZE
0.0018
2.84E-08
63.38
ROAt
13.97
0.01
17.46
Betat
-0. 49
0.002
-24.5
AGT+1
2.46
0.28
8.78
DivYieldt
-7.01
0.30
-23.36
EPSGRt
0.01
0.003
3.33
Weighted Statistics
R-squared
0.92
Mean dependent var
724.59
Adjusted R-squared
0.92
S.D. dependent var
1512.47
S.E. of regression
76.207
Sum squared resid
37127396
F-statistic
13833.87
Durbin-Watson stat
1.82
Prob(F-statistic)
0
Unweighted Statistics
R-squared
0.106
Mean dependent var
163.91
Sum squared resid
37842275
Durbin-Watson stat
1.46
Based on the presented results, since the t-statistic for each variable is 0.000, it can be
said that all variables are validated at the level below 1%; the null hypothesis that each
variable is zero is rejected. Conversely, the main study variable has a high t-statistic
(2.88), indicating that the firm's dividend payout ratio affects future earnings growth
with less than 1% probability of error; they have a positive relationship. Therefore, the
H1 hypothesis is verified, and it can be asserted that there is a significant relationship
between the dividend payments of companies listed on the Tehran Stock Exchange and
the company's future earnings growth. As a result, the first hypothesis was validated at
the 99% confidence level. Thus, if the dividend payment of a company listed on the
Tehran Stock Exchange increases by 1 percentage point, the company's future earnings
will increase by a factor of 2.6. There is a positive correlation between company size,
predicted return on assets for the next year, and future asset growth and the company's
future revenue growth. Market risk index and dividend performance have a negative
correlation with a company's future earnings growth.