Determinants of Dividend Reduction or Omission in Indian Pharmaceutical Industry: A Logistic Regression Approach

A company can use its earning either to pay dividends to its shareholders or to use these funds for other purposes such as financing new investments or retiring the debts. A decision to increase payouts conveys that the firm currently has accumulated excessive financial flexibility or that managers perceive operating cash flow to become stronger or more certain, and vice versa for a decision to decrease payouts. So, it is certain that the probability of dividend decreases and increases is related to cash position and owners’ capital in capital structure. The present study mainly focused on identifying the firm's specific factors that can play an important role in predicting the dividend reduction or omission by the companies across the pharmaceutical industry in India with a sample of 15 companies and covering the period of 10 years from 2000–01 to 2009–10. To empirically examine what is mentioned above, a logistic regression analysis is used. The results show that the likelihood of reducing/omitting the dividend payout to equity shareholders is significantly higher with decline in profitability, increase in owner equity and previous year return on assets.