Influence of Transparency and Disclosures on the Dividend Distribution Decisions in the Firms: Do Profitability and Efficiency of Firms Matter?

Summary

The research paper, "Influence of Transparency and Disclosures on the Dividend Distribution Decisions in the Firms: Do Profitability and Efficiency of Firms Matter?" by Rastogi, Pinto, Pathak, and Singh (2023), investigates the complex interplay between a firm's transparency and disclosure (TD) levels and its dividend distribution decisions, specifically exploring the moderating roles of technical efficiency and profitability. The study's core objective was to determine how these factors collectively shape the income shareholders receive through dividends. For its methodology, the study employed an econometric analysis on panel data spanning the period from 2016 to 2020. The sample comprised 78 enterprises listed on the Bombay Stock Exchange (BSE), making it relevant to an emerging market economy like India. A key part of their approach involved developing a transparency and disclosure index to effectively measure the levels of TD, thereby providing detailed insights into the efficacy of corporate governance systems. This robust analytical framework allowed the researchers to uncover nuanced relationships between the variables. The findings reveal a non-linear relationship between transparency and disclosure and dividend payouts. Initially, an increase in TD levels tends to lead to a decrease in dividends. However, beyond a certain threshold, further improvements in TD levels result in increased dividend distributions, aligning with theories suggesting suitable corporate governance mechanisms enhance payouts. Furthermore, the study identified significant moderating effects. Technical efficiency (TE) was found to adversely influence the relationship between TD and dividends, implying that in more efficient firms, increased TD leads to lower dividends. This suggests efficient firms might prefer to reinvest profits for growth rather than distributing them as dividends. Conversely, profitability was shown to have a substantially favorable effect, meaning that higher profitability, when combined with TD, positively influences dividend payouts. The originality of the study lies in examining these relationships to determine if companies' operating effectiveness and financial success are significant in dividend distribution choices. The practical implications highlight the importance for managers to focus on better profitability to facilitate dividend distribution alongside transparency.