Dividend policy : evidence from Turkey

The main aim of this doctoral thesis is to carry the dividend debate into an emerging market context, and contribute more evidence to dividend literature. This, however, is done different to prior research, by examining the dividend policy behaviour of an emerging market over a period of time, after implementing serious economic and structural reforms in order to integrate with world markets. Accordingly, therefore, attempting to uncover what behaviour the dividend policy of this emerging market shows. In particular, the dividend policies of the companies listed on the Istanbul Stock Exchange (ISE) are analysed. Turkey offers an ideal setting for studying dividend behaviour as a developing country, which implemented major reforms, starting with the fiscal year 2003 in compliance with the IMF stand-by agreement as well as adopting the EU directives and best-practice international standards for a better working of the market economy, outward-orientation and globalisation. Research results suggest that the ISE-listed firms follow the same firm-specific determinants of dividend policy as proposed by dividend theories, and as suggested by empirical studies conducted in developed markets following Turkey’s adoption of the International Financial Reporting Standards (IFRS) and inflation accounting, starting with the fiscal year 2003. Specifically, the primary firm-specific determinants of dividend policy are profitability, debt level, firm size, investment opportunities and firm age in the context of an emerging Turkish market. The findings of this thesis indicate that implementing major economic and structural reforms, adopting more flexible mandatory dividend policy regulations and attempting to prevent insider lending (non-arm’s length transactions) have led the ISE firms to adjust their cash dividends toward their target payout ratio by smoothing their dividends as suggested by Lintner (1956) and as exemplified by companies in developed markets. Hence, Turkish corporations have also been adopting stable dividend policies and using cash dividends as a signalling mechanism since 2003, with the implementation of severe economic and structural reforms. The main aim of this doctoral thesis is to carry the dividend debate into an emerging market context, and contribute more evidence to dividend literature. This, however, is done different to prior research, by examining the dividend policy behaviour of an emerging market over a period of time, after implementing serious economic and structural reforms in order to integrate with world markets. Accordingly, therefore, attempting to uncover what behaviour the dividend policy of this emerging market shows. In particular, the dividend policies of the companies listed on the Istanbul Stock Exchange (ISE) are analysed. Turkey offers an ideal setting for studying dividend behaviour as a developing country, which implemented major reforms, starting with the fiscal year 2003 in compliance with the IMF stand-by agreement as well as adopting the EU directives and best-practice international standards for a better working of the market economy, outward-orientation and globalisation. Research results suggest that the ISE-listed firms follow the same firm-specific determinants of dividend policy as proposed by dividend theories, and as suggested by empirical studies conducted in developed markets following Turkey’s adoption of the International Financial Reporting Standards (IFRS) and inflation accounting, starting with the fiscal year 2003. Specifically, the primary firm-specific determinants of dividend policy are profitability, debt level, firm size, investment opportunities and firm age in the context of an emerging Turkish market. The findings of this thesis indicate that implementing major economic and structural reforms, adopting more flexible mandatory dividend policy regulations and attempting to prevent insider lending (non-arm’s length transactions) have led the ISE firms to adjust their cash dividends toward their target payout ratio by smoothing their dividends as suggested by Lintner (1956) and as exemplified by companies in developed markets. Hence, Turkish corporations have also been adopting stable dividend policies and using cash dividends as a signalling mechanism since 2003, with the implementation of severe economic and structural reforms. Research evidence reveals that the ISE-listed firms have highly concentrated ownership structures; mostly owned by families followed by foreign investors, whereas other blockholders such as domestic financial institutions and the state, show relatively lower shareholdings. Moreover, evidence implies that the implementation of various major economic and structural reforms in cooperation with the IMF and the EU directives and best-practice international standards, which include the publication of the Capital Market Board (CMB) of Turkey’s Corporate Governance Principles in line with the World Bank and the OECD, starting with the fiscal year 2003, have resulted in significant improvements for the ISE-listed firms corporate governance, transparency and disclosure practices and better shareholder protection. Investors, in general, therefore, have preference for the potential long-run growth opportunity for the stocks they hold in the ISE, since Turkey is a fast-growing market, rather than requiring cash dividends as a monitoring mechanism or to control agency problems. This thesis extends empirical research on dividend policy into an emerging market, which not only passed laws for financial liberalisation, but implemented serious reforms to integrate with world markets by using a large panel dataset from Turkey. Although the implementation of major reforms and regulatory changes may produce different results in different emerging markets, it is believed that this thesis can be a valuable benchmark for further longitudinal and cross-country research on this respect of the dividend puzzle.