Corresponding Author: Jamal Haj Mohammadi, M.A Student, Science and Research Branch of Islamic Azad University, Tabriz, Iran
E-ma
The Surveying of Effect Value At Risk (VAR) on Dividend Policy in Investment
Companies Listed in Tehran Stock
1
Jamal Haj Mohammadi,
2Rassoul Baradan Hasanzadeh and
2Younes Badvar Nahandi
1
M.A Student, Science and Research Branch of Islamic Azad University, Tabriz, Iran
2Assistant Professor, Department of Accounting,Tabriz Branch, Islamic Azad University Tabriz, Iran
Abstract: The present study undertakes to evaluate effects of value at risk on dividend policy in investment companies listed at Tehran Stock Exchange. A risk metrics model is used for measuring value at risk, while dividends policy is determined by ratio of dividends per share divided by earnings per share. Population of the study constitutes 23 companies listed at Tehran stock exchange from 2006 to 2011. Cumulative and cross-sectional regression models are used for testing hypotheses. Results indicate that, throughout the period under study, value at risk has positive and significant effects on dividends policy. Results also show that, except in 2011, financial leverage has negative and significant effects on dividends policy. This implies the pressure of lenders on leverage upon dividends in companies.
Keywords: value at risk, dividends policy, risk management.
INTRODUCTION
New economic developments and the need for accurate information from accounting systems demand new accounting methods and methodologies. Providing useful information about business units for users of financial statements such as investors, creditors, managers and authorities, is an objective of accounting systems. Earnings is one key information factor in financial statements.
Nowadays, many enterprises obsessed with economic and investing activities, use information from accounting systems in managing processes and market evaluation, and this requires that managers pay due attention to dividends policy, so that users of information may have access to them in the shortest possible time and apply them in their decisions.
Promotion of professional knowledge about new achievements in investment, along with advances in communication technology, has made suppliers of capital invest their cash in portfolios with higher likelihood of earnings. Accordingly, investment portfolio risk is developing at an increasingly rapid pace, compared to traditional distribution of gain and loss to value at risk. This is the main reason for many companies and financial institutes to measure risk. Neglecting risk and its management leads to failure at today’s competitive stage.
Thus, factors influencing dividends policy and growth in companies need to be identified, since they are of greatest importance for investors when evaluating financial statements. Companies report their earnings obtained in the past, but studying and forecasting value at risk and comparing it with dividends policy of companies help identify future levels of activities and success. However, this evaluation is only predictive and the future performance may turn out different. But having authentic information about future is essential and it only managers who can provide them. In general, forecasting value at risk, identifying dividends policy and determining the proper source for financing to distribute earnings among managers, stockholders, and investors are essential for investment companies. The present study evaluates effects of value at risk on dividends policy in investment companies listed at Tehran Stock Exchange.
2. Theoretical Basis:
Dividends policy has always been the site of exploration for researchers to determine and recognize factors at play. Results of different studies indicate the significance of dividends on future performance of companies.
Dividend payment is a way for affecting shareholders’ wealth, which is mainly aimed at determining the role of that policy on increasing shareholders’ wealth. This is highly vital for managers, both for corporate management and market analysis.
Disclosure of dividends policy may contribute to precision and transparency of market information and prove influential in economic decisions for interest groups, especially investors. On the other hand, non-disclosure of the policy leads to information void of the market and may affect decisions of major shareholders. Measurement and management of risk is an essential task of financial institutions. Thus, the literature introduces investment opportunity, financial structure, risk and leverage as factors affecting dividends policy
Risk is recognized as an important factor in this regard, and since value at risk summarizes different kinds of risks in the same level of quality and probability, it may be an appropriate measure for identifying all risks. It can be said that effects of value at risk on dividends policy is not addressed frequently.
Investment companies encounter many different forms of risks in their various activities and possess assets, the values of which are at threatened by risks. The risk influences their decisions. Examining effects of value at risk on dividends policy of investment companies is the subject of the present study.
A great deal of studies has been conducted in different countries on value at risk since it was first studied in 1994 by Wetertson, the manager of J. P. Morgan Institute
Hanifi (2001) studied the level of risk-taking in companies listed at Tehran Stock Exchange at both small and big scales. He concluded that the probability of financial risk is greater than industry risk. He also compared portfolios of investment and manufacturing companies and found that portfolio risk is greater for the former.
Nilson (2005) examined the relationship between corporate governance, leverage and dividends policy and found that companies with impotent shareholders are more likely to turn to liability and dividends in their capital structure.
Chang et al. (2006) evaluated methods of measuring value at risk and stated that all the methods seek to explain, partially or fully, events of financial markets.
Jahankhani & Ghorbani (2006), “Identifying and Explaining Factors on Dividends Policy”, stated that dividends policy is a function of random walk model. Based on signaling theory, it is expected that companies with higher level of growth earn greater returns. Firm size, investment opportunity, financial structure, risk and financial leverage are factors that explain dividends policy of companies active in Stock Exchange.
Shahriar & Ahmadi (2008) suggested in their study, “Determining Optimal Level of Investment in Tehran Stock Exchange, Based on Value at Risk”, that it is better for investors to invest mostly in Central Bank and less in Ghadir investment plan.
3. Hypothesis:
As disguised earlier, the present study evaluates effects of value at risk on dividend policy in investment companies listed at Tehran stock exchange and proposes the following hypothesis:
Value at risk is influential on dividends policy
4. Methodology:
The study seeks to investigate effects of value at risk on dividends policy in investment companies listed at Tehran Stock Exchange. Therefore, it is an applied study with a semi-empirical and post-event design, since data are collected without direct involvement of researchers and uses information from the past. Also, it is considered to be correlative study, for it analyses the relationship between variables.
4.1. Population and Samples:
Population of the study includes all companies listed at Tehran Stock Exchange satisfying the following criteria:
1. Companies possessing information required in the period of 2006-2011.
2. Companies listed at Stock Exchange before 2006 that remain active up to the end of 2011.
The study uses screening methodology and keeps the qualified companies while removes the others. Accordingly, 23 companies were selected.
4.2. Variables:
Defining the variables is the first step for testing the hypotheses, which allows for measuring the required characteristics. Variables of the study include dependent, independent and control variables.
4.2.1. Independent Variable:
Where
is the price of securities at the end of month t.
is the price of securities at the beginning of month t. is the return of securities at month t.
After calculating monthly returns for all assets (securities) in investment (portfolio), portfolio return is calculated as:
Where
is portfolio returns of month t.
is the ratio of market value of stock, or weight of assets, to total market value of portfolio.
Market value of an asset to total market value of portfolio is the weight of each stock in investment companies. Finally, variance of returns is calculated:
Where
is the variance of portfolio at the end of year T. is the weight of assets in portfolio at the end of year T.
After taking the square root of portfolio variance, standard deviance of returns on investment at the end of year T (V) is calculated as:
Where
is the value of Z for normal multivariate function at confidence level of 95%, i.e. 1.65.
4.2.2. Dependent Variable:
Dividends per share is the dependent variable of the study that is measured as: Dividends= dividends per share / earnings per share
4.2.3. Control Variables:
Control variables of the study as being influential on dividends policy are:
1. Firm Size:
Firm size is used as control variable here because bigger companies are more likely to pay dividends at the end of the year. It is calculated as:
is firm size at the end of year t.
is the number of shares of the company at the end of year t.
2. Leverage:
Two perspectives have been postulated about effects of leverage on dividends policy: first, paying greater dividends in the company may act as an incentive for creditors and other suppliers, except shareholders, to provide more sources of liability for the company. Second, financing from creditors and other suppliers, except shareholders, may be bound to paying dividends. Thus, leverage is taken as a control variable in the study and is calculated as:
is leverage of company at the end of tear t. is liability of company at the end of tear t.
is assets of company at the end of tear t.
3. Growth Opportunities:
Companies with better growth opportunities, especially those with higher sales growth, need more amounts of cash to provide more goods to sustain their current position. Therefore, they tend to pay less amounts of dividends.
The difference between returns from investment sales of the current and previous years to returns from investment sales of the previous year is used in the present study.
is returns from investment sales at the end of year t-1.
5. Data Analysis:
The study utilizes various tests for data analysis, including descriptive indicators in descriptive statistics and statistical tests in inferential statistics. Statistical tests constitute correlation test, t-test, and multivariate linear regression. Correlation coefficient is used not only for testing hypotheses, but also for estimating the relationship between independent and dependent variables. Based on data type and analytical method of the study, cross-sectional and cumulative model is used. To test normal distribution of variables and residual of regression, a Kolmogorov-Smirnov statistics is performed. A variable has normal distribution only when its obtained value is greater than 5%.
5.1. Normal Distribution of Variables:
A Kolmogorov-Smirnov test is used for examining normality of value at risk and dividends of companies listed at Tehran Stock Exchange and control variables throughout the study. Results are given in Table 1. Since the probability statistics value of Kolmogorov-Smirnov test for all the variables, except value at risk, is 5%, normal distribution of these variables is approved.
Table 1: Normal distribution of variables. statistics
variables
N K-S statistics probability statistics of K-S
Value at risk dividends Firm size
leverage 138
Growth opportunity 138
5.2. Descriptive Statistics of Variables:
Table 2 demonstrates descriptive statistics of variables. A comparison of coefficient of variation for value at risk and dividends shows that, except for the years 2006 and 2008, variation and dispersion for the value at risk is smaller and it has more stability. This implies that dividends policy is affected by factors other than value at risk, some of which are studied here as control variables. Our findings show that growth opportunity has greater coefficient of variation and higher dispersion, while it proves to be less stable, compared to leverage and firm size,
Table 2: Descriptive statistics of variables. Year / Variables
Statistics
N min max mean Standard deviation Coefficient of variation
Total period Value at risk
dividends Firm size leverage
Growth opportunity
-2006 Value at risk
dividends Firm size leverage
Growth opportunity -
-2007 Value at risk
dividends Firm size leverage
Growth opportunity
-2008 Value at risk
dividends Firm size leverage
Growth opportunity
-2009 Value at risk
dividends Firm size leverage
Growth opportunity
-2010 Value at risk
Year / Variables
Statistics
N min max mean Standard deviation Coefficient of variation
Growth opportunity
-2011 Value at risk
dividends Firm size leverage
Growth opportunity
-5.3. Correlation of Variables with Dividends Policy:
Results of correlation of variables with dividends policy are given in Table 3. Since all variables had normal distribution, Pearson Correlation was used. Results indicate a strong and positive relationship between value at risk and dividends policy throughout the period under study.
Table 3. Correlation of variables with dividends policy. Year
Variables
Value at risk Firm size Leverage Growth opportunity
Total period Level of
correlation
-Significance
2006 Level of
correlation
-Significance
2007 Level of
correlation
-Significance
2008 Level of
correlation
-Significance
2009 Level of
correlation
-Significance
2010 Level of
correlation
-Significance
2011 Level of
correlation
-Significance
5.4. Testing Hypothesis Using Regression Models:
Regression model for effects of value at risk on dividends policy is presented in Table 4. Results indicate that value at risk has positive relationship with dividends policy (1.719) and is significant (0.001). That is to say, any increase in value at risk leads to increase in dividends policy.
Results also demonstrate that leverage has negative, strong and significant effects on dividends policy. This negative effect may be due to limits imposed by creditors on dividends in investment companies. It is also found that firm size has weak but significant effects on dividends policy. Results of F statistics (0.000) show that the model is significant and, regarding Durbin-Watson statistics (1.843) doesn’t have the problem of autocorrelation. Furthermore, results of adjusted coefficient of correlation demonstrate that during the study 0.91 % changes in dividends level in investment companies are explained by value at risk and control variables, particularly leverage and firm size. Significance of effects of value at risk on dividends policy confirms our hypothesis. Regression model throughout the study is as follows:
Table 4: Eeffects of value at risk on dividends policy. variables
statistics
Regression coefficient Standardized coefficient (Beta)
t statistics t probabilistic statistics
Fixed value - -
-Value at risk Firm size
Leverage - -
-Growth opportunity - -
-Correlation coefficient Adjusted coefficient of correlation
F statistics F probabilistic statistics
Table 5 shows effects of value at risk on level of dividends throughput the study. Results demonstrate positive and significant effects of value at risk on level of dividends. Results of adjusted coefficient of correlation in 2009, 0.98% of changes in the level of dividends in investment companies are explained by effects of value at risk on control variables, particularly leverage. Regarding the significance of effects of value at risk on level of dividends in investment companies, our hypothesis throughout the study is confirmed.
Table 5: Regression results of effects of value at risk on dividends and control variables. Year / Variables
Variables
Value at risk
Firm size
Leverage Growth
opportunity
Adjusted coefficient of correlation
F probabilistic statistics
Durbin-Watson
total period
Regression coefficient
-
-Significance
2006 Regression
coefficient
-
-Significance
2007 Regression
coefficient
- -
-Significance
2008 Regression
coefficient
-
-Significance
2009 Regression
coefficient
-
-Significance
2010 Regression
coefficient
-
-Significance
2011 Regression
coefficient
-
-Significance
6. Discussion and Conclusion:
The present study investigates effects of value at risk on level of dividends in companies listed at Tehran Stock Exchange and yields the following results:
1. Effects of value at risk on dividends in companies listed at Tehran Stock Exchange throughout the study are positive and significant.
2. Effects of leverage on dividends in companies listed at Tehran Stock Exchange throughout the study, except 2011, are negative and significant.
3. Effects of growth opportunity on dividends in companies listed at Tehran Stock Exchange in 2008 are negative and significant.
4. Effects of firm size on dividends in companies listed at Tehran Stock Exchange throughout the study, except 2011, are positive and significant.
Significant and positive effects of value at risk on dividends in the period of 6 years under study are in agreement with capital asset pricing theory and Markowitz’ portfolio theory and indicate effects of high risk acceptability of investors and shareholders, compared to receiving more returns and earnings, in Iran’s capital market. Results of our study on relationship between leverage and dividends are in agreement those reported by Jahankhani & Ghorbani (2006) but they are in conflict with results of Saeidi & Behnam (2011).
7. Findings and Suggestions:
1. Regarding negative and significance effects of leverage on dividends and the fact that greater amount of dividends is favorable to minor shareholders in Tehran Stock Exchange, it is suggested that users of financial statements, particularly new shareholders and investors, pay attention in their decision-making to level of liability in investment companies.
2. Regarding negative and significance effects of leverage on dividends and the fact that greater amount of dividends may increase stock price in the market, it is suggested that managers and potential shareholders of investment companies pay attention to this matter.
3. Regarding negative and significance effects of leverage on dividends, it is suggested that creditors of investment companies in Tehran Stock Exchange evaluate whether reduction in dividends arises from increase n liability due to decrease in performance or limitations regulated in provisions of loan contracts.
4. It is suggested that Stock Exchange Organization make investment companies disclose value at risk of their investment portfolios.
8. Suggestions for Further Studies:
The study suggests that for better a use of our results and clarifying the relationship between dividends and factors at play in the future, the following issues be borne in mind:
1. Effects of industry on the relationship between dividends and value at risk.
2. Evaluating other measures in the relationship between dividends and value at risk for calculating dividends, such as dividends per share.
3. Evaluating effects of macroeconomic variables on the relationship between dividends and value at risk. 4. Evaluating and testing the relationship between dividends and value at risk in profitable and non-profitable companies, using virtual variable in future studies.
5. Replication of the present study using intervals, including dividends in the past and evaluating effects of increasing intervals on improving the relationship between value at risk and dividends.
REFERENCES
Chan, N.H., S. Deng, L. Peng, Z. Xia, 2005. Interval estimation of Value-at-Risk based on GARCH models with heavy-tailed innovations. Journal of Econometrics. Accepted.
Hanifi, F., 2002. “Evaluating Risk-taking of Companies Listed at Tehran Stock Exchange through Value at Risk”. Ph.D dissertation, Tehran Azad University.
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Saeidi, A., K. Behnam, 2011. “Factors Affecting Dividends Guidelines in Companies Listed at Tehran Stock Exchange”. Management Quarterly, 7(18): 61-71.
