Analyzing the influence of mandatory dividend distribution policy on capital allocation strategies

Priya Mandleshwar

Journal of Economic Studies, 2024, vol. 52, issue 8, 1487-1502

Abstract: PurposeThe primary objective of this study is to evaluate the effects of the mandatory dividend distribution policy (MDDP) on capital allocation strategies, particularly focusing on research and development (R&D) and capital expenditure (Capex) strategies. The purpose is to understand how companies manage the delicate balance between distributing dividends to shareholders and allocating funds for internal growth. This research seeks to provide insights into the effects of the MDDP on innovation and growth within the context of developing markets like India.Design/methodology/approachThe research utilizes a difference-in-differences (DID) methodology to establish a cause-and-effect relationship between the MDDP on R&D and Capex allocation strategies. By categorizing Indian firms into treatment and control groups based on the introduction of the MDDP, the DID approach allows for analyzing the effects of the policy while accounting for external influences. This methodology ensures that the exogenous shock introduced by the MDDP approximates random assignment, ensuring the validity of the analysis. The study utilizes empirical data from the period 2012 to 2021 to explore how the MDDP influences a firm’s capital allocation decisions.FindingsThe empirical analysis validates the study’s hypothesis. Companies subject to the influence of the MDDP exhibit significant increases in their allocation of resources. Specifically, the affected firms allocate 2.99% more of their resources toward Capex and 0.070% more toward R&D in the post-MDDP period compared to non-affected firms. These findings indicate that the MDDP encourages companies to proactively enhance their operational capacities and invest in innovative initiatives. Furthermore, this effect is positively moderated by the increased presence of promoters on the corporate board.Originality/valueTo the author’s best understanding, this study represents the first attempt to explore the influence of MDDP and its impact on R&D and Capex using data from India.

Keywords: Dividend policy; Capital expenditure; Research and development; Mandatory dividend distribution; India (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/jes/article/52/8/1487/1254 ... f-mandatory-dividend (text/html)
https://www.emerald.com/jes/article-pdf/52/8/1487/ ... s-06-2024-0424en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-06-2024-0424

DOI: 10.1108/JES-06-2024-0424

Access Statistics for this article

Journal of Economic Studies is currently edited by Prof Mohsen Bahmani-Oskooee

More articles in Journal of Economic Studies from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().