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Financing Discretionary Payout via Debt or Equity – Evidence From India

The purpose of the paper is to examine financing payout behavior of Indian firms. Specifically, the reliance of Indian firms on capital markets to finance their discretionary payouts (DCP) is explored using data of S&P BSE 500 firms for the sample period from 2010 to 2020. This study reports several new findings for the payout policies followed by Indian firms. First, dividend payouts are not disappearing in India because dividend payout ratio and share repurchase ratio for Indian firms are found to increase during the sample period. Second, rupee magnitude of dividend payments and percentage of firms paying dividends are also increasing. Third, the financing of DCP shows that firms finance DCP mostly with debt and occasionally with equity. Fourth, firm characteristics namely size, excess leverage, excess cash, market-to-book ratio, R&D (only for debt financing), managerial ownership, cash flows, and credit rating influence financing of DCP with debt and equity issuance. Lastly, business cycle conditions are shown to influence debt financed DCP. Overall, the findings run counter to existing studies which state that dividends are disappearing because this study finds evidence of increasing dividends among Indian firms and provides insights to practitioners and academicians on the financing of payout policy in India.