This empirical study focuses on the dividend behavior of select Indian firms. The sample of firms has been drawn from the Indian corporate firms listed on BSE (specifically Sensex 30 firms) from 1990 to 2005. The principal objective of the study is to answer the question, "Are dividends still in vogue as far as the Indian corporate sector is concerned?", and simultaneously, to judge the applicability of one of the two extremely opposite schools of thought—relevance and irrelevance of dividend decision. The paper examines the applicability of the tax-effect theory in the Indian context. The study offers mixed and inconclusive results about the tax-effect theory, which is not applicable on the select Indian firms, thus indicating that the change in the tax structure does not have a substantial effect on the dividend behavior of firms.

Dividend decision is one of the most difficult and controversial issues in modern corporate finance. This has resulted into a number of competing theoretical explanations for dividend policy. Yet, no consensus has emerged for a single theoretical explanation for dividend policy despite several decades of research. A range of firm and market characteristics have been proposed as potentially important in determining dividend policy. The attempt to test these competing models and refine them has in turn spawned a vast empirical literature. The empirical work on dividend policy, however, generally focuses on developed stock markets such as the UK and US. The research on dividend policy in emerging stock markets has, until recently, been much more limited. So far, very less work has been done in India as far as dividend policy is concerned, which is a major motivation for this paper. This study adds to this literature by providing an analysis of the corporate dividend behavior in India. Consequently, the findings of such a study could form the basis of future comparative research into other emerging markets.

Despite extensive research on these theories, consensus still lacks a theory, which can best explain the dividend policy. Lintner (1956) conducted an empirical research over dividend pattern of 28 companies for the period of 1947-1953. Lintner surveyed corporate chief executive officers and chief financial officers, and found that dividend policy is an active decision variable because managers believe that stable dividends lessen negative investor reactions. Quite contrary to this, Miller and Modigliani (1961) advanced the view that the value of firm depends solely on its earnings power and is not influenced by the manner in which its earnings are split between dividends and retained earnings. Miller and Modigliani view dividend payment as irrelevant. Fama and Babiak (1968) studied the determinants of dividend payments by individual firms during 1946-64.

Management Research Journal, Indian Corporate Firms, Indian Corporate Sector, Stock Markets, Emerging Markets, Socioeconomic Repercussions, Corporate Dividend Policy, Taxation Policy, Corporate Financial Policies, Software Firms, Indian Firms, Indian Government.