This study examines the dynamics and determinants of dividend payout policy of
320 non-financial firms listed in Karachi Stock Exchange during the period of 2001 to
2006. For the analysis we use dividend model of Lintner (1956) and its extended versions
in dynamic setting. The results consistently support that Pakistani listed non-financial firms
rely on both current earning per share and past dividend per share to set their dividend
payments. However, the dividend tends to be more sensitive to current earnings than prior
dividends. The listed non-financial firms having the high speed of adjustment and low
target payout ratio show the instability in smoothing their dividend payments. To find out
the determinants of dividend payout policy dynamic panel regression has been performed.
It is found that the profitable firms with more stable net earnings can afford larger free cash
flows and therefore pay larger dividends. Furthermore the ownership concentration and
market liquidity have the positive impact on dividend payout policy. Besides, the
investment opportunities and leverage have the negative impact on dividend payout policy.
The market capitalization and size of the firms have the negative impact on dividend
payout policy which shows that the firms prefer to invest in their assets rather than pay
dividends to their shareholders