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Book part
Publication date: 4 July 2015

Tarek Eldomiaty, Ola Attia, Wael Mostafa and Mina Kamal

The internal factors that influence the decision to change dividend growth rates include two competing models: the earnings and free cash flow models. As far as each of…

Abstract

The internal factors that influence the decision to change dividend growth rates include two competing models: the earnings and free cash flow models. As far as each of the components of each model is considered, the informative and efficient dividend payout decisions require that managers have to focus on the significant component(s) only. This study examines the cointegration, significance, and explanatory power of those components empirically. The expected outcomes serve two objectives. First, on an academic level, it is interesting to examine the extent to which payout practices meet the premises of the earnings and free cash flow models. The latter considers dividends and financing decisions as two faces of the same coin. Second, on a professional level, the outcomes help focus the management’s efforts on the activities that can be performed when considering a change in dividend growth rates.

This study uses data for the firms listed in two indexes: Dow Jones Industrial Average (DJIA30) and NASDAQ100. The data cover quarterly periods from 30 June 1989 to 31 March 2011. The methodology includes (a) cointegration analysis in order to test for model specification and (b) classical regression in order to examine the explanatory power of the components of earnings and free cash flow models.

The results conclude that: (a) Dividends growth rates are cointegrated with the two models significantly; (b) Dividend growth rates are significantly and positively associated with growth in sales and cost of goods sold only. Accordingly, these are the two activities that firms’ management need to focus on when considering a decision to change dividend growth rates, (c) The components of the earnings and free cash flow models explain very little of the variations in dividends growth rates. The results are to be considered a call for further research on the external (market-level) determinants that explain the variations in dividends growth rates. Forthcoming research must separate the effects of firm-level and market-level in order to reach clear judgments on the determinants of dividends growth rates.

This study contributes to the related literature in terms of offering updated robust empirical evidence that the decision to change dividend growth rate is discretionary to a large extent. That is, dividend decisions do not match the propositions of the earnings and free cash flow models entirely. In addition, the results offer solid evidence that financing trends in the period 1989–2011 showed heavy dependence on debt financing compared to other related studies that showed heavy dependence on equity financing during the previous period 1974–1984.

Details

Overlaps of Private Sector with Public Sector around the Globe
Type: Book
ISBN: 978-1-78441-956-1

Keywords

Book part
Publication date: 27 November 2017

Tarek Ibrahim Eldomiaty, Islam Azzam, Mohamed Bahaa El Din, Wael Mostafa and Zahraa Mohamed

The main objective of this study is to examine whether firms follow the financing hierarchy as suggested by the Pecking Order Theory (POT). The External Funds Needed (EFN…

Abstract

The main objective of this study is to examine whether firms follow the financing hierarchy as suggested by the Pecking Order Theory (POT). The External Funds Needed (EFN) model offers a financing hierarchy that can be used for examining the POT. As far as the EFN considers growth of sales as a driver for changing capital structure, it follows that shall firms plan for a sustainable growth of sales, a sustainable financing can be reached and maintained. This study uses data about the firms listed in two indexes: Dow Jones Industrial Average (DJIA30) and NASDAQ100. The data cover quarterly periods from June 30, 1999, to March 31, 2012. The methodology includes (a) cointegration analysis in order to test for model specification and (b) causality analysis in order to show the generic and mutual associations between the components of EFN. The results conclude that (a) in the majority of the cases, firms plan for an increase in growth sales but not necessarily to approach sustainable rate; (b) in cases of observed and sustainable growth of sales, firms reduce debt financing persistently; (c) firms use equity financing to finance sustainable growth of sales in the long run only, while in the short run, firms use internal financing, that is, retained earnings as a flexible source of financing; and (d) the EFN model is quite useful for examining the hierarchy of financing. This study contributes to the related literature in terms of utilizing the properties of the EFN model in order to examine the practical aspects of the POT. These practical considerations are extended to examine the use of the POT in cases of observed and sustainable growth rates. The findings contribute to the current literature that there is a need to offer an adjustment to the financing order suggested by the POT. Equity financing is the first source of financing current and sustainable growth of sales, followed by retained earnings, and debt financing is the last resort.

Details

Growing Presence of Real Options in Global Financial Markets
Type: Book
ISBN: 978-1-78714-838-3

Keywords

Open Access
Article
Publication date: 16 October 2019

Tarek Eldomiaty, Yasmeen Saeed, Rasha Hammam and Salma AboulSoud

This paper aims to examine the effect of both inflation rate and interest rate on stock prices using quarterly data on non-financial firms listed in DJIA30 and NASDAQ100…

10122

Abstract

Purpose

This paper aims to examine the effect of both inflation rate and interest rate on stock prices using quarterly data on non-financial firms listed in DJIA30 and NASDAQ100 for the period 1999-2016. The stock duration model is used to measure the sensitivity in variations in inflation rates and interest rates on stock prices.

Design/methodology/approach

The authors use standard statistical tools that include Johansen cointegration test, linearity, normality tests, cointegration regression, Granger causality and vector error correction model.

Findings

The results of panel Johansen cointegration analysis show that cointegration exists between the stock prices, the changes in stock prices due to inflation rates and the changes in stock prices due to real interest rates. The results of cointegration regression show that inflation rates are negatively associated with stock prices, the real interest rates and stock prices are positively associated, changes in real interest rates and inflation rates Granger cause significant changes in stock prices, significant speed of adjustment to long run equilibrium between observed stock prices and real interest rates and significant speed of adjustment to long run equilibrium between changes in stock prices due to real interest rates and changes in inflation rates.

Originality/value

This paper contributes to the empirical literature in three ways. The paper examines the effects of inflation and interest rates on stock prices differently from other related studies by separating inflation from real interest rates. The paper examines the causality between stock prices, interest and inflation rates. This paper offers significant updated validity to extended literature that a negative association exists between stock prices and inflation rates. This validity can be considered as an existence a theory of stock prices, inflation rates and interest rates.

Details

Journal of Economics, Finance and Administrative Science, vol. 25 no. 49
Type: Research Article
ISSN: 2077-1886

Keywords

Book part
Publication date: 27 November 2017

Abstract

Details

Growing Presence of Real Options in Global Financial Markets
Type: Book
ISBN: 978-1-78714-838-3

Article
Publication date: 30 July 2018

Tarek Eldomiaty, Marwa Anwar and Ahmed Ayman

The purpose of this paper is to explore the potential benefits of an optimal vs observed working capital; the latter being measured by cash conversion cycle (CCC). Optimal…

Abstract

Purpose

The purpose of this paper is to explore the potential benefits of an optimal vs observed working capital; the latter being measured by cash conversion cycle (CCC). Optimal CCC is defined and measured as the CCC that maximizes sales in the last four quarters. The initial exploratory results show that optimal CCC has been shorter than the observed. In addition, shorter CCC is accompanied by higher return on investment.

Design/methodology/approach

The authors use various statistical tools to analyze the differences between determinants of observed and optimal CCC. These statistical tools include Johansen cointegration test, linearity, normality tests, cointegration regression and Granger causality. The authors also use the benefits of discriminant analysis in order to reach a Z-score model that can be used for monitoring the move from an observed to optimal working capital.

Findings

The results show that: significant association exists between volatility of sales and CCC; sales volatility and lagged growth of sales carry relatively the highest weights when a firm moves from observed to optimal CCC; shorter CCC is associated significantly with higher profitability; the observed CCC adjusts to an optimal level; as inflation rises causing potential rise in cost of goods sold, firms prefer staying away from optimal levels of working capital; as economic growth slows down, firms stay at the current level of observed working capital; the results are subject to industry and size effects; and the DJIA and NASDAQ listed firms adjust observed CCC to optimal level slowly.

Originality/value

This paper offers three advances in the literature. The first advance is that the paper determines an optimal level of working capital empirically. To the best of the authors’ knowledge up to the date of submission, other related studies did not include an empirical solution to determine optimal working capital. The second advance is that the paper develops an empirical discriminant model that can be used for monitoring firms’ move from an observed to optimal working capital. The third advance is that optimal working capital shows the empirical integration between short-term and long-term investments that results in an improvement to firm’s liquidity and profitability.

Details

Journal of Economic and Administrative Sciences, vol. 34 no. 3
Type: Research Article
ISSN: 1026-4116

Keywords

Open Access
Article
Publication date: 14 June 2022

Hassanudin Mohd Thas Thaker, Mohamed Asmy Mohd Thas Thaker, Muhammad Rizky Prima Sakti, Imtiaz Sifat, Anwar Allah Pitchay and Hafezali Iqbal Hussain

The purpose of this paper is to examine the effect of economic policy uncertainty (EPU) of China on investment opportunities in five ASEAN economies.

Abstract

Purpose

The purpose of this paper is to examine the effect of economic policy uncertainty (EPU) of China on investment opportunities in five ASEAN economies.

Design/methodology/approach

This paper employs advanced empirical approaches, such as Multivariate DCC-GARCH and Continuous Wavelet Transform (CWT) to test the research objective. The period of analysis involved monthly data from 2003 until 2019.

Findings

This paper provides evidence where the Malaysian stock market to be the least exposed to risks emanating from Chinese EPU, followed by Singapore, the Philippines, Thailand and Indonesia. Results for investment opportunities based on time horizon suggest, for a short-term holding period, investors are better off investing in Singapore and Indonesia, while, for medium-term holding periods, all ASEAN markets appear lucrative except for the Philippines.

Practical implications

From a managerial perspective, the outcome or findings of this study are expected to aid the retail and institutional investors in designing better strategies on diversifying a stock portfolio with different holding periods.

Originality/value

Theoretically, the findings of this study contribute fresh insights into an emerging strand of literature focusing on the transmission of regional policy. Methodologically as well, this study is a novel venture to the best of authors' knowledge.

Details

Journal of Economics, Finance and Administrative Science, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2077-1886

Keywords

Open Access
Article
Publication date: 15 June 2020

Jorge Guillen Uyen

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Abstract

Details

Journal of Economics, Finance and Administrative Science, vol. 25 no. 49
Type: Research Article
ISSN: 2077-1886

Article
Publication date: 11 November 2014

Tarek Ibrahim Eldomiaty, Ola Atia, Ahmad Badawy and Hassan Hafez

The literature on the relation between dividends and stock risks include mixed results. The related studies have reached either insignificant, or positive, or negative…

1407

Abstract

Purpose

The literature on the relation between dividends and stock risks include mixed results. The related studies have reached either insignificant, or positive, or negative results. The authors offer a mathematical structure that addresses potential mutual benefits of dividends signaling under conditions of stock risks (systematic and unsystematic). The mathematical structure demonstrates explicitly a case of risk transfer. The purpose of this paper is to examine the potential benefits to firms and stockholders when financial managers adjust dividends per share (DPS) using percentage change in the explanatory power of systematic and unsystematic risks. This perspective is derived from a practical consideration that dividends are part of stock returns that can be adjusted to take stock risks into account.

Design/methodology/approach

The paper utilizes the specifications of the two-stage (simultaneous) regression and partial adjustment model. The sample includes quarterly data for firms listed in the Dow Jones Industrial Average and NASDAQ for the period December 31, 1989-March 31, 2011.

Findings

The authors have reached general results based on hypotheses developed from related literature. The results show that: first, benefits of risk transfer can be realized. That is, firms as well as stockholders achieve benefits when the DPS are adjusted using percentage change in the explanatory power of systematic risk only; second, dividend growth rates are affected positively by changes in systematic risks; third, the highest stock returns in the market are reached with sharp decreases in dividend growth rates; fourth, in the highest returns quartile, firm size and time do not matter but the industry type does; and fifth, the associations between dividend growth rates, systematic, unsystematic risks, and stock returns are intrinsically nonlinear.

Originality/value

The study contributes to the literature in terms of first, providing practical insights on the financial strategies that help in the use of dividends to convey the right signals to stockholders, and second, empirically show the potential benefits of adjusting dividends growth rates according to systematic and unsystematic stock risks in a unified mathematical structure that adds to the current literature.

Details

Journal of Economic and Administrative Sciences, vol. 30 no. 2
Type: Research Article
ISSN: 1026-4116

Keywords

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