eThesis - Kauppakorkeakoulun sähköiset gradut

The purpose of this thesis is to provide evidence on the relationship between payout ratio and future earnings growth in companies listed on the Helsinki Stock Exchange. This thesis addresses the lack of studies globally on the predictive nature of payout policy on future earnings growth, especially in Finland where the subject has not been studied previously to this extent to the knowledge of the author. New evidence is provided on the relationship that exists between payout ratio and earnings growth, and other variables seen to affect earnings growth. The study follows closely and earlier study conducted Zhou and Ruland (2006) in the US market.

The data employed in this study is sourced from the Thomson One Banker database in addition to which data was gathered manually. The sample consists of companies listed on the Helsinki Stock Exchange between the years 2000-2010. The final sample consists of 398 firms years and 47 companies. The relationship between dividend payout ratio and earnings growth is studied with a multiple regression on three levels; one year, three year and five year growth. The independent variables considered in the study are company size, leverage, return on assets, earnings yield, lagged earnings growth and future asset growth. In addition, tests on the robustness of the results were conducted on an alternative measure of earnings, additional measures of past earnings growth, asset growth and abundance of growth opportunities.

Payout ratio is found to be positively associated with future earnings growth on one, three and five-year earnings growth periods. Results are statistically significant on one and three-year growth periods. The results of the study do not find support for mean reversion in earnings or the free cash flow theory, which have been previously suggested as explanations for the positive association between earnings growth and payout ratio. Instead, the tests of robustness indicate that payout ratio can only explain earnings growth on the one-year period. When lagged earnings growth and asset growth are controlled for on more than one growth period, both variables subsume the explanatory power of payout ratio indicating growth in asset, i.e. investment and lagged earnings growth explain future earnings growth more than payout ratio does.