Does the Pecking Order Hypothesis Explain the Dividend Payout Ratios of Firms in the UK?

This study tests the pecking order hypothesis on data of 224 firms in the UK over the period 1993–96 inclusive. Evidence observed supports the prediction of the hypothesis that there is a negative interaction between the long term value of dividend payout ratio and investment. The evidence also indicates that financial leverage has a positive interaction with dividend payout ratio but no significant interaction with investment. While investment has a significant positive influence on financial leverage, financial leverage does not have a significant influence on investment. It is also observed that irrecoverable advance corporation tax (ACT) has a positive, albeit weak, influence on dividend payout ratio and that overseas profit has a negative influence on the ratio. The results of the study agree with the previous evidence with regard to the influence of dividend payout ratio on investment and financial leverage, and the influence of investment on financial leverage. However, the results contradict the previous evidence reported by Baskin (1989) and Allen (1993) about the influence of financial leverage on investment. While the previous studies observed that financial leverage has a positive influence on investment, this study finds that financial leverage does not have a significant influence on investment. The main contributions of the study are that (1) it provides some evidence that there is a negative interaction between dividend payout ratio and investment and a positive interaction between dividend payout ratio and financial leverage, (2) it provides some evidence about the effects of overseas profit and irrecoverable ACT on dividend payout and (3) its results suggest that the recent abolition of the refund of ACT is justified on the ground that it may affect investment and growth in the UK.