Journal of Financial Reporting and Accounting 13, no. 1 (2015): 2-19


Apedzan Emmanuel Kighir, Normah Haji Omar, and Norhayati Mohamed


The purpose of this paper is to contribute to the debate and find out the impact of cash flow on changes in dividend payout decisions among non-financial firms quoted at Bursa Malaysia as compared to earnings. There has been renewed debate in recent finance and accounting literature concerning the key determinants of changes in dividends payout policy decisions in some jurisdictions. The conclusion in some is that firms base their dividend decisions on cash flows rather than published earnings. The research made use of panel data from 1999 to 2012 at Bursa Malaysia, using generalized method of moments as the main method of analysis. The research finds that Malaysia non-financial firms consider current earnings more important than current cash flow while making dividends payout decisions, and prior year cash flows are considered more important in dividends decisions than prior year earnings. We also found support for Jensen (1986) in Malaysia on agency theory, that managers of firms pay dividends from free cash flow to reduce agency conflicts. The research concludes that Malaysian non-financial firms use current earnings and less of current cash flow in making changes in dividends policy. The policy implication is that current earnings are dividends smoothing agents, and the more they are considered in dividends payout decisions, the less of dividends smoothing. If dividends smoothing is encouraged, it could lead to dividends-based earnings management. The research is our novel contribution of assisting investors and government in making informed decisions regarding dividends policy in Malaysia.

Keywords: Bursa Malaysia, Cash flow from operations, Dividends smoothing, Free cash flow, Speed of adjustment, Target payout ratio