Portfolio Decisions for Faith-Based Investors by Zaheer Anwer

Author:Zaheer Anwer
Language: eng
Format: epub
Publisher: De Gruyter
Published: 2021-01-09T07:07:15.429000+00:00

Table 5.6:KZ Index.

KZ Index = −1.002(CF/K) − 39.368 (Div/K) − 1.315 (CA/K) + 3.139LEV + 0.283Q

where

where

‘Q’ i.e. Market-to-book ratio of assets can be calculated as

where

An alternate proxy for financial distress is Piotroski154[a] F score that uses three criteria i.e. profitability, financial leverage/liquidity and operational efficiency. We argue that KZ Index is a better proxy as it relates operating cash flows, dividends and cash to lagged property plant and equipment and hence provides a better picture of company’s liquidity position in relation to its investment in fixed assets. Additionally, it is extensively used in corporate governance literature like Hong, Kubik155[a], Cheng, Ioannou156[a], Carbó‐Valverde, Rodríguez‐Fernández157[a], Lian158[a] and Chan, Chou159[a].

Other control variables: The first four variables are related to the dividend life cycle hypothesis which argues that mature firms pay higher dividends owing to their higher profitability levels because, in the initial years of operations, mostly the firms prefer retention of the funds and invest in growth opportunities and, as a result, the firms have to maintain a balance between the payout and retention136,[c]160[a]. In the light of this hypothesis, the firm’s profitability, growth opportunities (in shape of asset growth and market-to-book assets ratio) and firm size are the determinants of its dividend payout decision.

The fifth variable is included to control for the financing structure of the company. The final variable i.e. RE/TE controls for the impact of earned equity on dividend payout.

Market-to-book ratio of assets reflects whether company is exposed to growth bias or value bias as high market-to-book ratio represents growth bias while low market-to-book is associated with value bias125[b]. This is understandable because many times, the book value of assets does not account for the true value of intangible assets of the company. These assets like brands, patents and copyright are instrumental in growth of the company whereas the companies having high amount of book assets are mostly mature companies and may be categorized as value stocks. Theoretically, growing firms pay lesser dividends and invest more in expansion whereas the mature firms possess lesser avenues of growth and they distribute earnings to investors. This variable is included to see the impact of growth vs value bias on probability of payout.

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