Do Leverage, Dividend Policy and Profitability Influence Future Value of Firm? Evidence from India

Abstract

This paper examines the effect of past dividend policy, leverage and profitability on the probability of increase in future value of the firm (in terms of market to book value ratio (MBVR)) for an emerging economy, India. It uses fixed effect logit model to predict the probability of increase in future value of the firms presently included in S&PCNX500 index. We found that there is a non-linear relation between leverage, profitability and probability of increase in future value of the firm. Probability of increase in future value of firm decreases exponentially with the increase in leverage, whereas, it increases with the raise in profitability of the firm. The relation of profitability and chances future value creation is stronger for foreign standalone firms as compared to private Indian standalone or business group owned firms.

Keywords: Dividend Policy, Profitability, Firm Value, Logit Model, Panel Data

JEL Classification: G 32 G35 C23 C25