Dividend policies of travel and leisure firms in the UK

• Published date: 18 January 2021
• Date: 18 January 2021
• DOI: https://doi.org/10.1108/IJAIM-09-2020-0144
• Pages: 324-344
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Erhan Kilincarslan,Sercan Demiralay

Dividend policies of travel and

leisure f‌irms in the UK

Erhan Kilincarslan

Department of Accounting, Finance and Economics, University of Huddersf‌ield,

Huddersf‌ield, UK, and

Sercan Demiralay

Department of Accounting and Finance, Nottingham Trent University,

Nottingham, UK

Abstract

Purpose –This study aims to examinecash dividend practices of travel and leisure (T&L)companies listed

on the London Stock Exchange(LSE).

Design/methodology/approach –The study uses a panel data setof 524 f‌irm-year observations of 55

unique publicly listed UK T&L companies between 2007 and 2019. First, it uses a modif‌ied version of

Lintner’s (1956) partial adjustment model for analysis regarding the target payout ratio and dividend

smoothing. Second, it performs logit and Tobit models in ascertaining the association between f‌inancial

characteristicsand divided decisions of T&L f‌irms. Finally, it applies the modif‌ied specif‌ication of the partial

adjustment model on different sub-samples that are partitioned based on various f‌inancial factors to

determinehow the f‌inancial characteristics of T&L companies affect their dividendbehavior.

Findings –The results show that UK T&Lcompanies have long-term payout ratios and adjust their cash

dividends by moving graduallyto their target at a serious degree of smoothing. The f‌indings also detect that

f‌inancial characteristics of T&L f‌irms (i.e. prof‌itability, debt and size) have signif‌icant effects on their

dividend payments decisions. In particular, more prof‌itable and larger T&L corporations are more likely to

pay cash dividends,whereas T&L companies with more debt are lesslikely to pay cash dividends in the UK.

The results further reveal that although such f‌inancial characteristics also have important impacts on the

target payout ratios and dividend smoothing levels, UK T&L companies generally adopt stable dividend

policiesover the period 2007-2019.

Originality/value –This is thoughtto be the f‌irst study to provide insights on dividend policy practices of

UK travel and leisurecorporation listed on the LSE.

Keywords Dividend policy, United Kingdom, Dividend smoothing, Travel and leisure

Paper type Research paper

1. Introduction

In the tourism business literature, it is well-documented that the travel and leisure (hereafter

T&L) sector is greatly affected by macroeconomic variables such as gross domestic product

growth, money supply, inf‌lation, interest, exchange and unemployment rates (Barrows and

Naka, 1994;Wong and Song, 2006;Lim and Chan, 2013) and highly vulnerable to non-

macroeconomic factors such as war, terror events, nuclear threats and economic uncertainty

(Ioannides and Apostolopoulos, 1999;Drakos, 2004;Seetanah, 2011;Demiralay and

Kilincarslan, 2019). Previous studies also show that the T&L sector is gen erally characterized

This research did not receive any specif‌ic grant from funding agencies in the public, commercial or

not-for-prof‌it sectors.

Declarations of interest: None.

IJAIM

29,2

324

Received14 September 2020

Revised29 November 2020

Accepted6 December 2020

InternationalJournal of

Accounting& Information

Management

Vol.29 No. 2, 2021

pp. 324-344

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-09-2020-0144

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

by higher leverage dependency, higher risk of bankruptcy, higher capital intensity and higher

competitive rivalry than other service sectors (Reich, 1993;Liu, 2009;Moon et al.,2015).

Considering the greater sensitivity to various macroeconomic and non-macroeconomic

dynamics and the unique structural characteristics, the implementation of effective corporate

management and strategic decision-making is extremely vital for T&L sector companies to

promote more sustainable and competitive development. Hence, this situation highlights the

need for setting coherent and comprehensive policies, which shape the future of T&L f‌irms, in

various areas such as the use of sources, market strategies, innovation and technology and

environmentally friendly activities and f‌inancial management (e.g. investment, payout and

capital structure decisions).

In this paper, we attempt to investigate the strategic decision-making behavior of T&L

companies from the f‌inancial management point of view –especially focusing on their

dividend policy practices. This is because a f‌irm’s dividend decisions involve the

distribution of corporate funds (determining the size of cash payments) to shareholders or

retaining earnings (not paying dividends) for reinvestment and, again through retention,

using low-cost internally generated cash to lower leverage ratio in their capital structure

(Barclay et al., 1995;Lease et al.,2000). Therefore, the dividend policysetting process is one

of the key aspects of corporate f‌inancial management closely related to investment and

f‌inancing policies, and thus has signif‌icant implications for overall corporate strategy and

f‌irm value creation (Brealey and Myers, 2003). In this respect, owing to the unique sector

characteristics previouslymentioned, the decisions to pay or not to pay corporate prof‌its as

a cash dividend and how much or how often to pay are very important in travel and leisure

companies.

It is, however, observed that T&L companies follow many different dividend payout

policies. For instance, highly prof‌itable T&L f‌irms appear to pay generous dividends as a

good (credible) signal to the market conveying their better f‌inancial performance and

distinguishing themselves fromtheir less or non-prof‌itable counterparts who cannot mimic

such dividend payment behavior. Given the high debt dependency, some may use internal

earnings for reinvestment instead of the distribution of cash dividends to prevent costly

external f‌inancing, thus loweringthe risk of default, whereas others pursue stable dividend

payments because of increase their existing shareholders’conf‌idence and attract potential

investors to their f‌irms.

Alternately, some T&L corporations might recognize the shifts in investor demandand

adopt dividend policies accordingly but still, there are others who pay no cash dividends.

Indeed, the variety of these plausible explanations can be extended to a large amount but

one thing certain is thatdividend policy decisions of T&L companies haveimportant causes

and consequences on other f‌inancial policies(i.e. investment and f‌inancing decisions), hence

on their overall sustainability and competitiveness. According to the World Tourism Off‌ice

(UNWTO), tourism is one of the world’s largest traded services sectors and generated

USD 1.7tn export earnings from international tourism in 2018, accounting for 7% of global

exports and 29% of global services exports (UNWTO, 2019). Consequently, it is worth

investigating dividend policies of travel and leisure companies operating in such a sector

that is a truly global force for economic growthand development.

Dividend policy is a highly researched topic in the corporate f‌inance literature, thus

contains numerous theoretical and empirical studies for dividends. Nevertheless, although

the above discussion clearly illustrates the importance of dividend payment decisions for

T&L companies, relatively less attention is given to this topic in the tourism literature.

Especially, to date, no research has focused on the UK investigating dividend policy

behavior of T&L sector companies. In fact, tourism is one of the most important sectors in

Travel and

leisure f‌irms

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