Analyzing the influence of mandatory dividend distribution policy on capital allocation strategies

Purpose The primary objective of this study is to evaluate the effects of the mandatory dividend distribution policy (MDDP) on capital allocation strategies, particularly focusing on research and development (R&D) and capital expenditure (Capex) strategies. The purpose is to understand how companies manage the delicate balance between distributing dividends to shareholders and allocating funds for internal growth. This research seeks to provide insights into the effects of the MDDP on innovation and growth within the context of developing markets like India. Design/methodology/approach The research utilizes a difference-in-differences (DID) methodology to establish a cause-and-effect relationship between the MDDP on R&D and Capex allocation strategies. By categorizing Indian firms into treatment and control groups based on the introduction of the MDDP, the DID approach allows for analyzing the effects of the policy while accounting for external influences. This methodology ensures that the exogenous shock introduced by the MDDP approximates random assignment, ensuring the validity of the analysis. The study utilizes empirical data from the period 2012 to 2021 to explore how the MDDP influences a firm’s capital allocation decisions. Findings The empirical analysis validates the study’s hypothesis. Companies subject to the influence of the MDDP exhibit significant increases in their allocation of resources. Specifically, the affected firms allocate 2.99% more of their resources toward Capex and 0.070% more toward R&D in the post-MDDP period compared to non-affected firms. These findings indicate that the MDDP encourages companies to proactively enhance their operational capacities and invest in innovative initiatives. Furthermore, this effect is positively moderated by the increased presence of promoters on the corporate board. Originality/value To the author’s best understanding, this study represents the first attempt to explore the influence of MDDP and its impact on R&D and Capex using data from India.