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Introduction
Dividend policy is one of the most thoroughly researched subjects in modern corporate finance (Gonzalez et al. , 2014) and is likely to be a topic of ongoing debate because questions still remain unanswered (Baker and Weigand, 2015). Similarly, the DuPont analysis is a popular framework for financial analyses and has been termed "a timeless and elegant model of financial analyses" (Little et al. , 2009). While these two sets of rich literature have generated important insights, there has been surprisingly little or no cross-fertilization and links between them. As dividend policy continues to capture the attention of academicians and corporate managers, the decomposition of the determinant of dividend policy (i.e. profitability or return on assets) into the DuPont analysis components of asset turnover (ATO) and profit margin (PM) could enlighten our understanding of the unresolved dividend puzzle. DuPont analysis may have the potential to provide a fertile research framework to examine the usefulness of ATO and PM in explaining dividend policy. As determining an appropriate dividend payout policy is a difficult choice because of the need to balance many potentially conflicting forces (Baker and Weigand, 2015), understanding the influence of ATO and PM on dividends could enable managers to realize the importance of these factors when making dividend policy decisions. A better understanding of the effect of ATO and PM on dividends will be beneficial, given the large amounts of money involved in dividend payments and the close attention that investors, financial analysts and firms give to dividends (Farre-Mensa et al. , 2014). Furthermore, our examination of ATO and PM with dividends is apt because solving the dividend puzzle has become more challenging. In this study, we explore the empirical specifics related to decomposing the popular profitability measure of return on assets into its two components of operating characteristics, one measuring the asset efficiency or ATO and the other measuring the profitability per unit of product or PM.
Specifically, our study investigates the usefulness of information that is contained in ATO and PM ratios in explaining dividend policy in Malaysia. In the past, ATO and PM in the context of the DuPont analysis (hereafter DuPont) has been used to examine their informativeness in predicting future earnings (Fairfield and Yohn, 2001; Penman and...