FREE CASH FLOW AS DIVIDEND DETERMINANT

Dividend and dividend policy represent one of most debating economic subjects, but till now have a lot of unanswered questions. One of the main questions regarding with dividends and dividend policy is which significant factor determines the dividend. Previous research shows that significant factors of dividend and dividend policy are profitability, stability of earnings, growth, debt level, owner ship concentration and size. The main determinant is profitability, which is crucial for making the business surplus, which partially serves for dividends. But beside to profitability for paying the dividends the company must have cash. The old saying "cash is king", points the role and meaning of cash in the business. The role of cash in the business is particularly pronounced in today's business conditions when access to cash is difficult and expensive. Companies have to ensure liquidity and solvency, which are necessary for paying off dividends. Starting from the fact that dividends are a portion of a company's cash flow, which is paid to shareholders, with this paper we want to answer on questions if and how the free cash flow influences the dividends level on Croatian capital market. So the research objective was to explore the correlation between free cash flow and amount of total paid dividends. The research was conducted on the 40 companies from the Croatian capital market by using static unbalanced panel data analysis. The research result shows that free cash flow is a significant determinant of dividends and that greater free cash flow resulting with higher dividends. The obtained data shows that free cash flow statistically significantly affects the amount of the total paid dividends at the 1% level. The free cash flow is positively correlated with the amount of total paid dividends and show if the free cash flow increased by 1,00 kn the amount of total paid dividend will rise for 0,078 kn. This paper implied the crucial role of free cash flow in the determination of dividends level.