Does Dividend Policy Determine Stock Price Volatility? (A Case Study of Malaysian Manufacturing Sector)

Abstract

The paper aims to investigate the association between dividend policy and stock price volatility in Malaysian context. The study used multiple regression analysis to explore the association between stock price volatility and both dividend payout ratio and dividend yield. On the basis of diagnostic tests, the study elaborates the results of random effect model. The result is in line with prediction showing that any increase in dividend payout will minimize the stock price volatility. As there is high correlation between dividend yield and dividend payout, the results showed positive and insignificant association between dividend yield and price volatility. The control variables are used in order to address the issue of multicollinearity and to observe if there would be any change in the coefficient of dividend yield. The results show that there is a significant change in dividend yield and the coefficient value changed into negative. Similarly, the results of other variables are also as per expectation. This explains the fact that dividend policy on its own is not the determining factor of price volatility. There are certain other factors that also contribute in measuring stock price volatility. As per results, firm’s size is also negatively associated with stock price volatility. The firms with high level of market capitalizations are better in managing their stock price volatility as compared to their counterpart. Moreover, the mature firms are also efficient in managing their stock prices and firm’s age is negatively associated with stock price volatility. In contrast, the debt ratio is negatively significant which shows that high levered firms have high volatile stock operating in market. Lastly, the earnings volatility shows insignificant effects on stock price volatility.