Effect of Dividend Policy on Stock Prices

Adnan Ali,Ilyas Sharif,Farzand Ali Jan

doi:10.31580/jmi.v6i1.47

Abstract

This investigates the effect of dividend policy on stock prices. Objective of the study is to see if there exists any relationship between dividend policy and stock prices. We analyzed 45 non-financial companies listed on KSE-100 index that have earned profits and paid dividend for a period of twelve-year w.e.f. 2001. Technique adopted for sampling adopted is convenience sampling. As the nature of data is panel therefore, pooled regression, fixed and random effect tests are run. Random effect results are focused after applying Hausmanâ€™s test. Regression Results witness that Dividend per Share and Retention Ratio have an insignificant relationship with Share Market Prices. Dividend Payout Ratio has a significant positive relationship with Share Prices as supported by the Bird in hand theory suggested that owners give preference to a dollar of estimated dividends over a likely dollar of capital gains. Profit after tax, Earning per share and Return on Equity are the three control variables. Profit after Tax has insignificant relation to Stock Prices. Earnings per Share have positive significant relation to Stock Prices. There is negative significant relation between Return on Equity and Share Prices. It is recommended that firms in the sample should regularly pay dividend as it will cause an upward movement in the stock market prices, whereas profit retention by firms will result in a decrease in the value of the stock market prices.

Highlights

Dividend policy has been among the very important topics in financial management since the coming into existence of Corporation form of business
Though Ahmad and Javaid (2009) explored the factors of dividend policy by selecting a sample of 320 firms enlisted at Karachi Stock Exchange for six years starting from 2001
Akbar and Baig (2010) selected 79 firms scheduled at Karachi Stock Exchange (KSE) for four years starting from 2004 to realize the impact of di vided declaration on stock prices

Summary

Introduction

Dividend policy has been among the very important topics in financial management since the coming into existence of Corporation form of business. Lintner (1956) was pioneer to work on dividend policy. He inquired about the factors that affect the size, shape and dividend payment timing. Later on Miller and Modigliani (1961) found that there exists no relationship between the dividend and the value of any firm; rather investment policy can exclusively affect the value of the firm. Gordon (1963) proved that dividend policies cause a change in the firm value and is an indication for the prospectincomes (Baskin, 1989). Dividend policy affects a number of things, e.g. duration, rate of return, arbitrage pricing along with information effect. This study focuses on “Impact of dividend policy on stock price.”. In case of stable dividend policy dividends, stock will have a short term duration. As per Gordon Growth Model predictions, more dividend will show less response to changes in the value of discount rates and as a result show the lower price explosiveness

Objectives

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Conclusion