Abstract
Despite the growing debate on the stock price valuation, it has become a complex puzzle. Various theories, models and explanations have been provided to solve this confusing riddle. This study contributes to this debate by determining the relative importance of stock dividends and retained earnings regarding stock price valuation in Karachi Stock Exchange. Data for the analysis of this study were collected from the 66 nonfinancial companies that were included in KSE-100 index for a period from 2007 to 2010. This study found the evidence that dividends are more important variable than the retained earning regarding the explanatory power of stock prices in Karachi Stock Exchange. Practical implications are also provided in the study.
Highlights
The active debate on the stock prices was started after the publication of the work of John Burr Willams in 1938, who for the very first time proposed about stock prices and the function of the dividends instead of the profits ofHow to cite this paper: Tariq, A., et al (2014) Solving the Puzzle of Relative Importance of Dividends and Retained Earnings in Stock Valuation: A Case of Karachi Stock Exchange
The results indicated that dividend payout was not that important determinant of stock price of New York bank stocks, it strongly influenced on bank stocks of other groups
Turing towards the key point which is the determination of the relative importance of the dividends and retained earnings in prediction of the stock price, which would be determined by the relative higher coefficient value and t-statistic, we found that dividend has more influence over the stock price than retained earnings in all three Models
Summary
The active debate on the stock prices was started after the publication of the work of John Burr Willams in 1938, who for the very first time proposed about stock prices and the function of the dividends instead of the profits of. How to cite this paper: Tariq, A., et al (2014) Solving the Puzzle of Relative Importance of Dividends and Retained Earnings in Stock Valuation: A Case of Karachi Stock Exchange. Some conformed the explorations of the Williams (Walter [2], Lintner [3], Friend & Puckett [4]), while others (see, Miller & Modigliani [5]) provided different views. Scholars and practitioners could not develop a precise model to predict the accurate movements of the stock price in the stock exchanges. Dividends have yet been considered to be the most important determinant of the stock price (Khan [6])
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