The Effect of Dividend Bubble on Share Price: A Case of Nepalese Commercial Banks

Abstract

This study examines the effect of dividend bubble on share price of Nepalese commercial banks. The market prices per share, dividend per share and dividend yield are dependent variables whereas earnings per share, dividend payout, return on assets, return on equity, size and leverage are independent variables. The study is based on 14 commercial banks of Nepal from 2007 to 2014, leading to a total of 112 observations. The data are collected from Banking and Financial Statistics and Bank Supervision Report published by Nepal Rastra Bank, annual report of Nepal Stock Exchange and the annual reports of the selected banks. The regression models are estimated to test the significance and effect of dividend bubble on share price of Nepalese commercial banks. The study reveals that dividend payout ratio and firm size are positively related to market price per share, dividend per share and dividend yield. It indicates that higher the dividend payout and firm size, higher would be the market price per share, dividend per share and dividend yield. Likewise, the result shows that return on assets and earnings per share are positively related to the market price per share and dividend per share. Similarly, the leverage ratio has positive relation with market price per share and dividend per share which indicates that higher the leverage, higher would be the market price per share and dividend per share. Moreover, return on equity has positive relation with market price per share. The result also shows that EPS and ROA have significant positive impact on MPS and DPS. However, ROE has negative impact on dividend yield. The beta coefficients for leverage and return on equity are significant at 5 percent level of significance.