Effect of Dividend Policy on Stock Prices
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Published:
Mar 31, 2017
Keywords:
Dividend Policy, Stock Price.
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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 Hausman’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.
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Effect of Dividend Policy on Stock Prices. (2017). Journal of Management Info, 4(1), 19-28. https://doi.org/10.31580/jmi.v6i1.47
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Research Article
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How to Cite
Effect of Dividend Policy on Stock Prices. (2017). Journal of Management Info, 4(1), 19-28. https://doi.org/10.31580/jmi.v6i1.47
References
Adefila et al. (2004). The Effect of Dividend Policy on the Market Price of Shares in Nigeria: Case Study of Fifteen Quoted Companies. International Journal of Accounting. University of Ado-Ekiti. 2 (1):1-10.
Adefilaet al., (2004). The Effect of Dividend Policy on the Market Price of Shares in Nigeria: Case Study of Fifteen Quoted Companies. International Journal of Accounting. University of Ado-Ekiti. 2 (1):82-91.
Adesola, W. A. and A. E. Okwong. (2009). An Emparical Study of Dividend Policy of Quoted Companies in Nigeria. Global Journal of Social Sciences. 8 (1):85-101.
Afza, T. and H. H. Mirza, (2010). Ownership Structure and Cash Flows As Determinants of Corporate. International Business Research. 3(3): 210-221.
Ahmed, H. and Javid, A. (2009). Dynamics and Determinants of Dividend Policy in Pakistan (Evidence from Karachi Stock Exchange Non-Financial Firms). International Journal of Finance and Economics. 25: 148-171.
Akbar, M and Baig, H. H. Summer (2010). Reaction of Stock Prices to Dividend Announcements and Market Efficiency in Pakistan. The Lahore Journal of Economics. 15(1):103-125.
Allen, D. E. and V. S. Rachim, (1996). Dividend Policy and Stock Price Volatility: Australian Evidence. Applied Financial Economics. 6 (2):175-188.
Al-Kuwari, D. (2010). To Pay or Not to Pay: Using Emerging Panel Data to Identify Factors Influencing Corporate Dividend Payout Decisions. International Research Journal of Finance and Economics. 42, 19-36.
Amidu, M. (2007). How does dividend policy affect firm performance? A Ghanaian Case. Investment management and Financial innovations. 4(2):103-112.
Anand, M. (2008). Factors Influencing Dividend Policy Decisions of Corporate India. The ICFAI Journal of Applied Finance. 10 (2):5-16.
Asquith, P. and D. Mullins. (1983). The impact of initiating dividends on shareholder wealth, Journal of Business. 56: 77-96.
Baker, H. K. et al., (2002). Revisiting Managerial Perspectives on Dividend Policy. Journal of Economics and Finance. (26):267-283.
Baker. et al., (2006)In search of a residual dividend policy. Review of Financial Economics. (15): 1-18.
Barclay, M.J., and C.W. Smith. (1995). Financial Architecture: Leverage, Maturity and Priority, Journal of Applied Corporate Finance. 8(4): 4-17.
Baskin, J. (1989). Dividend Policy and the Volatility of Common Stock. Journal of Portfolio
Management. 3 (15):19-25.
Benartzi, S. et al., (1997). Do Changes in Dividends Signal the Future or the Past? Journal of Finance. 3 (52):1007-1034.
Black, F., and M. Scholes. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy. 81 (3): 637–654.
Black, F. and M. Scholes. (1974).The Effects of Dividend Yield and Dividend Policy on
Common Stock Prices and Returns. Journal of Financial Economics. 1 (1):1-22.
Capstaff, J. et al., (2004). Share Price Reaction to Dividend Announcements: Empirical Evidence on the Signaling Model from the Oslo Stock Exchange. Multinational finance Journal. 8 (1 & 2):115-139.
Chen, D.-H. et al. (2009). The Announcement Effect of Cash Dividend Changes on Share Prices: An Empirical Analysis of China. The Chinese Economy. 42(1): 62-85.
Chen, G.et al. (2002). The Information Content of Concurrently Announced Earnings, Cash Dividends, and Stock Dividends: An Investigation of the Chinese Stock Market. Journal of International Financial Management and Accounting. 2 (13):101-124.
Chen, J. and N. Dhiensiri. (2009). Determinants of Dividend Policy: The Evidence from New Zealand. International Research Journal of Finance and Economics. (34):18-28.
Chen, D.-H., Huang, H.-H. L., & Cheng, T. (2009). The Announcement Effect of Cash Dividend Changes on Share Prices: An Empirical Analysis of China. The Chinese Economy, 42 (1), 62-85.
Davis, J. S. (1917). Essays in the Earlier History of American Corporations (1-2). Cambridge: MA: Harvard University Press.
DeAngelo, H. and L.DeAngelo. (2007). Payout policy pedagogy: what matters and why? European Financial Management. 13(1): 11-27.
Denis, D. J. and I. Osobov. (2008). Why Do Firms Pay Dividends? International Evidence on the Determinants of Dividend Policy. Journal of Financial Economics. 89 (1):62-82.
Dong, M. et al., (2005). Why Individual Investors Want Dividends. Journal of Corporate Finance. 1 (12):121-158.
Easterbrook,F.H. (1984). Two agency-cost explanations of dividends. The American Economic Review, (74): 650-9.
Gorden, M. J. (1963). Optimal Investment and Financing Policy. The Journal of Finance. 18 (2):264-272.
Gordon, M.J. and Shapiro, E. (1956). Capital equipment analysis: the required rate of profit. Management Science, Vol. 3: 102-10.
Ho, H. (2002). Dividend policies in Australia and Japan. International Advances in Economics.2 (9):91-100.
Hussainey, K. et al., (2011). Dividend Policy and Share Price Volatility: UK Evidence. Journal of Risk Finance. 12 (1):57-68.
Jensen, M. and W. Meckling. (1976). Theory of the firm: Managerial behavior, agency costs, and wnership structure. Journal of Financial Economics 3(4): 305-60.
John, K. and J. Williams. (1985). Dividends, Dilution and Taxes: A Signaling Equilibrium. Journal of Finance. 4 (40):1053-1070.
Kaen and F.R. (2003). A blueprint for corporate governance: strategy, accountability, and the preservation of shareholder value. New York: AMACOM.
Khan, A. and K. Khan. (2011). Dividend Policy and Stock Prices – A Case of KSE-100 Index Companies.
Kakar, P., Raziq, A., & Khan, F. (2015). Impact of Human Resource Management Practices on Employee Retention: A Case of Banking Sector in Quetta Baluchistan. Journal Of Management Info, 5(1).
Khan, K. I. (2011). Effect of Dividends on Stock Prices– A Case of Chemical and Pharmaceutical Industry of Pakistan University of Central Punjab, Lahore. 6(6): 969- 978.
Khan, F., Rasli, A. M., Khan, S., Yasir, M., & Malik, M. F. (2014). Job Burnout and Professional Development among Universities Academicians. Science International Lahore, 26(4), 1693-1696.
Khan, N.U. (2011). Dividend policy and the stock market reaction to dividend announcements in PakistanUniversity of Dundee UK. 120-123.
Ling, F. S. et al., (2008). Dividend Policy: Evidence From Public Listed Companies in Malaysia. International Review of Business Research Papers. 4 (4):208-222.
Lintner, J. (1956). Distribution of Incomes of Corporations Among Dividends, Retained Earnings, and Taxes. American Economic Review. 46: 97-113.
Liu, S., and Y. Hu. (2005). Empirical Analysis of Cash Dividend Payment in Chinese Listed Companies. Nature and Science. 1 (3): 65-70.
Maditinos, D. I. et al., (2007). Individual Investors’ Perceptions towards Dividends: The Case of Greece. International Journal of Monetary Economics and Finance. 1 (1):18-31.
Malik, M. F., Khan, S., Khan, M. I., & Khan, F. (2014). Interest Rate and Its Effect on Bank’s Profitability. J. Appl. Environ. Biol. Sci, 4(8S), 225-229.
Miller, M. H. and F. Modigliani. (1961). Dividend Policy, Growth and Valuation of shares.
Journal of Business . 4 (34): 411-433
Miller, M. H. and K. Rock. (1985). Dividend Policy Under Asymmetric Information. The Journal of Finance. 40 (4): 1031-1051.
Myers, M. and F. Bacon, (2004). The Determinants of Corporate Dividend Policy. Academy of Accounting and Financial Studies Journal. 3 (8):17-28.
Naeem, S. and M. Nasr, (2007). Dividend Policy of Pakistani Firms: Trends and Determinants. International Review of Business Research Papers. 3(3): 242-254.
Nazir, et al., (2010). Determinants of Stock Price Volatility in Karachi Stock Exchange: The Mediating Role of Corporate Dividend Policy. International Research Journal of Finance and Economics (55): 100-107.
Nishat, M. (1992). Share Prices, Dividend and Retained Earnings Behavior in Pakistan Stock Market. The Indian Economic Journal. 40 (2): 57-65.
Nishat, M. (1995). Determinants of stock prices in Pakistan. International Journal of Development Banking. 13(2): 37-42.
Nishat, M. (1999). The Impact of Institutional Development on Stock Prices in Pakistan. Doctoral Dissertation, Auckland Business School, University of Auckland.
Nishat, M. (2001). Industry risk premia in Pakistan. Pakistan Development Review. 40 (4): 929-952.
Nishat, M., and C. M. Irfan, (2003). Dividend Policy and Stock Price Volatility in Pakistan. 11thPacific Basin Finance, Economics and Accounting Conference.
Nishat, M. and N. Bilgrami. (1994). Who pays dividend - An exploratory analysis of firms listed with Karachi stock market", Saving and Development. (3): 17.
Pani, U. (2008). Dividend Policy and Stock Price Behaviour in Indian Corporate Sector: A panel data approach. Retrieved from Indian Institute of Technology: http://ssrn.com/abstract=1216171
Pradhan, R. S. (2003). Effects of Dividends on Common Stock Prices: The Nepalese Evidence. Research in Nepalese Finance. 1-13.
Raballe, J., and J. S. Hedensted. (2008). Dividend Determinants in Denmark. Retrieved from: http://papers.ssrn.com
Rashid, A., and A.Z.M.A. Rahman. (2009). Dividend Policy and Stock Price Volatility: Evidence from Bangladesh. Journal of Applied Business and Economics. 71-81.
Rozeff, M. (1982). Growth, beta and agency costs as determinants of dividend payout ratios. Journal of Financial Research 5(3): 249- 259.
Travlos, N. et al., (2001). Shareholder Wealth Effects of Dividend Policy Changes in an Emerging Stock Market: The Case of Cyprus. Multinational Finance Journal. 5 (2):87-112.
Uddin, M. H. and G. M.Chowdhury. (2005). Effects of Dividend Announcement on Shareholders’ Value: Evidence from Dhaka Stock Exchange. Journal of Business Research. 7:61-72.
Yasir, Habib et al (2012). Dividend Policy and Share Price Volatility: Evidence from Pakistan. Global Journal of Management and Business Research, 12(5)
Adefilaet al., (2004). The Effect of Dividend Policy on the Market Price of Shares in Nigeria: Case Study of Fifteen Quoted Companies. International Journal of Accounting. University of Ado-Ekiti. 2 (1):82-91.
Adesola, W. A. and A. E. Okwong. (2009). An Emparical Study of Dividend Policy of Quoted Companies in Nigeria. Global Journal of Social Sciences. 8 (1):85-101.
Afza, T. and H. H. Mirza, (2010). Ownership Structure and Cash Flows As Determinants of Corporate. International Business Research. 3(3): 210-221.
Ahmed, H. and Javid, A. (2009). Dynamics and Determinants of Dividend Policy in Pakistan (Evidence from Karachi Stock Exchange Non-Financial Firms). International Journal of Finance and Economics. 25: 148-171.
Akbar, M and Baig, H. H. Summer (2010). Reaction of Stock Prices to Dividend Announcements and Market Efficiency in Pakistan. The Lahore Journal of Economics. 15(1):103-125.
Allen, D. E. and V. S. Rachim, (1996). Dividend Policy and Stock Price Volatility: Australian Evidence. Applied Financial Economics. 6 (2):175-188.
Al-Kuwari, D. (2010). To Pay or Not to Pay: Using Emerging Panel Data to Identify Factors Influencing Corporate Dividend Payout Decisions. International Research Journal of Finance and Economics. 42, 19-36.
Amidu, M. (2007). How does dividend policy affect firm performance? A Ghanaian Case. Investment management and Financial innovations. 4(2):103-112.
Anand, M. (2008). Factors Influencing Dividend Policy Decisions of Corporate India. The ICFAI Journal of Applied Finance. 10 (2):5-16.
Asquith, P. and D. Mullins. (1983). The impact of initiating dividends on shareholder wealth, Journal of Business. 56: 77-96.
Baker, H. K. et al., (2002). Revisiting Managerial Perspectives on Dividend Policy. Journal of Economics and Finance. (26):267-283.
Baker. et al., (2006)In search of a residual dividend policy. Review of Financial Economics. (15): 1-18.
Barclay, M.J., and C.W. Smith. (1995). Financial Architecture: Leverage, Maturity and Priority, Journal of Applied Corporate Finance. 8(4): 4-17.
Baskin, J. (1989). Dividend Policy and the Volatility of Common Stock. Journal of Portfolio
Management. 3 (15):19-25.
Benartzi, S. et al., (1997). Do Changes in Dividends Signal the Future or the Past? Journal of Finance. 3 (52):1007-1034.
Black, F., and M. Scholes. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy. 81 (3): 637–654.
Black, F. and M. Scholes. (1974).The Effects of Dividend Yield and Dividend Policy on
Common Stock Prices and Returns. Journal of Financial Economics. 1 (1):1-22.
Capstaff, J. et al., (2004). Share Price Reaction to Dividend Announcements: Empirical Evidence on the Signaling Model from the Oslo Stock Exchange. Multinational finance Journal. 8 (1 & 2):115-139.
Chen, D.-H. et al. (2009). The Announcement Effect of Cash Dividend Changes on Share Prices: An Empirical Analysis of China. The Chinese Economy. 42(1): 62-85.
Chen, G.et al. (2002). The Information Content of Concurrently Announced Earnings, Cash Dividends, and Stock Dividends: An Investigation of the Chinese Stock Market. Journal of International Financial Management and Accounting. 2 (13):101-124.
Chen, J. and N. Dhiensiri. (2009). Determinants of Dividend Policy: The Evidence from New Zealand. International Research Journal of Finance and Economics. (34):18-28.
Chen, D.-H., Huang, H.-H. L., & Cheng, T. (2009). The Announcement Effect of Cash Dividend Changes on Share Prices: An Empirical Analysis of China. The Chinese Economy, 42 (1), 62-85.
Davis, J. S. (1917). Essays in the Earlier History of American Corporations (1-2). Cambridge: MA: Harvard University Press.
DeAngelo, H. and L.DeAngelo. (2007). Payout policy pedagogy: what matters and why? European Financial Management. 13(1): 11-27.
Denis, D. J. and I. Osobov. (2008). Why Do Firms Pay Dividends? International Evidence on the Determinants of Dividend Policy. Journal of Financial Economics. 89 (1):62-82.
Dong, M. et al., (2005). Why Individual Investors Want Dividends. Journal of Corporate Finance. 1 (12):121-158.
Easterbrook,F.H. (1984). Two agency-cost explanations of dividends. The American Economic Review, (74): 650-9.
Gorden, M. J. (1963). Optimal Investment and Financing Policy. The Journal of Finance. 18 (2):264-272.
Gordon, M.J. and Shapiro, E. (1956). Capital equipment analysis: the required rate of profit. Management Science, Vol. 3: 102-10.
Ho, H. (2002). Dividend policies in Australia and Japan. International Advances in Economics.2 (9):91-100.
Hussainey, K. et al., (2011). Dividend Policy and Share Price Volatility: UK Evidence. Journal of Risk Finance. 12 (1):57-68.
Jensen, M. and W. Meckling. (1976). Theory of the firm: Managerial behavior, agency costs, and wnership structure. Journal of Financial Economics 3(4): 305-60.
John, K. and J. Williams. (1985). Dividends, Dilution and Taxes: A Signaling Equilibrium. Journal of Finance. 4 (40):1053-1070.
Kaen and F.R. (2003). A blueprint for corporate governance: strategy, accountability, and the preservation of shareholder value. New York: AMACOM.
Khan, A. and K. Khan. (2011). Dividend Policy and Stock Prices – A Case of KSE-100 Index Companies.
Kakar, P., Raziq, A., & Khan, F. (2015). Impact of Human Resource Management Practices on Employee Retention: A Case of Banking Sector in Quetta Baluchistan. Journal Of Management Info, 5(1).
Khan, K. I. (2011). Effect of Dividends on Stock Prices– A Case of Chemical and Pharmaceutical Industry of Pakistan University of Central Punjab, Lahore. 6(6): 969- 978.
Khan, F., Rasli, A. M., Khan, S., Yasir, M., & Malik, M. F. (2014). Job Burnout and Professional Development among Universities Academicians. Science International Lahore, 26(4), 1693-1696.
Khan, N.U. (2011). Dividend policy and the stock market reaction to dividend announcements in PakistanUniversity of Dundee UK. 120-123.
Ling, F. S. et al., (2008). Dividend Policy: Evidence From Public Listed Companies in Malaysia. International Review of Business Research Papers. 4 (4):208-222.
Lintner, J. (1956). Distribution of Incomes of Corporations Among Dividends, Retained Earnings, and Taxes. American Economic Review. 46: 97-113.
Liu, S., and Y. Hu. (2005). Empirical Analysis of Cash Dividend Payment in Chinese Listed Companies. Nature and Science. 1 (3): 65-70.
Maditinos, D. I. et al., (2007). Individual Investors’ Perceptions towards Dividends: The Case of Greece. International Journal of Monetary Economics and Finance. 1 (1):18-31.
Malik, M. F., Khan, S., Khan, M. I., & Khan, F. (2014). Interest Rate and Its Effect on Bank’s Profitability. J. Appl. Environ. Biol. Sci, 4(8S), 225-229.
Miller, M. H. and F. Modigliani. (1961). Dividend Policy, Growth and Valuation of shares.
Journal of Business . 4 (34): 411-433
Miller, M. H. and K. Rock. (1985). Dividend Policy Under Asymmetric Information. The Journal of Finance. 40 (4): 1031-1051.
Myers, M. and F. Bacon, (2004). The Determinants of Corporate Dividend Policy. Academy of Accounting and Financial Studies Journal. 3 (8):17-28.
Naeem, S. and M. Nasr, (2007). Dividend Policy of Pakistani Firms: Trends and Determinants. International Review of Business Research Papers. 3(3): 242-254.
Nazir, et al., (2010). Determinants of Stock Price Volatility in Karachi Stock Exchange: The Mediating Role of Corporate Dividend Policy. International Research Journal of Finance and Economics (55): 100-107.
Nishat, M. (1992). Share Prices, Dividend and Retained Earnings Behavior in Pakistan Stock Market. The Indian Economic Journal. 40 (2): 57-65.
Nishat, M. (1995). Determinants of stock prices in Pakistan. International Journal of Development Banking. 13(2): 37-42.
Nishat, M. (1999). The Impact of Institutional Development on Stock Prices in Pakistan. Doctoral Dissertation, Auckland Business School, University of Auckland.
Nishat, M. (2001). Industry risk premia in Pakistan. Pakistan Development Review. 40 (4): 929-952.
Nishat, M., and C. M. Irfan, (2003). Dividend Policy and Stock Price Volatility in Pakistan. 11thPacific Basin Finance, Economics and Accounting Conference.
Nishat, M. and N. Bilgrami. (1994). Who pays dividend - An exploratory analysis of firms listed with Karachi stock market", Saving and Development. (3): 17.
Pani, U. (2008). Dividend Policy and Stock Price Behaviour in Indian Corporate Sector: A panel data approach. Retrieved from Indian Institute of Technology: http://ssrn.com/abstract=1216171
Pradhan, R. S. (2003). Effects of Dividends on Common Stock Prices: The Nepalese Evidence. Research in Nepalese Finance. 1-13.
Raballe, J., and J. S. Hedensted. (2008). Dividend Determinants in Denmark. Retrieved from: http://papers.ssrn.com
Rashid, A., and A.Z.M.A. Rahman. (2009). Dividend Policy and Stock Price Volatility: Evidence from Bangladesh. Journal of Applied Business and Economics. 71-81.
Rozeff, M. (1982). Growth, beta and agency costs as determinants of dividend payout ratios. Journal of Financial Research 5(3): 249- 259.
Travlos, N. et al., (2001). Shareholder Wealth Effects of Dividend Policy Changes in an Emerging Stock Market: The Case of Cyprus. Multinational Finance Journal. 5 (2):87-112.
Uddin, M. H. and G. M.Chowdhury. (2005). Effects of Dividend Announcement on Shareholders’ Value: Evidence from Dhaka Stock Exchange. Journal of Business Research. 7:61-72.
Yasir, Habib et al (2012). Dividend Policy and Share Price Volatility: Evidence from Pakistan. Global Journal of Management and Business Research, 12(5)