Journal of Business and Tourism Volume 04 Number 01

January – June, 2018

Impact of Dividend Policy on Shareholders’ Wealth: An

Empirical Analysis of Listed Insurance
Companies in Pakistan
MUHAMMAD SHABEER KHAN
MS Scholar, Department of Management Sciences
University of Swabi, K.P.K, Pakistan
[email protected]

DR. SAID SHAH

Assistant professor, Department of Management Sciences
University of Swabi, K.P.K, Pakistan

SYEDA UROOJ BABER

Lecturer, Department of Management Sciences
University of Swabi, K.P.K, Pakistan

Abstract
This study aims to investigate the impact of dividend policy on shareholders’ wealth
using secondary data of 17 listed insurance companies in Pakistan employing non-
probability convenience sampling for 2012-2015. Shareholders’ wealth is used as
dependent variable measured by earning per share whereas dividend policy as
independent variable measured by three ratios namely dividend per share, Retention
ratio and dividend payout ratio. Analysis techniques include descriptive statistics,
regression analysis and correlation analysis. The results show that all the independent
variables impact dependent variable positively with dividend per share and retention
ratio significant at 5%. Moreover study reveals that the theory of dividend irrelevancy
failed in the case of insurance industry of Pakistan.

Keywords: Dividend policy, Shareholders wealth, Earnings per share, Dividend payout,
Retention and Dividend per share

1. Introduction
Dividend policy has distinctive value in corporate world for the purpose to achieve
organizational objectives efficiently. According to Moyer (2001, p.19) “Dividend policy
determines the final distribution of the companies’ earnings between retention and cash
dividend payments of shareholders”. The retained earnings give financiers with a
wellspring of possible upcoming earning development, while dividend provides them a
present circulation. There is some common and basic dividend policies are mention such
as regular dividend policy, stable or constant dividend policy, no dividend policy and the
last one is irregular dividend policy. The issue has great importance in corporate world
that whether the firm earnings should be invested back in future favorable project or
should be distributed among stockholders. For solving this issue financial manager
extremely concentrated to find out that dividend policy which is more suitable to increase

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stockholders wealth as well as result in growth of corporation. Most of the shareholders

prefer cash dividend but at the same time they are also interested in the corporation
growth for capital appreciation which lead management to reinvest the firm earnings in
productive projects.
The financial managers are working as agent of owners’ in corporations, so the first
priority and objective of financial managers in organization to maximize wealth of
stockholders which demonstrate by the share market value. Dividend policy focus on two
decision functions, either to pay earnings as dividend or to reinvest in firm future
projects. Any change in dividend policy may have positively or negatively effects on firm
stock price. Higher payout ratio lead to higher quick cash flow to investors, which is
good, but higher payout also lead to lower future growth, which is bad for corporation
and also for investors in long term. The optimal dividend policy maintains balance
between these difference and increase market price of share which represents
maximization of shareholders wealth.
1.2 Problem Statement
Under financial management in corporate sector dividend policy has high preference.
There are different views about, how dividend policy affects shareholders wealth.
According to one view (Linter 1956; Fama 1969, p.19), the dividend policy has positive
relationship with the stockholders’ wealth, whereas another view (Miller & Modigliani
1961; Fischer & Scholes 1974, p.19/20) argued that shareholders’ wealth is not
influenced through dividend policy. So this review concentrates impact on stockholders’
wealth by dividend policy.
1.3 Objectives of the Study
The study has the following two main objectives:
 To discover the link of dividend policy with shareholders’ wealth in Pakistan
listed insurance industry.
 To scrutinize the influence on shareholders’ wealth by dividend policy in
Pakistan listed insurance industry.
1.5 GDP Comparison with Different Countries’ Insurance Sectors
At the end of 2014, the insurance industry of china contributed 2.98%, Germany 8.57%,
India 3.86%, Turkey 1.45%, USA 14.1%, and Indonesia 1.85% while the insurance
industry of Pakistan contributed 0.80 % in GDP (Express Tribune 2015).
2. Literature Review
Scrutinizing the influence on stockholders’ wealth by dividend policy, using earnings per
share as dependent and return on equity, dividend Payout ratio and dividend per share as
independent variables and based on 12 non-financial companies, and employing
correlation and regression as analysis technique, Balagobei (2015, p.18) found a positive
and significant relationship between dependent and independent variables. Likewise there
was also a robust impact represented of dividend per share toward shareholders’ wealth
through regression analysis. The study also suggested that dividend policy had created
valuable and robust impact on shareholders’ wealth as such there be a suitable and strong
dividend policy for promoting shareholders’ wealth and motivating investors toward
organization. Linter (1956, p.19) found positive relationship of dividend policy with
stockholders’ wealth and suggested dividend payment reduced investor uncertainty and
also increase share value.

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Ansar, et al. (2015, p.18) analyzed the relationship of dividend policy with stockholders’
wealth in Pakistani market. Study used 30 firms as a sample from such sectors, textile,
chemical and cement. The market price per share was used as dependent variable while
return on equity, retained earnings per share, lagged price, dividend per share were used
as independent variables and employee Multiple regression model for analysis. The
finding indicated positive and robust relationship of dividend policy with stockholders’
wealth. Gul et al., (2012, p.19) studied the association between dividend policy and
stockholders’ wealth. The study used multiple regression and stepwise regression models
which showed highly significant impact of dividend policy on shareholders’ wealth.
The investigated work intended to find out the influences on shareholders’ wealth from
dividend policy. With the help of quota random sampling tool, 10 listed companies were
chosen, out of 216 companies from different sectors during period of 2015. Data was
collected through questionnaires and ANOVA was applied for analyzing the data. After
analysis of various theories of dividend policy the finding showed that dividend policy
influenced the shareholders’ values in Nigeria, because investor preferred to present
dividend on future retention policy and capital appreciation. Further the findings
indicated that higher market share value depends upon higher dividend payment ratio and
vice versa (Ozuomba et al., 2016, p.19).The research study conducted by Amidu and
Abor (2006, p.18) for the purpose to discover the determining factors of dividend payout
ratio, with using Twenty firms as a sample during 1998-2003. It was found that dividend
payout policy has positive relationship with profitability, corporate tax and cash flow,
while other side dividend payout has negative relationship with sale growth, institutional
holding, market to book value and risk.
Pani (2008, p.19) tried to find out the association of stock price behavior with dividend
policy of the firm. The Sample contained six different firms of Bombay Stock Exchange
from interval of 1996 to 2006. It was found through fixed effect model that there was
positive relationship of retention ratio with stock return. Ilaboya & Aggreh (2013, p.19)
investigated the influence on stock price volatility by dividend policy. The study used 30
companies as a sample from Nigerian stock exchange during period of 2005 to 2011.
Finding presented long term debt, dividend yield and asset growth positive and
significant influence on share price volatility. Khan (2012, p.19) studied the relationship
of dividend announcement with share price. Fixed and Random effect model were used in
study. Thirty listed companies were chosen as a sample during 2001-2010. Finding
indicated positive significant association of share market value with profit after tax, stock
dividend and earnings per share. Long Lee, et al (2012, p.19) studied the effect of intra
industry cash dividend announcement for real estate investment trust of U.S. The research
study covered during 2001 to 2008 and used Short window event methodology. The
finding showed contagion effects of real estate investment trust dividend announcement.
Further contagion effect found higher in case of dividend decreasing event.
The study conducted to assess the association of dividend payment with ownership
structure in China Stock Exchange during 1997 to 1999; it was found that government
control firms interested to pay more dividend as compare to corporate control companies.
Further that multiple large shareholders’ corporations paid less dividend than without
multiple large shareholders firms. Besides that there was positive relationship of dividend
payout with ownership of the controlling stockholders (Zhao, 2012, p.20). Miller and

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Modigliani (1961, p.19) found, the share price and firms capital cost had not affected by
dividend policy and gave arguments that firm value only depend on earning power of the
firm and its assets risk. The Company added more risk by increasing the amount of debt
in case of paying dividend to stock holders.
Rahman and Nazim-ud-Din (2014, p.20) studied the relationship of dividend with share
price volatility and found negative insignificant impact of dividend announcement on
stock price volatility in the context of Bangladesh marketplace. Study conducted by Tahir
and Sarfaraz raja (2014, p.18) to scrutinize the impact on shareholders wealth by
dividend policy. Holding period yield was used as dependent variable and dividend
payout, price to earnings ratio, and BV/MV equity ratio were used as independent
variables. Through Convenience Sampling six companies were chosen as a sample from
oil and gas sector of Pakistan Stock Exchange. The dependent variable showed
insignificant link with independent variables.
The purpose of conducted research review to discover the relationship of dividend policy
with shareholders’ wealth. Finding showed highly significant influence of dividend per
share on market price per share as compare to retained earnings per share (Rehman 2015,
p.19).Intention of research review to studied the determining factor of dividend policy in
emerging market. The dividend payout ratio was used dependent variable and for
measuring independent variables used ratios namely agency cost, firm size, profitability,
Leverage ratio and growth. The 680 firms were used as a sample out of 978 firms from
Bursa Malaysia Stock Exchange during 2005 to 2009. There was significant relationship
found between dividend payout ratio and firm size, leverage and profitability (Mahdzan
et al., 2016, p.19).
Azhagaiah and Pria (2008, p.18) analyzed the link of dividend policy with stockholders’
wealth. The research review used 28 chemical companies as a sample during 1997-
2006.It was found significant impact on shareholders’ wealth by dividend policy. Amidu
(2007, p.18) tried to discover the impact of dividend policy on companies performance
and found that, dividend policy influence firm’s performance. The Return on equity and
growth in sale positively influenced from dividend policy, while dividend payout indicate
negative relationship with return on asset and leverage.
Maharshi and Malik (2015, p.19) tried to know the influence of dividend policy on
market value of shares and growths of Joint Stock Companies. The market price of share
was used as dependent variable and for measuring independent variable used four ratios;
namely dividend yield, retention ratio, Profit after tax and earning per share. The study
used 30 listed companies as a sample during 2011-2012. The outcome demonstrated that
share price volatility and dividend yield had strong relationship and also positively
associated, while other side share price volatility and assets growth indicated highly
negative relationship. The Study conducted for the purpose to estimate the association of
dividend policy with share price during 2007 to 2009. The finding demonstrated that
price earnings ratio and earnings per share were significant positive impact on stock price
and dividend yield revealed negative relationship with share price (NTUI Ponsian et al.,
2015, p.19).
The Purpose of conducted research review to discover the influence on share price by
dividend payment. In study Cal bank, Eco bank and Anglo Gold were randomly chosen
out of 36 firms from Ghana Stock Exchange during 2005 to 2009. The finding revealed

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that dividend payment positively affected on share price. Moreover dividend payment
was a components behind the increased of share demand in Ghana Stock Exchange
(Attah-Botchwey, 2014, p.19). Akif Shah and Noreen (2016, p.20) tried to assess the link
between dividend policy and stock price volatility, based on 50 dividend paying
companies out of 11 industries. They used stock price volatility dependent variable and
dividend payout and dividend yield as independent variables. The verdict indicated
dividend yield and dividend payout negative significant influenced on share price
volatility.
Iqbal, et al (2014, p.19) studied the influence on share price by dividend. The study used
dependent variable market value of share and for measuring independent variable used
ratios namely; profitability, dividend payout, price earnings, earnings per share, return on
equity, retention ratio and dividend yield. The study chosen 30 companies as a sample
and employee multiple ordinary least square model. The research indicated dividend
yield and price earnings negative significant impact on market value of stock price, while
all other variables showed positive significant influence on market value of share. Alim
et al., (2014, p.18) studied the impact on stockholders’ wealth by dividend policy during
2001-2010, found that dividend policy positive and significant influenced on
shareholders’ wealth in the Pakistan textile industry.
2.2 Conceptual Framework
Conceptual Framework in figure 1 indicates the main theme of current research
work.

2.3 Hypotheses
Keeping in view the above; this study tests the following hypotheses.
1
H : The impact of dividend per share on earnings per share is positive and significant in
Pakistani insurance sector.
H2: The influence of retention ratio on earnings per share is positive and significant in
Pakistani insurance industry.
H3: The influence of dividend payout ratio on earnings per share is positive and
significant in Pakistani insurance industry.

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3. Methodology
3.1 Research Design
The study uses the quantitative casual correlational research design and employed panel
study in longitudinal research for the purpose of data analysis.
3.2 Data Collection
This study uses secondary data collected from Pakistan stock exchange and official
websites of sample companies. The study collect data about variables form the audited
annual reports and financial statements of companies.
3.3 Target Population
The target population of research is insurance companies listed on Pakistan Stock
Exchange for the period 2012-2015.
3.4 Sampling
The Pakistan stock exchange has 35 sectors representing 578 companies in 2016. The
insurance sector of Pakistan stock exchange has total 32 companies, which is net
population of present research study. In this population 17 companies are choses through
convenience sampling during 2012 to 2015 which shown in table1.
Table 1: Sample companies of present study
No Listed insurance companies names No Listed insurance companies names
1 Pakistan Reinsurance Company 10 Atlas Insurance Limited
Limited
2 The United Insurance Company of 11 East West Insurance Company
Pak Ltd Limited
3 Cyan Limited 12 Adamjee Insurance Company
Limited
4 Jubilee General Insurance Company 13 IGI Insurance Limited
Ltd
5 EFU General Insurance Limited 14 IGI life Insurance Limited
6 Habib Insurance Company Limited 15 Askari General Insurance Company
Ltd
7 Century Insurance Company Limited 16 Asia Insurance Company Limited
8 Pakistan General Insurance Company 17 Silver Star Insurance Co. Limited
Ltd
9 Reliance Insurance
3.5. Econometric Model of present study
EPS = α + β1DPS+ β2 DPR+ β3 RR+ u
Whereas: α: is the y – intercept; u mean regression residual and β represent the slop of
coefficient.
3.6. Measuring techniques of study
Table 2 shows variables and their measurement for current study.
Table 2: show variables and their measurement for current study.
Variable types Variable Measurement Abbreviations
No Dependent variable Earnings per Net profit after tax/No. EPS
share of ordinary share
1 Independent Dividend per Dividend/ No. of DPS
Variables share ordinary share

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2 Dividend yearly dividend per DPR

payout ratio share/earning per share
3 Retention ratio Net income-dividend/net RR
income
4. Data Analysis and Findings
4.1 Descriptive Analysis
Table 3: Represents the result of descriptive statistics
N Minimum Maximum Mean Standard.
Deviation

EPS 17 1.21 16.36 5.7601 4.52430

DPS 17 0.25 5.88 2.4920 1.80378

DPR 17 0.16 3.46 0.6132 0.75847

RR 17 0.18 0.84 0.5666 0.18258

Valid N 17
(listwise)

The above table 3 represents the result of descriptive statistics in which the values of
earnings per share have 1.21 of minimum and 16.7601 of maximum rupees with 5.7601
mean and 4.52430 of Standard deviation. Likewise each study variable shows their
minimum, maximum, mean and standard deviation value in various study years.
4.2 Correlation analysis
Table 4: shows the correlation result
EPS DPS DPR RR

EPS Pearson Correlation 1 .821** -.070 -.099

Sig. (2-tailed) .000 .788 .704

N 17 17 17 17
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
The above table four shows positive significant correlation between EPS and DPS,
besides that dividend payout and retention have negative insignificant correlation with
earning per share.

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4.3 Regression Analysis

Table 5: show result of regression coefficient
Variables coefficient Std. Beta t-statistics P Collinearity
Error value Statistics
Tolerance VIF

C -8.353 2.910 -2.870 0.013

DPS 2.742 0.331 1.093 8.273 0.000 0.684 1.462
DPR 0.208 0.752 .035 0.276 0.787 0.752 1.330

RR 12.624 3.687 0.509 3.424 0.005 0.539 1.855

Dependent Variable: EPS

In above table 5, the coefficient of DPS indicates positive significant impact on
dependent variable because P value for DPS is less than (<.05), that means if 1 unit
change occurs in dividend per share then 2.742 unit variations bring in earning per share.
Likewise coefficient of RR also indicates positive significant impact on dependent
variable because P value for RR is also less than ( <.05), which means 1 unit change in
retention ratio brings 12.624 unit variation in earning per share, while DPR indicates
insignificant impact on dependent variable. Beside that VIF test shows that, there is no
multicollinearity problem.
4.4 Model Summary and ANOVA
Table 6: show the result of Model Summary and ANOVA
R-squared Adjusted R- Durbin- F- statistics Sig
squared Watson
0.845 0.809 2.375 23.586 0.000
The above table 6 shows that R2 of the model is 0.84, which denotes that 84% of the
aggregate variance in dependent factor is caused through the change of all the
independent variables, thus shows the overall powerful strength of the model. Moreover,
value of the adjusted R2 is 0.809, which states that 80% of variation described by
independent variables in dependent variable, and also the Durbin-Watson show no
autocorrelation issue. Besides that The regression model in ANOVA table has good fitted
the data because the F- statistics in econometric model is significant at one percent level
of significance, which demonstrating that overall regression model is statistically
significant predicted the dependent variable, F(3,13)=23.586,P<.0005.
4.5 Hypotheses testing summary
Table 7: Represents Hypotheses testing summary
No Hypotheses Methods Outcome
H1 The impact of dividend per share on earnings per share Regression Accepted
is positive and significant in Pakistani insurance sector. Analysis
H2 The influence of retention ratio on earnings per share is Regression Accepted
positive and significant in Pakistani insurance industry. Analysis

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H3 The influence of dividend payout ratio on earnings per Regression Rejected

share is positive and significant in Pakistani insurance Analysis
industry.
In above table 7, H1 and H2 hypotheses are accepted because the regression test shows
positive significant impact of dividend per share and retention on shareholders’ wealth.
Besides that the H3 hypothesis is rejected due to insignificant impact found of dividend
payout on earnings per share.
5 Discussion
Influence of dividend policy on shareholders’ wealth has been discussed through
different researchers in various countries, but still it’s a big issue for financial managers
and also for board of directors in corporate sector. The basic aim of financial managers in
corporation to maximize shareholders’ wealth, and for this purpose they try to find out
the best indicator through which investors attract toward them organization and also
beneficial for their organization in short and long term. Therefore the finding of current
study recommends that the dividends per share and retention ratio are best indicators for
financial manager in maximizing shareholders’ wealth. Because the retention ratio and
dividend per share both have positive and significant impact on shareholders’ wealth, it
means that the investors in Pakistan insurance industry consider dividend per share as a
quick source of profit for themselves, as well they are interested in organization growth
because they also prefer capital appreciation with cash dividend. So the finding indicates
that organization needs to formulate that type dividend policy in which they handle
consistently both elements of dividend policy such as dividend and retained earnings, it
will help for attracting investors toward organization, maximization shareholders’ wealth
and beneficial for long term growth of organization.
5.1 Conclusion
The current study has been completed which started under the intent, to find out the
influences on shareholders’ wealth by dividend policy in Pakistan insurance industry. The
research achieves two main objectives, the impact and relationship of dividend policy
with shareholders’ wealth. The correlation test demonstrates significant positive link of
earnings per share with dividend per share, while the regression analysis also represents
positive significant impacts on earning per share by dividend per share. The finding of
dividend per share is supported previous works like as Azhagaiah & priya (2008) Ansar
et al, (2015) and Balagobei (2015). In the remaining two ratios the retention ratio has
positive significant impact on earnings per share which is also supported the previous
study of Ansar et al, (2015), and dividend payout ratio has positive insignificant impact
on shareholders’ wealth and also negative insignificant correlated with shareholders’
wealth which is supported the study of Tahir and Sarfaraz raja (2014) and NTUI Ponsian,
et al (2015). Furthermore the finding indicates that the theory of dividend irrelevancy
failed in the case of insurance industry of Pakistan stock exchange. Base on finding the
corporation need to formulate such dividend policy which give equal preference to
dividend and retained earnings in organization because the investors of Pakistan
insurance industry prefer dividend as well as they are interested in capital gain.
5.2 Implications of Study
The findings of study is especially beneficial for financiers, directors, senior managers,
policy makers and research students. The retention ratio and dividend per share are

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different in nature with each other. But the outcome of current research show positive and
significant relationship of retention ratio and also dividend per share with shareholders’
wealth, which simple mean investors prefer current profit as well as interested in capital
appreciation. Therefore it’s essential for corporations to formulate that kind dividend
policy which meet the existing and also upcoming expectation of the financiers. Further,
study contributes theoretically and empirically knowledge for academicians through
finding the influence on shareholders’ wealth by dividend policy in Pakistani insurance
sector. Thus, it will provide worthwhile help to academicians in future research in
Pakistan as well as any abroad country.
5.3 Limitations of study
Generalization: The findings of current study are limited to only insurance industry so
therefore the result may not be generalized to all Pakistan stock exchange listed
companies.
Time Constraint: The span of the research is not sufficient to pay in-depth attention the
different financial aspects of the insurance companies
Period of Analysis: The time of four financial years utilize for the investigation are not
ample to finish up about all the perspective.
Wide Area to Study: This study has wide range but could not be cover entirely due to
the shortage of time and resources.
Secondary Data: The data utilizes for the analysis are secondary in nature which has
taken from the annual reports of the Sample Companies.
5.4 On the basis of the findings of the study, we recommend future research as
under
The upcoming research is suggested to extend the range of current study in the country as
well as extended study to other country. This comparative study will be worthwhile
especially for multinational corporations in the world by knowing the behavior of
dividend policy with shareholders’ wealth in different nation’s financial or manufacturing
sectors.

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