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Impact of Dividend
Impact of Dividend
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introDuCtion
Management science is different from the natural science in the sense
that it has multiple views on particular subject or point because individual
judgments, perceptions, and observations vary from one person to another.
Dividend policy is one of the topics which is much debated for many
decades, but some circumstances and facts have entangled the topic. Black
(1976), argued that dividend policy is like a puzzle with pieces that don’t
fit together, the more we look into it more we get confused (Brealey &
Myers, 2003). Describe that dividend policy is top ten difficult unsolved
issues of financial economics. When companies earn a profit, they have
two options, either to pay the dividend or to retain the amount for their
future project needs. Now the puzzle is, whether to pay the dividend or
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Memon, N.A., Channa, N., and Khoso, I.
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Impact of Dividend Policy on Market Prices of Shares
This study would help the managers of the firms of non-financial sectors
of Pakistan to formulate their policies regarding dividend issuance.
researCH oBJeCtiVes
There are numerous reasons to study dividend policy in Pakistan. Much
work has been done so far around the world, but the theoretical work is
done in Pakistan regarding dividend policy is unsubstantial, thus,
consequently need arises of a comprehensive evaluation of the impact of
dividend policy on the share prices in Pakistan. According to Federal
Board of Revenue (FBR), up to 2010, there was tax immunity on capital
gain in Pakistan, even though firms announced a dividend. So the question
arises why they announced dividend if there was tax immunity on the
capital gain. This invites us to investigate further on dividend policy in
Pakistan’s perspective. Most of the firms of these sectors continuously
announce a dividend, so it is to investigate the factors which influence
these sectors to announce dividend continuously. This research intends to
observe the impact of dividend policy, dividend payout and dividend yield,
on market price of shares of the non-financial firms during 2006 to 2015.
The impact is examined after controlling some variables such as growth
in assets, growth in earning, growth in sales, leverage, liquidity, profit
after tax, and the size of the firm.
literature reVieW
In past, many studies have been conducted in corporate finance
literature to explain the positive, negative or no relation between dividend
policy and stock prices. In this section, we would discuss reasonable
evidence conducted by the researchers across the world.
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Memon, N.A., Channa, N., and Khoso, I.
depends upon its earning ability and future activities. According to the
theory, under certain conditions, a shareholder can make their dividend
policy by purchasing and selling shares.
agency theory
This theory state that if the managers want to please the shareholders,
they should pay high dividend payouts to minimize the agency problem,
otherwise shareholders may think that their money may be wasted on
unnecessary project and compensation for the management.
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Impact of Dividend Policy on Market Prices of Shares
changes its stock, and hold stock which would satisfy their needs. As a
result of these changes, the stock price fluctuates in the market.
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Memon, N.A., Channa, N., and Khoso, I.
Data of 500 Indians’ firms were taken by Pani (2008). Their results
presented that stock prices were significantly affected by the dividend
retention ratio; size and debt to equity ratio. In another study, data of 73
firms were taken by Nazir, Abdullah and Nawaz (2012). A strong relation
was proved between dividend policy and prices of stock in Pakistan by
the researchers. Data of United kingdom firms were taken by Hussainey,
Oscar Mgbame, and Chijoke-Mgbame in 2011. A positive result was
identified between dividend payout and dividend yield whereas, a negative
result was identified between dividend payout and stock prices in their
study. Their results also proved that stock prices were also affected by
firm size, earning and debt ratio. Asghar, Shah, Hamid, and Suleman
(2011), studied on five sectors. Their findings disclosed that stock price
and firm size are significantly and positively affected by dividend payout
and yield. Data of 29 firms were taken by Khan (2012), from 2001 to 2010.
Results of the study revealed that the dividend, EPS, and PAT had a
positive impact on share prices, whereas RR and ROE had negative
insignificance impact on stock prices. Data of Zimbabwe’s firms were
taken by Jakata and Nyamugure (2012), their results revealed that there is
no significant change in share price due to dividend announcement and
the earnings per share also had no impact on stock prices. Thus , their
findings support dividend irrelevance theory. Data of Kenyan firms were
taken by Kenyoru, Kundu, and Kibiwott (2013). Their results showed that
there was a substantial relation of stock price volatility and dividend
policy in Kenya. Furthermore, data of 17 banks were taken by Nazir, Ali,
and Sabir (2014). Their research outcomes confirmed that there was a
definite relationship between stock prices and dividend policy in Pakistan.
Their findings also revealed that there was a negative relationship between
dividend payout and share prices. Moreover, there was a positive relation
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Impact of Dividend Policy on Market Prices of Shares
between asset growth, and stock prices and no significant effect was
identified between earning, leverage, and size with share price volatility.
Data of 11 firms was taken by Abrar-ul-haq, Akram, and Imdad Ullah in
2015. According to their research no significant impact of dividend
announcement on share prices in Pakistan was found. Further, Data of 45
non-financial firms were taken by Adnan, Jan, and Sharif in 2015. Their
research findings showed that share price was positively affected by
dividend payout ratio which supports bird in hand theory and rejects the
dividend irrelevance theory in case of Pakistan. They further revealed that
the share price is insignificantly affected by profit after tax, retention ratio,
and dividend per share, whereas, positively affected by Earning per share
and negatively affected by return on equity. In another study, data of 50
firms were taken by Shah and Noreen in 2016. Their findings reveal that
there was significant negative association of stock price volatility and
dividend policy, whereas stock price volatility was positively affected by
asset growth and Earnings per share.
researCH MetHoDologY
A sample of 67 non-financial firms of 6 sectors is taken from Karachi
Stock Exchange for the period of ten years from 2006 to 2015. Only
those firms were selected which at least paid three dividend payments
during the research period. State bank of Pakistan divide the non-
financial firms into 14 sectors out of which six sectors were selected for
this study. As per our observation, these six sectors cover almost 87.5
percent of average dividend amount paid during the study period.
Selected sectors of this study are: 1) fuel and energy sector, 2) oil and
refined petroleum products, 3) chemicals, chemical products, and
Pharmaceuticals, 4) Other food products, 5) Information, Comm. and
Transport Services, 6) Motor Vehicles, Trailers & Auto parts. Data is
secondary in nature, which has been collected from the FSA of (non-
financial) firms listed in KSE by the State Bank of Pakistan from 2006
to 2015. Market prices of shares have been collected from KSE website.
As a result, our sample consists of 67 cross sections balanced panel for
ten years with 670 observations. To observe the association between
dependent and independent variables, multiple regression analysis was
used. Cross-section Fixed effect model or cross-sectional random effect
model was employed after Hausman test result. Unit root test, F
statistics, descriptive statistics, Pearson correlation and Granger
Causality Test, is also used to analyze the data.
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Memon, N.A., Channa, N., and Khoso, I.
econometric Model
To answer our primary research questions, regression model is
developed as follows.
Measurement of Variables
stock Market Price. Previous studies have taken stock price volatility
as the dependent variable, but this study has taken stock market price as
the dependent variable. Masum (2014), also took stock market price as the
dependent variable. This is calculated by taking an average of annual
opening price and the closing price of the stock, and after taking its log 10.
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Impact of Dividend Policy on Market Prices of Shares
Profit after tax. The profit after tax as a control variable is calculated by
taking net profit of current year minus taxes for the year.
size of the firm. Size of the firm is calculated by total ordinary shares
multiplied by the average market price of the stock and then taking its log10.
results anD DisCussion
The data analysis signifies that the SMP, G_A, PAT and S have mean
value of (2.11), (1.14), (5.45), (6.82) with standard deviation of (0.57),
(0.35), (1.62), (0.84) respectively. Which means that SMP, G_A, PAT, S
remained low volatile during the period while D_P, D_Y, G_E, G_S, L,
and LIQ remained highly volatile during the research period. Liquidity is
recorded as a highest volatile variable of the study.
Mean 0.49 0.05 1.14 0.20 0.22 1.83 2.40 5.45 6.82 2.11
Median 0.34 0.04 1.11 0.18 0.12 1.04 1.51 5.73 6.88 2.10
Max: 10.17 0.94 5.94 3.75 36.11 58.26 138.52 8.08 9.45 4.01
Min: -6.55 -0.14 -0.23 -2.60 -0.98 0.01 0.22 0.00 4.84 0.55
std. Dev: 0.91 0.06 0.35 0.32 1.53 3.94 7.16 1.62 0.84 0.57
sum 325.60 34.16 759.34 135.53 147.48 1219.98 1602.03 3641.28 4555.06 1409.58
sum sq. Dev. 548.30 2.37 80.96 68.18 1551.77 10366.19 34186.42 1750.39 472.29 213.84
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Memon, N.A., Channa, N., and Khoso, I.
The results of table 2 & 3 of unit root tests show that the probability of
all variables is 0.00 which is less than 0.05. It means that all variables are
stationary and could be used for further analysis.
Table 2. Unit Root Test Summary
Variables Method statistics Probability
Stock Market Price -11.52 0.00
Dividend Yield -40.28 0.00
Dividend Payout -70.63 0.00
Growth in Assets -24.31 0.00
Growth in Earnings Levin, Lin, and Chu -44.84 0.00
Growth in Sales test -25.28 0.00
Leverage -9.63 0.00
Liquidity -6.58 0.00
Net Profit after Tax -19.08 0.00
Size of the firm -16.20 0.00
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Impact of Dividend Policy on Market Prices of Shares
Furthermore, the Hausman test is used to find best fit model for the
study among the fixed effect or Random effect. The guideline for
Hausman test directs that if probability value is less than 0.05 it means
that cross-sectional fixed effect model is fit but if probability value is
higher than 0.05 than cross-sectional random effect model is suitable for
the study. According to Table 6 the probability value of Hausman test is
0.00, which means that cross-sectional fixed effect model is better for the
study analysis.
Table 6. Random Effects-Hausman Test
test summary Chi-sq. statistic Chi-sq. d.f. Prob.
Cross-section random 48.44 9 0.00
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Memon, N.A., Channa, N., and Khoso, I.
effects specification
Cross-section fixed (dummy variables)
r-squared 0.9540 Mean dependent var: 2.1102
adjusted r-squared 0.9482 s.D. dependent var 0.5662
s.e. of regression 0.1289 akaike info criterion -1.1530
sum squared resid 9.8339 schwarz criterion -0.6406
log-likelihood 461.1106 Hannan-Quinn criteria. -0.9545
f-statistic 163.7494 Durbin-Watson stat 2.2428
Prob(f-statistic) 0.0000
ConClusion
This research intends to observe the impact of dividend policy on
market prices of stocks. For this, nine questions including two primary
and seven secondary questions were developed. Firstly, two primary
questions were related to the relationship of dividend policy and stock
market price, and other seven questions were related to the relationship of
control variables with the stock market prices. After the empirical result
findings, it is concluded that two proxies of dividend policy (dividend
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Impact of Dividend Policy on Market Prices of Shares
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Memon, N.A., Channa, N., and Khoso, I.
referenCes
Abrar-ul-Haq, M., Akram, K., & Imdad Ullah, M. (2015). Stock price
volatility and dividend policy in Pakistan. International Journal
of Scientific and Research Publications, 5(2), 1-7.
Adnan, A. L. İ., Jan, F. A., & Sharif, I. (2015). Effect of Dividend Policy
on Stock Prices. Business & Management Studies: An
International Journal, 3(1), 55-85
Asghar, M., Shah, S. Z. A., Hamid, K., & Suleman, M. T. (2011). Impact of
dividend policy on stock price risk: Empirical evidence from equity market
of Pakistan. Far East Journal of Psychology and Business, 4(1), 45-52.
Baker, M., & Wurgler, J. (2004). Appearing and disappearing dividends: The link
to catering incentives. Journal of Financial Economics, 73(2), 271-288.
DeAngelo, H., DeAngelo, L., & Stulz, R. M. (2006). Dividend policy and
the earned/contributed capital mix: a test of the life-cycle
theory. Journal of Financial economics, 81(2), 227-254.
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Impact of Dividend Policy on Market Prices of Shares
Kenyoru, N.D., Kundu, S.A., & Kibiwott, L.P. (2013). Dividend policy
and share price volatility in Kenya. Research Journal of finance
and accounting, 4(6), 115-120.
Masum, A. (2014). Dividend Policy and its Impact on Stock Price – A Study
on Commercial Banks Listed in Dhaka Stock Exchange. Global
Disclosure of Economics and Business, Volume 3, No 1 (2014).
Nazir, M.S., Abdullah, & Nawaz, M.M. (2012). How dividend policy affects
volatility of stock prices of financial sector firms of Pakistan.
American Journal of Scientific Research, 61(2012), 132-139.
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Memon, N.A., Channa, N., and Khoso, I.
Nazir, N., Ali, D., & Sabir, D. (2014). Impact of Dividend Policy on Stock
Price Volatility:A Case Study of Pakistani Capital Market.
European Journal of Business and Management, 6(11), 49-61.
Nishat, M., & Irfan, C. M. (2004). Dividend policy and stock price
volatility in Pakistan. In Pide-19th annual general meeting and
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