1. 1
A report on
“STUDY ON DIVIDEND BEHAVIOUR OF INDIAN FIRMS AFTER SHARE
SPLIT”
Dissertation Report Submitted In Partial Fulfillment of the Requirement for the Award of the Degree Of
POST GRADUATE DIPLOMA IN MANAGEMENT
2013-2015
OF RAJAGIRI BUSINESS SCHOOL
KAKKANAD, KOCHI
By
Ashams T Verghese
Register No: P13112
RAJAGIRI BUSINESS SCHOOL
RAJAGIRI VALLEY
KAKKANAD, KOCHI – 682039
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Acknowledgement
The gratification and elation of this project will be incomplete without mentioning all the people
who helped me to make it possible, whose guidance and encouragement were valuable to me.
First of all I thank the God Almighty for his immense grace and blessings at each and every
stage of the project
I would like to express my gratitude to the Hon. Dean Joseph I. Injodey Ph.D. for granting me
the opportunity to do the project. I am thankful to my Faculty Guide, Prof. K. G. Jose, director,
Rajagiri Centre for Business Studies, Kochi, Kerala for giving me his valuable guidance to
execute the project as per university requirements. I am also thankful to all other faculties and
friends who had extended their support and contributions, which helped me in improving my
dissertation.
Above all I would like to thank my parents for their blessings and a sincere thanks to all
respondents who helped me with the valuable information I needed for the project.
Thank You,
Ashams T Verghese
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DECLARATION
I, Ashams T Verghese, student of Rajagiri Centre for Business Studies, Kochi, hereby declare
that this report titled “Study on dividend behaviour of Indian firms after share split” is an original
work done by me and submitted to Rajagiri Centre for Business Studies for the partial fulfillment
of the requirement for the award of Post Graduate Diploma in Management.
I further declare that any part this project itself has not been submitted elsewhere for award of
any degree.
Place: Cochin Ashams T Verghese
Date: Rajagiri Centre for Business Studies
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List of Contents
Chapter Title Page Number
1 Introduction 1-5
1. Introduction 1-2
2. Theoretical Framework 2-5
2 Review of Literature 6-16
3 Research Methodology 17-20
1. Problem Statement 17
2. Title 17
3. Objectives 17
4. Research Design 17-19
5. Scope of Study 19
6. Tools Used for Data Analysis 19
7. Limitations of Study 20
3 Data Analysis and Interpretation 21-22
4 Findings Conclusions and Limitations 23
1. Findings 23
2. Conclusions 23
Bibliography 24-25
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EXECUTIVE SUMMARY
This study examines the dividend behavior and financial performance of Indian private sector
companies before and after share split. All the companies which have undergone share split in
the year 2010 is selected for the study. Pre – post dividend behavior and financial performance of
the selected companies are measured in the study. The pre – post period include three years
before and after the share split. That is 2007-2009 and 2011-2013.
The review of existing literature suggests for split or stock dividend increased no of shares
cannot alter the proportion of ownership of an investor in a company. The ownership of an
investor remains unaltered but in addition they got some extra stock certificates. In both case the
market price of the share should decline proportionately to maintain the same value
Study measures four parameters to examine the dividend behavior and financial performance of
the selected Indian firms before and after the share split namely, dividend percentage, dividend
payout ratio, net profit margin, and return on total assets are selected as variables and collected
time series data for three years before the share split and three years after the share split. Pre -
post T test is used to analyze the data.
The study concludes dividend payout ratio increased after the share split. Dividend payout ratio
is the portion of available profit distributed to equity shareholders. Extended analysis on
profitability reveals that return on total assets reduced after the share split. Net profit margin also
reduced but not significantly. This dividend information is useful to investors and other capital
market participants. A consistent trend in this ratio is usually good than a high or low ratio.
Increase in dividend payout ratio implies that the company is maturing and planning on limited
expansion. Here financial performance of firms reduced after share split. So we can assume that
the increase in dividend payout ratio may be because the firms paid from their reserves. It is done
to maintain the trust of investors in the firm. So it would be beneficial to shareholders to invest in
these companies. Because even in the case of reduced profits they are considering their
shareholders. This study concludes by saying that share splits increased the dividends paid to
shareholders.
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1.1 INTRODUCTION
Stock splits lower the face value of a company’s stocks and increase the number of shares owned
by each shareholder. Stock splits helps in increasing the number of outstanding shares of the
company without providing any additional cash inflows. There is no change in the shareholder
claim on the assets of the firm.
Stock split, as the term suggests, results in reduction in face value of a stock and thereby
corresponding increase in number of outstanding shares. For instance, if a company goes for a
1:10 stock split, Rs. 10 face value stock is divided into 10 shares with face value of Re. 1 each.
Nothing changes as far as total share capital of a company is concerned. Hence, when a company
decides to split its stocks, price of the stock should come down in the proportion of the split ratio.
If 1:10 stock split is announced, then stock price should come down to 1/10 of the price before
the split. This means that stock split is nothing but a mere cosmetic event and hence,
announcement about the stock split does not contain any information to affect stock price in a
way that leads to abnormal positive returns.
Firms mainly make stock splits for making price attractive to average retail investor. Further as
more people buy the stock at lower price, stock tends to rise in future. This is the split effect. If
the company’s stock prices are already affordable they may not go for further price lowering.
Making more shares available to trade is another motivational factor behind stock split.
The objective of present study is to analyze the dividend behavior of Indian corporate before and
after the share split for examining whether dividend behavior changes after the share split.
Dividend policy refers to payout policy that a firm follows in determining the size and pattern of
distribution to shareholders over time. Dividend policy has been an issue of interest in financial
literature since Joint Stock Companies came into existence.
Dividends are commonly defined as the distribution of earnings in real assets among the
shareholders of the firm in proportion to their ownership. Dividend decisions are recognized as
centrally important because of increasingly significant role of the finances in the firm’s overall
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growth strategy. Dividend policy of a firm has implication for investors, mangers and lenders
and other stakeholders. It is expected that such a study will be useful for investors and
other capital market participants.
1.2 Theoretical Framework
In theory, stock splits are mere cosmetic corporate events and therefore, announcement of stock
split should not have any significant impact on market returns of the firm. However, empirical
evidence from developed markets suggests that announcement of a stock split leads to significant
positive returns surrounding announcement and ex-days of stock split. Even if one believes that
stock split carries some information content about the future prospects, according to semi strong
form of efficient market hypothesis, the entire positive abnormal return should be reflected on
such announcement itself and no abnormal returns should be present surrounding ex-day.
Why Firms Pay Dividends
Over the past five decades, financial economists have devoted considerable study to the question
of why companies paying dividends. Truong & Heaney (2007) found that dividend policy
involves two decisions, which are whether or not to pay dividends and how much to pay. Some
surveys from past researchers found that firms choose to pay dividend because they believe
dividend can serves as a signal to shareholders (Baker et.a!., 1985; Allen, 1992; Baker & Powell,
1999; Zeng, 2003; and Tse, 2005) and clientele effect exists (Baker et. aI., 1985). In addition,
dividend also can reduce agency costs and enforce manager to act in the interest of shareholders
(D'Souza & Saxena, 1999; and Zeng, 2003).
Stock Split Vs Stock Dividend:
Stock split means if a company decreases the price per share by dividing existing shares into the
multiple shares. For example: if Sony Ericson‟s stock is at $150 and if the manger of Sony
Ericson announces a three-for-one stock split, the price per share should decreases at about $50.
And also stock dividend refers when a company rewarded the corporate dividend to its
stockholders in the form of stock as a substituted of cash (Fama et al., 1969:544). Stock split
indicates the increased number of shares as a result of proportional reduction in the par value of
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the stock. For split or stock dividend increased no of shares cannot alter the proportion of
ownership of an investor in a company. The ownership of an investor remains unaltered but in
addition they got some extra stock certificates. In both case the market price of the share should
decline proportionately to maintain the same value (Van Horne, 2003:325-326)
SIGNALING HYPOTHESIS
According to Bhattacharya, the signaling theory refers that the positive excess of return is the
consequence of an unanticipated increase in dividend (Bhattacharya, 1979:259-270). Some
empirical research suggests that dividend acts as signal for a firm. Usually it is seen that the
stock price of a firm will increase if the firm declares to increase its dividend however, the stock
price of a firm will decrease if the firm announces to decrease its dividend (Ross et al., 2005:
519). In 1983, Asquith and Mullins estimated that on the declaration of dividend initiations the
prices of stock increases about 3%. On the other hand, Healy and Palepu (1988) and Michealy et
al., (1995) stated that on the declaration of dividend exclusions the prices of stock goes down
about 7%. Some authors argue that firms are not interested to cut the dividend but the firm will
only be interested to increase the dividend when there is a probability of increasing its future
earnings and cash flow (Ross et al., 2005: 519-520).
Moreover, empirical research have found that, usually, the market responds positively if the firm
declares to increase its dividend and the market responds negatively if the firm declares to reduce
its dividend. The announcement of dividend will convey information about the future prospects
of the firm (Ogden et al., 2003: 485).
Tax Effect
Usually it has been said that tax has a great impact on dividend and capital gain. Moreover,
market valuation of dividends depends on the tax, which is a gradually becoming more important
issue. If the corporate tax is higher than the personal tax, the company would have an intention to
increase the dividend yield and on the other hand if the corporate tax is lower than the personal
tax, the company would have an intention to reduce the dividend yield (Ross et al., 2005:515). In
1970, Elton and Gruber published an article about the stock price behavior on the ex-dividend
day. They were the first researchers who said that the behavior of stock price on ex-dividend day
was due to the effect of taxation.
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Optimal trading range hypothesis
According to this hypothesis, each stock market has a popular trading range for stocks (i.e. it is
unlikely to see a stock trading at Rs. 50,000 per share in the Indian stock market!). Stock splits
are used as a tool by firms who find that their stock price has moved way above the popular
trading range. Announcement of stock split is done with an intention to bring the stock price
back to the normal trading range and thereby making it more affordable for small investors to
buy round lots of shares. Marketability of the stock increases post-split, which results in
improved liquidity and positive abnormal returns due to buying activity of deprived wealth-
constrained small investors who could not afford buying the stock at the higher pre-split price.
((Lakonishok & Lev, 1987); (McNichols & Dravid, 1990)). If there is merit in this hypothesis,
positive price returns should be evident immediately on ex-day and after that. Relevance of this
hypothesis has come down significantly in Indian markets in the last decade as the lot size for
stocks in the Indian market is one share only. While (Lakonishok & Lev, 1987) and (Han, 1995)
provided some empirical evidence on the existence of an optimal trading range in the U.S.,
studies by (Copeland, 1979) and (Conroy, Harris, & Benet, 1990) find results contradicting
optimum trading range hypothesis. Copeland observes decrease in trading activity after stock
split.
Liquidity hypothesis
A related hypothesis that explains positive abnormal returns post stock split is the liquidity
hypothesis. According to this hypothesis, the motivation of management to bring the stock price
back to the popular trading range is to improve liquidity. (Muscarella & Vetsuypens, 1996) show
that liquidity after stock split improves, results in wealth gains for investors. Their findings
support the model of (Amihud & Mendelson, 1986), which predicts a positive relation between
equity value and liquidity. According to this model, rational investors discount illiquid securities
heavier than liquid ones due to the higher transaction costs and greater trading frictions they face.
On the other end, (Conroy, Harris, & Benet, 1990) show an increased bid-ask spread after stock
split announcements. (Ferris, Hwang, & Sarin, 1995) report reduction in depth post-split. These
results show reduction in liquidity rather than increase.
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Small firm or neglected firms hypothesis
Stock split is the way of catching attention of the market by a firm which feels that they are
undervalued in the market due to negligence of market participants, which means there is little
known about a firm and its shares trade at a discount. Thus, firms use the split to draw attention
of market participants and try to ensure that information about the company is disseminated over
a larger number of market participants. This is more relevant for small firms than large firms and
that is one of the reasons why they may go for stock split according to (Arbel & Strebel, 1983),
(Arbel & Swanson, 1993), (Grinblatt, Masulis, & Titman, 1984), (Wulff, 2002).
Information Asymmetry
In contract theory and economics, information asymmetry deals with the study of decisions in
transactions where one party has more or better information than the other. This creates an
imbalance of power in transactions, which can sometimes cause the transactions to go awry, a
kind of market failure in the worst case. Examples of this problem are adverse selection,[1]
moral
hazard, and information monopoly.[2]
Most commonly, information asymmetries are studied in the context of principal–agent
problems. Information asymmetry causes misinforming and is essential in every
communication process.[3]
Information asymmetry is in contrast to perfect information, which is
a key assumption in neo-classical economics.
Information asymmetry causes markets to become inefficient, since all the market participants do
not have access to the information they need for their decision making processes.
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Literature Review
A.F.M. Mainul Ahsan(2013) conducted a study on Market Reaction around the Bonus Issues
Announcements in Bangladesh
In his research paper he discuss the facts about the stock price reaction to the bonus issue
announcement in Dhaka Stock Exchange (DSE) in Bangladesh. Data of all the 136 right issues
from six different sectors, i.e., Engineering, Cement, Food & Allied, Fuel & Power,
Pharmaceuticals & Chemicals, and Textile during 2009 to 2012 combined with the standard
event study methodology has been used for this purpose. Findings reveal statistically significant
abnormal returns on and around the bonus issue announcement dates which supports signaling
hypothesis for Bangladesh and also implies that investors have anticipated the informational
content of the event, or that they have gained access to inside information. However, sectoral
decomposition of returns showed quite paradoxical results. Cement, Food & Allied, Fuel &
Power, and Pharmaceuticals & Chemicals sector supports long-established theories that the stock
market reacts positively to the announcement of a bonus issue. However, Engineering and
Textile sector illustrates the opposite. Results of this study imply that DSE is not semi-strong
form efficient with respect to past information on bonus issue announcements. Also, information
leakage before the announcement of bonus issues raises serious questions against efficiency in
regulation and effectiveness of supervision in DSE.
Chandra Sekhar Mishra(1996) conducted a study on Dividend Policy of SOEs in India—An
Analysis, FINANCE INDIA
In his research paper he says that in the changed economic scenario of India, the SOEs are
vulnerable to radical adjustments. These potential blue chips have now the best and competitive
option to move into the capital market and face the investors at large. Dividend, a crucial factor
as considered by the investors should now come to the forefront of financial decision making in
the SOEs as the stakeholder in such SOEs is no more the Government alone. This paper is an
attempt to analyse the dividend behaviour of a cross-section of SOEs in India. It takes into
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account the dividend theories in general and Lintner’s model in particular and also various
guidelines issued by the Government from time to time. The results show that not all the profit-
making SOEs have adhered to the guidelines.
James J Angel(1997) conducted a study on Tick size, share prices, and stock splits
In his research paper says that minimum price variation rules help explain why stock price vary
substantially across countries, and other curiosities of share prices. Companies tend to split their
stock so that institutionally mandated minimum tick size optimal relative to the stock price. A
large relative tick size provides an incentive for dealers to make markets and for investors to
provide liquidity by placing limit orders, despite its placing a high floor on the quoted bid-ask
spread. A simple model suggests that idiosyncratic risk, firm size, and visibility of the firm affect
the optimal relative tick size and thus share price.
Nehal Joshipura(2013) conducted a study on Market reaction to stock splits in large and
liquid stocks: evidence from the Indian stock market
In his research he examines the market reaction to stock splits using the standard event study
methodology. The study uses stock splits in large and liquid stocks in the Indian markets during
the years 2001 to 2012. According to a semi-strong form of efficient market hypothesis, any
information content associated with corporate announcements must be reflected fully on
announcement day itself resulting in an abnormal return. However, several studies report
abnormal returns surrounding announcement as well as effective day of stock split, and many
competing hypotheses are presented to explain such abnormal returns. Studies from India on
market reaction to stock splits offer mixed results. (Gupta & Gupta, 2007) find significant
abnormal returns surrounding ex-split day and not surrounding announcement day.
(Joshipura,2009) and (Ray, 2011) find abnormal returnssurrounding announcement day. This
study reports reaction to stock split in large and liquid stocks that are constituents of NIFTY or
NIFTY Junior.
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Alon Kolly(2012) conducted a study on The market reaction to stock split announcements:
earnings information after all
In his research paper he re-examine the original “information hypothesis” which seeks to
explain the abnormal returns around stock split announcements. While recent research focuses
on liquidity and catering theories, our evidence re-affirms a link between the abnormal returns
and earnings growth. Analysts revise earnings forecasts by 2.2-2.5% around split
announcements, and this revision is significantly larger than that for matched firms. We further
show that the earnings information in a split likely arises from the fact that splitting firms
experience less mean reversion in their earnings growth relative to matched firms. Consistent
with an earnings information hypothesis, the analyst revision and the abnormal returns are
stronger for firms with more opaque information environments. Furthermore, the cross-sectional
variation in analyst revisions is related to the variation in abnormal returns. We also find
evidence on splitting activity and the market reaction to splits that is inconsistent with liquidity-
based theories and mixed with respect to catering.
Mark S. Grinblatt(1984) conducted a study on The valuation effects of stock splits and stock
dividends
In his research paper he presents evidence which indicates that stock prices, on average, react
positively to stock dividend and stock split announcements that are uncontaminated by other
contemporaneous firm-specific announcements. In addition, it documents significantly positive
excess returns on and around the ex-dates of stock dividends and splits. Both announcement and
ex-date returns were found to be larger for stock dividends than for stock splits. While the
announcement returns cannot be explained by forecasts of imminent increases in cash dividends,
the paper offers several signaling based explanations for them. These are consistent with a cross
sectional analysis of the announcement period returns.
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Suresh B (2012) conducted a study on the topic An empirical study on effect of bonus
announcement on share price volatility and liquidity and its impact on market wealth
creation of informed investors in Bangalore with special reference to CNX NIFTY stocks of
NSE
This paper investigates the market reaction to bonus issue announcement news, using a event
study methodology for Nifty stocks from 1995 to 2011. There are several theories that have been
advanced to explain why companies go for stock dividends. In previous studies, it is evident that
stock returns are significantly affected negatively or positively around bonus issue
announcement dates. Informed investors market wealth is affected to a greater extent around this
event. The purpose of this study is to test whether the investor can gain or lose an above normal
return by relying on public information impounded in a bonus issue announcement. Using risk
adjusted event study methodology, this study tests where there is excessive abnormal return
exists during event window of announcement. Bonus announcement sample observations S&P
Nifty INDEX were analyzed using standard risk adjusted event study methodology. The event
study methodology was employed in the determination of the effects of the bonus. Abnormal
returns were calculated by use of the market model and t-tests are conducted to test the
significance. We find the existence of significant positive abnormal returns on AD 0, but under a
short run of AD+3 abnormal returns do not persist and dilutes to its normal return. The study
found out that the Indian market reacts positively to bonus issues. Also shown a increase in
volumes of shares traded around the bonus issues date. There is also an increase in trading
activity after the bonus announcement as compared to that before the announcement.
M. Raja (2010) conducted a study on the topic An empirical test of Indian stock market
efficiency in respect of bonus announcement
A capital market is said to be efficient with respect to an information item if the prices of
securities fully impound the return implications of that item. The efficiency with which the
capital formation is carried out depends on the efficiency of the capital markets and financial
institutions. A capital market is said to be efficient with respect to corporate event announcement
(stock split, buyback, right issue, bonus announcement, merger & acquisition, dividend etc)
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contained information and its disseminations. How quickly and correctly the security prices
reflect these event contained information show the efficiency of stock markets. Present study is
an attempt to test the efficiency of Indian stock market with respect to bonus issue announcement
by IT companies.
Sarvanan Kumar (2012) conducted a study on Market Reaction to Dividend Announcement:
An Empirical Study Using Event Study Technique
The event study methodology is considered to investigate the impact of an event on a specific
dependent variable. A generally used dependent variable in event studies is the stock price of the
company. The definition of such an event study will be a study of the changes in stock price
beyond expectation i.e., abnormal returns during the event window period. While employing
event studies to measure the event impact, we may found the techniques to outperform the
market. The event study methodology seeks to determine whether there is an abnormal stock
price effect associated with an event. From this, the researcher can infer the significance of the
event. The basic and indispensable assumption followed in the event study methodology is that
the market is always efficient. In the efficient market, the impact of an event will be reflected
immediately in the stock prices.
Amitabh Gupta (2010) conducted a study on the topic The Determinants of Corporate
Dividend Policy
A dividend decision of a firm is an outcome of various considerations. These considerations
differ across time and industry. The present study re-examines various factors that have a bearing
on the dividend decision of a firm by using a two-step multivariate procedure. First factor
analysis is performed on the data to extract prominent factors from various variables and then
multiple regression is conducted on such factors. Results of factor analysis indicate that leverage,
liquidity, profitability, growth and ownership structure are the major factors. Regression on these
factors shows leverage and liquidity to be the determinants of the dividend policy for Indian
companies.
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DR.S.DEVAKI (2012) conducted a study on the topic Shareholding patterns and dividend
payout: an empirical analysis in Indian corporate hotels
This paper examines the influence of shareholding pattern on dividend payout ratio of the Indian
corporate hotels. Panel data analysis has been carried out to find out the effect of shareholding
pattern on dividend policy. Fixed effect firm model estimations revealed that there is a positive
association of lagged dividend, earnings, debt-equity ratio, sales, size, age of the firm and
institutional shareholding. Fixed effect firm and time model corroborates the results of fixed
effect firm model and it is concluded that there is not much impact of the time changing factors
on dividend payout ratio during the period under consideration. Institutional shareholding has a
greater influence than other shareholders‟ stake on the determination of dividend payout policy
of the corporate hotels in India.
Dinesh Kumar Sharma (2013) conducted a study on the topic Ownership Structures and
Dividend Policy - A Study of Bombay Stock Exchange-500
Indian Corporate Firms Ownership structures are characterized by large shareholders, like other
emerging market economies. The dominance of large shareholders may affect the dividend
payout in several ways. For the modern corporate firms, the agency problem i.e. the conflict of
interest between the shareholders and managers has always been considered as potential
weakness. Given their predilection for rewards and the security of their human capital, managers
have a tendency to engage in unwarranted earnings retention and payout as little as possible if
they have the prospect to do so. However, ownership concentration lessens these distortions,
resulting in higher dividend payments. The main purpose in this paper is to study the impact of
ownership structure defined as institutional shareholding, promoter’s shareholding, and foreign
institutional shareholding on Dividend Policy of Companies Listed at BSE 500. Since dividend
policy is affected by many other variables, we have taken debt equity ratio, net profit ratio and
cash flow as controlling variables in the study. The data has been sourced from Prowess database
of the Centre for Monitoring Indian Economy (CMIE). The multiple regression analysis has been
applied to the data to study the effect of shareholding pattern of the companies of BSE -500 on
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the dividend policy of respective companies. Only 457 companies could be studied due to lack of
available information on one or the other variables in respective company. The result indicated
that 6% of variation has been explained by the independent variables (promote, foreign
institutional shareholding and institutional shareholding).
VANITHA CHAWLA (2014) conducted a study on the topic A Comparative Analysis of
Dividend Payout Trend of Indian Telecom & Steel Industries
In the literature of financial management, dividend policy of the firms is considered as one of the
important decision area where a firm has to make a choice between what portion of earnings is to
be retained by the firm and what portion is to be paid off. Several questions related to dividend
decisions remain perplexing because of diverse and conflicting theories and empirical results.
The major objective of this study is to examine and compare the dividend payout trends (based
on the DPS and DPR) of the two leading industries i.e. Telecom and Steel Industry in India for a
sample of 6 companies during the year 2007-08 to 2011-12. Secondary data from the published
annual reports of the sample companies are used in the study. The data’s are analyzed using
statistical tools such as Trend analysis, Mean, Standard deviation and hypothesis was tested
using by Fisher’s ‘t’. The findings of the study reveal that the ratios (DPS and DPR) of Telecom
Industry are more consistent than that of Steel Industry .Size and EPS is found to have an
influence on Dividend policy for companies in Steel Industry but the same is not true for
Telecom Industry. The study concludes that companies belonging to the same industry have
adopted different dividend policies among themselves.
Dharmendra S. Mistry (2011) conducted a study on the topic Factors affecting dividend
decision of Indian cement industry
Dividend decision is one of the most important functions of finance managers. It depends on the
trend of the turnover and control of the management over the expenditure. It also affects the
decision of potential investors regarding investment in company’s equity and overall market
value of the company’s share. In this paper, an attempt has been made to ascertain influence of
the factors i.e. Total Assets, Liquidity, Inventory Turnover Ratio, Profitability and Retained
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Earnings on the dividend decision of Indian cement industry for a period of 2004-05 to 2008-09
based on the secondary data of 28 out of 36 listed public companies in the industry. The study
finds that significant increase in the selected factors influences the dividend decision to the great
extent rather than the factors which have resulted marginal or moderate increase. It is also found
that change in Total Assets and Profitability affects dividend decision positively; while change in
Liquidity, Inventory Turnover Ratio and Retained Earnings affects dividend decision negatively.
Dr.T.Sobha Rani (2013) conducted a study on the topic Determinants of Dividends in Indian
Pharmaceutical Companies
Dividend is the portion of corporate profits paid out to stockholders. Dividend policy is
influenced by various determinants of dividend. The payment of dividend is associated with
profitability position of the firm and is influenced by internal and external factors. The Indian
pharmaceutical industry currently tops the chart amongst India's science-based industries with
wide ranging capabilities in the complex field of drug manufacture technology. The current study
focuses on the determinants of dividends and its performance of select pharmaceutical
companies in India. This study evaluates the performance of various pharmaceutical companies
and their annual compound growth rate.
Gagan Deep Sharma (2009) conducted a study on the topic Efficiency Hypothesis of the
Stock Markets: A Case of Indian Securities
The paper attempts to investigate the validity of the Efficient Market Hypothesis on the Indian
Securities Market. Initially, the paper discusses the definitions and types of the EMH, as also the
literature available on the same. Taking a sample of eleven securities listed on the Bombay Stock
Exchange (BSE), the oldest stock exchange of Asia, we apply the runs tests and the
autocorrelation tests in order to judge the efficiency of the Stock Markets. The Autocorrelation
test when directly applied to share prices gives conflicting results with Runs test and thus,
making it difficult to reach a definite conclusion. Then, the autocorrelation test is applied to first
differenced series, which gives satisfactory results. In a nutshell, it is observed that the effect of
stock prices for the sample companies on future prices is very meager and an investor cannot
21. 21
reap profits by using the share price data as the current share prices already reflect the effect of
past share prices.
Faiza Saleem (2013) conducted a study on the topic Effects of dividend announcement of
stock prices: evidence from pakistan
The objective of this research study is to analyze the impact of dividend announcement on stock
prices in Pakistani economy. The study investigates whether change in dividend announcement
leads to change the stock prices. Time period selected for this research is from 2007-2011. The
study employed ratio analysis of five selected companies from each oil and textile sector listed in
Karachi stock exchange and the ratios are; dividend payout ratio, Dividend yield, earning per
share, price earnings ratio and dividend cover ratio. This result shows that dividend
announcement have strong impact on stock prices. Increase in dividend announcement increase
the stock prices and vice versa.
Malhotra (2012) conducted a study on the topic Liquidity changes around bonus and rights
issue announcements: Evidence from manufacturing and service sectors in India
This paper examines the stock price liquidity changes before and after the bonus and rights issue
announcements. Liquidity measured using raw trading volume ratio, relative trading volume
ratio and liquidity ratio suggest that raw trading volume and relative trading volume have
decreased around bonus and rights announcements. Market depth, as measured by the liquidity
ratio, has significantly decreased after the bonus and rights issue announcement in the Indian
stock market. There is evidence of negative and significant decrease in stock price liquidity for
bonus and rights issue announcements similar to other issue announcements in US, UK and other
emerging economies. The results support cash substitution hypothesis and signaling theory but
rejects liquidity hypothesis with respect to bonus and rights issue announcements.
Neetu Mehndiratta (2010) conducted a study on the topic Impact of dividend announcement
on stock prices
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Observing the stock price movement is an area of research that attracted the attention of various
academicians and scholars. Perhaps no other area of finance has been subject to so much
empirical investigation during the last four decades as the behavior of stock prices. The present
study attempts to contribute positively to the understanding of the behavior of Indian share prices
in relation to the dividend announcements. Dividend announcements usually are considered as
the positive signal to the shareholders and its positive impact on the share prices is also expected.
A standard event study methodology is adopted in this paper to examine the price reactions of 15
listed companies surrounding sixty days of the announcement dates.
Remya Ramachandran (2013) conducted a study on A Study on Semi-Strong Efficiency of
Indian Stock Market
The study aims at examining the efficiency of Indian Stock market by studying stock price and
trading volume reaction resultant upon the corporate action information. If the market is efficient
prices fully reflect all information and to evaluate there is no scope for abnormal returns and
dramatic increase in the traded volume consequent upon such release of information. Here the
efficiency of stock market is tested by analyzing the dissimilation of corporate event
announcements like dividend, Stock Split, merger, Bonus issue.
Pitabas Mohanty (1999) conducted a study on the topic Dividend and Bonus Policies of
Indian Companies: An Analysis
This article presents the findings of a study of dividend paying behavior of more than 200 Indian
companies over 15years. It attempts to examine whether the companies offering bonus issue
have been able to generate greater returns for their shareholders than those that have not offered
any bonus issue but have maintained a steadily increasing dividend rate. It is found that most of
the companies either maintained the dividend rate after the bonus issue at the pre-bonus level or
decreased it (but not proportionately) thereby increasing the dividend payments to the
shareholder. In fact, a few companies increased the dividend rate after a bonus issue. It is found
that, during 1982-91, the bonus issuing companies yielded greater returns to their shareholders
23. 23
than those that did not make any bonus issue but maintained a steadily increasing dividend rate.
This phenomenon got reversed during 1992-96. The declining tendency of the MNCs to issue
bonus shares is found to be one of the reasons for such behavior.
25. 25
3.1 Problem Statement
This study attempts to measure the dividend behavior of Indian corporate before and after the
share split. The study also measures the financial performance of the firms to find out whether
the performance of firms improved after share split.
3.2 Title
Study on dividend behaviour of Indian firms after the share split.
3.3 Objectives
• To analyze the dividend behavior of Indian corporate before and after the share split.
• To find out financial performance of the firms after share split.
3.4 Research Design
3.4.a) Hypothesis
• H1 – There is no significant difference in the dividend percentage of firms before and
after the share split.
• H2 – There is no significant difference in the dividend payout ratio of firms before and
after the share split.
• H3 – There is no significant difference in the net profit margin of the firms before and
after the share split.
• H4 – There is no significant difference in the return on total assets of the firms before and
after the share split.
3.4.b) Type of Study
Event Study (Event Considered – Share split)
3.4.c) Sample Selection
• The sample of the study comprised of 52 Indian firms who have undergone share split in
2010.
26. 26
• The study was analytical in nature and was based on secondary data covering a period
2007-2009 and 2011-2013
• Public sector firms, banking firms, and firms issued bonus shares during the year 2010
are excluded.
3.4.d) Sample Period
The sample period taken for the study is 6 years. That is 3 years before the share split and 3 years
after the share split(2007-09 & 2011-13).
3.4.e) Variables
Table: List of Variables
Parameters Variables
Dividend Behaviour • Dividend Percentage
• Dividend Payout Ratio
Financial Performance • Net Profit Margin
• Return on Total Assets
3.4.f) Definition of Variables
1. Dividend Percentage
The dividend yield or dividend-price ratio of a share is the dividend per share, divided by the
price per share. It is also a company's total annual dividend payments divided by its market
capitalization, assuming the number of shares is constant. It is often expressed as a percentage.
Dividend percentage = (Annual dividends per share/ Price per share) *100.
2. Dividend Payout Ratio
27. 27
Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends.
Dividend payout ratio = Dividends/ Net Income.
3. Net Profit Margin
A ratio of profitability calculated as net income divided by revenues, or net profits divided by
sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Net profit margin = Net Profit/ Sales.
4. Return on Total Assets
A ratio that measures a company's earnings before interest and taxes (EBIT) against its total
net assets. The ratio is considered an indicator of how effectively a company is using its assets to
generate earnings before contractual obligations must be paid. Return on Total Assets = EBIT/
Total Net Assets.
3.5 Scope of Study
The research includes all Indian private sector firms who have undergone share split in 2010.
3.6 Tools used for data analysis
Pre - post t test
Pre - post t-test is used in ‘before-after’ studies. It is calculated using paired sample t test. Paired
sample t-test is a statistical technique that is used to compare two population means in the case of
two samples that are correlated.
It is used in a situation where
i)The sample sizes are equal, i.e. , n1=n2=n , say and
ii)The sample observations(x1,x2,….,xn) and (y1,y2,…yn) are not completely independent but
they are dependent in pairs i.e., the pairs of observations(x1,y1),(x2,y2),….(xn,yn) correspond to
the 1st
,2nd
,…nth unit respectively
Suppose the sample observations(x1,x2,….,xn) are observations before the occurrence of an
event and observations (y1,y2,…yn) are observations after the occurrence of an event, i.e. the
28. 28
two sets of observations are not completely independent but they are dependent in pairs i.e., the
pairs of observations(x1,y1),(x2,y2),….(xn,yn) correspond to the 1st
,2nd
,…nth unit respectively.
Let di = xi-yi (i=1,2,…n) denotes the difference in observation for the ith
unit.
Under the null hypothesis that the increment in observations (y1,y2,…yn),are just by chance due
to the occurrence of the event, i.e. H0= µx=µy, the test statistics is
𝑡 =
𝑑�
𝑠
√𝑛�
=
𝑑�
𝑠2
√𝑛
�
̴ tn– 1
Where d= x-y, 𝑑̅ =
1
𝑛
∑ d and s2 = 1
𝑛−1
∑ (d-𝑑̅)2
=
1
𝑛−1
[ ∑ d2
–
(∑𝑑)2
𝑛
]
3.7 Limitations of the study
One major limitation of the study is the elimination of split firms due to unavailability of data. A
wide study by including all variables will give much clear picture on dividend payment.
30. 30
Data Analysis and Interpretation
Paired Samples Statistics
Mean N Std. Deviation Std. Error Mean
Pair 1 Dividend % .206739 156 .1482544 .0118699
Dividend % .205318 156 .1699734 .0136088
Pair 2 Dividend Payout Ratio 69.644 156 107.6437 8.6184
Dividend Payout Ratio 111.824 156 147.2730 11.7913
Pair 3 Net Profit Margin 9.791218 156 8.3392275 .6676726
Net Profit Margin 8.645000 156 8.0989531 .6484352
Pair 4 Return on Total Assets 8.710833 156 6.0167113 .4817224
Return on Total Assets 7.256154 156 4.7305005 .3787432
Paired Samples Test
Paired Differences
t df
Sig. (2-
tailed)
95% Confidence Interval
of the Difference
Mean
Std.
Deviation
Std. Error
Mean Lower Upper
Pair 1 Dividend % -
Dividend %
.0014212 .1579841 .0126489 -.0235652 .0264075 .112 155 .911
Pair 2 Dividend Payout
Ratio - Dividend
Payout Ratio
-42.1795 108.9841 8.7257 -59.4162 -24.9428 -4.834 155 .000
Pair 3 Net Profit Margin -
Net Profit Margin
1.146217
9
7.4904990 .5997199 -.0384610 2.3308969 1.911 155 .058
Pair 4 Return on Total
Assets - Return on
Total Assets
1.454679
5
5.9592659 .4771231 .5121766 2.3971824 3.049 155 .003
31. 31
Pair - 1
• Pair 1 denotes the dividend percentage of selected firms before the share split and
dividend percentage after the share split.
• 52 companies undergone share split in the year 2010. N denotes the sum of the
companies in the year 2007, 2008, 2009 (52*3 = 156).
• The significance value of the pair 1 is 0.911. This implies that there is not much
difference between dividend percentage before and after share split.
Pair – 2
• Pair 2 denotes the dividend payout ratio of selected firms before the share split and after
the share split.
• The significance value of the pair 2 is 0.000 which is lesser than 0.05. This implies there
is a significant difference between dividend payout ratio before and after the share split.
By comparing the mean of pair 2 from table, it is seen that the mean before the share split
is 69.644 whereas the mean after the share split is 111.824. Hence it can be concluded
that dividend payout ratio increased after the share split.
Pair - 3
• Pair 3 denotes the net profit margin of the selected firms before the share split and after
the share split.
• The significance value of the pair 3 is 0.058. This implies that there is not much
difference between the net profit margin before and after the share split.
Pair – 4
• Pair 4 denotes the return on total assets of the selected firms before the share split and
after the share split
• The significance value of pair 4 is 0.003 which is less than 0.05. This implies that there is
a significant difference between the return on total assets before and after the share split.
By comparing mean of pair 4 from table, it is seen that the mean before the share split is
8.710833 whereas the mean after the share split is 7.256154. Hence it can be concluded
that the return on total assets are higher before the share split.
33. 33
Findings
• There is a significant difference between dividend payout ratio before and after the share
split.
• There is a significant difference between the return on total assets before and after the
share split.
• There is not much difference between dividend percentage before and after share split.
• There is not much difference between the net profit margin before and after the share
split.
Conclusion
In this study dividend payout ratio of pre share split and post share split of 52 companies have
been computed from the period 2007-2009 to 2011-2013. From the study it is found out that the
dividend payout ratio increased after the share split. Dividend payout ratio is the portion of
available profit distributed to equity shareholders. Extended analysis on profitability reveals that
return on total assets reduced after the share split. Net profit margin also reduced but not
significantly. This dividend information is useful to investors and other capital market
participants. A consistent trend in this ratio is usually good than a high or low ratio. Increase in
dividend payout ratio implies that the company is maturing and planning on limited expansion.
Here financial performance of firms reduced after share split. So we can assume that the increase
in dividend payout ratio may be because the firms paid from their reserves. It is done to maintain
the trust of investors in the firm. So it would be beneficial to shareholders to invest in these
companies. Because even in the case of reduced profits they are considering their shareholders.
This study concludes by saying that share splits increased the dividends paid to shareholders.
34. 34
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Websites
• Google, https://www.google.co.in
• Investopedia, http://www.investopedia.com
• Moneycontrol, http://www.moneycontrol.com
• Financial Dictionary, http://financial-dictionary.thefreedictionary.com
Databases
• Prowess: http:/www.prowess.cmie.com
• EBSCO : http://search.epnet.com
