presentation on effects of dividends on common stock prices in the nepelese evidence paper was was published by prof. rade shyam pradhan in the the excellence

1. Effects of Dividends on Common
Stock Prices : The Nepalese
Evidence*
Author : Radheshyam Pradhan
The Excellence – The Journal For Management And IT Professionals
Vol.2, No.1 (Balasore: Academy of Business Administration, Orissa, India, July
,2003),pp.18-25

2. Group - 4
Group members
Nirmala Baniya
Sangita Giri
Subas B.k
Meera Thapa
Neetu Yadav
Pankaj Kunwar

3. Introduction
 Effect of dividend payment and retained earnings
 Dividend policy decision
 Association between Stock return and dividend yields
 Dividend policy has been a subject of Considerable study
 Shareholder in perfect capital market are indifferent

4. Purpose
Dividend

5. Study of resolving issue in the Nepal
 Dividends or retained earnings are more attractive
 Elasticity of dividends or retained earnings with respect to the
market price per share
 Fact of economies of scale in dividend supply functions
 Relationship between dividend or retained earning and market
price per share
 Whether the speed of adjustment through dividend payment or
retained earnings between desired and actual shares prices is slow
or fast ?

6. Literature Review
 Those who believe dividend affects the share price based their argument on the
hypothesis ( Chawla and Shrinivasan, 1987)
- Shareholders prefer current to future income
- Dividend has information content and its payment indicates company’s good
earning capacity.

7. Contd.
 The argument that the dividend policy may affect the values can be viewed in
two categories (Van Horne and McDonald, 1971):
1. investor may have a net preference for dividends relative to capital gains or vice
versa owing to uncertainty resolution, transaction and inconvenience costs, and
differential tax rates.
2. Costs associated with the sale of issues of new issues of equity securities may
make these issues more costly source of equity financing than retained earnings.

8. Contd.
 Some argue that required rate of return used by investors to discount dividends
expected in future period increases with time . (Gordon ,1963)
 Another evidence is that the firms with higher dividend yields sell for lower prices . (
Litzenberger and Ramaswami, 1982 )
 A study conducted in 1971 using time series data concluded that the retained earnings
had no effect on share price (Sarkar ,1971 )
 Another study carries out in 1975 by using cross section data revealed impact of
retained earnings in cotton textiles industry and the impacts of dividends in electrical
industries ( Kumar and Man Mohan, 1975)

9. The Basic Model
 As suggested by Friend and puckett in 1964, this model is the one of the most
commonly applied to cross - section data as follows:
MPSit = a + b DPSit + c REit + eit . . . (1)
Where,
MPSit = Market price per share
DPSit = Dividend per share
REit = Retained earning per share
The above model assumes the following reasonable a priori hypothesis:
DPSit > 0
REit > 0

10. Contd.
 The subscript i denotes the ith company is a sample of n companies selected from
a particular industry.
 All variables are measured in the ith time period.
 Market price per share is the average of high, low and closing prices of the year.

11. Contd.
 If the companies in a sample tend, on the average, to pay out less than the
optimum, b should be greater than c.
 if they pay out more than the optimum, b should be less than c
 if they pay just the optimum, regardless of what that optimum is, or if the payout is
matter of indifference, b should equal c.

12. The problem of least square bias
 The problem of least squares bias can be handled by specifying a dividend supply
function such as the following:
MPSit = a + b DPSit + c REit + (PE)t-1 + eit . . . (2)
Lagged price also hold constant any firm effects that exist.
MPSit = a + b DPSit + c REit + MPSit-1 + eit . . . (3)

13. Nature and Sources of Data
 The models are estimated by using secondary data for the listed companies of
Nepal.
 The data for the study purpose is based pooled and cross-section data of 29
companies from 1994 to1999 which results total of 93 observations.
 Not all the 110 listed companies in Nepal Stock Exchange provide scope of the
study.
 There is absence of data as many of these companies are either new and have
just begun their operations and old listed companies which do not submit their
financial statements to Nepal Stock Exchange Ltd.

14. Empirical Results
The simple linear equation,
MPS = 1709.62 + 4.57 DPS – 12.54 RE . . . (4)
(2.41) (4.72*) (1.71)
R-bar square = 0.43 F = 7.60 SEE = 225.90 DW = 1.29
 Coefficient of DPS is significant.

15. Linear Relationship Including Lagged Price
Earnings
MPS = 1701.37 + 4.54 DPS – 12.43 RE + 0.09 PEt-1 . . . (5)
(2.38) (4.71*) (1.69) (0.28)
R-bar square = 0.42 F = 5.04 SEE = 229.13 DW = 1.30
Coefficient of DPS is significant and coefficient of RE is negative.

16. Linear Relationship Including Lagged Price
Variable
MPS = 1666.18 – 9.31 DPS – 15.57 RE + 0.75 MPSt-1 . . . (6)
(3.07) (0.82) (2.78) (8.08)
R-bar square = 0.49 F = 30.45 SEE = 77.99 DW =1.44
 Dividend receive greater relative weight and has a greater effect than retained
earnings.

17. Logarithmic Model
ln MPS = 3.62 + 0.60 ln DPS + 0.24 ln RE . . . (7)
(0.92) (5.28*) (0.29)
R-bar square = 0.63 F = 20.91 SEE = 0.86 DW = 1.44

18. Contd.
ln MPS = 3.96 + 0.63 ln DPS – 0.05 ln RE + 0.32 lnPEt-1 . . . (8)
(1.10) (5.75*) (0.06) (3.70*)
R-bar square = 0.56 F = 13.04 SEE = 0.787 DW = 1.42
Here,
 Coefficient of RE is negative
 Coefficient of dividend is significant.
 Elasticity of dividend with respect to share price is less than unity which shows the
absence of economies of scale.

19. Contd.
ln MPS = 3.73 – 0.01 ln DPS – 0.51 ln RE + 0.77 MPSt-1 . . . (9)
(1.38) (0.07) (0.91) (8.55*)
R-bar square = 0.64 F = 39.84 SEE = 0.591 DW = 2.28
Here,
 Adjustment coefficient = 0.23, this implies that the speed of adjustment between
desired and actual share prices is slow.
 Only 23% of adjustment of actual to desired share price is completed within a
year.

20. Conclusion
 Higher investor valuation may be placed on Dividends rather than Retained
Earnings.
 Possible to increase stock price by rising dividends.
 For growing companies, management might increase stock price by greater
retention of earnings, but could not be revealed by this study.

21. limitations
 Tests were undertaken for few companies i.e 93 observations.
 Regression model explained less than half of the total variance in linear
equations.
 Ignorance of qualitative factor affecting market price of shares

22. RECOMMENDATION
 Similar study can be conducted at different point of time to update finding
 Industrywise analysis can give the proper result

23. THANK YOU