Dividend policy


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Dividend policy

  1. 1. The impact of dividend Policy on Shareholder’s wealth (An M-Phil proposal) Fouzia Iram Fouzia_minhas@gmail.com Foundation University, Islambad, Pakistan The Original paper is adopted from R. Azhagaiah and Sabari Priya . “International research journal for finance and economics” irjfe_20_15Abstract:The present paper is aimed at analyzing the impact of dividend policy ofshareholders’ wealth in Textile sector of Pakistan during 2004 to onwards. Tomeasure the impact of dividend policy on shareholders’ wealth multiple regressionmethod and stepwise regression models will be used by taking (Dividend perShare), RE it (Retained Earnings per Share), Pet-1 (Lagged Price Earning Ratio)and MPSit-1 (Lagged Market Price) (MVit-1) as independent variable, and MPSit(Market Price per Share) as dependent variables. To determine the proportion ofexplained variation in the dependent variable, the co-efficient of determination (R2)will be tested with the help of F value. The previous study done in this field studyproved that the wealth of the shareholders is greatly influenced mainly by fivevariables viz., Growth in sales, Improvement of Profit Margin, Capital InvestmentDecisions (both working capital and fixed capital), Capital Structure Decisions,Cost of Capital (Dividend on Equity, Interest on Debt) etc. The previous study wasdone on organic and inorganic chemical industries of India. The author found asignificant impact of dividend policy on shareholders’ wealth in Organic ChemicalCompanies while the shareholders’ wealth is not influenced by dividend payout asfar as Inorganic Chemical Companies are concerned. This study aims to apply theprevious research on textile sector of Pakistan. Electronic copy available at: http://ssrn.com/abstract=1545749
  2. 2. Keywords: Dividend Paying Companies, DPS, Share Price, Retained Earrings.Introduction:Pakistan has a diverse economy that includes textiles, chemicals, leatherproducts, food processing, financial services, telecommunications, retail,automobile manufacturing, light and heavy armaments, agriculture and otherindustries.Pakistan’s textile industry is a major contributor to the national economy in termsof exports and employment. Pakistan holds the distinction of being the world’s 4thlargest producer of cotton as well as being the 3rd largest consumer of the same.In the period July 2007 - June 2008, textile exports were US$ 10.62 Billion andaccounted for 55% of the total exports. The share of textile industry in theeconomy along with its contribution to exports, employment, foreign exchangeearnings, investment and value added makes it the single largest manufacturingsector for Pakistan. It contributes around 8.5 percent to GDP, employs 38 percentof the total manufacturing labor force, and contributes between 60-70 percent tototal merchandise exports.Finance scholars have engaged in extensive theorizing to explain the impact ofdividend policies on shareholders. Some researchers have developed andempirically tested various models to explain it. Some researchers have surveyedcorporate managers and institutional investors to determine their views about itsimpact. In Pakistan, the industry do not follows the same patterns as in othercountries because of terrorism and other political and economics issues make theinvestor hesitate to invest. The textile sector being the major sector of Pakistan’seconomy the implication of this study is more significant as textile sectorrepresents the major part of Pakistan’s economy.Objectives of the Study:• To study the relationship between dividend payout and shareholders wealth.• To analyze the impact of variation in dividend policy on shareholders wealth ofdividend paying and non-paying companies (Textile) in Pakistan. Electronic copy available at: http://ssrn.com/abstract=1545749
  3. 3. • To analyze the impact of retained earnings and past performance in thepresence of dividend policy on shareholders’ wealth of (Textile) Companies inPakistan.Literature Review:The question of whether dividend policy affects the wealth of the shareholders haspuzzled researchers and corporate managers for many years. Dividend policy isone of the most widely researched topics in finance. Yet, researchers havedifferent views about whether the percentage of earnings that a firm pays out individends materially affects its long-term share price. Some empirical studiesappear to support Miller and Modiglianis (1961) classic dividend irrelevanceproposition [e.g., Black and Scholes (1974), Miller and Scholes (1978), Jose andStevens (1989)]; others do not [e.g., Long (1978), Sterk and Vandenberg (1990)].In addition, survey research by Farrelly, Baker, and Edelman (1985) shows thatcorporate managers typically believe that dividend policy affects a firms value andthat an optimal level of dividend payout exists.Baker and Powell (1999) conducted a survey on dividend policy. Mostrespondents think dividend policy affects firm value and also it has effect onshareholder’s wealth. Respondents had the highest level of agreement withstatements involving dividend signaling. This idea has merit since a share ofcommon stock is worth the "present" or "discounted" value of its stream of futuredividends (Malkiel, 1999, p. 327). Cash dividends announcements conveyvaluable information about assessment of a firms future profitability. The surveyresults suggest that investors may use dividend announcements as information toassess a firms stock price. For example, steep drops in stock prices oftenaccompany dividend cuts signaled as bad news about the future prospects of thefirm.The bird in hand theory claims a high dividend yield will maximize a firmsvalue. Dividends represent a sure thing relative to share price appreciationbecause dividends are less risky than capital gains. The study respondents alsosuggested that managers are highly concerned about the continuity of dividends.Dividend continuity suggests stability and constant growth in the firms earnings.This increases investor confidence by insuring a constant of return oninvestments. Electronic copy available at: http://ssrn.com/abstract=1545749
  4. 4. Hypotheses:• H1: “There is no significant difference in average market value relative to bookvalue of equity between dividend payers and non-payers of (Textile) companies.”• H2:“There is no significant impact of dividend policy on shareholders’ wealth in(Textile) Companies.”Methodology:The purpose of this paper is to investigate the impact of dividend policy on shareholder’s wealth. Previous study is used to examine the relationship betweendividend policy and share holder’s wealth. Data will be collected from both primaryand secondary sources. The primary source is field surveys, while the secondarysource is the “Monthly Survey of textile sector”.Sampling:Originally the sample for this study has been planned to choose from the list ofcompanies listed in Karachi Stock Exchange (KSE). A sample of 50 textilecompanies will selected on the basis of availability of information like DPS, andshare prices and also the declaration of dividends.References:Gallagher and Andrew, Financial Management: Principles and Practice;www.Netlibrary.com.Joe K. Shim, Joel G. Siegel; Financial Management, www.Netlibrary.comDeAngelo, H. and DeAngelo, L. (2006). The irrelevance of the MM dividendirrelevance the-orem. Journal of Financial Economics, 79(2), 293-315.Jensen, M. (1986). Agency costs of free cash ow, corporate _nance, andtakeovers. American Economic Review, 76(2), 323-329.Jensen, M. and Meckling, W. (1976). Theory of the _rm: managerial behavior,agency the-ory, and ownership structure. Journal of Financial Economics, 3, 305-360.Miller, M. and Modigliani, F. (1961). Dividend policy, growth, and the valuation ofshares. Journal of Business, 34, 411-433.