The intent of this paper is to analyze the impact of dividend policy on stockholders wealth. Dividend policy is at the nucleus of the theory of corporate finance. It is one of the most debated subjects in the finance literature and still maintains its outstanding place. Many research workers have devised theories and provided empirical grounds sing the determiners of a house ‘s dividend policy. The dividend policy issue, nevertheless, remains unsolved. Clear guidelines for an ‘optimal payout policy ‘ have non yet emerged despite the immense literature. We still do non hold an acceptable account for the ascertained dividend behaviour of companies. We are yet to understand wholly the factors that drive dividend determinations and the mode in which these factors interact. Dividends are payments made by a company to a stockholder normally after a company earns a net income, Dividends are either paid on a regular basis or can be called out anytime, dividend policy is a set of company regulations and guidelines used to make up one’s mind how much the company will pay out to its stockholder. Some companies believe that a no-dividend policy is merely every bit sound as companies with a dividend policy. Companies without a dividend policy can utilize their net income net incomes to reinvest and spread out the company portions or purchase assets. Having a dividend policy foregoes these chances. A cyclical policy or stable policy is a regular dividend payout normally given every one-fourth. A cyclical dividend policy is set at a fixed fraction of quarterly net incomes while a stable policy is set as a fraction of annual net incomes. This produces certainty for investors that they get regular income for their investings.
The Pakistan ‘s capital market and the economic system have several of import characteristics for analyzing the kineticss of dividend policy. First, Pakistan is traveling towards the development and bettering the economic system place in the universe since the 1980. The capital markets of Pakistan are much develops as earlier. Many surveies conclude that houses are likely to pay stable dividend during the high growing period and it is interesting to happen that how dynamic dividend policy is determined in turning economic system like Pakistan. Second, due to weak corporate administration the ownership construction of Pakistani houses is frequently characterized by the laterality of one primary proprietor who manages a big figure of attached houses with merely a little sum of portions or investing which consequence in the bureau struggle between the stockholders and the proprietor, where commanding stockholders confiscate value from minority stockholders and can act upon the dividend policy easy. Third, the revenue enhancement environment in Pakistan is wholly different as comparison to developed markets. There is no capital addition revenue enhancement on stocks in Pakistan because the Government hold given the extension boulder clay 2010 so before the 2010 no capital addition revenue enhancement will be collected on stocks in Pakistan while 10 % keep backing revenue enhancement is charged on dividend incomes and it is of import to advert here that if the houses earned the net income and non announced the dividend that the 35 % of the income revenue enhancement is charged by the Government of Pakistan. There is a possibility of differences in the revenue enhancement system may Influence the dividend policy and besides act upon the grade of dividend smoothing in Pakistan since this inauspicious revenue enhancement intervention of dividend income is a more serious issue than the developed states like United States. Fourthly, in the Pakistan the payment of dividend is voluntary. In fact, in Pakistan the many major investors are still disagreed with dividends and see stock monetary values grasp as the major constituent of stock returns hence, it is assumed that investor attitude towards dividends is expected to hold an impact on the manner in which houses set their dividend policy in Pakistan. The theoretical and empirical groundss suggest that there are many steadfast specific factors related to administration related which play an of import function in dividend signaling and bureau cost account of dividend behaviour.
Fifthly, in the Pakistan several capital market reforms has been implemented by the Securities
Exchange Commission of Pakistan to guarantee the market mechanism based economic system. From the early 1990 ‘s the Pakistan ‘s capital market faced many critical issues including among other, weak and out-of-date regulative model, an inefficient, non transparent and dead stock market, a ill Regulated and publically owned common fund industry and a nascent insurance industry that contributed small to capital market development. The impact of the ordinances of Securities Commission of Pakistan is over the last few old ages, there is enormous addition in market capitalisation with a surging stock market index. The Karachi Stock Exchange ( KSE ) portion index that stood at 1507 points at the terminal of the twelvemonth 2000 has crossed the degree of 12,274 points on April 17, 2006 registering a growing of 64.7 % over June 2005.
1.2 Problem Statement
The job paper shows a relationship between impacts of dividend policy on stockholders wealth. By this survey we want to happen out the impact of different policies on the stockholders wealth. Despite the immense literature there is a still confusion that either dividend policy straight impact on stockholders wealth or some other factors.
H1: Dividend policy has a important impact on the stockholders wealth.
1.4 Outline of the Study
This survey is organized as follows, after the debut in chapter1, the chapter 2 reviews some literature on dividend policy. Chapter 3 nowadayss analytical model of the theoretical account which includes informations, variables description and Jockey shortss about the methodological analysis, which is followed by the empirical consequences presented in chapter 4. Chapter 5 eventually concludes the survey.
Rate of return
Rate of return is the combination of dividend output and the capital addition. Stockholders receive the return at the terminal of the twelvemonth or when they gross revenues their portions. Stockholders receive the return in footings of dividend and capital addition.
Dividend output is the per centum that companies paid to stockholders from their net incomes in footings of dividend.
Capital addition is the difference between the opening monetary value of portion and the shutting monetary value of portion.
Gaining per portion
Gaining per portion is the gaining per portion of a companies stock. It can be calculate as the net income divided by portions.
Dividend payout ratio
Companies pay some part from their earning per portion to the stockholders to retain the good dealingss with their stockholders.
Retention ratio is the ratio which companies retain their some of the part from the earning. Companies retain their some part from net incomes for the hereafter investings, future uncertainnesss etc.
Chapter 2: LITERATURE REVIEW
Many recent empirical surveies have demonstrated that a significantly positive relationship exists between the way of dividend alterations and proclamation twenty-four hours common stock returns.
Dividend addition ( lessening ) will ensue in an addition ( lessening ) in purchase ; a purchase alteration can do wealth transportations among security holders in the absence of adequate me first regulations every bit good as signal information to investors in markets with less than perfect information. On proclamation twenty-four hours, Dann found significantly positive returns for common stock and undistinguished returns for nonconvertible preferable stock and debt. Woolridge are consistent with both a signaling and a wealth transportation hypothesis for dividend alteration proclamations. The dividend alteration common stock monetary value relationship was corroborated and it was demonstrated that unexpected dividend additions ( lessenings ) are associated with positive ( negative ) debt and preferable stock returns. Dividend alterations are positively associated with stock returns in the yearss environing the dividend alteration proclamation ( Aharony and Swary, 1980 ) . Miller and Modigliani ( 1961 ) , dividend alterations trigger stock returns because they convey new information about the house ‘s future profitableness. However, recent surveies have non supported this hypothesized relation between dividend alterations and future net incomes ( Skinner, 1996 ) .
Handjinicolaou and Kalay ( 1984 ) analyse bond returns around dividend alterations, and study that “ bond monetary values are non affected by dividend additions but respond negatively to dividend decreases ” . Dividend increases ( lessenings ) indicate that current-year net incomes will be higher ( lower ) than the old twelvemonth ‘s net incomes. For subsequent old ages, nevertheless, BMT find no important relation between dividend alterations and net incomes alterations. Jayaraman and Shastri ( 1988 ) find insignificantly negative bond monetary value reactions to particular dividend proclamations. The big dividend lessening sample confirms wealth transportation, with stock monetary value diminutions accompanied by positive bond extra returns. Positive reaction to big dividend additions in the stock market and a negative monetary value reaction in the bond market, which is consistent with the wealth redistribution hypothesis. Miller and Modigliani ( 1961 ) survey shows that the there is no any impact on the stockholders wealth when the proclamation made. Their survey shows that this consequence may last even if there is differential revenue enhancement of dividends and capital additions ; dividend income suggests a negative wealth impact because dividend is taxed at a higher rate.
Brennan ( 1970 ) suggests that if hazard is held changeless so the before revenue enhancement returns are increasing the dividend output. Dividend alterations are positively correlated with current ROE, the expected alteration in net incomes is likely to be negatively correlated with the dividend alteration. A deficiency of correlativity between net incomes alterations and dividend alterations would really bespeak that dividend alterations are enlightening about future net incomes. The information content of dividends hypothesis, direction additions dividends when it receives information that indicates that future net incomes will be higher than antecedently anticipated. It may non hold the same degree of assurance about the timing of those net incomes additions.
Dividend alterations trigger stock returns because they convey new information about the house ‘s future profitableness, which in bend determines equity monetary value. Future net incomes are affected by value making activities, but they are besides affected by actions that are non straight relevant for current monetary value, such as future retained net incomes, stock issues and stock redemptions. Dividend additions are positively related to net incomes in each of the four subsequent old ages, but dividend lessenings are non related to future net incomes. We found out that after commanding for the expected alteration in future net incomes, dividend alterations are positively related to net incomes alterations in each of the two old ages following the dividend alteration. Fama ( 1981 ) rational market responses to an addition ( lessening ) in expected hereafter end product are additions ( lessenings ) in both stock monetary values and in the demand for existent money. The negative relationship between stock returns and rising prices is observed because stock monetary values and the monetary value degree react oppositely to alterations in expected hereafter end product. Hess ( 1981 ) suggests that the negative wealth impact may ensue from other costs associated with paying dividends. But many research workers had suggested that the there is positive impact on the stockholders wealth. Dividend may supply the helpful information to the direction, by dividend the direction can cognize the public presentation of the company and can foretell about the hereafter.
Charest ( 1978 ) found that the proclamation of a dividend addition generates an extra return of about 1 % . The survey suggests that the initiating hard currency dividend is associated with a important positive extra return. Factors that addition stockholders ‘ wealth include the present values of ( 1 ) set uping a system for pass oning managerial information ( 2 ) cut downing institutional restraints on investors and ( 3 ) benefits associated with the diehard. Gordon ( 1959 ) finds that the investors prefer the returns in the signifier of hard currency dividends. Factors which decrease stockholders ‘ wealth include the present values of ( 1 ) the extra revenue enhancement load associated with having dividends now and in the hereafter and the accommodation costs incurred by revenue enhancement induced alterations in patronages and ( 2 ) any other costs ( e.g. , administrative costs, dealing costs associated with publishing new equity ) incurred in paying dividends now and in the hereafter. The survey suggest that the about 70 % of the houses examined there is a positive market reaction to the proclamation of initial dividend.
The returns on the option around the antique dividend twenty-four hours are compared to those on a indiscriminately selected twenty-four hours. It should be noted that we make no premise sing the procedure bring forthing returns on the underlying stock or the call option written on it, other than the stationarity of the latter procedure. The average extra return on the antique dividend twenty-four hours is non different from that on a indiscriminately selected twenty-four hours. Options which should hold been exercised on the last dividend twenty-four hours exhibit significantly negative extra returns if held during the antique dividend interval of clip. The traditional reading of Fisher ( 1930 ) is that nominal returns adjust one for one with expected rising prices. Dividends and capital additions are related otherwise to rising prices. Proxy consequence reflects non merely a negative correlativity between expected end product and rising prices, but a positive relationship between rising prices and extra returns. Positive dazes to the economic system are associated with additions in expected hard currency flows, additions in price/dividend ratios, and lessenings in required ( extra ) returns. ( Boudoukh et al ) rising prices end product relationship at the industry degree can non account for the full cross sectional differences in the relationships between industry stock returns and rising prices. Price/dividend ratios are that the two constituents of a stock ‘s return are likely to be related otherwise to expected rising prices. This difference can be used to insulate the carbon monoxide fluctuation between expected price/dividend ratios and expected rising prices and to gauge its influence on the ascertained relationship between stock returns and rising prices. Dividends and capital additions relate otherwise to rising prices in foreign markets every bit good. The cause of the differing relationships is a negative relationship between existent price/dividend ratios and expected rising prices, which supports the decision that the proxy consequence reflects non merely a negative correlativity between expected end product and rising prices, but a positive relationship between rising prices and extra returns.
Black and Scholes ( 1974 ) states that if investors required higher returns for keeping higher output stocks, corporations would set their dividend policy to curtail the measure of dividends paid, lower their cost of capital, and increase their portion monetary value. Similarly, if investors required a lower return on high-yield stocks, value maximizing houses would increase their dividend payouts to increase their portion monetary value. Black and Scholes ( 1974 ) find no statistically dependable nexus between a portfolio ‘s monthly stock return and its long-term dividend output.
Blume ( 1980 ) and Keim ( 1985 ) relation between hazard adjusted returns and outputs, with 0 output stocks recognizing larger returns than dividend paying stocks and higher output stocks recognizing larger hazard adjusted returns than lower output stocks. Christie finds that zero output stocks earn significantly lower returns than dividend paying stocks. Chen et Al. ( 1990 ) show that trials associating returns to dividend outputs are sensitive to the method of hazard return accommodation. Gordon ( 1959, 1962 ) and Lintner ( 1962 ) claim that dividend policy does impact the house ‘s cost of capital, and they provide some early grounds to back up the position that a higher dividend payout reduces the cost of capital ( i.e. , investors prefer dividends ) . Others argue that personal and corporate revenue enhancements cause dividend policy to impact the house ‘s cost of capital, but in the way that a higher payout raises the cost of capital ( i.e. , investors prefer capital additions ) .
The revenue enhancement consequence hypothesis proposed by Brennan ( 1970 ) predicts that investors receive higher before revenue enhancement, hazard adjusted returns on stocks with higher awaited dividend outputs to counterbalance for the historically higher revenue enhancement of dividend income relation to capital addition income. Initial dividend proclamation consequences in positive surplus returns even when there is no other information released at the same time. These consequences suggest that the market ‘s positive reaction to the dividend proclamation is non due to other events. If dividend additions are expected and received as good intelligence, the proclamation twenty-four hours extra return reported by earlier surveies under provinces the market reaction to an addition in dividends. The arrested development consequences support the hypothesis that portion of the larger extra return associated with initial dividends is due to the larger addition in the dividend output. Dividend policy does matter, likely as an information beginning, and that the market reaction is strong and positive. Campbell ( 1991 ) found that stock returns appear predictable over long skylines. Stock monetary value reactions to alterations in dividends ( where alterations are used to proxy unexpected dividends ) and the way and magnitude of the unnatural returns are positively related to the mark and grade of the dividend surprise ( Pettit 1972 ) .
A big bulk of surveies have documented statistically important stock monetary value reactions to alterations in dividends ( where alterations are used to proxy unexpected dividends ) and the way and magnitude of the unnatural returns are positively related to the mark and grade of the dividend surprise ( Pettit, 1972 ) . The magnitude of the information transportation is related to the magnitude of the dividend alteration, the correlativity of stock returns between the announcer and non announcer, and the instantly anterior dividend alteration history of the other company. Carroll ( 1995 ) provides grounds that dividend alterations are associated with alterations in fiscal analysts ‘ prognosiss of future corporate net incomes and the net income estimates become more accurate.
Unexpected dividend alterations and unnatural stock returns is that the dividend alteration signals alterations in future net incomes and hard currency flows ( Lintner, 1956 ) . The proclamation twenty-four hours extra return for the group of houses with either insider purchasing or no insider trading is significantly higher than that for the insider selling group ( Asquith and Mullins 1983 ) . Equilibrium returns are non changeless, and that bing theoretical accounts of clip changing equilibrium returns provide sufficient fluctuation in price reduction rates so that monetary values are non overly volatile. The earliest information transportation survey Firth ( 1976 ) found that net incomes proclamations by British companies affected non merely their ain stock monetary values but besides the returns of other houses in the same industry. This information transportation was positive and its magnitude depended on the grade of surprise contained in the announcing house ‘s net income figure. Changes in dividends are associated with expected ( and existent ) future net incomes, corporate net incomes display positive cross sectional correlativities among houses in the same industry Brown and Ball ( 1967 ) and positive intra industry net incomes information transportation has been documented in a figure of surveies. Therefore, a signal of future net incomes chances ( via dividends ) for one house may be extrapolated to other companies.
An unexpected dividend addition ( lessening ) for one house led to increased ( decreased ) stock returns for non newsmans. The unnatural stock returns of both the dividend announcers and the non announcers were positively associated with alterations in analysts ‘ net incomes prognosiss of the other companies and positively associated with the existent alterations in future net incomes and dividends.
Chapter 3: Research METHODS
3.1 Method of Data Collection
For the intent of this survey secondary information has been used. All the information has been acquired from Karachi stock exchange and company ‘s web sites.
3.2 Sample size
The sample used in this survey covers 9 old ages period ( 2001 to 2009 ) get downing at January 2001 and stoping at December 2009. The annual informations of gaining per portion, dividend per portion, payout ratio and keeping ration was obtained from 30 companies listed in the Karachi stock exchange. The companies are from the 6 different sectors, top five companies in every sector in footings of volume.
3.3 Research Model developed
In our theoretical account there is one dependant and three independent variables. We used a statistical technique in order to measure the affects of independent variables on dependent variable.
3.4 Statistical Technique
We used a multiple additive arrested development. Multiple additive arrested developments is a technique for finding the additive relationship between one dependant variable and two or more independent variables.
The equation of multiple additive arrested development of our theoretical account can be presented as below:
Rate of Return = I±+ I?1 ( gaining per portion ) + I?2 ( keeping ratio ) + I?3 ( dividend payout ) +I
ROR = P1+D1-Po/Po
I± = the intercept of the equation.
I?1 = the coefficient of dividend payout.
DPO = dividends/Net income.
I?2 = the coefficient of gaining per portion.
EPS = Net income / outstanding portions.
I?3 = the coefficient of keeping ratio.
RR = 1-dividend payout
= The error term.
Chapter 4: Consequence
4.1 Findingss and reading of the consequences
( Table-4.1.1 )
Adjusted R square
Adjusted R Square value 0.444 suggested that there is 44.4 % fluctuation in rate of return due to its additive relationship with dividend policy, which is 44.4 % explained.
( Table-4.1.2 )
Analysis of variance
Sum of squares
1 Arrested development
The ANOVA tabular array suggested that the sig-value of our theoretical account is 0.000. The F-value 8.721, P & lt ; .05 value shows that the arrested development is statistically important.
( Table-4.1.3 )
( Constant )
Coefficient end product tabular array gives the arrested development equation and Unstandardized Coefficients B column provides the value of intercept for the changeless row and the incline of the arrested development line from EPS, Retention Ratio, and Payout Ratio row. It gives the undermentioned arrested development equation.
Rate of Return = I±+I?1 ( gaining per portion ) +I
Rate of Return =.205+.30 ( gaining per portion ) +I
4.2 Hypothesis Assessment Summary
Regression coefficient I?
1-Change in EPS has important association with the alteration in return
P & lt ; .05
P & lt ; .05
2-Change in keeping ratio has insignificant association with the alteration in return
P & gt ; .05
P & gt ; .05
2-Change in payout ratio has insignificant association with the alteration in return.
P & gt ; .05
P & gt ; .05
Chapter 5: Discussion, CONCLUSION,
IMPLICATIONS AND FUTURE RESEARCH
This survey has examined the impact of dividend policy in the period of January 2001 to December 2009 on the stockholders wealth. Regression consequences supported the hypothesis that “ Dividend policy has a important impact on stockholders wealth ” and arrested development was statistically important and has shown that there is a positive relationship between Gaining per portion and return, negative relation between payout ratio and return, and negative relationship between keeping ratio and return. The consequence showed that the Return has a relation with merely gaining per portion, whereas consequences showed that payout and keeping ratio had no any relation with return. We can reason that stockholders are concerned with merely gaining per portion, stockholders are non concerned with the payout or keeping.
We used informations from the different sectors to analyze the impact of dividend policy on stockholders wealth. We came to cognize that the dividend policy has impact on the stockholders wealth. We besides came to cognize that the stockholders are merely concerned with the earning of the companies.
5.3 Deductions and Recommendations
As our consequences show that the dividend policy has impact on the stockholders wealth, so the companies should concern about the dividend policy and should equilibrate in the payout and the keeping ratio. Companies should denote the dividend for the stockholders in order to keep the good relation with the stockholders.
5.4 Future Research
The present survey should be of important importance for the both stockholders and the companies. Therefore the hereafter survey can be conducted that the impact of new revenue enhancement regulations on the dividend policy, and how that impact transportations to stockholders wealth.