Electronic copy available at: http://ssrn.com/abstract=1545749

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_15

Abstract:

The present paper is aimed at analyzing the impact of dividend policy of

shareholders’ wealth in Textile sector of Pakistan during 2004 to onwards. To

measure the impact of dividend policy on shareholders’ wealth multiple regression

method and stepwise regression models will be used by taking (Dividend per

Share), 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 of

explained 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 study

proved that the wealth of the shareholders is greatly influenced mainly by five

variables viz., Growth in sales, Improvement of Profit Margin, Capital Investment

Decisions (both working capital and fixed capital), Capital Structure Decisions,

Cost of Capital (Dividend on Equity, Interest on Debt) etc. The previous study was

done on organic and inorganic chemical industries of India. The author found a

significant impact of dividend policy on shareholders’ wealth in Organic Chemical

Companies while the shareholders’ wealth is not influenced by dividend payout as

far as Inorganic Chemical Companies are concerned. This study aims to apply the

previous research on textile sector of Pakistan.

Electronic copy available at: http://ssrn.com/abstract=1545749

Keywords: Dividend Paying Companies, DPS, Share Price, Retained Earrings.

Introduction:

Pakistan has a diverse economy that includes textiles, chemicals, leather

products, food processing, financial services, telecommunications, retail,

automobile manufacturing, light and heavy armaments, agriculture and other

industries.

Pakistan’s textile industry is a major contributor to the national economy in terms

of exports and employment. Pakistan holds the distinction of being the world’s 4th

largest 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 and

accounted for 55% of the total exports. The share of textile industry in the

economy along with its contribution to exports, employment, foreign exchange

earnings, investment and value added makes it the single largest manufacturing

sector for Pakistan. It contributes around 8.5 percent to GDP, employs 38 percent

of the total manufacturing labor force, and contributes between 60-70 percent to

total merchandise exports.

Finance scholars have engaged in extensive theorizing to explain the impact of

dividend policies on shareholders. Some researchers have developed and

empirically tested various models to explain it. Some researchers have surveyed

corporate managers and institutional investors to determine their views about its

impact. In Pakistan, the industry do not follows the same patterns as in other

countries because of terrorism and other political and economics issues make the

investor hesitate to invest. The textile sector being the major sector of Pakistan’s

economy the implication of this study is more significant as textile sector

represents 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 of

dividend paying and non-paying companies (Textile) in Pakistan.

Electronic copy available at: http://ssrn.com/abstract=1545749

• To analyze the impact of retained earnings and past performance in the

presence of dividend policy on shareholders’ wealth of (Textile) Companies in

Pakistan.

Literature Review:

The question of whether dividend policy affects the wealth of the shareholders has

puzzled researchers and corporate managers for many years. Dividend policy is

one of the most widely researched topics in finance. Yet, researchers have

different views about whether the percentage of earnings that a firm pays out in

dividends materially affects its long-term share price. Some empirical studies

appear to support Miller and Modigliani's (1961) classic dividend irrelevance

proposition [e.g., Black and Scholes (1974), Miller and Scholes (1978), Jose and

Stevens (1989)]; others do not [e.g., Long (1978), Sterk and Vandenberg (1990)].

In addition, survey research by Farrelly, Baker, and Edelman (1985) shows that

corporate managers typically believe that dividend policy affects a firm's value and

that an optimal level of dividend payout exists.

Baker and Powell (1999) conducted a survey on dividend policy. Most

respondents think dividend policy affects firm value and also it has effect on

shareholder’s wealth. Respondents had the highest level of agreement with

statements involving dividend signaling. This idea has merit since a share of

common stock is worth the "present" or "discounted" value of its stream of future

dividends (Malkiel, 1999, p. 327). Cash dividends announcements convey

valuable information about assessment of a firm's future profitability. The survey

results suggest that investors may use dividend announcements as information to

assess a firm's stock price. For example, steep drops in stock prices often

accompany dividend cuts signaled as bad news about the future prospects of the

firm.The bird in hand theory claims a high dividend yield will maximize a firm's

value. Dividends represent a sure thing relative to share price appreciation

because dividends are less risky than capital gains. The study respondents also

suggested that managers are highly concerned about the continuity of dividends.

Dividend continuity suggests stability and constant growth in the firm's earnings.

This increases investor confidence by insuring a constant of return on

investments.

Hypotheses:

• H1: “There is no significant difference in average market value relative to book

value 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 share

holder’s wealth. Previous study is used to examine the relationship between

dividend policy and share holder’s wealth. Data will be collected from both primary

and secondary sources. The primary source is field surveys, while the secondary

source is the “Monthly Survey of textile sector”.

Sampling:

Originally the sample for this study has been planned to choose from the list of

companies listed in Karachi Stock Exchange (KSE). A sample of 50 textile

companies will selected on the basis of availability of information like DPS, and

share 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.com DeAngelo, H. and DeAngelo, L. (2006). The irrelevance of the MM dividend irrelevance the-orem. Journal of Financial Economics, 79(2), 293-315. Jensen, M. (1986). Agency costs of free cash ow, corporate _nance, and takeovers. 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 of shares. Journal of Business, 34, 411-433.