Impact of Dividend Policy Determinants on Indian Capital Market

 

Abhin. J¹, Diljith. P¹, Dr. A. Ananth²

¹MBA Student, Gnanam School of Business, Thanjavur,

²Professor, Department of Finance, Gnanam School of Business, Thanjavur

 

ABSTRACT:

In the growing arena of Corporate Finance dividend decision is considered to be one of the most complicated decision. Irrespective of the size and nature of the market the dividend policy demonstrates an unpredictable impact. Many scholars have put efforts to unveil the problems related to the dividend policy determinants, even though still do not have a satisfactory elucidation on the analyzed dividend nature of various firms. The principal decision that the firm has to deal with is the creation of trade-off between the profit to shareholders and ploughing back of profit. There are still contradictory opinions are prevailing in the field of dividend determinants and its effect on market value of the firm based on the share price. In one school of thought, the dividend decisions are irrelevant and does not need to pay much attention. On the other end certain theories considers dividend decisions are relevant and have significant impact on the market value of the firms in terms of share prices. The present study aims to shed some lights into the relationship between dividend policy and volatility of share price. For this purpose, a sample of five companies from FMCG sector which are listed in the NSE were selected and empirical study is steered to test the hypothesis using the balance sheet of respective companies for 10 years from 2007-2008 to 2016-2017 and the following ratios which include EPS, dividend yield, dividend payout ratio, ROE, Profitability ratios and the value of share have been calculated to test the same. The analyses conducted, parameter estimates are then studied using AMOS 21. The study proved that Price Earnings Ratio(PER) is act as the most influential determinant of dividend which impact the market value of FMCG firms in India.

 

 

 

1. INTRODUCTION:

Dividend policy- One among the most deliberated subjects and a principal concept in the field of Corporate Finance which still has its protruding place due to its inevitable impact and importance. Several scholars have argued with countless theories and innumerable experiential suggestions, But the topic is still open for discussion and investigation due to contradiction about the relationship between dividend pay-out and volatility in stock price It is one among the important unanswered problems in the growing field of Corporate Finance. We don’t have a justifiable clarification for the observed nature of dividend decision of the firms. In the initial era of finance literature, dividend decision is considered as the decision that deals with how much will be the profit portion distributed to shareholders for satisfying the objective of maximizing the wealth of shareholders and the portion of ploughing back for the investment purpose. There are various understandings amid the researchers regarding the association between dividend policy and market prices of stock. There are mainly three payment modes of dividend named stock dividend which generally deals with increasing the number of outstanding shares, second the regular dividend in which the dividend is paid on regular intervals finally the special dividend in which the dividend is paid over thenormal dividend. The Indian Capital Market is having a complex structure which has been affected by both the company related factors and the environmental factors. The dividend decision of each firm varies from one to another. The dividend decision of a firm will be affected by two major decisions they are a firm need for fund and shareholders need for income besides an optimal dividend decision can be influenced by– shareholders return, growth of the firm and market value of the company. Furthermore, the study intends to explore the outline of dividend policies in Indian Capital Market, examine the impact of dividend policy on NSE listed companies share market value.

 

2. LITERATURE REVIEW:

Nilam Panchal, Prof. Puja Khatri (Asian Journal of Management, 2017) in their study on How Does Dividend Policy Impact the Value of the Firm? – An analysis of selected Indian Sectors finds out that in a short-term perspective majority of the companies in the NIFTY 50 are favouring the irrelevant theory of dividend policy because in the short-term tenure there are not much changing in the movement of the market price. But for a long-term analysis it can be drawn to conclusion that the market slightly favours the relevant theory of dividend policy, further theyfind out that the dividend payment is acting as an inevitable tool to impact the market value and performance of a firm but the impact has become irrelevant because of the presents of other factors in the market.

 

Girish. S and Dr. Kavitha Desai (Asian Journal of Management. 2018)steered an analysis on the topic An Analysis of Accounting Variables and Its Impact on Market Price Per Share: Evidence From Nifty Pharma Index Companies of India. They analysed the influence of accounting variables on the market price per share of pharma companies in India. They used data from 2011 to 2017 and did regression analysis. The study revealed that earnings per share, dividend per share, and book value per share are some of the factors which are significantly and positively influences the market price per share of the companies.

 

Dr.Ayan Majumdar (Asian Journal of Management, 2017) conducted a study on Empirical Modelling of Corporate Dividend Policy: A Study on Nifty 50 Companies the major postulates that he put forwarded through the same are the previous dividend payment pattern and profitability of the firm are positively affecting the dividend payout ratio, whereas the liquidity, growth and free cash flow are then factors that are adversely affecting the dividend payout ratio. At the same time, he also found out that firm size, leverage and life cycle have failed to create any impact on the same, the overall study shed some light on the role and impact of several factors in framing the dividend payment structure of Indian companies.

 

Yogesh Verma and Priyanka (Asian Journal of Management, 2014 ) in their study on Dividend Behavior of Selected Companies in India revealed that the companies dividend policy in the current year is highly associated with the dividend paid  in the previous year and the earnings made in the current year, More over the  study found out that the companies in present scenario concentrated on the dividend payment which means rather than being a profit retainers the companies look to be dividend payers with the mindset that the dividend payment will help the companies to gain a long term momentum by increasing the market value of the firm.

 

Dr. Ayan Majumdar and Anuradha Saha (Asian Journal of Management, 2018) conducted a study on Influence of Macroeconomic Variables on Stock Market Volatility: A study on Nifty, found out that the economic health of a country is assessed by the performances of stock market the study revealed that dividend policy plays an inevitable role in maintaining the market value of the firm by having a control over the volatility of the stocks. The study further argues that in short term the dividend policy took by the firm has a mode of irrelevant approach and in long term the dividend policy plays a relevant role in creating a market value for the firm, the study further shed some light into the fact that the companies are moving from the old school thought of ploughing back of profit to dividend payment.

 

Ruchi Mangla and Dr. Manisha Goel (Asian Journal Management; 2017)   in their study titled The Impact of Financial Leverage and Earnings on Dividend Policy: A Study of Banking Sector in India discovered that the companies in banking sector in India are not up to the bench mark performance in terms of dividend payouts from 2013. Most of the banks were in a position of not meeting up the dividend pay out to the satisfactory level as well as also quite low, because the banks are suffering in terms of high debt and increased NPA, the investors those who are looking forward for a better return might not be happy. The study concludes that, this scenario of not matching up the dividend payment benchmarks is the indication of negative growth as in a scenario where the dividend payment policies got an inevitable importance in deciding the market value of the firm.

 

RupalMuduli and Udayan (Asian Journal of Management, 2018) Das in the a study on  Investment in Pharma Stocks in BSE: A Performance Analysis revealed that  there will be a presence of ambiguity in the minds of investors on the investment selection, one of the main factor considered by the investor is the dividend policy of the firms, the study further proved that the companies in  Pharma industry are now  moving to a pattern of dividend payment than profit retaining as on the assumption that the benefit in terms of increased market value in long run  can be gained through the same.

 

Jasminder Kaurand Dr. Harsh Vineet Kaur (Asian J. Management, 2015) conducted a study on the title Impact of Financial Leverage on Profitability of Fast Moving Consumer Goods Companies Listed on BSE revealed that the capital structure of the  companies has an impact on the market value of the firm. When the firms are earning less profit before interest and tax, it will result in less EPS to the equity shareholders. It means that the shareholders will not be paid much. In this case the companies have to follow an optimum capital structure that will provide more earnings to the ordinary shareholders. They concluded the research that EPS have an impact on the capital structure of the FMCG companies in India and the market value of the firms are influenced by the capital structure.

 

UpanandaPani (2006) analyzed the Dividend policy and Stock price behavior in Indian Corporate Sector. The author used Regression analysis is to test the hypothesis. The study was conducted using the selected sample of 500 listed companies from BSE for the years 1996-2006. The paper evaluated the impact and influence of dividend behavior of various firms corresponding to its market value.  The study concluded that dividend retention ratio is positively related with the stock returns when the industry is analyzed separate. Otherwise there is some distractions in the result based on the industry.

 

Ajeigbe and Kola Benson (IJECM, 2014) examined ‘The impact of dividend policy on Stock Price of listed Firms in Nigeria’. The aim of this research was to review the impact of dividend policy on the stock prices. The researchers used 22 listed companies on Nigerian Stock Exchange with the help of secondary data on their firm’s fundamentals from their corresponding relevant reports starting 2009 to 2013.  The study made a conclusion that a strong positive relationship exists between DPS and market value of share in Nigeria and it also recommended that both dividend pay-out and profit portion retained are found to have a strong influence on the prices of stocks of companies registered in NSE. Regression analysis, Correlation analysis and Granger Causality Test were used to test research hypothesis.

 

3. OBJECTIVES:

The present study aims to find out the impact of the dividend determinants on the Indian stock market performance and also to find out the most influencing determinant and suggest the investor in their future investment decisions.

 

4. RESEARCH METHODOLOGY:

This present study uses quantitative method of analysis to explore various aspects relating to the concepts of dividend determinants and its impact on Indian stock market. Selecting 5 FMCG companies listed in the NSE as sample and collected data for 10 years starting from 2007-08 to 2016-2017. The sample are the top 5 FMCG companies in India, namely, Hindustan Uniliver, ITC, Dabur, Britania and Marico. The data in this study consisted of daily closing price of these companies from the official website of National Stock Exchange and data related to financial performance are from websites like Moneycontrol and Economictimesindia. Using AMOS 21 an optimal structure is created.

 

The following formulas are used for the analysis:

Table-1: Equations

Earnings Per Share (EPS)	Net Income/Number of Shares
Return on Capital (ROC)	Earnings Before Interest and Tax /Capital Employed
Return on Net worth (RON)	Net income /Shareholders Equity
Return on Long Term fund (ROL)	Earnings Before Interest and Tax / Long Term Funds
Dividend Pay-Out Ratio (DPR)	Dividends / Net Income
Price Earnings Ratio (PER)	Market Value Per Share / Earnings Per Share

 

Abbreviations

Table-2: Abbreviations

 

 

 

5. ANALYSIS AND INTERPRETATION:

5.1Industry Output:

 

Figure-1:Overall model output

 

Regression Weights: (FMCG - Default model)

Table-3: Regression Weights

Path	Estimate	S. E	C.R	Sig.P Value
NP<---OPS	-.012	.004	-3.452	***
NP<--- OPM	-1.331	.313	-4.259	***
NP<--- GP	2.133	.342	6.241	***
EPS<--- NP	-1.844	.795	-2.318	.020
ROC<--- NP	-.621	1.402	-.443	.658
RON<--- NP	-2.489	1.019	-2.443	.015
ROL<--- NP	-3.070	1.207	-2.544	.011
DPR<--- EPS	-.241	.072	-3.361	***
DPR<--- ROC	.088	.043	2.044	.041
DPR<--- RON	.535	.055	9.634	***
DPR<--- ROL	-.255	.047	-5.468	***
PER <--- EPS	.032	.054	.587	.557
PER <--- ROC	.066	.032	2.051	.040
PER <--- RON	-.724	.042	-17.356	***
PER <--- ROL	.587	.035	16.775	***
ROE <--- EPS	.024	.053	.465	.642
ROE <--- ROC	.033	.032	1.041	.298
ROE <--- RON	.276	.041	6.775	***
ROE <--- ROL	.470	.034	13.741	***
Nifty <--- PER	294.904	53.295	5.533	***
Nifty <--- ROE	-22.466	44.489	-.505	.614
Nifty <--- DPR	72.323	73.468	.984	.325

 

Standardized Regression Weights: (FMCG - Default model)

Table-4: Standardized Regression Weights

Path	Estimate
NP<---OPS	-.086
NP<--- OPM	-2.053
NP<--- GP	3.007
EPS<--- NP	-.393
ROC<--- NP	-.081
RON<--- NP	-.411
ROL<--- NP	-.425
DPR<--- EPS	-.280
DPR<--- ROC	.167
DPR<--- RON	.804
DPR<--- ROL	-.457
PER <--- EPS	.026
PER <--- ROC	.088
PER <--- RON	-.766
PER <--- ROL	.741
ROE <--- EPS	.027
ROE <--- ROC	.059
ROE <--- RON	.390
ROE <--- ROL	.792
Nifty <--- PER	.972
Nifty <--- ROE	-.056
Nifty <--- DPR	.168

 

Squared Multiple Correlations (R²⁾:

Table-5: Squared Multiple Correlations

Dependent Variable	R2
NP	.984
ROL	.180
RON	.169
ROC	.007
EPS	.154
ROE	.907
PER	.946
DPR	.805
Nifty	.696

 

5. 2 INTERPRETATION:

As per the analysis, the P value of the Fig. 1.1, shows the impact level of independent variables on dependent variables. The Operating Profit Ratio (0.000), Operating Profit Margin (0.000) and Gross Profit (0.000) are significantly influenced by Net Profit as P value is less than 0.05. The independent variables such as Operating Profit, Operating Profit Margin and Gross Profit are influenced by Net Profit. The Net Profit has not significantly impact on ROC (0.658). ROL (0.011) and RON (0.015). EPS (0.020) is significant to Net profit ratio. The independent variable Net profit is influenced on RON, EPS and ROL. The independent variables such as EPS (.000), RON (.000), ROC (.041) and ROL (.000) are significantly influenced by DPR as P value is less than 0.05. RON (0.000), ROL (.000) and ROC (0.04) are significant to Price Earnings Ratio as the P value is less than 0.05. The independent variable EPS (.557) is not significant to PER. RON (.000) and ROL (.000) are significantly influenced by ROE as the P value is less than 0.05. EPS (.642) and ROC (.298) is not significant to ROE. The independent variable PER (0.000) the outcome variable to Nifty Index (Nifty) is significantly influenced. ROE (0.614) and DPR (0.325) are not significantly influenced to Nifty Index.

 

6. DISCUSSION AND CONCLUSION:

Dividend Policy – one of the most complicated and debatable topic in the Corporate Finance. This study is an effort to reveal the impact of determinants of dividend policy in market price of stocks in FMCG Sector in India. After this study we arrived in a conclusion that the market value of FMCG companies in India is significantly influenced by PER and the Price Earnings Ratio is highly influenced by Return on Long Term Funds, whereas DPR and ROE on Market value of FMCG companies doesn’t create significant impact. It shows that since the investor trades the scrip on market price, the PER influences strongly.

 

In the practical aspects, these findings may support firms to focus on the major factors which will have impact on Dividend Payment. Such evidence will support the FMCG firms in forming proper strategies to support the dividend payment and firm’s performance.

 

7. REFERENCE:

1.     Nilam Panchal, Puja Khatri. How does Dividend Policy Impact the Value of the Firm? – An analysis of selected Indian Sectors. Asian Journal of Management. 2018; 9(1):99-106.

2.     Desai, K. (2018). An Analysis of Accounting Variables and its impact on Market price per Share: Evidence from Nifty Pharma Index Companies of India. Asian Journal of Management, 9(1), 333-336.

3.     Verma, Y. (2014). Dividend Behavior of Selected Companies in India. Asian Journal of Management, 5(1), 84-89.

4.     Majumdar, A. (2017). Empirical modeling of corporate dividend policy: A study on nifty 50 companies. Asian Journal of Management, 8(3), 718-722.

5.     Kaur, J., & Kaur, H. V. (2015). Impact of Financial Leverage on Profitability of Fast Moving Consumer Goods Companies Listed on BSE. Asian Journal of Management, 6(4), 276-282.

6.     Mangla, R., &Goel, M. (2017). The impact of financial leverage and earnings on dividend policy: A study of banking sector in India. Asian Journal of Management, 8(3), 379-383.

7.     MuduliRupal, Das Udayan (2018), Investment in Pharma Stocks in BSE: A Performance Analysis, Asian Journal of Management 9(1),351-358

8.     Majumdar Ayan, G., Saha Anuradha (2018). Influence of Macroeconomic Variables on Stock Market Volatility: A study on Nifty. Asian Journal of Management 9(1),440-444

9.     UpanandaPani, Dividend policy and stock price behaviour in Indian corporate sector: A panel data approach, Research Scholar, Department of Humanities and Social Sciences.

10.  Ajeigbe, Kola Benson (September 2014) The Impact of Dividend Policy on Stock Prices of Quoted Firms in Nigeria, International Journal of Economics,

11.  Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe (2004) Corporate Finance (Page no: - 514-515)

12.  AswathDamodaran (2008) Corporate Finance Theory and Practice (Page no: 659-685)

13.  I M Pandey (2015) FinancialManagement (Page no: 440-457)

 

 

 

 

 

 

 

 

Received on 06.03.2018          Modified on 10.04.2018

Accepted on 21.04.2018           ©A&V Publications All right reserved