How does Dividend Policy Impact the Value of the Firm? – An analysis of selected Indian Sectors

 

Nilam Panchal*

B.K. School of Business Management, Gujarat University, Ahmedabad

*Corresponding Author E-mail:  nilamcpanchal@gmail.com

 

ABSTRACT:

One question that has bothered most finance managers over several decades is the decision on whether to pay or not to pay dividends. Dividend decisions are important because they determine what funds flow to investors and what funds are retained by the firm for investment. Dividend yield has a significant positive effect on share price while retained earnings ratios have a significant negative effect on it. The purpose of the study is to determine short term and long term the effects of dividend policy on the market performance of company. Dividend policy is a widely-researched topic in the field of investments and finance but still it remains a mystery that whether dividend policy affects the stock prices or not. There are many internal and external factors, which simultaneously affect stock returns and it is almost impossible to segregate the effect of each. This study mainly focuses on analyzing the impact of dividend policy on the value of the firm. For analyzing purpose of this study, short-term effect and long term effect on market price of company or market performance of company were examined. To understand the effect of dividend declaration a sample of various companies from various industries, comes under nifty50 was taken for the study. A long term and short term analysis was done to understand the effect of dividend declaration on market value. In this study attempts were made to find out correlation between dividend declaration and changes in market value of the share. The research is purely based on secondary data. It was found in this study that dividend policy is an important tool to affect the market performance of company but its impact has become irrelevant due to available of other factors in market.

 

KEYWORDS: Dividend Policy, Value of Firm, Short term Effect, Long Term Effect

 

 

INTRODUCTION:

A dividend policy is a company's approach to distributing profits back to its owners or stockholders. Dividend policy is an integral part of financial management decision of a firm. Dividend policy remains one of the most important financial policies not only from the viewpoint of the company, but also from that of the shareholders, the consumers, employees, regulatory bodies and the Government.

 

Every firm operating in a given industry follows some sort of dividend payment pattern or dividend policy and obviously it is a financial indicator of the firm. Thus, demand of the firm’s share should to some extent, dependent on the firm’s dividend policy. Dividends affect the price of the underlying stock in three primary ways. While the dividend history of a given stock plays a general role in its popularity, the declaration and payment of dividends also has a specific and predictable effect on market prices. It stands to reason that the possibility of creating recurring investment income encourages investors to purchase and retain shares of stock. While this motivation may seem to be purely economical, the underlying beliefs about the company's profitability are what impact stock prices the most. To understand how dividends positively affect investor thinking, it helps to first understand the mechanics of the stock market and the basic of how dividends work. The Dividend Decision is an important part of the present day corporate world. The payment of dividends impacts the perception of a company in financial markets, and it may also have a direct impact on its stock price. There are a number of factors affecting the
dividend policy decisions of a firm such as investor’s preference, earnings, investment opportunities; annual vs. target capital structure, flotation costs, signaling, stability and Government policies and taxation. Declaration of dividend, sometimes its impact on market price of company is either positive or negative or sometimes it is irrelevant mean no effect on market price of company. All these effects are depended on dividend policy of company and its declaration of it. Before examining the impact of dividend policy, it is must to clear the meaning of dividend.

 

Dividend:

Dividend is a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves). Dividends are mostly paid quarterly or annually. The Dividend Decision, in corporate finance, is a decision made by the directors of a company about the amount and timing of any cash payments made to the company's stockholders. The Dividend Decision is an important part of the present day corporate world. It is important for the firm as it may influence its capital structure and stock price. There are certain issues that are taken into account by the directors while making the dividend decisions: -

· Free Cash Flow

· Signaling of Information

· Clients of Dividends

 

Free Cash Flow Theory:

The free cash flow theory is one of the prime factors of consideration when a dividend decision is taken. As per this theory the companies provide the shareholders with the money that is left after investing in all the projects that have a positive net present value.

 

Signaling of Information:

It has been observed that the increase of the worth of stocks in the share market is directly proportional to the dividend information that is available in the market about the company, whenever a company announces that it would provide more dividends to its shareholders, the price of the shares increases.

 

Clients of Dividends:

While taking dividend decisions the directors have to be aware of the needs of the various types of shareholders as a particular type of distribution of shares may not be suitable for a certain group of shareholders. It has been seen that the companies have been making decent profits and also reduced their expenditure by providing dividends to only a particular group of shareholders.

 

Dividend Theories:

There are two types of Dividend theories-

·        Relevant Dividend Theory

·        Irrelevant Dividend Theory

 

Relevant Dividend Theory:

Dividends paid by the firms are viewed positively both by the investors and the firms. The firms which do not pay dividends are rated in oppositely by investors thus affecting the share price. The people who support relevance of dividends clearly state that regular dividend reduce uncertainty of the shareholders i.e. the earnings of the firm is discounted at a lower rate, thereby increasing the market value. However, it’s exactly opposite in the case of increased uncertainty due to non-payment of dividends. Two important models supporting dividend relevance are given by

 

Walter and Gordon:

Walter's model:

Walter's model shows the relevance of dividend policy and its bearing on the value of the share. Dividends are referred to as the opportunity cost of the firm or the cost of capital, ke for the firm. Another situation where the firms do not pay out dividends is when they invest the profits or retained earnings in profitable opportunities to earn returns on such investments. This rate of return r, for the firm must at least be equal to ke. If this happens then the returns of the firm is equal to the earnings of the shareholders if the dividends were paid. Thus, it's clear that if r is more than the cost of capital ke, then the returns from investments is more than returns shareholders receive from further investments.

 

If r > ke, the firm should have zero payout and make investments.

If r < ke, the firm should have 100% payouts and no investment of retained earnings.
If r = ke, the firm is indifferent between dividends and investments.

 

 

P = Market price of the share

D = Dividend per share

r = Rate of return on the firm's investments

Ke = Cost of equity

E = Earnings per share'

 

The market price of the share consists of the sum total of:

· The present value of an infinite stream of dividends.

· The present value of an infinite stream of returns on investments made from retained earnings.

Therefore, the market value of a share is the result of expected dividends and capital gains according to Walter.

 

Gordon's Model:

Myron J. Gordon has also supported dividend relevance and believes in regular dividends affecting the share price of the firm. According to this model Investors are risk averse and believe that incomes from dividends are certain rather than incomes from future capital gains, therefore they predict future capital gains to be risky propositions. They discount the future capital gains at a higher rate than the firm's earnings, thereby evaluating a higher value of the share. In short, when retention rate increases, they require a higher discounting rate. Gordon has given a model similar to Walter’s formula to determine price of the share.

 

Where,

P = Market price of the share

E = Earnings per share

b = Retention ratio (1 - payout ratio)

r = Rate of return on the firm's investments

ke = Cost of equity

br = Growth rate of the firm (g)

 

Therefore the model shows a relationship between the payout ratio, rate of return, cost of capital and the market price of the share.

 

Irrelevant Dividend Theory:

The Modigliani and Miller school of thought believes that investors do not state any preference between current dividends and capital gains. They say that dividend policy is irrelevant and is not deterministic of the market value. Therefore, the shareholders are indifferent between the two types of dividends. All they want are high returns either in the form of dividends or in the form of re-investment of retained earnings by the firm. There are two conditions discussed in relation to this approach.

 

· Decisions regarding financing and investments are made and do not change with respect to the amounts of dividends received.

· When an investor buys and sells shares without facing any transaction costs and firms issue shares without facing any floatation cost, it is termed as a perfect capital market.

 

 

 

Modigliani-Miller theorem:

The Modigliani–Miller theorem states that the division of retained earnings between new investment and dividends do not influence the value of the firm. It is the investment pattern and consequently the earnings of the firm which affect the share price or the value of the firm. The dividend irrelevancy in this model exists because shareholders are indifferent between paying out dividends and investing retained earnings in new opportunities. The firm finances opportunities either through retained earnings or by issuing new shares to raise capital. The amount used up in paying out dividends is replaced by the new capital raised through issuing shares. This will affect the value of the firm in an opposite way. The increase in the value because of the dividends will be offset by the decrease in the value for new capital rising.

 

LITERATURE REVIEW:

Pani, (2008) in this paper analyzed the possible links between dividend policy and stock-price behavior in Indian corporate sector. For study purpose 500 listed companies on BSC had been taken during the period 1996-2006.The survey made on six different industries namely electricity, food and beverage, mining, Non-metallic, Textile and service-sector. Fixed effect model had been used for study purpose. The variables like size and long term debt-equity ratio has been taken for analyzing the relationship between dividend retention ratio and stock-price behavior of the firm by using panel data approach. The study result based on fixed effect model. The result of this model indicated that there is possible links between dividend policy and stock price behavior. The author said that in some industries it showed the possibility of “clientele effect.

 

Sura, Pal, and Bodla, (2006):

In this paper evaluated the factors influencing dividend policy decisions in banking sector. This study examined the re-applicability of Linter’s (1956) and Britain (1966) path breaking analyses of dividend policy. For, study purpose banks listed on National stock exchange have been taken. Survey has been made by using cross sectional analysis during the period 1996-2006.The study found that commercial banks in India generally followed stable dividend policy. The study also found that lagged dividends and current earnings are major determinants of dividends. The study also supported the argument of ‘information content of dividends’ with reference to dividend proceeds. Hence, author suggested that the management of the bank can use dividend policy as signaling device.

 

Mittal and Chopra, (2006):

Investigated the dividend behavior of NSC and BSC firms. The article studied the dividend behavior of selected firms during the period 2001-2005 and divides them into payers and non-payers groups. To know the relationship of dividend paid with investment opportunities, Growth cost of equity and ownership structure regression analysis was used. The study found that payer firms to have large size, less investment opportunities and high cost of retained earnings and the opposite in case of nonpayers. Author also found that by reducing agency costs promoters can increase in dividend with increase in equity ownership.

 

Balyan(n.d.):

Attempted to know the relationship between earnings and dividends particularly for top five selected companies from steel sector in India for finding out the difference practices. For analysis purpose variables like earnings per share, dividend per share, dividend payout ratio and dividend yield has been taken. For study purpose one way ANOVA and an independent sample t test has been used. The study found that companies belonging to steel industry who have declared dividend do not follow a similar pattern while declaring dividends to shareholders in relation to earnings.

 

Gupta and Banga, (2010):

Re-examined the various factors that influenced the dividend decision of firms. The study has been conducted on BSE listed Indian companies for the period 2001- 2007.Depending on the literature review author has found fifteen variables for framing dividend policy. Author used factor analysis for extracting prominent factors from various variables. And then multiple regression analysis has been conducted. The result of the factor analysis showed that leverage, liquidity, ownership structure and growth are major factors. The study revealed that after applying regression leverage and liquidity are the major determinants of dividend policy for Indian companies. The study also found that non-financial factors such as foreign collaborators’ shareholding, attitude and behavior of management, company policy etc. may also influence the dividend decision of firm.

 

Gayathridevi and Mallikarjunappa, (2012):

Analyzed the trends and determinants of dividend decisions. For survey purpose NSC listed 114 Indian Textiles companies have been taken during the period 1989-2009.The simple Regression model was used to evaluate the study. Study revealed that most of the dividends paying companies are profit making companies. The study also showed that absolute value of dividends and dividend paid-up capital shows the significant and positive relationship between dividend policy and lagged earnings belonging to common shareholders, profit after tax, earnings belonging to shareholders cash flows, size, cash dividends and lagged dividends. It also showed that current Ratio and capital structure have insignificant influence on dividend policy.

Kaur and Saraf, (2014):

Investigated the concept and scope of dividend policy and to study the irrelevance theory (Modigliani-Miller Model) dividend theory and to know the relationship between dividend policy approach and share prices (companies listed in CNX Dividend opportunities Index was chosen as population universe) and for sample 5% companies listed in index was considered. Analysis has been made by using secondary data and simple random sampling is used during period 2013-2014.The study found that there is neither positive nor negative relationship between the market price of shares and dividend payout. Author said that due to other factors share-prices are affected. It can be concluded that irrelevance theory shows true picture in current scenario in comparison to relevance theory in short time period.

 

Fama and French, (2001):

Analyzed the issue of lower dividends paid by corporate firms over the period 1973- 1999 and the factors responsible for the decline. In particular they analyze whether the lower dividends were the effect of changing firm characteristics or lower propensity to pay on the part of firms. They observe that proportion of companies paying dividend has dropped from a peak of 66.5 percent in 1978 to 20.8 percent in 1999.

 

They attribute this decline to the changing characteristics of firms: “The decline in the incidence of dividend payers is in part due to an increasing tilt of publicly traded firms toward the characteristics – small size, low earnings, and high growth – of firms that typically have never paid dividends”

 

Khan, (2006):

Investigated how the ownership structure of firms affects their dividends policies. His sample period covers the period of 1985-1997 and the sample size reaches a maximum of 281 firms in 1989 and a minimum of 126 firms in 1985. A key contribution of this article is that it exploits extremely rich ownership data on all beneficial owners (individuals, insurance companies, pension funds and other financial institutions) holding more than 0.25% of any given firm’s equity. A significantly negative relation between dividends and ownership concentration result appear to corroborate Rozeff’s model, dividends fall when the degree of ownership of ownership concentration increase, which is generally associated with better incentives to monitor. However, the positive relationship between dividends and insurance companies would suggest that they are relatively poor at monitoring compared to individual investors. These results imply particularly acute agency problems when insurance company shareholdings is high and provide some support for the views expressed in the various governance reports.

 

Azhagaiah and .N, (2008):

Aimed at analyzing the impact of dividend policy of shareholders’ wealth in Organic and Inorganic Chemical Companies in India during 1996 –1997 to 2005-2006. To measure the impact of dividend policy on shareholders’ wealth multiple regression method and stepwise regression models were used by taking DPS it (Dividend per Share), RE it (Retained Earnings per Share), Pet-1 (Lagged Price Earnings 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) has been tested with the help of F value. The 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. There was a significant impact of dividend policy on
shareholders’ wealth in Organic Chemical Companies while the shareholders’ wealth was not influenced by dividend payout as far as Inorganic Chemical Companies were concerned.

 

OBJECTIVE OF THE STUDY:

·      To find the impact of dividend announcement on shareholders’ wealth

·      To analyses the impact of dividend policy on shareholders' wealth and market performance of dividend paying and non-paying companies.

·      To find that whether retained earnings or dividends increase shareholder’s wealth.

·      To analyze the impact of dividend per share on market price per share

 

SCOPE OF THE STUDY:

The study focuses on dividend policy of the companies which are listed in NSE as NIFTY50. This study is concentrating on NIFTY50 companies for short term analysis and on IT and service (banking) sector for long term analysis.

 

RESEARCH METHODOLOGY:

In this section a brief overview of various dimensions of the research, tools and techniques and methods used to achieve various research objectives has been discussed. For analysing short term effect, pre-weekly and post weekly market price data in context of dividend declaration was collected, and for analyzing long term effect statistical measure i.e. correlation between dividend payout ratio (independent variable) and market price (dependent variable) is used. The given formula is used to analyze effect –

 

Research Design:

This study is mainly descriptive, analytical and empirical in nature. In this study secondary data is collected to analyze the impact of dividend policy on market performance of company in the selected Sectors in India.

 

Data collection:

This study is completely based on secondary data. For short term analysis, weekly data from pre and post date of declaration of dividend was taken, and for long term, data was taken of Nifty 50 companies from year 2011 to 2015.

 

Sample:

NIFTY50 was used as sample to analyze the impact on market performance of companies in context of NSE.

 

ANALYSIS:

In this study analysis is divided into two parts

·        Short term Analysis

·        Long term analysis

 

Analysis of Short Term Effect of Dividend Policy:

Here pre-weekly data and post-weekly data of market price in context of dividend declaration of NIFTY50 companies was taken to analyze the impact of market price movement of companies before a week of declaration of dividend and after declaration of dividend. Here comparison of pre and post effect of declaration of dividend was done to know that declaration of dividend is affected on market price of company positively or negatively. Sector wise short term analysis is as follows.

 

Among 50 companies, 25 companies either who declared dividend or not, there is no impact on their market price. Market performance of 11 companies are improving (positive change) because of declaration of dividend. But market performance of 14 companies is moving in negative direction because of dividend declaration. So, it can be said that market performance of mostly company is irrelevant of dividend policy means dividend policy is rarely affected market price of company. The performance of company is not much depended on distribution of dividend.

 

Analysis of Long Term Effect of Dividend Policy:

In this section of the study the long-term impact of dividend policy on market price of companies (sector wise) was analyzed. For this purpose, statistical measure i.e. correlation between market price of companies and their respective dividend payout ratios were calculated.

So, it was clear that how much change in market price is due to change in dividend payout ratio.

 

 

Table-1: Sector wise analysis of effect of dividend policies on market price of companies:

Sr.No.

Sector

Company

AVERAGE % CHANGE IN PRICE

Effect of dividend

Pre weekly

Post weekly

1

Cigarettes Sector

ITC

0.14

-0.43

Negative

2

PHARMACEUTICALS SECTOR

Dr Reddy’s Laboratories

-0.11

4.15

Positive

3

Cipla

-0.82

-1.32

No Effect

4

Lupin

-0.18

0.4

Positive

5

Sun Pharmaceutical Industries

0.46

1.55

Positive

6

Information Technology Sector

HCL Technologies

0.48

-0.43

Negative

7

Infosys

-0.76

-0.52

No Effect

8

TCS

-0.38

-0.45

No Effect

9

Tech Mahindra

0.77

-1.82

Negative

10

Wipro

-0.96

-0.97

No Effect

11

Cement Sector

ACC

-0.16

0.8

Positive

12

Ambuja cement

0.56

-1.07

Negative

13

Ulta Tech Cement

-1.38

-0.18

No Effect

14

Auto mobile

Bajaj Auto

-0.19

0.23

Positive

15

Bosch

-0.05

-1.8

Negative

16

Hero Motocorp

-0.17

1.16

Positive

17

Mahindra and Mahindra

-0.64

-0.6

No Effect

18

Maruti Suzuki India

-0.53

-0.38

No Effect

19

Tata Motors

-0.7

-1.28

No Effect

20

Financial Services Sector

Axis Bank

0.05

-0.01

Negative

21

Bank of Baroda

-0.16

-0.82

No Effect

22

HDFC

-0.86

0.32

Positive

23

ICICI Bank

-0.31

0.18

Positive

24

IndusInd Bank

0.34%

-1.76

Negative

25

Kotak Mahindra Bank

0.83

-0.28

Negative

26

SBI

1.2

-0.83

Negative

27

Yes Bank

-0.99

1.05

Positive

28

Metal sector

Coal India

0.16

0.8

No Effect

29

Hindalco Industries

-0.58

-1.5

No Effect

30

Tata Steel

0.02

-0.13

Negative

31

Energy Sector

Bharat Petroleum Corporation

0.08

0.46

No Effect

32

GAIL India

0.28

-0.34

Negative

33

NTPC

-0.15

0.26

Positive

34

ONGC

0.46

-0.95

Negative

35

Power Grid Corporation of India

0.29

0.4

No Effect

36

Reliance Industries

1.7

-0.97

Negative

37

Tata Power Company

0.71

-0.32

Negative

38

Telecom Sector

Bharti Airtel

-0.63

-0.32

No Effect

39

Idea Cellular

-1.22

-1.68

No Effect

40

Consumer Goods Sector

Asian Paints

0.2

0.32

No Effect

41

Construction sector

Larsen and Toubro

0.37

0.01

No Effect

42

Industrial Manufacturing sector

Bharat Heavy Electricals

0.26

0.39

No Effect

43

Media and Entertainment

Zee Entertainment Enterprises

0.05

0.14

No Effect

(Source- Calculations done by researcher on data collected from NSE)

 

Table-2: Summary of effect of dividend policies on various companies of Nifty 50

POSITIVE CHANGE

NEGATIVE CHANGE

NO CHANGE

ACC

ADANI PORTS

AXIS BANK

BAJAJ AUTO

AMBUJA CEMENTS

BOB

CAIRN INDIA

HCL TECHNOLOGIES

BHARTI AIRTEL

DR. REDDY'S LAB

HINDUSTAN UNILEVER

BHEL

HDFC

INDUSIND BANK

BOSCH

HERO MOTOCORP

ITC BANK

BPCL

ICICI BANK

KOTAK MAHINDRA BANK

CIPLA

LUPIN

ONGC

COAL INDIA

NTPC

RELIANCE INDUSTRIES

GRASIM IND.

PNB BANK

STATE BANK OF INDIA

HDFC BANK

YES BANK

TATA POWER COMPANIES

HINDALCO IND.

TATA STEEL

IDEA CELLULAR

TECH MAHINDRA

INFOSYS

GAIL INDIA

LandT

MAHINDRA and MAHINDRA

MARUTI SUZUKI

POWER GRID CORPORATION OF INDIA

SUNPHARACEUTICAL  IND.

TATA MOTORS

ULTRATECH CEMENT

VEDANTA

WIPRO

ZEE INTERPRISE LTD.

ASIAN PAINTS LTD.

TCS

(Source: inferences drawn from calculation of data)

 

Table 3:Correlation between D/P ratio and market price of companies

SECTOR

NAME OF COMPANY

CORRELATION

RESULT

IT Sector

HCL Technologies

0.608

Positive

Infosys

-0.797

Negative

TCS

0.713

Positive

Tech Mahindra

-0.329

Negative

Wipro

0.401

Positive

Bank Sector

Axis bank

-0.59

Negative

Bank of Baroda

0.59

Positive

HDFC Bank

-0.44

Negative

ICICI Bank

-0.55

Negative

IndusInd Bank

0.94

Positive

Kotak Mahindra bank

-0.47

Negative

State bank of India

0.4

Positive

Yes bank

0.86

Positive

(Source: Calculation done by author)

 

 

The correlation coefficient can range between ±1.0 (plus or minus one). A coefficient of +1.0, a "perfect positive correlation," means that changes in the independent item will result in an identical change in the dependent item. A coefficient of -1.0, a "perfect negative correlation," means that changes in the independent item will result in an identical change in the dependent item, but the change will be in the opposite direction. A coefficient of zero means there is no relationship between the two items and that a change in the independent item will have no effect in the dependent item. There are 5 companies of IT in NIFTY 50. Among these 5 companies, 3 companies are showing positive correlation and 2 companies are showing negative correlation. There are 8 companies of banking sector in NIFTY50. Among these 8 companies, 4 companies are showing positive correlation and 4 companies are showing negative correlation.

 

Positive impact:

HCL Technologies and TCS are showing “high positive correlation”. So, it can be said that the impact of dividend payout ratio (independent variable) is showing more effect on market price (dependent variable). From these it is found that these 2 companies having good dividend policy and it can attract more investors. Wipro is also showing positive correlation but it is less than HCL technologies and TCS. So the impact of dividend policy on market price of Wipro is less effective than HCL technologies and TCS.

 

Bank of Baroda, IndusInd Bank, State bank of India, and Yes bank is showing positive correlation. IndusInd Bank and Yes bank are showing “high positive correlation”. So, it can be said that the impact of dividend payout ratio (independent variable) is showing more effect on market price (dependent variable). From it is clear that these 2 companies are having good dividend policy and it can attract more investors. State bank of India, and Bank of Baroda are also showing positive correlation but it is less than IndusInd Bank and Yes bank. So the impact of dividend policy on market price of State bank of India, and Bank of Baroda are less effective than HCL technologies and TCS.

 

Negative impact:

Infosys is showing “high negative correlation” and tech Mahindra is showing “less negative correlation”. A high negative correlation says that when the dividend payout ratio changes, the market price moves in the opposite direction. So, it can be said that these companies are more interested to retain their earning than to distribute their profit as dividend.

 

Axis bank, HDFC Bank, ICICI Bank and Kotak Mahindra bank are showing negative correlation. Axis bank and ICICI Bank are showing “high negative correlation” and HDFC Bank and Kotak Mahindra bank are showing “less negative correlation” with dividend payout ratios. A high negative correlation says that when the dividend payout ratio changes, the market price moves in the opposite direction. So, it can be said that these companies are more interested to retain their earning than to distribute their profit as dividend.

 

Based on this analysis, it can be stated that overall banking Sector shows irrelevant impact of the dividend policy on market price. So, it cannot be said that dividend declaration is good or not for banking factor because there are same number of companies are showing positive and same no. of companies are showing negative impact of dividend declaration. So, companies of banking sector should either distribute their earning as dividend or retained, there is no impact on overall banking sector of dividend policy.

 

Comparatively Analysis of IT Sector and Banking Sector:

It is found in this study that IT Sector companies having positive impact of dividend policy than the banking sector companies. Thus, it can be said that investors are more interested to invest their fund in IT–sector than banking sector. IT sector are more sensitive if there is any change in dividend policy. In banking sector, some banks are showing positive correlation and some are showing negative correlation. So it becomes irrelevant. Balance is occurred between positive correlation bank and negative correlation bank. IT sector are more growth prospective than banking sector. Thus the impact of dividend policy on market performance of IT sector are more positive impact and banking sector are showing positive and negative impact in same proportion.

 

CONCLUSION:

It can be concluded that in short term analysis, mostly company of NIFTY50 are supporting to irrelevant approach of dividend policy because there is not much changing their movement of market price. But in that some company are showing positive effect and adverse effect of dividend policy also. This study analyzed that dividend policy of company is not much affected on its market price so company should give dividend or not, it is based on company’s requirement. For long term analysis, it can be concluded that impact of dividend policy on IT sector is more than the Banking sector. Because in IT sector three companies are showing positive correlation out of five companies but in banking sector, four companies are showing positive correlation and four are showing negative correlation out of eight companies. So, it is clear that impact of dividend policy on IT sector is positive and on banking sector is irrelevant. Thus, it can be said that dividend policy is an important tool to affect the market performance of company but its impact has become irrelevant due to available of other factors in market.

 

SUGGESTION FOR FUTURE RESEARCH:

Since the study was based on only NIFTY50 companies to analyze impact. Thus, future research could be possible for Bombay stock Exchange by using SENSEX index. Here the data was taken for long term analysis from 2011 to 2015. Same research can be possible by taking more than five years data. This study can be done by using other statistical tools as well to know the impact of dividend policy on market performance of industry. Effect of dividend policy can be executed on other sectors than bank and IT as well. Further research could be done by looking at half yearly results as opposed to yearly results and stock prices. This could assist to gauge the effect on stock returns of those firms that adopt interim dividend payments policy with in the financial sector.

 

REFERENCES:

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4.     Gayathridevi, A., And Mallikarjunappa, T. (2012). Dividend Policy of Indian Textile Companies - An Empirical Study. Journal of Contemporary Management Research, 6(2), 14-32.

5.     Gupta, A., and Banga, C. (2010). The Determinants of Corporate Dividend Policy. Decision (0304-0941), 63-77.

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Received on 30.08.2017                Modified on 10.09.2017

Accepted on 26.09.2017            ©A&V Publications All right reserved

Asian Journal of Management. 2018; 9(1):99-106.

DOI: 10.5958/2321-5763.2018.00015.X