The Impact of Dividend Policy on Shareholders’ Wealth
R. Azhagaiah Faculty Member, Department of Commerce Kanchi Mamunivar Centre for Post Graduate Studies (Autonomous) (Govt. of Puducherry) Affiliated to Pondicherry Central University Puducherry – 605 008, South India E-mail: drrazhagaia@ yahoo.co.in Tel: ++91-0413 – 2255017; Fax: ++91-0413-2251687 Sabari Priya .N Research Scholar, Department of Commerce Kanchi Mamunivar Centre for Post Graduate Studies (Autonomous) (Govt. of Puducherry) Affiliated to Pondicherry Central University Puducherry – 605 008, South India E-mail: email@example.com Tel: ++91-0413 – 2255017; Fax: ++91-0413-2251687 Abstract The present paper is 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 are used by taking DPSit (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) has been tested with the help of F value. The study proves 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 is 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. Keywords: Dividend Paying Companies, Dividend Non-Paying Companies, DPSDividend Per Share, MPS-Market Price Per Share
In an ever-increasing Indian economy, globalization, liberalization and privatization together with rapid strides made by information technology, have brought intense competition in every field of activity. So, Indian companies at present are dazed, confused, and apprehensive1. To maintain the competitiveness of, and add value to the companies, today’s finance managers have to make critical
International Research Journal of Finance and Economics - Issue 20 (2008)
business and financial decisions which will lead to long-run perspective with the objective of maximizing the shareholders’ wealth2. Shareholders’ wealth is represented in the market price of the company’s common stock, which, in turn, is the function of the company’s investment, financing and dividend decision3. Managements' primary goal is shareholders' wealth maximization, which translates into maximizing the value of the company as measured by the price of the company’s common stock4. Shareholders like cash dividends, but they also like the growth in EPS that results from ploughing earning back into the busines5s. The optimal dividend policy is the one that maximizes the company's stock price which leads to maximization of shareholders' wealth and thereby ensures more rapid economic growth6. The present study is intended to study how far the dividend payout has impact on shareholders' wealth in general; and in particular to study the relationship between the shareholders' wealth and the dividend payout and to analyze whether the level of dividend payout affects the wealth of the shareholders.
2. Statement of the Problems
In India few studies have analyzed the relationship between the shareholders' wealth and dividend payment. Net earnings are divided into two parts –...