Dividend Policy

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Effects of Dividends on Stock Prices in Nepal
Rabindra Joshi* Abstract
This paper examines the impact of dividends on stock price in the context of Nepal. A majority of earlier studies conducted in developed countries show that dividend has a strong effect than retained earnings. The study examines whether this is consistent in the context of Nepal (or not) and the implication particularly to the banking and non-banking sector. To achieve the objective of the study, a descriptive and analytical research design has been administered. The secondary data are used to test this impact. In order to examine the impact of dividends on stock prices, a multivariate linear regression analysis has been implied in which current market stock price is taken as a dependent variable and four other variables namely Dividend Per Share (DPS), Retained Earnings Per Share (REPS), Lagged Price Earnings Ratio (P/E ratio) and Lagged Market Price Per Share (MPS) as the explanatory variables. This attempt has been made to test the dividends retained earning hypothesis and to examine the estimated relationship over the period of time. The overall conclusion drawn in this study reveals that, the impact of dividends is more pronounced than that of retained earnings in the context of Nepal. Dividend has a significant effect on market stock price in both banking and non-banking sector. Key words: Dividends, stock price, banking and non- banking sector, multivariate linear regression analysis

JEL Classification: D53, G10, G14

I. INTRODUCTION
Dividend is the result of a discretionary decision made by the board of directors of a firm. Generally, a firm announces dividend on the profit. Corporate dividend policy is one of the most enduring issues in modern corporate finance. Dividend policy determines the division of earnings between payments to stockholders and reinvestment in the firm (Weston, Copeland & Shatri: 2004). Miller and Modigliani (1961) have given a theory
*

Faculty Member, Tribhuvan



References: Akbar, M., & Baig, H. H. 2010. “Reaction of Stock Prices to Dividend Announcements and Market Efficiency in Pakistan”. The Lahore Journal of Economics, 15 (1), 103-125. Banking and Financial Statistics, No. 55, Mid-July 2010, www.nrb.org.np Banking and Financial Statistics, No. 54, Mid-Jan 2010, www.nrb.org.np Black, F., & Scholes, M. S. 1976. “The Dividend Puzzle”. The Journal of Portfolio Management, 2, 5-8. Black, F., & Scholes, M. S. 1974. “The Effects of Dividend Yield and Dividend Policy on Common Stock Prices and Returns”. Journal of Financial Economics, 1, 1-22. Chawla, D., & Srinivasan, G. 1987. “Impact of Dividend and Retention on Share Price- An Economic Study”. Decision,14 (3), 137-140. Chhetri, G.R. 2008. “Dividend and Stock Prices: A Case of Nepal”. An unpublished M.Phil. thesis submitted to Tribhuvan University. Effects of Dividends on Stock Prices in Nepal 75 Friend. I., & Puckett, M. 1964. “Dividend and Stock Prices”. American Economic Review, 54, 656-682. Gitman, L.J. 1985. Managerial Finance. New York: Harper and Row Publishers. Gitman, L.J. 2008. Principles of Management Finance, 5/E. New York: Harper Collins College Publishers. (What an old study?) Gordon, Myron J. 1962. “Dividends, Earnings, and Stock Price”. Review of Economics and Statistic, 41, 99-105. Gujarati, D. N. 1988. Basic Econometrics, McGraw-Hill, Inc. Hussainey, K., Mgbame, C. O., & Chijoke-Mgbame, A. M. 2011. “Dividend Policy and Share Price Volatility: UK Evidence”. Journal of Risk Finance, 12 (1), 57 - 68. Khan, Shohrab Hussain. 2009. “Determinants of Share Price Movements in Bangladesh: dividends and Retained Earnings.” Available in: http://www.seamist.se/fou/cuppsats.nsf/all/7a3a58f2c2af8ba1c1257695000a3b1d$file/Final%20V ersion. pdf Kumar, S. and Man Mohan (July-September 1975). “Share Prices in India”. Indian Economic Journal, Vol.23, pp. 23-27. Lintner, J. 1956. “Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes”. American Economic Review, 46, 97-113. Manandhar, K. D. 1998. “A Study of Dividend Policy and Value of the Firm in Small Stock Market: A Case of Nepal”. Management Dynamics, 8(1), 15-20. Miller, M. H., & Modigliani, F. 1961. “Dividend Policy, Growth, and the Valuation of Shares”. Journal of Business Finance, 34, 411-433. Nazir, MS., Nawaz, M.M., Anwar, W. and Ahmed, F. 2010. “Determinants of Stock Price Volatility in Karachi Stock Exchange: The Mediating Role of Corporate Dividend Policy”. International Research Journal of Finance and Economics, 55, pp 100- 107. Nishat, M. 1995. “Share Prices, Dividend & Share Retained Earnings Behaviour in Pakistan Stock market”. The Indian Economic journal, 40, 56-95. Pradhan, R. S. 2003. “Effects of Dividend on Common Stock Prices: The Nepalese evidence”. Research in Nepalese Finance. Katmandu: Buddha Academic Enterprises (P) Ltd. Van Home, J.C. 2006. Fundamentals of Financial Management. New Jersey Prentice Hall Inc. pp. 280-300. Weston, J. F., Copeland, Thomas E., and Shastri, K. 2004. Financial Theory and Corporate Policy: International Edition, 4/E. Pearson Publication.

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