Effect Of Dividend Policy On Share Prices: A Study On Four Listed Australian Banks
Research aim
Dividend is a significant concept when it comes to corporate finance. According to Shah, & Noreen, (2016) defines dividend as the amount money paid out from the company’s earnings. Therefore, it is the distribution of money amongst company shareholders. Accordingly, if the payment of money is made aprt from the accumulated or present retained earnings, the term distribution is used instead of dividend. Thus, dividend is the amount of money which part of the profit that is distributed amongst the stock shareholders sin accordance to their stock investment. There are various forms of divided such as cash dividend, special dividend, extra dividend and liquidating dividend. Dividend policy is the guideline utilised by the organisation on deciding on the way to share out the profit to stakeholders in form of dividend and the amount to be reinvested in the business as preserve earning.
Therefore, the financial management of the company can take dissimilar positions on the dividend payment. In this light there are two approaches concerning the outcome of dividend on the company’s value (Ali, Sharif, & Jan, 2015). Firstly, it is believed that dividend policy in nor relevant. Modigliani and Miller (1961) were the pioneer who presented the ideology of irrelevance of dividend theory. According to these scholars dividend policy do not have any effect on capital structure, share prices and development. Accordingly, this theory of irrelevance validity is built on the assumption that there are no transactions expenses and no taxes. However, it is a well-known reality that these two aspects are vital to any organised economy, thus can hardly support this philosophy.
The second ideology state that dividend is significant. Indeed, this school of thought opposes the irrelevance theory established on the postulation of perfect market. It is argued that the irrelevance theory has been built on unrealistic assumptions of no transaction expenses and no taxes in relation to capital gains (Sharif, & Lai, 2015). According to Gordon (1963) believes that the relevance of dividend policy has an effect on the corporation’s share prices, value and development. Gordon (1963) argue that investor prefer dividend compared to capital gains. Nonetheless, the most significant decision by the company is to address the issue regarding the portion of profit that should be distributed to stakeholders and the amount to be put into in the business. In order to address these matter, financiers are required to analyse the dividend policy and sort out the policy that is optimum in maximising the assets and incomes of shareholders (Pathan, Faff, Méndez, & Masters, 2016). Also, the divided is connected to share prices thus its effect on share prices has to be considered. Furthermore, the dividend plan is related to capital organisation indirectly where different dividend plans calls for dissimilar capital arrangements. Therefore, capital arrangement and dividend policy impact the wealth of stakeholders.
Research questions
Research aim
The intent of this research is to investigate the effect of dividend plan on share price instability in the Australian stock market.
Research questions
Does dividend policy have any impact on share prices?
In there a relation between share prices and dividend policy aspects?
Research hypothesis
H1: There is a substantial connection between share price instability and dividend return.
H2: There is a relevant effect of dividend disbursement ratio on share price
According to Ali, Sharif, & Jan, (2015) the scholar note that dividend is the money paid to the company stakeholders as returns on their investment in the company’s shares. Dividends are paid in a range of ways such as special dividend, extra dividend, liquidating dividend as well as cash dividend. Dividend policy is the period pattern of the dividend payment to stakeholders. There are two primary concepts regarding dividend policy.
Irrelevance of the dividend policy
In accordance to Miller and Modigliani (1961) suggested the irrelevance theory does not impact on the wealth of shareholders by the dividend strategy. It is debated in this theory that the significance of the organisation is exposed to the company’s returns which originate from its asset policy. In this literature the scholars suggest that dividend does not impact on the value of the shareholder in the business minus taxes and market deficiencies. It is claimed that dividend as well as capital achievement are the two key approaches which contribute towards the firm’s returns to the stakeholders (Miller, & Modigliani, 1961). Therefore, when a company makes the decision to allocate its earnings as dividends to stakeholders, it will mean that the share price will habitually decline by the dividend amount on each share on the ex-dividend day. As a result, these scholars recommended that in a seamless market the dividend plan does not impact on the earnings of stockholders. In this light there a number of studies which are in support of the irrelevance dividend hypothesis. For instance, Pathan, Faff, Méndez, & Masters, (2016) argued that the irrelevance theory put forth by Miller and Modigliani (1961) by concluding that denunciation of this philosophy has to be found on denying the principle of symmetric market judiciousness in addition to the guess of objectivity of irrelevant information. The scholar postulated that in order to reject this latter assumption there has to exist one of these conditions: the share price has to be subordinate of the previous events and should be anticipated for forthcoming prospect. Also, investor should not behave rationally.
Research hypothesis
Similarly, Andriosopoulos, & Lasfer, (2015) also support the irrelevance theory of Miller and Modigliani (1961) by arguing that dividend regardless of enlightening or not, it is inappropriate to the company’s worth if financiers have identical belief as well as time addictive effectiveness when the market is completely resourceful.
Relevance of dividend policy
Relevance of dividend policy built on information content of dividend
According to the argument by Miller & Modigliani (1961) they postulated that in an unsatisfactory market, dividend can impact on the share price. Consequently, the declaration of dividend can be inferred as a sign of forthcoming productivity of the organisation. Shah, & Noreen, (2016) used a sample of 170 corporations which paid bonus for the first time or paid bonus after at least ten years break by studying the link between the return of the market and dividend declaration. The scholar made an analysis of day-to-day strange stock returns for ten days prior to the ten-day period after the declaration of the bonus. The finding these scholars found implied that there was an estimated irregular return of + 3.8% in a period of two days after dividend declaration (Sharif, & Lai, 2015). Moreover, the theorist embraced cross-sectional regression and gave a report that the initial dividend amount has a constructive effect on the additional profit on the day that the dividend was announced. Consequently, it was established that the change scale in the bonuses can be significant. Also, Rashid, & Rahman, (2008) studied the share price response based on the declaration of stock bonus and the rise in dividend in the Cyprus Stock Exchange for a period of ten years from 1985 to 1995 (Ali, Sharif, & Jan, 2015). In this sense the researcher considered 40 announcements of cash dividend and 38 evets of rise in dividend. The outcome gave a robust evidence in support of the dividend policy. The study showed a conspicuous excess profit for money dividend and money dividend announcement.
According to Gordon (1962) proposed an assessment model connecting the market worth of the stock and the dividend plan. After studying the market price and dividend plan of shares Gordon suggested that the dividend plan of company’s impact the market price of stocks even in the flawless capital market. Gordon notated that investors prefer current dividend as compared to future capital gains since the future state in uncertain even though the capital market is seamless. Accordingly, Gordon elucidated that a majority of stakeholders’ fancy dividend at hand to evade risk associated with forthcoming capital gain. Additionally the scholar suggested that there is a straight correlation between dividend plan and the market worth of shares despite the interior profit rate sand the anticipated rate being similar. According to Gordon’s (1962) continuous development model, the share price of organisations is subservient to reduced flow of forthcoming dividend. Nazir, Nawaz, Anwar, & Ahmed, (2010a) picked about 250 firms based in the United Sates as a sample and studies the affiliation between the value of the business’s value and the dividends which retained the profits between 1961 and 1962. As a result, Andriosopoulos, & Lasfer, (2015) found that there solitary feeble signal is that shareholders fancy dividends in relation to impending capital gain. Therefore, Diamond’s results illustrated a negative relationship between the firm development and preference of dividend.
Irrelevance of the dividend policy
Methodology
Sample size and data
The sample size for this study consisted of commercial banks in Australian Stock Exchange for constant period of five years from 2013to 2017. Only the selected commercial banks whose figures was easily and readily available were picked. Data was composed from the inventory report of ASC index commercial banks. The purpose of this study is to show the relationship between effects of dividend on price share. The researcher employs quantitative methodology. The type of data used is secondary data which comes from commercial banks of Australian Stock Exchange.
Study variables
Dependable variable
The dependent variables is share price. It is calculated by taking the lowest market price and the highest share price. Then an average between the high and low prices and then square it (Ali, Sharif, & Jan, 2015).
Independent variables
Dividend pay-out ratio
The independent variables is dividend pay-out ratio. It is considerably explain the impact of the dividend policy on the share price. Also, this shows the extent to which the returns are distributed as dividend to the shareholders. The greater the dividend pay-out ratio, the more fascinating the stock to the shareholders. This variable has been decide on by (Hashemijoo, Mahdavi & Younesi, 2012). The formula used in calculating the dividend pay-out ratio (DPO):
DPO Dividend / Net income
Control variables
Size of the company
This control variable is computed by taking the logarithm of the whole company resources. Therefore, being a control variable various studies like Nazir et al. (2010) and Zakaria et al. (2012).
Earning volatility (EV)
The earning control variable restrict the effect of variation in the earning stream based on price volatility (Abrar-ul-haq, Akram, & Imdad Ullah, 2015).
EV = Operation Income /Total Asset
The deviance from the average is calculated and then standard deviation determined. This was regarded as the indicator for assessing the company’s profitability (Khan et al., 2011). Accordingly, this describes the variation in the share price significantly.
References
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