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Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 12
November 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 214
A Study on Dividend Policy and Its Impact on the Shareholders’ Wealth in
Trading Organizations
Yesha.N1 & William Robert P
2
1 Student, Saveetha School Of Management , Chennai
2Asst. Professor, Saveetha School Of Management, Chennai
ABSTRACT:
The study titled „A Study On Dividend Policy And Its Impact On The Shareholders Wealth
In Trading Organization‟ focuses on dividend policy and its impact on the wealth of
shareholders in the trading industry. For the purpose of this study, a trading company and
three of its shareholders‟ companies were selected and the dividend policies of these
companies were analyzed. This was a descriptive study and the period of study was during
the years 2015 to 2017. The tools used for analysis are Dividend per Share, Earnings per
Share, Payout ratio and Gordon‟s model. At the end of this study, it was found that the
dividend policy is relevant in maximising the shareholders‟ wealth. Also, many companies
were not in a position to declare dividend due to retention for future purposes. It was also
found that when the cost of capital decreases, the rate of return increases and this influences
the market price per share.
Keywords: Dividend Policy, Market price per share (MPS), payout ratio, Dividend Per Share
(DPS), Earnings Per Share (EPS) , Cost of equity
INTRODUCTION:
In today‟s world, finance has an important
place. The management of any company
has to take decisions in various areas
requiring concern. One such area is to
maximise the wealth of shareholders and
for this, dividend policy plays a major role.
The shareholders‟ wealth can be
maximised if the market price of the
company‟s shares increases and for this to
happen, the management should chalk out
an appropriate dividend policy. Dividend
decision is an important decision which a
company has to make. The company must
decide whether it should pay the dividend
to its shareholders or retain the entire
earnings with itself for future purpose. For
joint – stock companies, dividend payment
is not considered as an expense but as a
division of profits after tax to their
shareholders. When a company sees that
Page 2 of 7
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 12
November 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 215
there are good investment opportunities, it
must try to retain the profits to itself and
go for reinvestment. But at the same time,
it should see that at the end it does not
result in reduction in the value of the
company‟s stock because of non- payment
of dividend. So, the finance manager must
choose an optimal dividend decision. A
dividend decision is said to be optimal
only when the shareholders‟ wealth
increases along with the value of the firm.
The relevance theory of dividend supports
the factors that have an impact on the
market price per share namely – cost of
equity, dividend and growth rate. One of
the important contributions from relevance
theory is the Gordon‟s model. According
to Gordon, the value of a share reflects the
value of the future dividends accruing to
that share. Hence, the dividend payment
and its growth are relevant in valuation of
shares.
OBJECTIVES OF THE STUDY:
To study the impact of dividend
policy on the wealth of
shareholders
To find the impact of cost of equity
and growth rate on market price per
share
LITERATURE REVIEW
Asquith, P., & Mullins Jr, D. W. (1983)
conducted a study to investigate the impact
of dividends on the shareholders‟ wealth
by studying 168 firms that either pay their
dividend for the first time or those who
initiate dividends after a ten year break and
the effect of subsequent increase in
dividends. The results found showed that a
subsequent increase in dividend had a
positive impact on the wealth of
shareholders. Black, F., & Scholes, M.
(1974) also conducted a research to find
the effects of dividend yield and dividend
policy on common stock prices and returns
and concluded that it is not possible to
determine or show that the expected
returns coming out on a high yield stocks
differ from the expected returns coming
out on a low yield stocks, let it be before
or after taxes. Also, it is not possible to
determine the effect of a change in policy
over the stock„s price.
Baker, H. K.,& Powell,
G.E.(1999)conducted a study to know the
views of managers on dividend policy and
also the relationship between dividend
policy and value of a firm. A mail survey
sent to 603 chief financial officers of U.S
firms found that most of them agreed that
dividend policy affects the value of the
firm. Also, the managers were also
Page 3 of 7
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 12
November 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 216
concerned regarding the continuity of
dividends when setting dividend payments.
There was also research done to find the
determinants of dividend policy. The size
of a firm and its profitability also has an
influence in the dividend payout decision
of a firm. In a study conducted during the
period of 1999 – 2003 at Gulf Co- operation Council (GCC) country stock
exchanges, Al-Kuwari, D. (2009) found
that the dividend payout was heavily
influenced with firm size and its
profitability. Also, the firms listed in the
GCC alter their dividend policies
frequently. According to
Adaoglu,C.(2000),the earnings of the
corporations had a huge influence in
determining the amount of cash dividends.
La Porta, R.,et al (2000) for their research
on agency problems and dividend policies
around the world conducted an experiment
on a section of 4000 employees selected
from 33 countries to test the two agency
models of dividend – the outcome model
and the substitute model. The test results
supported the “outcome model” which
says that dividends are paid because of the
pressure instilled by the minority
shareholders. According to Alli, K.
L.,(1993) managerial consideration affects
a firm‟s payout especially for the firms
that maintain a stable dividend policy.
Also the firms that have financial
flexibility pay high dividends to their
shareholders.
In different countries, the policy followed
for dividend is also different. Andres, C.,et
al (2009) analysed the dividend policy of
German firms and found that Germans pay
out lower proportion of dividend from
their cash flows but higher compared to
other countries in terms of profit. Also,
Germans determine dividend payout based
on their cash flows and not on published
earnings. The dividend policies of
German firms were found to be more
flexible. . Denis, D. J., & Osobov, I.(2008)
conducted a study with countries like US,
UK, Canada, Japan, Germany and France
as samples to understand the determinants
of dividend policy. They found out that
most of the countries were driven by the
failure of newly listed firms in initiating
dividends. Also, abandonment of dividend
was considered economically unimportant
in most of the countries except Japan.
The preference of shareholders also has an
impact on the dividend policy. This was
verified by Brennan, M. J., & Thakor, A.
V.(1990). They state that for small
distributions, the shareholders prefer a
dividend payment as compared to large
distributions for which the shareholders
prefer an open market stock repurchase.
