Frim Specific Return Prediction

Fama and French’s three factor model attempts to explain the variation of stock prices through a multifactor model that includes a size factor and BE/ME factor in addition to the beta risk factor. Fama-French model essentially extended the CAPM (which breaks up cause of variation of stock price into systematic risk which is non-diversifiable and idiosyncratic risk which is diversifiable) by introducing these two additional factors. Fama and French find that stocks with high beta didn’t have consistently higher returns than stocks with low beta and this indicates that beta was not a useful measure under their model. Their model is based on research findings that sensitivity of movements of the size and BE/ME factor constituted risk, and

Percentage return is always an issue concerned by the investors, which measures the rewards can be earned on the investment. According to Christensen et al (2007, P336), percentage return consists of dividend yield and capital gain yield. Appendix 2 is extracted from Fin Analysis (Aspect Huntley, 2008) about the two yields for the past 7 years. It is scientific that the past performance of a corporation is being evaluated in order to predict its future performance. Graph 1 below also illustrates the movement of percentage return during the

The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.

The capital structure of a company changes the risks exposure highlighting the need to determine the impact of debt levels on financial risk (Pearson Learning, 2014). The dividend payout is the ratio of dividends per share to the earnings per share, and both ratios increased for the three years. The increase in the DPS rose at a decreasing rate resulting in slower growth in the dividend payout. The dividend per share is dependent on the total number of dividends paid out in an interim year, and the increase in the DPS was in line with the management’s efforts to reward the investors as the earnings improved. The dividend yield representing the dividend paid out relative to the share price, and the lower divided yield in December 2014 can be attributed to the higher share price hovering over $40, which was more than double the share price in the previous

Since the emergence of the so-called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm distributes it income because the firms’ value is rather determined by their investment policies and the earning power of its assets. They further stated that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.

The payments of interest are a fixed liability of the company so the financial manager have to decide what profit is left over for the company (Pujari, S 2015). The surplus profit is distributed to equity shareholders as dividend or it is kept aside as retained earnings. Financial managers have to decide how much to distributed as dividend and how much is needed to keep aside as retained earnings. They take in consideration the growth plans and investment opportunities (Pujari, S 2015). There are also affecting factors for dividend decision which the financial manager needs to analyze the factors before dividing the net earnings between dividend and retained earnings. Earnings is an affecting factor because dividends are paid out of the current and previous year’s earning (Pujari, S 2015). When a company experiences more earnings than the company has a high rate of dividends whereas if the experience low earnings than the dividends are low as well. Stability of earnings is another affecting factor because when a company has stable earnings they will give a higher rate of dividends, but if a company has lower earnings the dividends will be lower as well (Pujari, S 2015). Dividend decisions also has cash flow position factors where companies will declare a high rate of dividends only when the company has surplus funds. In cases where the company has a cash shortage they will also have low dividends (Pujari, S

According to this Fama & French three factors model, there are two more variable added into the regression model. They are SML factor (the return of small cap companies minus the the return of large cap companies) and HML factor (the

As indicated by the case study S&P 500 index was use as a measure of the total return for the stock market. Our standard deviation of the total return was used as a one measure of the risk of an individual stock. Also betas for individual stocks are determined by simple linear regression. The variables were: total return for the stock as the dependent variable and independent variable is the total return for the stock. Since the descriptive statistics were a lot, only the necessary data was selected (below table.)

Hence, Fama & French’s three factor model flourished when considering the market book value and the size of business. Additionally, in Fama and French’s (1996) paper, they concluded Sharpe – Lintner’s CAPM has never been an empirical success. According to the current study, the factors that affected the Beta are serious enough to invalidate most applications of the CAPM

The dividend policy such as the payment of dividend affects the market price of share. If there is a debate in this issue, this theory is commonly accepted. In this report the relationship between dividend and the market price of share is proved in the banking sector of Bangladesh. But it is also revealed that

Limited research work exists on this area, like Booth et al (2001) studied 10 developing countries including Pakistan. However, this study was confined only to top 100 index companies. Second study by Shah and Hijazi (2004) was an improvement on the first one as it included all non-financial firms listed on KSE for the period 1997-2001. However, the second study too was basic in nature in terms of its use of pooled regression model avoiding the fixed effects and random effects models. The purpose of this study is to extend the work of Shah and Hijazi (2004) by extending the sample period i.e 2001-2006 and including more firms in sample as convenient random selection of samples, using relevant models of panel data and using more explanatory variables.

Miller and Modigliani (1961) proposed the dividend irrelevance theory, suggesting that the wealth of the shareholders is not affected by the dividend policy. It is argued that the value of the firm is subjected to the firm’s earnings, which comes from company’s investment policy. The literature proposed that, the dividend does not affect the shareholders’ value in the world without taxes and market imperfections or perfect capital market. Further they argued that dividend and capital gain are two main ways that can contribute profits of the firm to the shareholders. When a firm chooses to distribute its profits as dividends to its shareholders, then the share price will be reduced automatically by the amount of a dividend per share on the ex-dividend date. So, they proposed that in a perfect market, dividend policy does not affect the shareholder’s return. The main assumptions

Purpose – The purpose of this paper is to examine the Dickens et al. model of bank holding company dividend policy. They identified five explanatory factors in a sample of bank holding companies (BHCs). Banking companies typically pay larger dividends and more often than industrial firms. Investors often look at the dividends as being important return variables. Design/methodology/approach – In this study, a sample of 99 firms with 2006 data

This study is analysis of previous twelve months (May-2012 to Jun-2012) data relating to prices of shares in Bombay Stock Exchange only.

To increase and maximize the wealth/value of shareholders, it is necessary that the company is competitive in their market and can reliably “earn a considerable return on its investments above their cost of capital” (Doyle, 2000). The increasing rates of return of well performing companies attract new investors who invest money to become shareholders. These outside funds from investors are essential for growth of businesses and the expansion into new markets. Measurements of generated shareholder returns over a certain time period deliver the company useful information on whether their objectives have been achieved or should be new adjusted (Atrill, 2009).