Relationship Between Dividend Policy And Stock Prices Volatility Essay

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.

When a company decides to pay dividends, it has to be careful on how much it will be given to the shareholders. It is of no use to pay shareholders dividends

George C. Philippatos and William W. Sihler, 'Models of Dividend Policy', Financial Management (Allyn and Bacon), 228-229

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.

In practice, dividend policy will be affected by taxes as tax rates for different categories of investors will differ. Also, a firm’s dividend policy is perceived by the financial markets to be a signaling mechanism. A cut back in dividends may signify that the firm perceives tough

By cutting dividends, FPL can react better to future threats. After an initial panic selling triggered by the news shock (FPL never cut its dividend in the past 47 years), investors will process the new information realized that the dividend cut is balanced by an increased growth rate in the future. To justify the HOLD recommendation on the

We studied long term trends in stock earnings and dividends from 1871 to the present. We observed two distinct periods: 1) from 1871 to 1945 where the common dividend policy was to focus on high payout ratios; 2) after 1945 companies started managing the amount of dividends paid per share. In the latter period, companies were slow to increase dividends as earnings increased, effectively reducing the payout ratio and providing them with a cushion to maintain dividends when earnings dropped temporarily. As a result, the payout ratio dropped, hitting a historical low of 30% in 2011. Since then, companies

CAPM).According to this table, we find that the net income increase from 24.442 to 70.221 in 2005 and 2010, the share price increase from 5.81 to 58.80 in 2005 and 2010 as well. According to the calculation of P/E ratios for ICC in these years are higher than the average annual P/E ratio, which means that the company overpricing his share price. Obviously, the dividend payout ratio at the same time appear in city is filled with the molecular formula with the denominator. At the molecular, dividends payout ratio, the bigger the current dividend level higher, the greater the P/E ratio; But in the denominator, dividends payout ratio, the bigger the dividend growth rate is lower, the smaller the P/E ratio. So, with P/E and the relationship between the dividends payout ratio is uncertain.

In general the three-stage approach allows us to add complexity to the standard dividend discount models by enabling changing growth scenarios throughout the forecasting period: an initial period of higher than normal growth, a transition/consolidation period of declining growth and final a period of stable growth. The main assumptions are that the company on which we conduct the calculation study currently is in extraordinary strong growth phase. The time period with the extraordinary strong growth must be strictly defined and eventually be replaced with the declining growth assumption. Lastly, Capital Expenditures and Depreciation are expected to grow at the same rate as revenues. .

The factors that determined the dividend policy of firms were governed by the way firms could catch up from the crisis. The number of firms that resorted to dividend payout was dangerously low, but in 2011 the firms earnings having rebounded there have been nearly 1000 cases of increases and only 84 cases of decreases in firms which have started paying dividends . S&P 500 firms were seen to have paid approximately $200 billion in 2010 and the dividends to earnings pay out continues to remain very low .

Dividends are subjected to higher tax rate compare to capital gain increased due to share buy-back. This discourages shareholders from desire to receive high dividends in place of higher capital gain as share values increase. A comparison is made below between the proposed capital structure and dividend policy.

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

While conducting the analysis of EMI group’s dividend policy, one factor that stood out to us was the clientele effect. The clientele effect shows us who holds most of our outstanding shares. High tax-bracket individuals would prefer zero-to-low dividend payout to save on taxes. Low tax-bracket individuals would prefer a low-to-medium dividend payout, which gives them additional income while helping them save on taxes. An investing corporation would prefer a higher dividend payout because if they own a significant amount of shares, say 1 million, the income stream from that dividend would provide the company with more monetary resources while benefitting from tax exemptions. So before setting a dividend policy for EMI group, we must first

Kumar (1988) builds a model that explains dividend smoothing - one of the most salient features of dividend policy. Dividends once again signal a firm’s quality (productivity), but, since they are over invested in the firm, managers will try to under invest by underreporting a firms productivity. While there is no fully revealing equilibrium, Kumar shows that firms will tend to cluster around optimal dividend levels. Agency theory suggests that dividends can be used as a means to control a firm’s management. Distributing dividends reduces the free cash

The first objection is related to the fact that this is a totally new approach concerning dividend policy, and nobody can predict what is going to happen. We consider that this may have positive effects on share prices, especially taking in consideration that it will stabilise the market price of the company.