Dividend Policy and Share Price - Essay Example

? Study on Relationship between Market Ratio, Dividend Policy, Earnings and Share Price: Evidence from Hong Kong Listed Company Purpose: Themain purpose of this study is the find out the relationship between Market Ratio, dividend policy, earnings and share prices of the Listed Company in Hong Kong Share Research Methodology: Analyze the data and find out the relationship between share price, dividend policy and earning by using multiple regression analysis method through excel. Findings: Share prices are positively influenced by earnings per share and dividends per share while negatively influenced by dividend yield and dividend payout. Price earnings ratio does not affect share prices. The model accounts for 78.9% of the variance in share prices of listed firms on the Hong Kong Stock Exchange. Conclusion: Dividends influence stock prices of listed firms on the Hong Kong Stock Exchange thus supporting the dividend relevance theories. Contribution: This paper contributes to the literature on dividend puzzle by providing a perspective from an emerging market on the debate and supporting the relevance of dividends. Recommendations: The study recommends use of larger sample size, longer period, panel data and panel analysis methodologies in future. Introduction This study seeks to examine the relationship between market ratio, dividend policy, earnings and share prices of the Listed Company in Hong Kong Stock Exchange. Since there are inconsistencies in the results of numerous studies on the relationship between dividend policy and stock prices with some supporting dividend irrelevance theories while other supporting dividend relevance theories, there is still need to study more on this especially from the perspective of an emerging market. This study focuses on the listed firms on Hong Kong Stock market. The stock market in Hong Kong is blooming over the past few years with over 1,300 companies currently listed in the Hong Kong stock market. Being an emerging market therefore, this sample will be useful in providing the link between dividend policy and stock prices. The study therefore selects 35 listed companies with five year financial data (total 185 data). This research study is based on 2 journal articles, “The investigation of relation between Market Ratios and Market price per share of accept companies in Tehran Stock Exchange” (Saeidi and Khandoozi, 2011) and “Dividend policy, trading characteristics and share prices: Empirical Evidence from Egyptian Firms” (Omran and Pointon, 2004). Literature Review Omran and Pointon (2004) used data from 94 firms up to 1999 to study the relationship between dividend policy, trading characteristics, and share prices in Egyptian firms. The results showed that retentions were more significant determinants of prices of shares actively traded on the Egyptian stock market than dividends. This study therefore revealed that share prices are influenced by dividend policy, though not as much as retention does. Rashid and Rahman (2008) examined the relationship between dividend policy and stock price volatility in Bangladesh. The study used the cross-sectional regression analysis and controlled for earning volatility, payout ratio, debt, firm size and growth in assets. The study found a positive, but non-significant relationship between stock price volatility and dividend yield. The authors noted that the share price reaction to the earnings announcement was not similar to that of other developed countries and therefore managers may not use the dividend policy to influence their stock’s risk. The authors also noted that because of the inefficient capital market in Bangladesh, the influence of stock price risk through dividend may be ambiguous. Fracassi (2008) examined the stock price sensitivity to dividend changes. The study found that dividend signaling, the free-cash-flow, the maturity and the catering hypotheses all predicted an average positive (negative) reaction to announcement of a dividend increase (decrease). The results showed that the positive stock price response to dividend increases was due to the signaling of higher future earnings, to the managers catering to the time-varying premium assigned by the market to dividend paying stocks, and partially to the reduction of agency problems. The negative price response to dividend was due to the transition from a mature life-cycle stage to a decline stage with higher systematic risk. Ali and Chowdhury (2010) examined stock price reactions of listed private commercial banks in Bangladesh following the dividend announcement dates. The study intended to identify whether dividend announcement convey any information to the market that results a price reaction for adjusting the dividend announcement information. The study employed a standard event study methodology. The statistical pooled t-test also revealed that stock price reaction to dividend announcement was not statistically significant. The study concluded that dividend announcement does not convey any information. Bougatef (2011) investigated the impact of dividend payments on common stock prices using a panel of listed firms in Tunis Stock Exchange for a period from 2000 to 2008. The study found that Tunisian investors reward firms paying cash dividends. Cash dividends had a positive effect on stock prices. The study also found that profitability and market had positive effects on stock prices. The authors therefore wondered why Tunisian managers pay dividend when investors put a stock price premium on payers. Saeidi and Khandoozi (2011) investigated the relationship between market ratios and market price per share of accepted companies in Tehran Stock Exchange. The study employed single and multiple regression methods to analyse data. The study found that market ratios, earnings per share, dividend per share and price earnings ratio significantly influenced market price per share. These results therefore confirm that dividends are important determinants of share prices. Ebrahimi and Chadegani (2011) investigated the effect of current period earning divided by stock price at the beginning of the stock market period, current period dividend divided by stock price at the beginning of the stock market period, prior dividend divided by stock price at the beginning of the stock market period and the reverse of stock price at the beginning of the stock market period on stock market returns in Iran. The study used cross-section, pooled data and panel data regression models for testing the effects of the above variables on stock returns. The results showed that in some years, shareholders pay special attention to dividends and also the variable prior dividend divided by stock price at the beginning of the stock market period affects stock return. The results also showed a significant relationship between current period earning divided by stock price at the beginning of the stock market period and stock return. These results therefore confirm that there is a relationship between earning, dividend and stock return. Hussainey et al. (2011) used multiple regression analyses to explore the association between share price changes and both dividend yield and dividend payout ratio. This study focused on the UK stock market. The study found that there was a positive relationship between dividend yield and stock price changes. The results also showed that there was a negative relation between dividend payout ratio and stock price changes. Other factors that influenced stock price changes were firm’s growth rate, debt level, size and earnings. This study therefore supports the theory that dividend policy is relevant in determining share price changes for listed firms in the London Stock Exchange. Olweny (2012) investigated the extent to which dividend announcements have information content and its effect on firm value for listed firms on the Nairobi Stock Exchange. Secondary data was drawn for the period 1999- 2003 on stock prices and dividend announcements. The study used an event study methodology. The results showed that dividend announcements do indeed convey useful information about the future value of a firm. The results also showed that the information content in dividend announcements significantly affected the firm value. The authors also noted that the stock market was not semi strong and therefore market participants can make abnormal profits by trading on public information, such as dividend announcements. Zakaria et al. (2012) examined the impact of dividend policy on the share price volatility of the Malaysian listed construction and material companies using the least square regression method after controlling for debt, firm size, investment growth and earnings’ volatility. The study found that only 43.43 percent of the changes in the share prices were explained by the model. The results showed that dividend payout ratio significantly influenced the changes in share price. The study also found that firm size had a positive impact on volatility of share price. The results further showed that dividend yield, investment growth and earnings volatility insignificantly influenced the changes in the company’s share prices. Further, leverage negatively influenced the movement of the share price. Murekefu and Ouma (2012) sought to establish the relationship between dividend payout and firm performance among listed firms in the Nairobi Securities Exchange. The study employed a regression analysis. The findings indicated that dividend payout had a positive and significant impact on firm performance. This study therefore found evidence for relevance of dividend policy in Kenya. It therefore recommended that managers should devote adequate time in designing a dividend policy that will enhance firm performance and therefore shareholder value. Hashemijoo et al. (2012) examined the relationship between dividend policy and share price volatility by focusing on consumer product companies listed in Malaysian stock market. This study used a sample of 84 companies listed in main market of Bursa Malaysia and a multiple regression model used for a period of six years from 2005 to 2010. The study showed significant negative relationship between share price volatility with dividend policy. The study found a significant negative relationship between share price volatility and size. Therefore, according to these results, share price volatility was influenced by dividend yield and firm size. Khan (2012) studied the effect of dividend announcements on stock prices of chemical and pharmaceutical industry of Pakistan. The study used a sample of 25 companies listed at KSE-100 Index from the period of 2001 to 2010. The study used both fixed and random effect model on panel data to explain the relationship between dividends and stock prices after controlling for earnings per share, retention ratio and return on equity. The results showed that cash dividend, retention ratio and return on equity had significant positive relation with stock market prices and significantly explained the variations in the stock prices while earnings per share and stock dividends had negative insignificant relation with stock prices. The study does not support dividend irrelevance theory. Gul et al. (2012) examined the influence of dividend policy on shareholder’s wealth of 75 companies listed in Karachi Stock Exchange, for duration of six years from 2005 to 2010. The study used multiple regression and stepwise regression methods to analyse data. Data was collected from company’s annual reports, Karachi Stock Market and State Bank of Pakistan. The study found that the difference in average market value relative to book value of equity was highly significant between dividend paying companies and non-paying companies. The study found that retained earnings have insignificant influence on market value of equity. Further, the results showed significant influence of dividend policy on wealth of shareholders for the dividend paying companies. The results also showed that lagged price earnings ratio did not have any significant influence on dependent variable while the lagged market value of equity had a significant impact on market price per share. Joshi () examined the impact of dividends on stock price in the context of Nepal. In order to examine the impact of dividends on stock prices, a multivariate linear regression analysis was used in which current market stock price was the dependent variable and four other variables (Dividend Per Share (DPS), Retained Earnings Per Share (REPS), Lagged Price Earnings Ratio (P/E ratio) and Lagged Market Price Per Share (MPS)) were the explanatory variables. The study found that dividend has a significant effect on market stock price in both banking and non-banking sector. Data and Methodology Data This study uses secondary data collected on a sample of 185 firms from the listed firms on the Hong Kong Stock Exchange. The data is collected for a two year period between 2011 and 2012. This is collected on a number of variables especially the market price per share, the price earnings ratio, earnings per share, dividend per share, dividend payout ratio and dividend yield. Methodology The study will use a multiple regression model to estimate the relationship between dividend policy and share prices. The following model is used in the analysis: MPS = ? + ?1PE + ?2EPS + ?3DPS + ?4DP + ?5DY + µ Where MPS = Market price per share PE = Price earnings ratio EPS = earnings per share DPS = Dividends per share DP = Dividend payout ratio DY = Dividend yield As shown above, the dependent variable is market price per share while the independent variables are price earnings ratio, earnings per share, dividends per share, dividend payout, and dividend yield. The PE and EPS will act as the control variables in the model. The data is analysed using excel and presented in the form of tables. Results Descriptive results are shown in Table 1. The results show the number of observations, the mean, the standard deviation, minimum values, median, and maximum values. As the results show, market price per share had a mean of 33.22 with a standard deviation of 37.29. The highest share price was 177.8 and the median price was 20.3. The results further show that EPS ranged from -32.24 to 19.88 with a mean of 2.63 and a standard deviation of 4.72. The median EPS was 1.25. The results also show that PE ranged from 0 to 221 with a mean of 16.92 and a standard deviation of 19.48. The median PE was 13.83. Table 1 also shows that DPS ranged from 0 to 6.3 with a mean of 1.04 and a standard deviation of 1.31. The results also show that DY ranged from 0 to 98 with a mean of 5.19 and a standard deviation of 13.42. The median DY is 2.51. The results further show that DP ranged from 0 to 729.5 with a mean of 43.61 and a standard deviation of 58.82. The median DP was 39.36. Table 1: Descriptive Statistics Variables Obs Mean SD Min Median Max MPS 185 33.22337 37.29603 0 20.3 177.8 EPS 185 2.636657 4.724442 -32.24 1.25 19.88 PE 182 16.91692 19.48054 0 13.82 221 DPS 185 1.045559 1.314634 0 0.49 6.3 DY 179 5.197263 13.42593 0 2.51 98 DP 179 43.60922 58.81794 0 39.36 729.5 Table 2 shows the results of correlation analysis with all the six variables entered. As the results show, market price per share was highly correlated with earnings per share and dividends per share. The data also seems to suggest no collinearity between the independent variables as the correlations are very low except for that of earnings per share and dividends per share which is 0.54. Table 2: Correlation Analysis Results MPS EPS PE DPS DY DP MPS 1 EPS 0.5832 1 PE -0.0015 -0.123 1 DPS 0.8739 0.5433 -0.0034 1 DY -0.1114 -0.0629 0.174 -0.0459 1 DP 0.0805 -0.0507 0.1294 0.2043 0.3359 1 Basic OLS Regression Model Table 3, 4 and 5 show the results of OLS regression analysis with MPS as the dependent variable and PE, EPS, DPS, DY and DP as the independent variables. The results in Table 3 shows an R-squared value of 0.793 suggesting that this model accounted for 79.3% of the variance in market price per share and can therefore be said to have explained more of the variances in share price volatility. Table 4 shows that the model was significant, F = 137.22, p-value < 0.001. As the results show in Table 5, EPS had a positive and significant effect on MPS at 1% level of confidence. Thus the null hypothesis of no relationship is rejected. This therefore shows that earnings have a significant impact on share prices. The study found that PE had a positive but insignificant impact on MPS at 1%, 5%, or 10% level of confidence. The null hypothesis of no relationship is therefore accepted. This means that earnings as measured by price earnings ratio does not influence share prices. The results also show that DPS had a positive and significant effect on MPS at 1% level of confidence. The null hypothesis of no relationship is therefore rejected. Thus, dividends per share influence share prices. The results in Table 5 also show that DY had a negative but insignificant relationship with MPS leading to the acceptance of null hypothesis of no relationship. These results therefore show that dividend yield does not influence share prices of companies listed on the HKSE. The results further show that DP had a negative but insignificant effect on MPS at 5% level of confidence and significant at 10% level of confidence. Since the null hypothesis is tested at 5% level of confidence, the null hypothesis of no relationship cannot be rejected. It is therefore noted that share prices of firms listed on the HKSE are not influenced by dividend payouts. Table 3: Regression Statistics Regression Statistics Multiple R 0.890557 R Square 0.793092 Adjusted R Square 0.787312 Standard Error 17.20022 Observations 185 Table 4: ANOVA   df SS MS F Significance F Regression 5 202986.1 40597.2211 137.2235 2.67E-59 Residual 179 52956.71 295.847534 Total 184 255942.8       Table 5: Coefficients of OLS Regression   Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 7.421081 2.071189 3.58300606 0.000438 3.333994 11.50817 Dividend 22.96686 1.216567 18.8784228 1.89E-44 20.5662 25.36752 EPS 1.127932 0.329959 3.41839911 0.00078 0.476822 1.779042 PE 0.072486 0.067045 1.08114666 0.281086 -0.05981 0.204786 Dividend Yield -0.13692 0.10379 -1.319246 0.188772 -0.34173 0.067885 Dividend Payout -0.04035 0.024332 -1.6584395 0.09898 -0.08837 0.007661 OLS Regression with Robust Standard Errors Table 6, 7 and 8 show the results of OLS regression analysis with robust standard errors. This was run in order to eliminate heteroskedasticity of variance following the procedure used by Ebrahimi and Chadegani (2011). Table 6 shows that the model still explained 78.9% of the variance in share prices as evidenced from the R-squared value. Table 7 shows that the F statistic was significant hence the model. The results in Table 8 showed that earnings per share had a positive and significant impact on market price per share at 5% level of confidence. The null hypothesis of no relationship is therefore rejected. Earnings per share therefore influence stock price volatility of listed stocks on the Hong Kong Stock Exchange. The results also showed that dividend per share had a positive and significant effect on market price per share at 1% level of confidence. This leads to the rejection of null hypothesis of no relationship between dividend per share and market price per share. Dividend per share therefore influences stock price volatility of listed stocks on the Hong Kong Stock Exchange. Further, the results revealed that dividend yield had a negative and significant impact on market price per share at 5% level of confidence leading to the rejection of the null hypothesis of no relationship between dividend yield and share prices of stocks listed on the Hon Kong Stock Exchange. Dividend yield therefore influences stock price volatility of listed stocks on the Hong Kong Stock Exchange. The study also found that dividend payout had a negative and significant impact on market price per share. This leads to the rejection of null hypothesis of no relationship between dividend payout and stock prices. Dividend payouts therefore influence stock price volatility of listed stocks on the Hong Kong Stock Exchange. Table 8 also shows that price earnings had a positive and non-significant relationship on market price per share at 1% level of confidence. Therefore, the null hypothesis of no relationship between stock prices and price earnings is rejected. Price earnings do not therefore influence stock prices of listed firms on the Hong Kong Stock Exchange. Table 6: Regression Statistics for Robust OLS Regression Statistics Multiple R 0.888351 R Square 0.789167 Adjusted R Square 0.787312 Standard Error 17.20022 Observations 179 Table 7: ANOVA for Robust OLS   df SS MS F Significance F Regression 5 250296.28 40597.2211 129.511 2.67E-59 Residual 174 52770.55 295.847534 Total 179 303066.83       Table 8: Coefficients of Robust OLS Regression   Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Intercept 7.785594 2.192297 3.58300606 0.000438 3.333994 11.50817 DPS 22.90817 1.237805 18.8784228 1.89E-44 20.5662 25.36752 EPS 1.118148 0.336379 3.41839911 0.01278 0.476822 1.779042 PE 0.068461 0.068597 1.08114666 0.281086 -0.05981 0.204786 DY -0.13864 0.10542 -1.319246 0.02772 -0.34173 0.067885 DP -0.04161 0.024802 -1.6584395 0.008981 -0.08837 0.007661 Conclusions The study concludes that share prices for firms listed on the Hong Kong Stock Exchange are influenced by dividends per share. This result was observed in both models. This is consistent with those previous studies that have found support for the dividend relevance theory in other countries such as Gul et al. (2012) and Khan (2012) in Pakistan, Murekefu and Ouma (2012) and Olweny (2012) in Kenya and Hussainey et al. (2011) in the UK, among other studies. The study also shows that earnings as measured by EPS have a significant influence on share prices. This was true for both models used in the study. This is consistent with the findings of Saeidi and Khandoozi (2011) in Tehran who found that earnings per share significantly influenced market price per share. These results are also consistent with those of Ebrahimi and Chadegani (2011) in Nigeria. The study concludes that price earnings ratio does not influence share prices. This was observed from the results of both models used in the study. The results are consistent with Gul et al. (2012) who found that earnings did not influence stock prices. These results are however inconsistent with Saeidi and Khandoozi (2011) who found a significant relationship between price earnings ratio and market price per share. The basic OLS model shows that stock prices are not significantly influenced by dividend yield but the model with robust standard errors shows that indeed the relationship was negative and significant. The basic model results are consistent with the findings of Rashid and Rahman (2008) who found a non-significant relationship between dividend yield and stock price volatility. They are also consistent with those of Olweny (2012) in Kenya who found that dividend yield does not influence share prices. On the other hand, the results of robust model are consistent with those of Hashemijoo et al. (2012) in Malaysia who found a statistically significant negative impact of dividend yield on share price volatility. Given that the robust model is a better estimator of the relationships based on the fact that it eliminates for effects of heteroskedasticity of variance, the study concludes that indeed dividend yield have a negative effect on stock prices of companies listed on the Hong Kong Stock Exchange. The basic OLS model leads to the conclusion that dividend payout did not influence stock prices. In terms of the sign of the relationship, these results are consistent with Hussainey et al. (2011) in UK but inconsistent on the significance. The results are also consistent with those of Hashemijoo et al. (2012) in Malaysia who found that dividend payout did not affect stock price volatility. On the other hand, the robust model shows that dividend payouts influence stock prices therefore consistent with Hussainey et al. (2011). The study concludes that indeed share prices of listed firms on the Hong Kong Stock Exchange are influenced by dividend payouts. Recommendations and Limitations The study faced a number of limitations which may have affected the results of this study. First, the data was collected from just a few firms out of the 1,300 listed companies on the Hong Kong Stock Exchange. This small sample was driven by time constraints and may therefore affect the generalisability of these findings. Studies therefore need to expand this sample size. Secondly, the study based the findings on a collection of data for only two years. This short period may not cover the cycles in businesses such as the global financial crisis or the Asian financial crisis and therefore unreliable for generalization as facts. Future studies should therefore expand this time period to cover a larger period of time. The present study uses the OLS regression analysis based on the data collected. Due to stringent assumptions of an OLS regression, the present data may not have met all the assumptions especially collinearity and the results may not therefore be accurate. It is suggested that future studies use panel data and use panel regression methods such as fixed effects or random effects to estimate the regression models. These may give more accurate results. This study has also used only five independent variables with two of these being control variables. Since there are numerous other variables that may ordinarily affect share prices such as firm size and GDP growth, future studies should control for more variables in order to come up with conclusive models. References Ali, M.B. and Chowdhury, T.A. (2010), Effect of Dividend on Stock Price in Emerging Stock Market: A Study on the Listed Private Commercial Banks in DSE, International Journal of Economics and Finance, 2(4), 52 – 64. Bougatef, K. (2011), How do Dividend Payments Affect Stock Prices? The Case of Tunisian Firms, The Journal of Commerce, 3 (2), 21 – 25. Accessed on 28 May 2013 from http://joc.hcc.edu.pk/articlepdf/joc_3_2_21_25.pdf Ebrahimi, M. and Chadegani, A.A. (2011), The Relationship between Earning, Dividend, Stock Price and Stock Return: Evidence from Iranian Companies, 2011 International Conference on Humanities, Society and Culture, Singapore. Fracassi, C. (2007), Stock Price Sensitivity to Dividend Changes, Retrieved on 23 May 2013 from http://www2.mccombs.utexas.edu/faculty/cesare.fracassi/Price%20Sensitivity%20to%20Dividend%20Change%20-%20072808.pdf Gul, S., Sajid, M., Razzaq, N., Iqbal, M.F., and Khan, M.B. (2012), The Relationship between Dividend Policy and Shareholder’s Wealth: Evidence from Pakistan, Economics and Finance Review, 2(2), 55 – 59. Hashemijoo, M., Ardekani, A.M., and Younesi, N. (2012) The Impact of Dividend Policy on Share Price Volatility in the Malaysian Stock Market, Journal of Business Studies Quarterly, 4 (1), 111 – 129. Hussainey, K., Mgbame, C.O., and Chijoke-Mgbame, A.M. (2011) Dividend policy and share price volatility: UK evidence, The Journal of Risk Finance,12 (1), 57 – 68. Joshi, R. (2012) Effects of Dividends on Stock Prices in Nepal, NRB Economic Review, 24(2), 61 – 75. Khan, K.I. (2012).Effect of Dividends on Stock Prices– A Case of Chemical and Pharmaceutical Industry of Pakistan, Management, 2 (5), 141-148. Murekefu, T.M. and Ouma, O.P. (2012), The relationship between dividend payout and firm performance: a study of listed companies in Kenya, European Scientific Journal, 8(9), 199 – 215. Olweny, T. (2012), Dividend Announcement and Firm Value: A Test of Semi Strong Form of Efficiency at the Nairobi Stock Exchange, Asian Social Science, 8(1), 161 – 175. Omran, M. and Pointon, J. (2004), Dividend policy, trading characteristics and share prices: empirical evidence from Egyptian firms, International Journal of Theoretical and Applied Finance, 7(2), 121 – 133. Rashid, A. and Rahman, A.Z.M.A. (2008) Dividend policy and stock price volatility: evidence from Bangladesh. Journal of Applied Business and Economics, 8 (4). pp. 71-81. Saeidi, P. and Khandoozi, B. (2011), The investigation of relation between market ratios and market price per share of accepted companies in Tehran Stock Exchange, Global Business and Management Research: An International Journal, 3(2), 136 – 140. Zakaria, Z., Muhammed, J., and Zulkifli, A.H. (2012). The impact of dividend policy on the share price volatility: Malaysian construction and material companies. International Journal of Economics and Management Sciences, 2 (5), 01 – 08. Accessed on 28 May 2013 from http://www.managementjournals.org/ijems/25/IJEMSi2n5i1i121209.pdf Read More