Effects of Dividends on Share Prices

Running head: PROFESSIONAL PROJECT 1
Professional Project
Name
Institution Affiliation

PROFESSIONAL PROJECT 2
Effects of Dividends on Share Prices
Abstract
The drive of this research is to explore the connection between dividend policy, dividend
pay-out and share price of commercial banks in Australian Stock Exchange to determine the
effect of dividends to the share price. The data was gathered from the Australian Stock
Exchange report from 2013 and 2017. The share price was used as the dependent variable
whereas the dividend pay-out was the independent variable.
Keywords: Dividend policy, share price, and shareholder.
Introduction
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

PROFESSIONAL PROJECT 3
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 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

PROFESSIONAL PROJECT 4
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
Literature Review
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