The Impact of Dividend Policy on Shareholders' Wealth
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The Impact of Dividend Policy on Shareholders' Wealth:
Evidence from Consumer Cyclical Sector in India
Pacific Business Review International
Volume 9 Issue 7, Jan. 2017
91
Abstract
Dividend policy (DP) is the most important to shareholders because it
can affect the share price and shareholders’ wealth (SW) as well.
Generally, higher dividends increase the market price of the share and
vice versa. Besides higher future dividends may also increase the
market price of share and thereby end up with wealth maximization of
the shareholders. Hence, the objective of the paper is to analyze the
impact of DP on SW of Consumer Cyclical Sector in India. Out of
13firms listed on Bombay Stock Exchange (BSE), 10 firms that have
been paying dividend consecutively for the recent past ten years are
considered for analysis. Besides descriptive statistics, Augmented
Dickey Fuller Test (ADF), Levin, Lin & Chu (LLC) t test, Philip Perron
(PP) Fisher x2 test, Im- Pesaran-Shin W (IPS-W) and Breitung test are
used. To test whether the data are stationary and to satisfy one pre-
condition for co-integration, Johansen Co-integration test is used.
Regression and Chow test are also applied to differentiate the impact
between pre and post financial meltdown periods. The results of the co-
integration test proves that there exists a stationary, long-run co-
integration between DP and SW. Regression result proves that DP has
significant impact on SW and the Chow test result proves that the
impact of DP on SW of Consumer Cyclical Sector has been
significantly affected by the event viz., the financial meltdown in
respect of variable dividend yield (DY) and not for the other selected
variables viz., dividend per share (DPS) and dividend payout (DPO).
Keywords: Dividend policy, Shareholders’ wealth, Financial
meltdown
JEL Classification: G 35, L 25, L 62
Introduction
The principal financial objective of any business enterprise is to
maximize the shareholders’ wealth (SW). The corporate function of
maximizing the SW assumes that managers operate in the best interests
of the shareholders. Therefore, it takes place when the returns to the
shareholders’ on the investment are maximized. In addition, these
returns are made up of capital gains in the form of increase in the share
prices, as well as dividends, which are made possible when the firm
generates adequate distributable profits.
When facing uncertainty, it is not always possible for a firm to achieve
its objectives. Wealth creation in entrepreneurial and established
organizations is a complex and challenging task. Therefore, in an ever-
Sandanam Gejalakshmi
Ph.D Research Scholar
Kanchi Mamunivar Centre for PG Studies
Puducherry
Dr. Ramachandran Azhagaiah
Associate Professor of Commerce
Avvaiyar Govt. College for Women
Karaikal
The Impact of Dividend Policy on Shareholders' Wealth:
Evidence from Consumer Cyclical Sector in India
Pacific Business Review International
Volume 9 Issue 7, Jan. 2017
91
Abstract
Dividend policy (DP) is the most important to shareholders because it
can affect the share price and shareholders’ wealth (SW) as well.
Generally, higher dividends increase the market price of the share and
vice versa. Besides higher future dividends may also increase the
market price of share and thereby end up with wealth maximization of
the shareholders. Hence, the objective of the paper is to analyze the
impact of DP on SW of Consumer Cyclical Sector in India. Out of
13firms listed on Bombay Stock Exchange (BSE), 10 firms that have
been paying dividend consecutively for the recent past ten years are
considered for analysis. Besides descriptive statistics, Augmented
Dickey Fuller Test (ADF), Levin, Lin & Chu (LLC) t test, Philip Perron
(PP) Fisher x2 test, Im- Pesaran-Shin W (IPS-W) and Breitung test are
used. To test whether the data are stationary and to satisfy one pre-
condition for co-integration, Johansen Co-integration test is used.
Regression and Chow test are also applied to differentiate the impact
between pre and post financial meltdown periods. The results of the co-
integration test proves that there exists a stationary, long-run co-
integration between DP and SW. Regression result proves that DP has
significant impact on SW and the Chow test result proves that the
impact of DP on SW of Consumer Cyclical Sector has been
significantly affected by the event viz., the financial meltdown in
respect of variable dividend yield (DY) and not for the other selected
variables viz., dividend per share (DPS) and dividend payout (DPO).
Keywords: Dividend policy, Shareholders’ wealth, Financial
meltdown
JEL Classification: G 35, L 25, L 62
Introduction
The principal financial objective of any business enterprise is to
maximize the shareholders’ wealth (SW). The corporate function of
maximizing the SW assumes that managers operate in the best interests
of the shareholders. Therefore, it takes place when the returns to the
shareholders’ on the investment are maximized. In addition, these
returns are made up of capital gains in the form of increase in the share
prices, as well as dividends, which are made possible when the firm
generates adequate distributable profits.
When facing uncertainty, it is not always possible for a firm to achieve
its objectives. Wealth creation in entrepreneurial and established
organizations is a complex and challenging task. Therefore, in an ever-
Sandanam Gejalakshmi
Ph.D Research Scholar
Kanchi Mamunivar Centre for PG Studies
Puducherry
Dr. Ramachandran Azhagaiah
Associate Professor of Commerce
Avvaiyar Govt. College for Women
Karaikal
www.pbr.co.inwww.pbr.co.in
Pacific Business Review International
92
changing environment, any organization wishing to Profile of the Study Sector - Consumer Cyclical Sector in
maintain a competitive position and to satisfy its India
shareholders’ expectation should be engaged in planning Consumer cyclical sector includes industries such as
carefully every time when there is a need for. automotive, housing, entertainment and retail. The sector
The SW (Azhagaiah and Sabaripriya, 2008) is represented can further be divided into durable and non-durable sectors.
by market price of the firm’s common stock, which in turn, is Durable includes physical goods such as hardware or
the function of the firm’s investment, financing and vehicles, while consumer non-durable represents sector viz.,
dividend decision. The modern approach of financial entertainment or hotel services.
management provides a conceptual and analytical The performance of consumer cyclical sector is highly
framework for decision making, which emphasizes the related to the state of the economy. It represents goods and
effective use of resources to create SW. The optimal services that are not considered necessities, but for luxurious
dividend policy (DP) is one that maximizes the firm’s stock purchases. During contractions or recessions, investors
price; this leads to maximization of SW and thereby ensures have less disposable income to spend on consumer cyclical.
rapid economic growth. When the economy is expanding or booming, the sale of
Therefore, the present study is aimed at to study the long-run these goods rise as retail and leisure spending increase.
co-integration between the DP and the SW, and the impact of Consumer cyclical sector comprises textiles, automobiles,
DP on SW before and after an event viz., the global financial tyres, hotel, tourism and others as shown in figure A.
meltdown.
Figure A
Industries of Consumer Cyclical Sector
Source:http://www.investopedia.com
Review of Literature Priya and Nimalathasan (2013) revealed that dividend
payout had a significant impact on SW. Further, earnings per
Researchers have propounded many theories about a firm’s share (EPS), price earnings ratio (P/E) and market price to
value as well as the SW. There has been a substantial book value (MP_BV) had significant correlation with return
literature on the relationship between the DP and the SW and on assets (ROA); the P/E ratio had significant correlation
the impact of DP on SW. Several studies were made in with return on equity (ROE); EPS and the MP_BV were
respect of determinants of DP as well asSW in the developed significantly correlated with ROE of the selected hotels and
as well as in the developing economics like India. restaurants in Sri Lanka.
Vijaya kumar (2011) revealed that the sales and profit after Kumaresan (2014) found that there was a positive
tax of automobile firms had strong relationship with SW. relationship between return on equity, dividend per share
Devaki and Kamalaveni (2012)revealed that there was a and DP and SW of the firms while there was a negative
positive association between lagged dividend, earnings, relationship between retention ratio and SW of the listed
debt-equity ratio, sales size, age of the firm and institutional firms in hotel and travel sectors of Sri Lanka.
shareholding of the Indian corporate hotels. Ganesh et al.
(2013) found that the economic value added, market value Iqbal et al. (2014)found that the DP, firm size and firm
added, cash flow, and market to book value ratio were growth had significant positive impact on SW of selected
healthier in Ashok Leyland than that of the Tata Motors. manufacturing industries from three sectors viz., textile,
sugar and chemical.
Pacific Business Review International
92
changing environment, any organization wishing to Profile of the Study Sector - Consumer Cyclical Sector in
maintain a competitive position and to satisfy its India
shareholders’ expectation should be engaged in planning Consumer cyclical sector includes industries such as
carefully every time when there is a need for. automotive, housing, entertainment and retail. The sector
The SW (Azhagaiah and Sabaripriya, 2008) is represented can further be divided into durable and non-durable sectors.
by market price of the firm’s common stock, which in turn, is Durable includes physical goods such as hardware or
the function of the firm’s investment, financing and vehicles, while consumer non-durable represents sector viz.,
dividend decision. The modern approach of financial entertainment or hotel services.
management provides a conceptual and analytical The performance of consumer cyclical sector is highly
framework for decision making, which emphasizes the related to the state of the economy. It represents goods and
effective use of resources to create SW. The optimal services that are not considered necessities, but for luxurious
dividend policy (DP) is one that maximizes the firm’s stock purchases. During contractions or recessions, investors
price; this leads to maximization of SW and thereby ensures have less disposable income to spend on consumer cyclical.
rapid economic growth. When the economy is expanding or booming, the sale of
Therefore, the present study is aimed at to study the long-run these goods rise as retail and leisure spending increase.
co-integration between the DP and the SW, and the impact of Consumer cyclical sector comprises textiles, automobiles,
DP on SW before and after an event viz., the global financial tyres, hotel, tourism and others as shown in figure A.
meltdown.
Figure A
Industries of Consumer Cyclical Sector
Source:http://www.investopedia.com
Review of Literature Priya and Nimalathasan (2013) revealed that dividend
payout had a significant impact on SW. Further, earnings per
Researchers have propounded many theories about a firm’s share (EPS), price earnings ratio (P/E) and market price to
value as well as the SW. There has been a substantial book value (MP_BV) had significant correlation with return
literature on the relationship between the DP and the SW and on assets (ROA); the P/E ratio had significant correlation
the impact of DP on SW. Several studies were made in with return on equity (ROE); EPS and the MP_BV were
respect of determinants of DP as well asSW in the developed significantly correlated with ROE of the selected hotels and
as well as in the developing economics like India. restaurants in Sri Lanka.
Vijaya kumar (2011) revealed that the sales and profit after Kumaresan (2014) found that there was a positive
tax of automobile firms had strong relationship with SW. relationship between return on equity, dividend per share
Devaki and Kamalaveni (2012)revealed that there was a and DP and SW of the firms while there was a negative
positive association between lagged dividend, earnings, relationship between retention ratio and SW of the listed
debt-equity ratio, sales size, age of the firm and institutional firms in hotel and travel sectors of Sri Lanka.
shareholding of the Indian corporate hotels. Ganesh et al.
(2013) found that the economic value added, market value Iqbal et al. (2014)found that the DP, firm size and firm
added, cash flow, and market to book value ratio were growth had significant positive impact on SW of selected
healthier in Ashok Leyland than that of the Tata Motors. manufacturing industries from three sectors viz., textile,
sugar and chemical.
93www.pbr.co.in
Volume 9 Issue 7, Jan. 2017
Ashvin (2012) found that there was a linear relationship Specific Objectives
between dividend decision and market price of stock of the üTo study the long-run relationship between dividend per
firm of selected auto sector. Ajanthan (2013) showed that the share, dividend payout as well as dividend yield and
DP was a crucial factor affecting the firm’s performance of shareholders’ wealth of the Consumer Cyclical Sector in
the listed hotels and restaurants in Sri Lanka. India.
The above literature provides a review of impact of DP on üTo estimate the impact of dividend variables along with
SW. The previous studies, by and large, were attempted to finance variables on shareholders’ wealth of the
study the long-run and short-run co-integration between DP Consumer Cyclical Sectorin India.
and SW and the impact of DP on SW. In the present study, an üTo estimate the influence of finance factors on
attempt has been made to estimate the difference in the shareholders’ wealthof the Consumer Cyclical Sector in
impact of DP on SW between pre and post financial India.
meltdown periods. üTo study the difference in the impact of dividend policy
Statement of the Problem on shareholders’ wealth of Consumer Cyclical Sector
Previous researchers have propounded many theories on DP between pre and post financial meltdown periods.
as well as on SW. Thus, the researchers are puzzled by the Hypotheses Developed for the Study
question, “whether SW was affected by DP? for many years. H01:“There is no co-integration between dividend per share
In the literature, there are different views regarding whether and shareholders’ wealth”.
DP affects firm’s share price in the long-run. Some studies H02:“There is no co-integration between dividend payout
showed that the firm’s value was not influenced by DP while and shareholders’ wealth”.
some others showed that DP affected firm’s value (Toby, H03: “There is no co-integration between dividend yield and
2014; and Baker Collins et al.2007). So, the present study shareholders’ wealth”.
has made an attempt to study the difference in the impact of H04:“There is no significant impact of dividend policy on
DP on SW between pre and post financial meltdown periods shareholders’ wealth”.
of the selected firms of Consumer Cyclical Sector in India. H05: “There is no significant difference in the impact of
Research Questions dividend per share on shareholders’ wealth between pre and
The research proposes to seek answers to the following post financial meltdown periods”.
questions: H06: “There is no significant difference in the impact of
üWhether long-run relationship exists between dividend dividend payout on shareholders’ wealth between pre and
policy and shareholders’ wealth of listed firms of post financial meltdown periods”.
Consumer Cyclical Sector during the study period. H07:“There is no significant difference in the impact of
üHow do the dividend variables along with financial dividend yield on shareholders’ wealth between pre and post
variables influence the shareholders’ wealth of financial meltdown periods”.
Consumer Cyclical Sector? Research Methodology
üHow do finance variables (after removing dividend Data Source and Period of the Study
variables) influence the shareholders’ wealth of the The study used secondary data, which are collected from the
Consumer Cyclical Sector in India? capital market data base called Centre for Monitoring Indian
üHow does dividend policy impact shareholders’ wealth Economy Private Limited (Prowess CMIE) for a period of
before and after financial meltdown of Consumer 10 years on year to year basis from 2003-04 to 2012-13.
Cyclical Sector in India? Sampling Procedure and Technique
Objectives of the Study The study used multi-stage non-random sampling technique
To study the difference in the impact of dividend policy on and the different stages involved in it are shown in figure B.
shareholders’ wealth between before and after financial
meltdown periods.
Source: Compiled and edited data collected from PROWESS database provided by CMIE
Volume 9 Issue 7, Jan. 2017
Ashvin (2012) found that there was a linear relationship Specific Objectives
between dividend decision and market price of stock of the üTo study the long-run relationship between dividend per
firm of selected auto sector. Ajanthan (2013) showed that the share, dividend payout as well as dividend yield and
DP was a crucial factor affecting the firm’s performance of shareholders’ wealth of the Consumer Cyclical Sector in
the listed hotels and restaurants in Sri Lanka. India.
The above literature provides a review of impact of DP on üTo estimate the impact of dividend variables along with
SW. The previous studies, by and large, were attempted to finance variables on shareholders’ wealth of the
study the long-run and short-run co-integration between DP Consumer Cyclical Sectorin India.
and SW and the impact of DP on SW. In the present study, an üTo estimate the influence of finance factors on
attempt has been made to estimate the difference in the shareholders’ wealthof the Consumer Cyclical Sector in
impact of DP on SW between pre and post financial India.
meltdown periods. üTo study the difference in the impact of dividend policy
Statement of the Problem on shareholders’ wealth of Consumer Cyclical Sector
Previous researchers have propounded many theories on DP between pre and post financial meltdown periods.
as well as on SW. Thus, the researchers are puzzled by the Hypotheses Developed for the Study
question, “whether SW was affected by DP? for many years. H01:“There is no co-integration between dividend per share
In the literature, there are different views regarding whether and shareholders’ wealth”.
DP affects firm’s share price in the long-run. Some studies H02:“There is no co-integration between dividend payout
showed that the firm’s value was not influenced by DP while and shareholders’ wealth”.
some others showed that DP affected firm’s value (Toby, H03: “There is no co-integration between dividend yield and
2014; and Baker Collins et al.2007). So, the present study shareholders’ wealth”.
has made an attempt to study the difference in the impact of H04:“There is no significant impact of dividend policy on
DP on SW between pre and post financial meltdown periods shareholders’ wealth”.
of the selected firms of Consumer Cyclical Sector in India. H05: “There is no significant difference in the impact of
Research Questions dividend per share on shareholders’ wealth between pre and
The research proposes to seek answers to the following post financial meltdown periods”.
questions: H06: “There is no significant difference in the impact of
üWhether long-run relationship exists between dividend dividend payout on shareholders’ wealth between pre and
policy and shareholders’ wealth of listed firms of post financial meltdown periods”.
Consumer Cyclical Sector during the study period. H07:“There is no significant difference in the impact of
üHow do the dividend variables along with financial dividend yield on shareholders’ wealth between pre and post
variables influence the shareholders’ wealth of financial meltdown periods”.
Consumer Cyclical Sector? Research Methodology
üHow do finance variables (after removing dividend Data Source and Period of the Study
variables) influence the shareholders’ wealth of the The study used secondary data, which are collected from the
Consumer Cyclical Sector in India? capital market data base called Centre for Monitoring Indian
üHow does dividend policy impact shareholders’ wealth Economy Private Limited (Prowess CMIE) for a period of
before and after financial meltdown of Consumer 10 years on year to year basis from 2003-04 to 2012-13.
Cyclical Sector in India? Sampling Procedure and Technique
Objectives of the Study The study used multi-stage non-random sampling technique
To study the difference in the impact of dividend policy on and the different stages involved in it are shown in figure B.
shareholders’ wealth between before and after financial
meltdown periods.
Source: Compiled and edited data collected from PROWESS database provided by CMIE
www.pbr.co.in94
Pacific Business Review International
Table-1- List of Firms Selected for the Study (Based on listed firms in BSE 200) for
the Study Period 2003-04 – 2012-13
Total No.
of Firms
(1)
Dividend non-paying firms
(2)
Adequate Data
not available in
the data source
(3)
Total number of firms not
considered for the study
(4)= (2+3)
Ultimate sample firms
selected for the study
(5) =(1) - (4)
13 2 1 3 10
Source: Compiled data collected from PROWESS database provided by CMIE
Table 1 shows the number of firms of Consumer Cyclical statistical methods viz., Augmented Dickey Fuller Test,
sector listed in Bombay stock exchange (13), out of which Johansen Co-integration, Ordinary Least Square method
dividend non-paying firms (2), and firms for which adequate and Chow test are applied for analysis of data using Eviews
data were not in the data source (1) are eliminated, hence the 7 Econometrics software package.
ultimate number of sample firms considered for the study is Ratios used for Analysis
10 only.
The study used two important ratios viz., dividend related
Research Methods ratios and shareholders' wealth related ratios and details of
Besides various dividend variables and finance factors, the ratios used for analysis are shown in table2.
Table2- Dividend Variables (DPS, DPO and DY) used to Estimate the Impact of DP on SW (MPS)
Sl.
No.
Classification of
Dividend Ratios Variables Description Inference
I Dividend related
ratios
1. Dividend per
share (DPS)
Dividend / Number
of equity shares
outstanding
The DPS reveals how well
earnings support the dividend
payout.
2. Dividend
payout ratio
(DPO)
Dividend per share /
Earnings per share
The DPO provides an idea as to
how well earnings support the
dividend payment. Mature firms
tend to have a higher payout ratio,
while low dividend payout ratio
enables the firm to keep a large
portion of its earnings for its
future growth.
3. Dividend
yield (DY)
Dividend per share /
Market price per
share
The DY shows how much a firm
pays out as dividend each year
relative to its share price. Higher
dividend yield has been
considered to be desirable for
most investors. A high share price
will lead to low dividend yield and
vice versa.
II
Shareholders'
wealth (SW)
related ratio
1. Market price
per share
(MPS)
Market capitalization
/ Number of equity
shares outstanding
High market price reflects that the
firms are in very good position
and low market price reflects
reverse.
Source: www.scibd.com/essays/finance.php ; www.ukessays.com/essays/finance/current -assets-current-
liability.php
Table2 shows the variables used to study the co-integration Besides, the study also used finance variables viz., return on
between DP and SW and to analyze the impact of DP on SW capital employed (R_CE), return on net worth (R_NW),
before and after financial meltdown periods. Market price return on assets (ROA), return on long-term fund (R_LF),
per share (MPS) is considered as proxy response variable for return on equity (ROE), total debt to equity (TD_EQ), total
shareholders’ wealth (SW), while dividend per share (DPS), debt to total assets (TD_TA), total debt to fixed assets
dividend payout (DPO), and dividend yield (DY) are (TD_FA), equity multiplier (EM), proprietary ratio (PR),
considered as predictor dividend variables. total liabilities to net worth (TL_NW), current ratio (CR),
Pacific Business Review International
Table-1- List of Firms Selected for the Study (Based on listed firms in BSE 200) for
the Study Period 2003-04 – 2012-13
Total No.
of Firms
(1)
Dividend non-paying firms
(2)
Adequate Data
not available in
the data source
(3)
Total number of firms not
considered for the study
(4)= (2+3)
Ultimate sample firms
selected for the study
(5) =(1) - (4)
13 2 1 3 10
Source: Compiled data collected from PROWESS database provided by CMIE
Table 1 shows the number of firms of Consumer Cyclical statistical methods viz., Augmented Dickey Fuller Test,
sector listed in Bombay stock exchange (13), out of which Johansen Co-integration, Ordinary Least Square method
dividend non-paying firms (2), and firms for which adequate and Chow test are applied for analysis of data using Eviews
data were not in the data source (1) are eliminated, hence the 7 Econometrics software package.
ultimate number of sample firms considered for the study is Ratios used for Analysis
10 only.
The study used two important ratios viz., dividend related
Research Methods ratios and shareholders' wealth related ratios and details of
Besides various dividend variables and finance factors, the ratios used for analysis are shown in table2.
Table2- Dividend Variables (DPS, DPO and DY) used to Estimate the Impact of DP on SW (MPS)
Sl.
No.
Classification of
Dividend Ratios Variables Description Inference
I Dividend related
ratios
1. Dividend per
share (DPS)
Dividend / Number
of equity shares
outstanding
The DPS reveals how well
earnings support the dividend
payout.
2. Dividend
payout ratio
(DPO)
Dividend per share /
Earnings per share
The DPO provides an idea as to
how well earnings support the
dividend payment. Mature firms
tend to have a higher payout ratio,
while low dividend payout ratio
enables the firm to keep a large
portion of its earnings for its
future growth.
3. Dividend
yield (DY)
Dividend per share /
Market price per
share
The DY shows how much a firm
pays out as dividend each year
relative to its share price. Higher
dividend yield has been
considered to be desirable for
most investors. A high share price
will lead to low dividend yield and
vice versa.
II
Shareholders'
wealth (SW)
related ratio
1. Market price
per share
(MPS)
Market capitalization
/ Number of equity
shares outstanding
High market price reflects that the
firms are in very good position
and low market price reflects
reverse.
Source: www.scibd.com/essays/finance.php ; www.ukessays.com/essays/finance/current -assets-current-
liability.php
Table2 shows the variables used to study the co-integration Besides, the study also used finance variables viz., return on
between DP and SW and to analyze the impact of DP on SW capital employed (R_CE), return on net worth (R_NW),
before and after financial meltdown periods. Market price return on assets (ROA), return on long-term fund (R_LF),
per share (MPS) is considered as proxy response variable for return on equity (ROE), total debt to equity (TD_EQ), total
shareholders’ wealth (SW), while dividend per share (DPS), debt to total assets (TD_TA), total debt to fixed assets
dividend payout (DPO), and dividend yield (DY) are (TD_FA), equity multiplier (EM), proprietary ratio (PR),
considered as predictor dividend variables. total liabilities to net worth (TL_NW), current ratio (CR),
End of preview
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