Dividend Policy and Share Value

The assignment examines the influence of dividend policies on a company's share value. It requires students to delve into various academic articles and publications, including those by Barman (2008), Bodie (2013), Bradford et al. (2013), Brealey et al. (2007), and others. Students must analyze the research findings presented in these papers to understand the relationship between dividend policies and share value.

Running Head: Corporate Finance
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Project report: Corporate finance

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Contents
Introduction.......................................................................................................................3
Analyze the dividend polices and analytical view............................................................3
Low dividend payout or high dividend payout.................................................................4
Analysis over dividend and share price relation...............................................................5
Analytical evidences.........................................................................................................6
Conclusion........................................................................................................................7
References.........................................................................................................................9

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Introduction:
Dividend payment strategy and share price of a company is directly related to each
other. If the company would offer high dividend payout or low dividend payout than it
directly affects the share price of a company. Mainly, both the policies which are high
dividend policies and low dividend policies make the different impact over the performance
and the stock price of a company. Companies’ take the help of various dividend policies to
make a better decision about how much dividend must be paid to the investors to keep them
satisfied and attract other investors to invest into the operations of the company (Zhang,
2012). Various dividend policies such as relevant theory, residual relevant theory, expectation
theory etc have been analyzed. Usually making a decision about the high or low dividend is
important for an organization. An organization is required to look over various factors and
then make a better decision about the dividends. In this report, various dividend policies of
the company have been analyzed and than a better decision have been made (FIRRER 2012).
Analyze the dividend polices and analytical view:
Dividend policies are mainly of two types which are relevant dividend polices and
irrelevant dividend policies. Relevant dividend policies depict that mainly investors look over
the market and dividend offered by the company to make a decision about the investment into
the company. Relevant dividend theories are bird in hand theory, expectation theory and
residual dividend theory whereas irrelevant theories are MM theory. Dividend relevant
theories brief that the tax and the transaction cost of the company are also applied and
considered while making the decision of the investment. Inflation rate do not exist in this
theory (Tucker, 2011). Bird in hand theory mainly considers that high dividend payout ratio
must be adopted by the company as it attracts the investors more due to the thought process
of the investors that they would be able to earn the more return from the stock of the
company.
Further, the residual dividend theory depict that the company must manage all the
expenditure, capital expenditure before distributing the divided amount to its shareholders.
This depict that the total amount of profit must be distributed to the shareholder but after
paying all the capital expenditure (DEEPTEE and ROSHAN, 2009). Expectation theory
states that long term interest rate depict about the short term performance of the company.

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Further, it has been found that all of these theories depict the company to take the use of all
the net profit to attract the investors (Davies and Crawford, 2011).
Further, irrelevant dividend policies have been analyzed. It depict that mainly
investors do not look over the market and dividend offered by the company to make a
decision about the investment into the company whereas they analyze the financial
performance and stability of the company (Breuer, Rieger and Soypak, 2014). Miller and
Modigliani have invested this approach. They have analyzed through this research that it is
not necessary for the investors of a market to consider the dividend payout of the company
(Masum, 2014).
They have also approached that the dividend payout of a company could never be
enough to analyze about the stability and performance of the company. This theory also
briefs that the tax and the transaction cost of the company are also not applied and do not
considered while making the decision about the investment (CORRERIA, 2013). This theory
mainly considers that it is not required for an organization to deliver high dividend to the
investor because this could not depict about the performance of the company (Travlos,
Trigeorgis and Vafeas, 2015).
The hypothesis of dividend theory depict that various factors are there which makes
an impact over the management and organization choice about the dividends. Leverages, debt
constraints, capital rules impairment, cash availability and investment opportunities in front
of the company (Barman, 2008). For instance, if the company has a great investment
opportunity and for that company wants to raise the fund than company could retain some
amount of dividend for further use and it would impact over the dividend policies of the
companies.
Further, according to the study of Brealey, Myers and Marcus, (2007), it has been
found that the factors are quite important for an investors as well as organization to
understand. Many times, the dividend is lowered by the company to raise the profits of the
company through some other ways. Investors must look over these points and make a
decision accordingly (Bradford, Chen and Zhu, 2013). It would also help the company to
maintain the stock price.
Though, from various studies and the reports of the analyst, it has been analyzed that
the investors are not well informed and do not have enough knowledge to analyze and

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evaluate the performance of the company (Bodie, 2013). They only analyze the current
performance and the position of the company which could only be analyzed through the
current market share price of the company (STEEN et al, 2012).
Thus through this analysis, it has been analyzed that the company’s are required to
announce the dividend to set the performance and position into the current market so that the
investors could get attract towards the company and make high investment into the company.
Cash dividends are bit essential for the company to become more competitive and enhance
the market price of the stock of the company (CORRERIA et al, 2013).
Factors for low dividend payout or high dividend payout:
Dividend payout is the value which evaluates the total dividend paid out by the
company to its investors on the basis of the net profit of the company. Dividend payout of a
company mainly depends over the policies of the company (Breuer, Rieger and Soypak,
2014). If the company follows the policy of the relevant policies than the dividend payout of
the company would be higher whereas if the company would follow the policies of the
irrelevant policies than the dividend payout of the company would be lower or nil. The
formulas of dividend payout are as follows:
=Total annual dividend of the company / diluted earnings per share (Davies and Crawford,
2011).
There are various factors which affect the lower dividend payout as well as higher
dividend payout of a company such as the industry norms, investment opportunity, cash
position in the company, competitor’s position, profit position of the company, economical
position etc. A company is required to make the decision about dividend payout after
considering all the above given factors. Such as if the economical position is not good than
must company must retain the profit and use it for further operations of the company rather
than dividing it into the shareholders of the company.
Low dividend payout ratio depict that the comapny would offer a lower % of the total
net profit to the investors and will retain the extra amount for the further investment in the
company so that the company do not require to raise the funds from the external sources.
Low dividend payout ratio is not in the favour of the company according to the various
analyst of the company (Barman, 2008). At the same time, high dividend payout ratio depict
that the comapny would offer a higher % of the total net profit to the investors so that the

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company. This % would be higher than the affordability of the company. High dividend
payout ratio is not in the favour of the company according to the various analyst of the
company as this assist the company to face various risks in the market (Brealey, Myers and
Marcus, 2007).
A company must consider the high dividend payout ratio only if the market position
of the company is well and good and company could enhance the profit at any time and the
funds could also be raised by the company from market easily (Shao, Kwo and Guedhami,
2013). So, the management accountant must make the decision of lower dividend policies
and higher dividend policies accordingly. Mainly, it is considered that higher dividend profit
is the best option as investor got some money periodically in terms of dividend which makes
them attract.
Analysis over dividend and share price relation:
Dividend payment and share price of the company is direct related to each other.
Mainly, the share price of a company is affected due to the dividend price although the
dividend history and other related factors also make an affect over these values. If the
dividend offered by the company gets reduced than it directly affect the share price of the
company. Companies’ take the help of various dividend policies to make a better decision
about how much dividend must be paid to the investors to keep them satisfy and attract other
investors to invest into the operations of the company. Basically, it becomes bit tough for the
company to make these decisions.
Market psychology is an outcome of various analysts’ report collectively that depict
that basically the share price of a company depends over the total stock of the company
which has been issues and fluctuations which could take place into the security market or the
economical condition of the company. Naser, Nuseibeh and Rashed, (2013) have expressed
that an investor always wants to earn more profits from the market and enhance the worth of
the invested amount. So he or she tries to invest into that security from where they could earn
more profits.
Bodie, (2013) has expressed in their study that dividend psychology has also been
studied and it has been analyzed that it depicts that the many companies always offer the
same dividend with a good dividend payout ratio so that the expectation of the investors
enhances from the market and they expect that each company would offer them that much of

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dividend. Thanatawee (2013) says that this creates a positive relationship among the dividend
and share price of the company. As due to the dividend, the investors would be attracted more
towards the company and then the demand and supply of the stock in the market would
enhance and through it the share price of the company would also increase.
Through it and through the market analysis, it has been found that dividend
declaration affects the stock price of a company at huge level (Bradford et al, 2013). At the
time of delivering the dividend, the share price of the company get fluctuate rapidly and the
main reason behind enhancing and decreasing the stock price of the company is its dividend
payout value. Baker and Weigand, (2015) have expressed that through the dividend and stock
price of the company have positive relations with each other so the company is required to
offer a good dividend to the investors to make a good position in the market and enhance the
market price of the security.
Analytical evidences:
For analyzing the relationship of dividend and the stock price of a company. 10
companies of the market have been taken and their share price has been compared before
declaring the share price and after the declaration of share price. Through this, it has been
analyzed that after the declaration of the dividend, the share price of almost all the stock has
been enhanced this depict that the study of the analyst is realistic in the security market.
Comapny Date Share price Share price
After
Effect
Before 30
days
30 days
Anwar
Ceramic
tiles
13th April 0.143 0.146
Share
price has
been
enhanced.
AHLI
Bank
27th March 0.105 0.11
Share
price has
been
enhanced.

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Madina
Investment
28th June 0.38 0.39
Share
price has
been
enhanced.
ACWA
Power
Barka
18th June 0.78 0.752
Share
price has
been
reduced.
Bank
Dhofar
27th March 0.198 0.202
Share
price has
been
enhanced.
Majan
college
29th Nov 0.42 0.46
Share
price has
been
enhanced.
Batinah
power
11th June 1.125 1.125
Share
price is
similar.
Madina
Takaful
27th March 0.105 0.109
Share
price has
been
enhanced.
Buriami
Hotel
18th June 0.93 0.98
Share
price has
been
enhanced.
Omannia
financial
securities
21st March 0.253 0.276
Share
price has
been
enhanced.
The above calculation and analysis over the above companies express that the Anwar
ceramic tiles, AHLI bank, Medina Investment, Bank Dhofar, Majan college, Madina Takaful,
Buriami Hotel and Omannia financial securities depict that the stock price of these securities

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has been enhanced after announcing the dividend. This has taken place due to the high
dividend payout ratio. The dividend announcement has attracted the investors to invest into
the company. Further, the stock price of the ACWA power Barka has been reduced due to
lower dividend payout ratio. And the share price of Batinah Power has become same even
after announcing the dividend due to the fact that the dividend offered by the company was
average. Through this study, it has been found that if the normal or good dividend is offered
by the company to its investors then the demand of the stock enhances into the market and it
directly make an impact over the share price of the company (Hillier, Grinblatt and Titman,
2011).
Conclusion:
To conclude, organizations must look over the analysis and market situation as well as
the nature of the investors before announcing the dividend so that the investors could get
attract towards the company and company become able to get more dividend from the
market. Cash dividends are bit essential for the company to become more competitive and
enhance the market price of the stock of the company.
Neither the higher dividend payout ratio nor the lower dividend payout ratio is in the
favour of the company as both of these would raise the different issues in front of the
company. Through this, it is suggested to the manager of the company to evaluate the
dividend payout ratio according to the nature of the company and economical condition of the
country.

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References:
Baker, H.K. and Weigand, R., 2015. Corporate dividend policy revisited. Managerial
Finance, 41(2), pp.126-144.
Barman, G.P., 2008. An evaluation of how dividend policies impact on the share value of
selected companies.
Bodie, Z., 2013. Investments. McGraw-Hill.
Bradford, W., Chen, C. and Zhu, S., 2013. Cash dividend policy, corporate pyramids, and
ownership structure: Evidence from China. International Review of Economics &
Finance, 27, pp.445-464.
Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc
Graw Hill, New York.
Breuer, W., Rieger, M.O. and Soypak, K.C., 2014. The behavioral foundations of corporate
dividend policy a cross-country analysis. Journal of Banking & Finance, 42, pp.247-265.
CORREIA, C. et al. 2013. Financial Management. 7th Edition. Cape Town: Juta
andCompany Ltd.2.
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
DEEPTEE, P. and ROSHAN, B. 2009. Signaling Power of Dividends on firms futureProfits
A Literature Review. Evergreen Energy- Interdisciplinary Journal, pp.1-9.
FIRER, C. et al. 2012. Fundamentals of Corporate Finance. 5th Edition.Berkshire.McGraw-
Hill Companies, Inc.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy.
McGraw Hill.
Masum, A.A., 2014. Dividend policy and its impact on stock price–A study on commercial
banks listed in Dhaka stock exchange.

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Naser, K., Nuseibeh, R. and Rashed, W., 2013. Managers' perception of dividend policy:
Evidence from companies listed on Abu Dhabi Securities Exchange. Issues in Business
Management and Economics, 1(1), pp.001-012.
Shao, L., Kwok, C.C. and Guedhami, O., 2013. DIVIDEND POLICY: BALANCING
SHAREHOLDERS'AND CREDITORS'INTERESTS. Journal of Financial Research, 36(1),
pp.43-66.
STEEN, E. et al. 2012. stakeholder conflicts and dividend
policy. Journal of Banking & Finance, 36 pp. 2852-2864
Thanatawee, Y., 2013. Ownership structure and dividend policy: Evidence from Thailand.
Travlos, N.G., Trigeorgis, L. and Vafeas, N., 2015. Shareholder wealth effects of dividend
policy changes in an emerging stock market: The case of Cyprus.
Tucker, J.W., 2011. Selection bias and econometric remedies in accounting and finance
research.
Zhang, D., 2012. Managerial dividend-paying incentives. Erasmus University Rotterdam.