Finance Thesis | Course Paper

“The Impact of Dividend Policy on Shareholders wealth

in textile sector of Pakistan”.

Thesis Submitted to

In Partial fulfillment of the

Requirement for the Degree of

Master’s in Business Administration in Finance

By

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DEDICATION

I dedicate my work to my family and my teachers. A special feeling of gratitude to my loving

parents and teachers whose words of encouragement rings in my ears. I am grateful to my

supervisor, who has been a constant source of knowledge and inspiration.

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ACKNOWLEDGEMENT

Thanks to Almighty Allah Whose unending blessings enabled me to accomplish this gigantic

task. This dissertation could not have been completed without the time, effort, and support of a

number of people. Therefore, I wish to acknowledge the contributions of all of them.

I am grateful to my supervisors, since without her efforts and help I would never have been able

to complete my research, helping me in even the smallest details and helping me explore how

various theories are formulated and how it was applicable to my specific theory.

KASHIF JAVED

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Contents

Abstract: ………………………………………………………………………………………………………………………. 6

Chapter # 1: ………………………………………………………………………………………………………………….. 7

Introduction ………………………………………………………………………………………………………………. 7

Background study: …………………………………………………………………………………………………….. 8

Scope of study: ……………………………………………………………………………………………………….. 8

Problem statement of study: ………………………………………………………………………………………. 9

Limitations of the research: ……………………………………………………………………………………… 10

Research questions: ………………………………………………………………………………………………….. 11

Research objectives: …………………………………………………………………………………………………. 11

Hypothesis of study: …………………………………………………………………………………………………. 11

Model: ……………………………………………………………………………………………………………………… 11

Chapter # 2: ………………………………………………………………………………………………………………… 13

Literature review: ……………………………………………………………………………………………………. 13

Chapter # 3: ………………………………………………………………………………………………………………… 23

Theoretical Frame Work: …………………………………………………………………………………………. 23

Model Explanation: ………………………………………………………………………………………………….. 23

VARIABLE DESCRIPTION: …………………………………………………………………………………… 24

Dependent variable: ……………………………………………………….. Error! Bookmark not defined.

Return on asset: ………………………………………………………….. Error! Bookmark not defined.

Independent variable: …………………………………………………….. Error! Bookmark not defined.

Return on equity: ………………………………………………………… Error! Bookmark not defined.

Liability: …………………………………………………………………….. Error! Bookmark not defined.

Deposits: …………………………………………………………………….. Error! Bookmark not defined.

Total expense: …………………………………………………………….. Error! Bookmark not defined.

Non-performing loans: ………………………………………………… Error! Bookmark not defined.

Cost of funds: ……………………………………………………………… Error! Bookmark not defined.

Administrative cost: ……………………………………………………. Error! Bookmark not defined.

Equation Explanation: ……………………………………………………………………………………………… 24

Chapter 04 ………………………………………………………………………………………………………………….. 33

Data and Methodology ………………………………………………………………………………………………… 33

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4.1 Methodology ………………………………………………………………………………………………………. 33

4.1.1 Ontology & Epistemology ……………………………………. Error! Bookmark not defined.

4.1.2 Deductive Approach ……………………………………………. Error! Bookmark not defined.

4.1.3 Research Paradigm ……………………………………………… Error! Bookmark not defined.

4.1.3.1 Positivism Paradigm …………………………………………. Error! Bookmark not defined.

4.1.3.2 Interpretive Paradigm ………………………………………. Error! Bookmark not defined.

4.1.3.3 Pragmatism Paradigm ……………………………………… Error! Bookmark not defined.

4.1.3.4 Approach Taken ………………………………………………. Error! Bookmark not defined.

4.1.4 Research Methods……………………………………………….. Error! Bookmark not defined.

4.1.4.1 Qualitative Method …………………………………………… Error! Bookmark not defined.

4.1.4.2 Quantitative Method ………………………………………… Error! Bookmark not defined.

4.1.4.3 Methodological Approach Taken ………………………. Error! Bookmark not defined.

Data ……………………………………………………………………………….. Error! Bookmark not defined.

4.2.1 Primary source ……………………………………………………. Error! Bookmark not defined.

4.2.2 Secondary source ………………………………………………… Error! Bookmark not defined.

4.2.3 Tertiary source ……………………………………………………. Error! Bookmark not defined.

4.2.4 Source taken ……………………………………………………….. Error! Bookmark not defined.

4.2.5 Research instruments ………………………………………….. Error! Bookmark not defined.

Chapter # 5 …………………………………………………………………………………………………………………. 37

Results and Findings ………………………………………………………………………………………………… 37

Descriptive Statistics……………………………………………………………………………………………… 37

Interpretations:………………………………………………………………………………………………………… 37

Return on asset: ……………………………………………………………………………………………………. 37

Return on equity: ………………………………………………………………………………………………….. 37

Deposits: ………………………………………………………………………………………………………………. 38

Total expense: ………………………………………………………………………………………………………. 38

Non-performing loans: ………………………………………………………………………………………….. 38

Cost of funds: ……………………………………………………………………………………………………….. 39

Administrative cost: ……………………………………………………………………………………………… 39

1.2 Unit Root Tests……………………………………………………………………………………………. 39

Interpretations:………………………………………………………………. Error! Bookmark not defined.

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Interpretations:………………………………………………………………. Error! Bookmark not defined.

Interpretation: ……………………………………………………………….. Error! Bookmark not defined.

Chapter # 6 ……………………………………………………………………….. Error! Bookmark not defined.

Summary, Conclusion and Recommendations …………………. Error! Bookmark not defined.

6.1 Summary ………………………………………………………………. Error! Bookmark not defined.

6.2 Conclusion …………………………………………………………….. Error! Bookmark not defined.

6.3 Recommendations ………………………………………………….. Error! Bookmark not defined.

References …………………………………………………………………………. Error! Bookmark not defined.

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“The Impact of Dividend Policy on Shareholders Wealth in Textile

Sector of Pakistan”.

Abstract:

The impact of firm’s dividend policy on shareholders’ wealth is an unresolved issue and has

been subjected to many empirical discussions within the finance literatures. The objective of the

firm is to increase the wealth of its shareholders. The best dividend policy is the one that

increases shareholders wealth by the greatest amount. It is therefore necessary, to understand the

nature of the relationship between dividend and value of the firm. To the knowledge of the

researchers very few studies have attempted to observe the impact of dividend policy on

shareholders’ wealth in pakistan. In attempt to fill this research gap the present study was

initiated to find out the impact of dividend policy on shareholders’ wealth from textile industry

listed in KSE in Pakistan during the period from 2011/2015. Secondary data was collected from

Karachi stock exchange (KSE)The present study used unit root test,housemen test,fixed model

effect and descriptive statistics to evaluate the data collected from the twenty five companies

listed in the KSE. In addition the dividend policy has insignificant impact on share price of the

KSE. Outcomes of the study will be useful to the academicians, practitioners, policy makers and

investors for making suitable policy formulations for the companies. Further the companies are

able to decide a suitable polices in executing their financial decision without harming to the

market value of the shares.

Keywords: Dividend policy, Shareholders wealth, Earning per share (EPS), dividend yield

(DY), Dividend per Share (DPS) and Share price (SP)

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Chapter # 1:

Introduction

Dividend policy is one of the most widely researched topics in the field of finance but the query

is that dividend policy affect shares price and it’s remain arguable among managers, policy

makers and researchers for many years. Dividend policy is imperative for investors, managers,

lenders and for other stakeholders. It is imperative for investors because investors contemplate

dividends not only the source of earning but also a method to assess company from investment

point of view. It is the method of assessing that the company is cash reproductive or not.

Choosing a suitable dividend policy is an important choice for the company because flexibility to

invest in future projects depends on the amount of dividends that they pay to their investors. If

company compensate more dividends then less funds available for future projects depends on the

amount of dividends that they pay to their shareholders. If company pay more dividends then few

reserves available for future projects. Lenders are also paying attention in the amount of dividend

that a company declares, as more amounts is compensated as dividend earnings and less amount

would be available to the company for servicing and recovery of their claims and finally it is

imperative for other stakeholders especially for claimholders to help them in reducing

organization cost. The basic objective of shareholder is to maximize their return and it might be

in the form of dividends or capital gain. Shareholders decision concerning the profit on

investment is effected by dividend policy of the company. Arnold (2008) describe the main aim

of dividend policy is to maximize shareholders’ wealth by maximizing their purchasing power.

So maximizing shareholders’ wealth rely on the dividend policy of the company because of this

shareholders would satisfy their purchasing and spending patterns.

There are some factors that companies examine to designing their dividend policies like firms’

profitability ratios, managerial and behavioral environment, readiness of the company etc.

Juma’h & Pacheco (2008) explained that management decision of dividend policy is effected by

managerial and behavioral environment in U.S. They describe that sometimes financially strong

companies do not pay dividend to shareholders and financially weak companies pay dividends to

shareholders. According to their point of view mostly dividend paying companies are commonly

larger in size, growth and profitability, in terms of liquidity ratio and in research and

developments as contrast to non-dividend paying companies. Ling, Mutalip, Shahrin, & Othman

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(2008) studied the features of paying dividend companies of Malaysia. Results of their study

show that dividend compensating companies are more gainful, less risky and more developed in

their activities as compared to non-dividend compensating companies. And its results further

indicate that managers of Malayian companies understand the importance of compensating

dividends and they compensate dividends even if the companies are not earning profit.

The objective of this research is to see the effect of dividend policy on shareholders wealth of

textile industry of Pakistan. For this purpose different articles write down in Pakistan and

reviewed from abroad and dividend theories have been empirically tested of their effect on

shares price. There are mainly two schools of thoughts whose presented two different opinions

about dividend policy. One school of thought followed the opinion of Miller and Modigliani

(1961) and understands that dividend policy irrelevant although the second school of thought

followed the point of view of Gordon (1963) and understands that dividend policy relevant.

Since the half century passed, the question still remains i.e. whether dividend policy (DP) is

relevant or not. This problem yet exists, which theory the companies should apply for making

their dividend decisions.

Background study:

In the corporate finance, dividend policy (DP) is the key issue that the management has to deal

with analytically. Dividend policy involves the base question: whether the firm should disburse

all or some proportion of earning to shareholders; or should retain earned profits in business?

Firms adopt different dividend policies to answer this question. Dividends usually take form of

cash dividends or stock dividends. Cash dividend is the most common form of dividend. It is

directly transferred to shareholder’s account. Stock dividend is the additional shares issue by a

firm to its current shareholders. Additional shares are usually issued as a specific proportion to

shares owned. When a firm decides to distribute its earnings, then another question arises

concerning the proportion of earnings that should be distributed. It depends upon potential

investment opportunities. The remaining portion of earning after dividend distribution is known

as retained earnings. Managers are responsible for not only deciding the proportion of the

earnings required for investment, but also for considering the probable effects of such decisions

on stock prices (SP) (Bishop, Crapp, Faff, &Garray J.Twite, 2000). Management strives to adopt

such dividend policy that not only meet investment needs but also prevent negative effects on

share prices.

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The research work on dividend policy (DP) started with the limited study of Lintner (1995). He

raised a query which is still crucial for managers’ “what choices made by managers do affect the

size, shape and timing of dividend payments?” The study answered the critical questions

regarding dividend policy, frequently asked by managers in 1950s. the questions resolved by

Linter (1956) are the following.

a) Whether dividend payments need to be altered or remained at current level?

b) Whether owners wish to receive static dividend payments, or they require revised

dividend payment along with earnings?

c) Whether younger or older investor dividend policy should attract?

Dividend Policy

Dividend policy (DP) is concerned with financial policies regarding paying cash dividend in the

present or paying an increased dividend at a later stage. Whether to issue dividends and what

amount, is determined mostly on the basis of the firm’s inappropriate earning (surplus cash) and

affect by the firms long-period income power. When excess cash exists and is not needed by the

company, then executive management is expected to pay out some or all of those excess incomes

in the form of cash dividends or to re-purchase through a share buyback method. According to

Weston and Brigham, “Dividend policy (DP) determines the division of incomes between

payments to investors and retained earnings (RE)”. Gitman, “The firm’s dividend policy (DP)

represents a plan of action to be followed whenever the dividend decision must be made”. The

MM hypothesis (Miller-Modigliani) Theory has advocated that dividends are of no compatibility

and effect on the valuation of a firm. On the other hand Walter and Gordon have prorogated that

investment policy and dividend policy (DP) of accompany are interlinked and affects the price of

shares of a firm. Hence, dividends suppose immense significance in deciding the value of a firm.

Factors Affecting Dividend Policy

The boards of directors (BOD) of a company have the individual right to announce dividend and

decide the quantum of dividend. In addition to legal restrictions, there are several factors

affecting the dividend policy (DP) of a company such as Preference of Shareholders, Current

Year’s incomes, Past Dividends (PD), Management Control Motive, Liquidity Position, Future

Financial Requirements, and Access to Capital Market, Contractual Restrictions, Taxation

Policy, Inflation, Stability of Earnings and Legal Restrictions.

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Dividend Policy and Share Prices

Financial management (FM) having major three functions, one of them is dividend policy.

Financial management has to make an important decision on deciding the part of profits of

company to be distributed to shareholders and the part to be retained by it for future expansion

efforts. Dividend policy has to be formulated on the light of impact the decision about dividend

is likely to have on shareholders wealth. Dividend payment (DP) shall be determined such that it

leads to maximization of shareholders wealth. In case dividend payment (DP) does not lead to

maximization of shareholders wealth, then the company should rescind from paying dividend

and retain its earnings. However, financial experts have not expressed a unanimous view on this

issue.

Problem statement of study:

Dividend policy (DP) has been widely researched topic in the finance research field. As the

management’s chief objective is to maximize shareholder’s wealth, so it strive to achieve such

optimal dividend policy that positively influence a firm’s stock market value. On the other hand,

investors being risk avert, prefer a firm’s stock which is less volatile and has a dividend policy

with a stable dividend growth rate. However, some shareholders prefer dividend paying stocks,

and some do not. Managers are of the view that by adopting a particular dividend policy, share

price of stock can be minimized. Here, the question arises; does dividend policy really affect

shareholders wealth?

Furthermore, the implication of this theory depends upon particular market situation, size,

growth and several more factors. So the basic research question is:

“Whether there exists any relationship between dividend policy and shareholders wealth in

textile sector of Pakistan?”

Limitations of the research:

As all research works have some limitation in one way or the other, therefore, the fundamental

limitation of this research is that the study is based on secondary data. Further due to cost and

time constraints the researcher limits the study to dividend policy and selected sample also.

Research questions:

▪ What is the impact of dividend policy (DP) on shareholders wealth in textile sector of

Pakistan?

▪ Whether of control variables like firm size (SZ), firm growth (FG), earnings per share

(EPS) and return on equity (ROE) impact on textile Listed Companies at KSE?

▪ What is the relationship between dividend policy (DP) and shareholder’s wealth in textile

sector?

Research objectives:

➢ To analyze the impact of dividend policy on shareholder’s wealth on textile sector at

KSE.

➢ To identify internal factor such as earning per share (EPS), Firm Size (SZ), Firm growth

(FG) and return on equity (ROE) impact on share price (SP).