Relationship of the Dividend Payments to the Share Prices

Published: 2021-07-01
1938 words
8 pages
17 min to read
George Washington University
Type of paper: 
Research paper
This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Dividends serve a major role in the functioning of any company. They are used in the redistribution of a companys profits back to the investors and also serve as an announcement of a companys success. This is to show that for companies to issue out dividends at a consistent rate it also implies that the companies are experiencing profits from their sales. Normally dividends are paid in cash, which at the same time makes them a very lucrative source of income that can be used to add extra shares to a companys stock. In such instances its relevant to note that ones dividends are directly proportional to the amount of shares one has in a given company. As earlier noted there is a relationship between dividends and the concurrent shares. The basic objective of a shareholder is to maximize on the investments they place in a company and one of the ways this can be addressed is through the very dividends gained from the shares. In implication it can be noted that for dividends to be paid the share prices must be performing at expected levels. Dividends thus have an effect on the share price that cannot be ignored. For example when the dividends of a company are declared it encourages share holders  to purchase and retain share thus having the positive effect on the share price. An action in the view of a companys profitability creates an impact on the share prices the most.

Maximization of the return profit is the basic objective that a shareholder has in mind and this returns may be inform of capital gain or dividends. The dividend policy that is used by a company also affect the decisions of the investor concerning the return on investment .maximization of the shareholders wealth is the main objective of dividend policy and so maximization of the wealth of the shareholder mainly depends on the dividend policy that is used by the company. The declaration of dividend motivates investors to purchase stock this in turn causes the price of shares to increase. Most investors invest in certain types of stocks at certain times mainly because of collecting dividend payments. Some investors shares just before the dividend rate is reached and then sells them after the recorded date hence accruing higher profits. Even though for the investors stock dividends do not result in any increase in value at the time of their assurance. The book value per common share is diluted because a stock dividend increases the number of outstanding shares while the company value is not affected hence remains stable.

The objective of this study is to observe the relationship of the dividend payments to the share prices against five Australian pharmaceutical companies. For this purposes extensive research has been done on the same where data has been collected to concur with the same. Essentially it is the amount of money in a business that can be used to pay dividends and as such the share prices react in the same manner. According to opinion dividend paying companies are larger in size compared to non-paying companies. The results from the field indicate that companies need to understand that its important to pay dividends because of their overwhelming effect on the share prices.

Literature Review

Numerous studies have been conducted in the past on the dividends policies earlier that looked into the relationship between the stock prices and the dividend policy. These studies have been so resourceful to new researchers as they have been able to look into the dividend policies at new perspectives that can, in turn, show the relationship between dividend policy and the stock price. Discussion of dividend and how they are related to the stock prices cannot be complete without including the works of Tandon, 2013. He raised the question that still up to date is very essential. The question was that what choices that are made by the managers do affect the shape, size, and timing of the dividend payments. Answers to this question can play a very important role in finding the relationship between stock prices and the dividend payments. The question led to the introduction of the concept of dividend irrelevance theory whereby the theory explains that the dividends payments which are connected to the dividend payment as not impacting on the stock prices. A lot of studies that have been conducted after the introduction of the concept of dividend irrelevance theory support the theory. They did not consider its relevant to the stock prices. These studies gave evidence to show that in deed dividend payment have very little to affect the stock prices. Australian Pharmaceutical companies have been a center of focus for many studies trying to explore the relationship between stock prices and the dividend payments. This is because of the many buying and selling of shares in those companies. Also, a lot of these companies are listed companies. This makes it very easy to note the trends in the dividend payments and the stock prices with the changes in time.

Ahmad, et al. 2016 gave another perspective way into which the stock prices and the dividend payments can be viewed. He showed how the dividend payments could be presented by the concept of the concept of Dividend relevance theory. These concepts show that the dividend payments does not in any way affect the value of a firm as well as the market price of their shares (Pradhan, 2008). For this reason, most of the investors in the pharmaceutical companies, as well as other industries, usually prefer secure and current income as dividends over capital gains. A lot of studies have been done by different scholars supporting the concept of dividend relevance the. Oyinlola, 2014 found no relationship between the stock prices and the dividend payments. The results that were found in their studies further showed that there is no relationship between the dividend payments and stock prices. Their results also showed that the dividend payments does not in any way impact on the stock prices and it solely depends on the investor's decision to keep it either high or low-yielding securities, return that is earned by them in both the situations remains the same. Iftikhar, 2017 and other scholars found out in the article: maturity structure of the corporate debt, that the high growth organizations have lower dividend payouts and debt ratios compared to the low growth companies that have higher dividend payouts as well as debt ratios. This, therefore, means that the investors will prefer higher dividend payouts and regard I as less risky compared to capital gain. Furthermore, the studies also showed that there is no relationship between the dividend yield and the stock market price even after studying more than 100 of Australian-listed stock companies though it showed the positive relation between the stock prices and the size, leverage, and earnings and the negative relation stock prices and the payout ratio. A study that was done by Baskin 1989 showed that over 2300 of the United States stocks from the period of 1967 and 1986 had experienced a significant negative relationship between the stock price and the dividend yield.

In another study that was conducted by Kajola, et al. 2015 there was a positive relationship between the dividend payment ratio and the price earnings ratio. They study used data from the database of the individual companies that were used in the study. The results that were obtained in their study showed that there is a significant positive relation between dividend payout and the debt to equity ratio. This explains the behavior of most of the managers who are used to the tendency of designing their dividend policy. The results of their survey showed that there is the stability of earnings, the current and the future earnings, liquidity and the degree of the financial leverage as the main determinant that the corporate managers do regard in designing their dividend policies that do affect the dividend payments. The dividend policies do give out clear instructions of how the dividend payments should be made. A study that had a great focus on the effects of dividend policy on the performances of the listed companies showed that there is a positive relation between the dividend policy, the return on assets and the growth in sales while there is a negative relationship between the return on assets, leverage and dividend payout. The findings are similar to the results of the previous studies that provide the strongest evidence for the relevance of the dividend policy to the performance of an organization. The study that was conducted by Soni, 2014 a sample of 500 organizations from the six sectors of the Bombay Stock Exchange with the primary purpose of studying the relationship between the stock market prices and the dividend policies . The results that were obtained from this study showed that the dividend retention ratio is positively related to the stock returns just like in the individual sector though there is no statistically significant relation between the two variables (Osobov, 2003). These results also show that the debt equity ratio has the negative relation with the stock return while the size of the organization has a positive relationship with the stock return. The results also show that that the debt equity ratio has the negative relation with the stock return while the size of the organization has the positive relation with the stock return. This was further proved by the study that was conducted by Travlos, et al. 2015 which showed that there was a positive relationship between the net earnings of an organization and their cash dividends, retained earnings, return on equity and the size. However, the study did not show any relation between the decision making and the debt equity ratio.

In another study that was conducted by Ho 2002 that is relevant to the dividend payment whereby he uses the panel data approach and the fixed effects regression model. In the results that were obtained in this study of his, it was clear that there was a positive relationship between the dividend payment and the size of the Australian firm and the liquidity of the Japanese firms. The study found the negative relationship between the dividend policy and the risk and most particularly in mostly the Japanese organizations. The industrial effect of these companies that were studied was very resourceful in showing the relationship between the stock prices and the dividend payments. In the article that Ho wrote: Reinvesting managerial perspectives on dividend policies, there was the provision of new evidence of managers decision concerning the dividend policy. There were surveys that were conducted by managers of various Australian firms that are always paying the cash dividends. The results of the survey showed that the managers are in most cases aware of the historical patterns of the earnings and the dividends. This, therefore, can be taken to mean that they design their dividend policies after making and intense considerations at them. They can never make policies that will not be in their favor. So the dividend policies that are used may be biased as they may tend to favor the managers that are the main formulators of the policies. Dechow 2014 also showed the effect of dividend payment and the retained earnings on the stock prices of most of the Australian companies in general. The results of the study indicated that the dividend payment has a very strong relation with the stock price while on the other hand; the retained earning had very weak relations with the stock market price. His results further showed that most of the stakeholders of the Australian companies give a lot of considerations to the dividend income than the capita...

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