EFFECT OF DIVIDEND POLICY ON STOCK PRICE

VOLATILITY:
CASE OF COMMERCIAL BANKS OF PAKISTAN

Supervised By
DR. MEHBOOB UR RASHID

Submitted By
Hina Johar
MBA (1.5) Finance
Roll No. 11
INSTITUTE OF MANAGEMENT STUDIES
UNIVERSITY OF PESHAWAR
SESSION: 2013-14

EFFECT OF DIVIDEND POLICY ON STOCK PRICE

VOLATILITY: CASE OF COMMERCIAL BANKS OF PAKISTAN

Thesis report submitted to the Institute of Management Studies,

University of Peshawar in partial fulfillment of the requirement for the
Degree of Master of Business Administration

INSTITUTE OF MANAGEMENT STUDIES

UNIVERSITY OF PESHAWAR
SESSION: 2013-14

EFFECT OF DIVIDEND POLICY ON STOCK PRICE VOLATILITY: CASE OF

COMMERCIAL BANKS OF PAKISTAN

Supervisor:

DR. MEHBOOB UR RASHID

Signature:
Designation:
Organization:

Institute of Management Studies

University of Peshawar

INSTITUTE OF MANAGEMENT STUDIES

UNIVERSITY OF PESHAWAR
SESSION: 2013-14

DEDICATION

This thesis is dedicated to my parents who have supported me all the way since the beginning
of my studies. Also, this thesis is dedicated to my siblings who have been a great source of
motivation and inspiration. Finally, thesis is dedicated to all those who believe in the richness
of learning.

Acknowledgement

First of all, I want to express all my humble thanks to Allah who is very sensitive about each and
every activity of all his men and without whose help, I am unable to accomplish any objective in
my life.
Secondly, I put forward my earnest thanks to my affectionate parents, who always remain at
my back to support me, I can never give the returns of their un-tired struggle for me, but I can
only prove myself as they expect from me.
I am grateful to my prestigious institute that made this learning opportunity a part of our
education, especially to my kindhearted Supervisor DR. MEHBOOB UR RASHID who not only
guided me well but also make me able to write this thesis, His enthusiasm shows the way
forward to me to achieve this success and who keep me in high spirit through his appreciation.
He helped me a lot each time I went up to him.

Hina Johar
IMS, University of Peshawar
Session 2013 - 2014

LIST OF ACCRONYMS:
DND

Dividend

PC

Price

SPV

Share Price Volatility

DY

Dividend Yield

POR

Payout Ratio

EVR

Earning Volatility

SZ

Size

GIA

growth In Asset

MKCT

Market capitalization

FMSZ

Firm size

ER

Earnings

LVG

Leverage

KSE

Karachi Stock Exchange

TABLE OF CONTENTS

TABLE OF CONTENTS............................................................................................................ .
LIST OF TABLES.....................................................................................................................
LIST OF ACCRONYMS.................................................................................................................
ACKNOWLEDGEMENTS........................................................................................................
DEDICATION..
ABSTRACT.
CHAPTER 1: INTRODUCTION......
1.1 Introduction...........................................................................................................................
1.2 Objectives of the Research.........................................................................................
1.3 Significance of the Study.......................................................................................................
1.4 Limitation of the Study .......................................................................................................
1.5 Scheme of the Study..
CHAPER 2: LITERATURE REVIEW......
CHAPTER 3: METHODOLOGY AND METHODS.....
3.1 Literatures about the Model...................................................................................................
3.2 Nature of the Study..
3.3 Data Sources
3.4 Sample Size.
3.5 Time Horizon
3.6 Variables Identification..

3.7 Statistical Tools...........................................................................................

CHAPTER 4: EMPIRICAL ANALYSIS....................

4.1 Descriptive Statistics.
4.2 Correlation Analysis.
4.3Multicollinearity Test ...
4.4 Heteroscadasticity Test
4.5 Regression Analysis Test
4.5.1 Regression Statistics..
4.5.2 ANOVA...
4.5.3 Fixed effect Regression

CHAPTER 5: CONCLUSION.....
5.1 Conclusion . .............................................................................
5.2 Future Work

APPENDIX 4.1.....
APPENDIX 4.2..
APPENDIX 4.3.
APPENDIX 4.4.

BIBLIOGRAPHY..............................................................................................................

List of Table:
4.1 Descriptive Statistics
4.2 Correlation Analysis
4.3 Multicollinearity.
4.5.1 Regression Statistics..
4.5.2 Anova.
4.5.3 Fixed Effect Regression.

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Abstract

This research paper is mainly concern about the impact of dividend policy on the share prices of
the commercial banks. The impact of dividend policy on share prices varies with different
determinants of dividend policy. There are main two determinants of dividend policy that are
dividend yield and payout ratio. Both determinants have influence upon share prices of
commercial banks. In this research an attempt is made to explore the impact of dividend policy
through its determinants on share price. For estimation and evaluation of relation among
dividend policy and its impact on share price, a sample comprising panel data of 20 commercial
banks listed in Karachi stock exchange is selected for period of 2009-2013. Fixed effect model is
used by expanding regression model through the addition of controlled variables like size of
firm, earning volatility and growth in assets. Findings suggest significant association of dividend
yield, payout ratio, size of firm and earning volatility with share price volatility. While growth in
assets shows insignificant relationship with share price volatility.

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Chapter #1
INTRODUCTION
1.1 Introduction of the study:
Dividend policy decision is one of the important decisions of corporate management because it influences the
financial structure, corporate liquidating, the flow of funds and investors attitudes. The main feature of dividend
policy is to determine the quantity of earning to be distributed among the shareholder and the amount to be retained
in the firm for reinvestment purpose. Dividends are actually the payments made by a corporation to its
shareholders. Usually it is paid quarterly, semi-annually or annually. It is the part of corporate
profits paid out to stockholders. Dividend policy 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 mainly on the basis of the company's
inappropriate profit (excess cash) and influenced by the company's long-term earning power.
When cash surplus exists and is not needed by the firm, then management is expected to pay out
some or all of those surplus earnings in the form of cash dividends or to repurchase the
company's stock through a share buyback program.
Firms has two choices that whether to pay dividend or reinvest funds instead of paying
out. Shareholders cannot force Board of Directors to declare dividend and also courts will not
interfere with board of directors to make the dividend decision. There is no legal obligation for
firm to pay dividend to common shareholders. But when a company pays dividend, the
shareholder benefitted directly. If the company retains the funds for investment opportunities, the
shareholders can be benefitted indirectly through future increase in the price of their stock. Thus,
shareholders wealth can be increase through either dividend or capital gain. Any change in
dividend policy has both favorable and unfavorable effects on the firms stock price. Higher the

12

dividend means higher the immediate cash flows to investors, which is good, but lower future
growth, which is bad. The dividend policy should be optimal which balances the opposing forces
and maximizes stock prices
Dividend can be paid as following:a)-Cash dividend

b)-Share dividend

a)-Cash dividend: This is the most simplest and common form of paying dividend to
shareholders, by using this method direct cash is paid as dividend out of companys profit to the
shareholders.
b)-Shares Dividend: Another method which is adopted by the companies to pay extra shares to
the shareholders instead of direct cash payments. This method is very helpful to the company in
the situations when the company is running short of cash.
The dividend policy has pulled the concentration of management and business scholars to
attaining into theoretical modeling and empirical examination. Thus, dividend policy is one of
the most complicated factors in financial world.
Every firm operating in a given industry follows some sort of dividend payment pattern or
dividend policy and obviously it is a financial indicator of the firm. Thus, demand of the firms
share should to some extent, dependent on the firms dividend policy.
Dividend policy is one of the most widely researched topics in the field of finance but the
question is whether dividend policy affects stock prices still remain debatable among
managers, policy makers and researchers for many years. Dividend policy is important for
investors, managers, lenders and for other stakeholders. It is important for investors because
investors consider dividends not only the source of income but also a way to assess the firms
from investment points of view. It is the way of assessing whether the company could generate
cash or not.
Selecting a suitable dividend policy is an important decision for the bank because
flexibility to invest in future projects depends on the amount of dividends that they pay to their
shareholders. If company pay more dividends then fewer funds available for investment in
future projects. Lenders are also interested in the amount of dividend that a company

13

declares, as more amounts is paid as dividend means less amount would be available to the
company to pay off their obligation. So, the study will investigate the relationship between
dividend policy and its impact on market performance of the share in the Karachi stock
exchange.
This research thesis will be concern about dividend policy and market volatility. It can
be seen that dividend policy will affect the share prices of a company or sector and how the
investor prefers which commercial bank. This concept has been the most considerable in
developing and developed countries that can also affect the firm in the modern time. In recent
year it has been gaining more attention from the researchers to give more importance to the
dividend policy that will finally bring improvement in the firm financial position. The movement
of Index is very much influenced with the movement in the stock prices and it directly affects the
dividend policy of each firm.
1.2 Objectives of the research
The main objectives of this research are,

To evaluate and find out the relation between the dividend policy of the commercial
banks and the shares market price.

To investigate the factors affecting the market price of the banks share.

To assess the impact of the banks dividend policy on its shares market price.

1.3 Significance of the study

The significance of the study is as follow:
It will help in understanding the term dividend in enhanced way. This study will
detail the relationship between dividend and stock price volatility. The study will enhance
the understanding of dividend determinants. The results will help in making policies by
investors regarding investment in commercial banks. The study will help the common
people, business community, researchers, board of directors, shareholders and also the
investors to know about this important concept. The student and other research will also
use it for doing their own work on this same topic and it will help them to more specific to
the problems that are exist.

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1.4 Limitation of the study

The time specified for this research work was not sufficient to cover this study absolutely
and in detail and also the collection and non availability of data makes it more complex to
carry out the most quality research. The five year data was used in this study if it was more
than five year then the result will be more concrete as compared to the result base on this
data. Data concerning variables is obtained only through internet source, which can cause
problem of reliability. Other controlled variables cannot be included in the model, as the
model will becomes too multipart to be analyzed. Despite all these constraints, this
research study has been completed.
1.5 Scheme of the study
This research has particularly five main chapters.

Chapter #1 includes the introduction and background of the study, objectives of the
research, significance of the study, limitation of the study and scheme of the study.

Chapter # 2 includes the literature review which gives the general idea of the previous
work done on dividend policy and share prices movement.

Chapter#3 includes data Research design and methodology. It is shown that this research
has been divided into descriptive research and casual research. Descriptive research
describes the relationship between dividend policy and market movements, and its
characteristics. Casual research in a sense that it is explaining the cause and effect
relationship between dividend policy and market movements.

Chapter#4 includes the empirical analysis which shows the data analysis and interpretation

Chapter#5 includes the conclusion and recommendations. Based on the analysis and
interpretation some findings and recommendations are carried out.

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Chapter #2
LITERATURE REVIEW
This chapter includes the fundamental and comprehensively evaluation of previous research. It is
a review and sketch of a particular area of research, allowing the readers to found why this
particular research program is pursuing and to understand the impact of dividend policy on stock
price volatility. These studies show mixed pattern of results..
John Linter (1956) examined that dividend signify the most important and vigorous decision
variable. His model, linter raised the questions, which are still important, at any given time what
dividend should be paid by a company and after the satisfaction of management how large
change in the dividend payment should be brought? .He acquire 196 companies as a population
and out of that 28 companies as a sample were tested by structure a theoretical model of
corporate dividend behavior, In order to discover the answer that how much dividend should be
rewarded by company, regression test were conducted but there were no significant findings set
up. In sort to investigate the second question another sample were drawn from that it was
experimental that earning was believe the foundation to bring transform in dividends, also the
relationship between earning and existing dividend rate was also consider the leading and sole
element to determine the change. The influence of taxes was also set up which states that the
higher the taxes liabilities are, the less significant the companies earning will be which will result
in the smaller dividend payment.
Miller & Modigliani (1961) indicated arithmetically that as long as the firm understood the
returns expected by the business, it didn't make a difference whether that return returned to the
shareholder as profits now, or reinvested. The shareholder can make their own particular profit
by offering the stock when money is required. This hypothesis is focused around some
unrealistic assumptions of perfect capital market, rationality and certainty. Further clarified that
firm which pays profits will need to bring supports externally in order to finance its financing
arrangements. At the point when a firm pays profit subsequently, its preference is
counterbalanced by outer financing. This implies that the terminal estimation of the offer decays
when profits are paid. So the abundance of the shareholders profit in addition to the terminal

16

offer value stays unaltered. Accordingly the shareholders are detached between the installment of
profits and maintenance of income.
Gordon (1963) presented view about the dividend policy by presenting the assumption of
dividend relevance theory. He proposed that the dividend policy of firms affects the market value
of stocks even in the perfect capital market. He stated that investors may prefer present dividend
instead of future capital gains because the future situation is uncertain even if in perfect capital
market. As investors always favor safe, sound and current income in the form of dividends over
capital gains.
Rock&Miller (1985) expressed that there is significant positive relationship between dividends
paid and share price. Under asymmetric information environment in the business director of the
firm has more data about the firm as contrasted with any outcast shareholders and they don't
keep the profit of the firm however they separated as dividend among shareholder until and
unless some new information are received by them to cut the dividend and change their choices.
By allowing the payment of dividends the speculators understands that the firm has green future
open door and they began more financing in the firm which thus raised the prices of the stock of
that firm.
Allen & Rachim (1996) linked the dividend policy and stock price volatility by taking sample of
173 listed companies of Australia which were classified in 24 industrial categories. Long term
debt, growth rate, earning volatility and size were used as control variables. By applying crosssectional ordinary least square regression founded that results shows that there is insignificant
relationship among the dividend yield and stock prices volatility, besides they expressed that
earning volatility and leverage are positively correlated with the stock prices volatility and there
is a negative correlation between payout ratio and stock prices volatility, they likewise disclose
that the size of the company is positively associated to the stock price volatility however this
finding was only applicable to the extensive size organizations.
MEHAR (2003) Explored the behavior of companies in long term by changing procedure in
dividend payments, following Ordinary least square (OLS) technique on 180 companies which
are listed on Karachi stock exchange. He concluded that those firm which got enough growth
stated the payment of dividends to its shareholders. Furthermore he found that the ownership

17

structure has a strong influence over the payment of dividend. During his studies he estimated
that 77 % of the incremental profit is kept as retained earnings while the remaining is distributed
among the shareholder
Adesola & Okwong (2009) attempt to evaluate the impact of dividend policy by selecting 27
Nigeria quoted companies. Secondary data was used for year (1996 2006) from the annual
reports of the listed companies. Regression model were used to evaluate relationship among
dividend and share stock. Earning volatility, growth and size of assets were taken as controlled
variables in which only earning volatility has shown significant result. While growth and size
showed insignificant relation. Furthermore dividend shows positive and significant relation with
stock prices.
Rashid & Rahman (2008) analyzed the relationship between stock prices and dividend policy by
using the cross-sectional regression analysis after controlling variables like earning volatility,
payout ratio, long term debt, firm size and growth in assets. They consider the data for the period
of (1999-2006). Sample comprised of 104 non-financial firms listed in Dhaka Stock Exchange.
Depending on the availability of company annual reports a total of 554 observations were made.
Results showed that there were positive, but non-significant relationship between stock price
volatility and dividend yield.
Ali & Chowdhury (2010) inspected the impact of dividend on the stocks prices variations of
private commercial banks listed at Dhaka Stock Exchange (DSE). They broke down 25 banks as
a sample and utilized a standard event study technique and found that when dividends are
declared the stock prices of 8 banks continues as before as they were before the declaration while
the stock prices of 06 banks builds and in addition stock costs of 11 banks diminishes. Their
studies further show that there is an insignificant relation between stock prices variations and
dividend.
Nazir et al (2010) explored impact of corporate dividend policy in determining the volatility in
the stock prices in Pakistan. A sample of 73 firms has been selected from Karachi Stock
Exchange (KSE) indexed (KSE-100) firms for the period of (2003-2008). Fixed effect and
random effect models have been applied on the panel data. Long term debt ratio, earning
volatility, asset growth, and size were used as controlled variables in order to find out

18

relationship between stock prices volatility and dividend yield. Findings showed that both the
dividend policy measures (dividend yield and payout ratio) have a significant impact on the share
price volatility.
Kanwal (2010) explained the effect of dividend announcements on stock prices of chemical and
pharmaceutical industry of Pakistan. A sample of twenty five companies listed at KSE-100 Index
is taken from the period of (2001-2010). Findings of study is based on Fixed and Random Effect
Model which is applied on Panel data to explain the relationship between dividends and stock
prices after controlling the variables like Earnings per Share, Retention Ratio and Return on
Equity. Results indicate that Cash Dividend, Retention Ratio and Return on Equity has
significant positive relation with stock market prices and significantly explains the variations in
the stock prices of chemical and pharmaceutical sector of Pakistan while Earnings per Share and
Stock Dividends have negative insignificant relation with stock prices.
Ali (2011) examine the causal relationship between stock prices at Dhaka Stock Exchange (DSE)
and a set of four stock market oriented microeconomic variables like market dividend yield
(DY), market price earnings multiples (MKTPE), monthly average market capitalization
(MAMCAP) and monthly average trading volume (MATVM). UnitRoot tests and Co
integration test and the longrun Granger Causality test were applied on monthly data from the
period January 2000 to December 2010 were applied. Results showed that market dividend yield
and market price-earnings multiples are considered to be fundamental parameter that
significantly influence stock prices.
Kanwal et al (2011) explained the dividend policy effect on stock prices. They took sample of 55
companies out of 100 kse-indexes, to test the relationship between the dividend policy and stock
prices. Methodology used was cross sectional multiple regression analysis model and their
results showed that a significant positive relationship exist between leverage and share price
volatility. While a significant negative relationship between dividend yield and share price
volatility. While earning per share, Return on equity and Profit after taxes are positively related
and retention ration has a negative relationship with stock prices.
Kuwari (2010) has explored factors that affect the dividend policy decisions of companies listed
on stock exchanges in emerging markets. The models were developed using panel data set

19

consisting of observations from 191 companies over a period of five years (1999-2003). Random
effects model were used to analyze panel dataset from the non-financial firms listed on the Gulf
Cooperation Council (GCC) stock exchange. Before estimating the model, the existence of
multicollinearity and standard errors of the coefficients were investigated .Findings showed low
correlation coefficients between explanatory variables and no multicollinearity problem. Results
analyzed that government ownership, company size, and company profitability, which positively
affect the decision to pay dividends. The fourth factor, growth rate, negatively affects the
company dividend decision
Hussainey, Mgbame & chijoke (2011) study to examine the relation between dividend policy and
share price changes in the UK stock market. Paper supports the fact that dividend policy is
relevant in determining share price changes. Multiple regression analyses were run to explore the
association between share price changes and both dividend yield and dividend payout ratio. Data
for a period of ten years (1998-2007) were taken which were based on a sample of publicly
quoted companies in the UK. Results explored positive relation between dividend yield and stock
price changes, and a negative relation between dividend payout ratio and stock price changes. In
addition, it is shown that control variables like firm's growth rate, debt level, size and earnings
also positively affect stock price changes except long term leverage.

Kyle & Frank (2013) attempts to identify the impact of certain financial variables on the
volatility of a stocks price overtime by analyzing the financial panel data of diverse collection of
over 500 publicly traded companies taken from the Value Line Investment Survey Database. The
Ordinary Least Squares Multiple Regression functions were applied on data. Dividend yield,
payout, growth, size and leverage were used as independent variables. Findings showed that
dividend yield and size were negatively correlated to the stocks price volatility while leverage
and growth both varied negatively with stock price volatility. The positive relationship observed
between the payout ratio and the stock price volatility.

Asghar et al (2011) by studying the equity market of Pakistan with the objective to discover
impact of dividend policy on stock price in Pakistan. Five different sectors were selected for

20

exploring the relationship. Data is taken from the published resources of State Bank of Pakistan
and Karachi Stock Exchange for the period (2005-2009). Descriptive statistics, correlation and
regression models were used to perform the data analysis. The results of the study reveal that the
correlation of stock price volatility and dividend yield is positively significant. While stock price
volatility has negative correlation to the growth in assets.
Zakaria, Muhammad & Zulkifli (2012) by examining Malaysian construction companies listed
on Kula Lumpur Stock exchange explored the impact of dividend policy on the stock price
volatility, by using least square regression method on panel data of 55 companies for the period
of (2005-2010). Size, growth, leverage and earning volatility were taken as controlled variables
to run the regression model. Findings revealed that there were positive and significant
relationship between dividend payout ratio and stock prices risk whiles dividend yield is
insignificantly and negatively related to the movement in prices of stocks of the companies under
the study.

Ahmed & Javaid (2009) conducted a study to analyze the determinants of dividend policy in the
emerging economy of Pakistan by taking the sample of 320 companies listed at Karachi Stock
Exchange from the period of 2001 to 2006. Regression analysis was conducted because of the
panel characteristic of data. Results of study show that most of the Pakistani companies decide
their dividend payment on the basis of profits i.e. current year or previous year profits. So the
companies having high net profits pay larger amount of dividends to their shareholders.
Furthermore, their results showed that market liquidity is positively related to the dividend
payout ratio and negative relationship was found between the firm size and payouts while there
is no relationship between growth opportunities and dividend payment.

Farooq, Saoud & Agnaou (2012) analyzed the signaling of dividend policy during the different
growth period, taking sample of firm listed at Casablanca Stock exchange for the period of
(2003-2007). Results showed that under the low growth period the dividend payout ratio has a
significant negative relationship with the stock prices volatility and the return of the stock prices
has a significant positive relationship with the stock prices volatility. Furthermore they found
that under the high growth opportunities the above stated relations become insignificant and the

21

reason behind this is that the investors of the firms during the high growth opportunities ignore
the governance problem.
Khan (2009) strives on the relative importance of dividends, retained earnings, and other
determinants in the explanation of stock prices in Bangladesh with particular stock price of the
companies associated with Dhaka Stock Exchange. Applied multiple regressions to examine the
dynamic relations between stock price and different financial variables. Data for 96 companies
listed in DSE for the period from 2000 to 2006 were collected from the annual reports of the
respective companies, daily price quotation of DSE. Data was combination of cross-section and
time series. The results of the empirical analysis evidences that dividends, retained earnings and
other determinants have dynamic relationship with market share price. Findings also suggest that
the overall impact of dividend on stock prices is comparatively better that that of retained
earnings and expected dividends plays an important role in the determination of stock prices
Hashemijoo, Ardekani & Younesi (2012) studied the impact of dividend policy on stock prices
volatility. Their study was based on the stock market of Malaysia, as a sample of 84 companies
were selected out of 142 consumer product companies listed at Bursa Malaysia for the period of
(2005-2010). For data analysis correlation analysis and multiple least square regressions was
used, The regression model was expanded by adding control variables including size, earning
volatility, leverage, debt and growth. The empirical results showed significant negative
relationship between share price volatility with two main measurements of dividend policy
which are dividend yield and dividend payout. While significant negative relationship between
shares price volatility and size were found.
Ilaboya & Aggreh (2013) explored the relationship between dividend policy and share price
volatility among companies listed in the Nigerian Stock Exchange. Secondary data were taken
from the Nigerian Stock. Across a number of sectors of 26 sampled firms were selected through
simple random sampling technique over a period (2004 2011). For examination of data
regression analysis was conducted. Also various tests like Multicollinearity, Heteroskedasticity,
Autocorrelation and Model specification were conducted using Eviews 7.0. Regression model
captured share price volatility as the dependent variable, while dividend yield and dividend
payout ratio were the independent variable. Also firm size, long-term debt, earnings volatility

22

and asset growth rate were taken as control variables. Findings indicated that dividend yield
exerts a positive and significant influence on share price volatility of firms while dividend payout
exerts a negative and insignificant influence on share price volatility.

Upananda Pani (2008) explores the relation between dividend policy and stock price behavior in
corporate sector of Indian. A sample across six different industries of 500 listed companies was
examined for the years (1996-2006). Panel data approach based on the fixed-effect model were
used to analyze the relationship between dividend-retention ratio and stock-price behavior while
controlling the variables like size and long-term debt-equity ratio of the firm. Model was tested
for each industry separately with different combination of variables. Results display statistical
significance and linearity and show that dividend-retention ratio along with size and debt-equity
ratio plays a significant role in explaining variations in stock returns. The fixed effect models
show the presence of firm level effect in explaining the possible links between dividend policy
and stock price behavior of the firm display statistical significance and linearity when the
industry classifications are given.

Naveed &Ramzan (2013) examined the relationship between different factors and stock
exchange prices by using fixed effect regression model on sample of 15 banks selected from
Karachi stock exchange for the period of 2008-2011. Model was run on data after controlling
variables like size, return on asset and asset growth. While dividend yield were taken as
independent and stock volatility as dependent variables. Results show that controlled variable
size has a positive significant relationship with the share price while the other variables Dividend
yield, Asset growth, Return on assets have insignificant relationship.

Habib, Kiani & Khan (2012) used cross sectional regression model on non-financial
firms listed in kse 100 index in order to analyze the relationship between dividend policy and
share price volatility in Pakistani stock market. Different controlled variables like size, leverage,
assets growth and earning volatility were included along with some dummy variables. Results
found that share price is positively related with dividend yield, earning volatility and leverage
but negatively related with size and payout ratio. This study suggest that dividend policy is effect
the share price volatility in Pakistan and this study also proposed that signaling effect is also

23

relevant in determining the share price volatility. dividend yield, payout ratio and size put
negative impact

Irandoost et al (2013) evaluate the effect of dividend policy on stock price volatility and
investment decisions. Sample the admitted firms into the Tehran Stock Exchange of the study
include 65 firms for the period of 2007 to 2012 . Correlation analysis method and multiple
regressions were used in order to analyze the data and test the hypotheses. The research results
indicate that the dividend policy has a significant effect on stock price volatility in a short time.
However, the dividend policy does not have a significant effect on stock price volatility in a long
time. Moreover, the dividend policy does not have a significant effect on investment decisions.
Al-Maweds (2005) study aimed at identifying the variables that affect the shares price of the
public shareholding companies listed in Amman Stock Exchange during the years (1998-2003).
Sample comprise of 42 public companies listed in Amman Stock Exchange. Share price were
taken as dependent variable and the volatility in share turnover ratio, earnings per share,
dividends, interest rate in one year deposit and inflation rate are taken as independent variables.
Results showed statistical significant relationship between share turnover ratio and share price
and significant negative relationship between interest rate and share price while the results did
not show any statistical significant relationship between earnings per share, cash dividend per
share and the share price Additionally, the results did not reveal any statistical significant
relation between the inflation and the share price. The researcher concluded that the change in
the independent variables together explained only (9.5%) of the change in the market share price.

Sadiq et al (2013) analyzes the prices volatility of nonfinancial firms in Pakistan based on panel
data that covers 35 firms for the period 2001 to 2011. The study utilized partial regression
models to analyze the relationship between the dependent variable and the various independent
variables. In the model, dividend yield is used as main explanatory variable while the other
explanatory variables i.e., size, growth, earning per share and earning volatility, are used as
controlled independent variables. The results show that there is a negative and insignificant
relationship between price volatility and dividend yield and identified a positive statistically
insignificant relationship between sizes of firms, growth and price volatility of stocks.

24

Shafai (2012) examine the relation between dividend policy and share price volatility on firms
listed on the Bursa Malaysia Main Board. Multiple regressions are used on data of 841 firms for
the period from 2001 to 2010 included overall sectors in Malaysia. From the analysis, the result
suggest that dividend yield, dividend payout, size, earning volatility, long-term debt on all firms
sample have significant impact on the dividend policy and share price volatility and the findings
are consistent with the earlier researcher such Baskin (1989) & Al-Malkawi (2007).While
growth in asset is insignificant with the share price volatility.

Chapter #3
RESEARCH DESIGN AND METHODOLOGY
This chapter shows how the research work is carried out. It includes type of research, unit of
analysis, sample framework, models, statistical techniques and definition of variables. This
chapter also include different test which are applied on the collected data.
3.1 LITERATURE ABOUT THE MODEL:

25

Dividend is the product of a financial conclusion made by the board of directors of a firm.
Dividend policy determines the division of earnings between payments to stockholders and
reinvestment in the firm. Usually a firm announces dividend on the profit. Share price varies
with changes in different determinants of dividend policy.
According to Theoretical and empirical researches and studies, it is suggested that
relationship between the dividend policy and share price volatility is not constant. Mix of views
exists about the relation that it can vary and can be positive, negative or neutral depending on
different situations and factors.
3.2 Nature of research
Descriptive approach is being used in this research because it describes the relationship of
dividend policy and stock price volatility. It also emphasizes different distinctiveness of dividend
and stock prices. It can be explore through mean, median, maximum and minimum.
Also causality research is use in this thesis because causality defines casual in a sense that
we are explaining the relationship between dividend policy and stock price. It also shows the
cause and effect of these variables like cause and effect between dividend and stock price. It
could be done through correlation and regression.
3.3 Data sources:
In order to carry out the research study, secondary type of panel data was utilized. The values of
KSE 100 index are taken from the official website of KSE and other related websites and data
related to dividend are taken from the financial statements of particular commercial banks. The
website of State bank of Pakistan was also used to obtain the data.
3.4 SAMPLE SIZE:
To carry out this particular research study, data of total 20 commercial banks has been taken.
These 20 commercial banks were listed in the Karachi stock exchange (KSE). Some banks were
not included because of non availability of data.

3.5 TIME HORIZON:

26

The research study was carried out on the data available from 2009 to 2013. In order to develop a
balanced panel, annual report of each and every company was obtained for the required year.

3.6 Variables Identification:

3.6.1 Dependent Variable:

Stock Price Volatility (SPV):

In the research study stock price volatility is a dependent variable and this variable is calculated
by taking standard deviation of the average of annual stock prices (Hussainey et al., 2011).

3.6.2 Independent Variable:

Dividend Yield (DY):

Dividend yield is taken as determinants of dividend policy and it is taken as an independent

variable which is calculated by dividing dividend paid to shareholders to market capitalization of
the stocks (Nazir et al., 2011; Asghar et al., 2011).

DY= Dividend paid / Market capitalization

PAYOUT RATIO (POR):

Another determinant of dividend policy is payout ratio which is also an independent variable. It
is calculated by dividing cash dividend to total earning(Nazir et al., 2011).

POR= Cash dividend / Total earning

3.6.3 Controlled Variables:

Earning Volatility (EV):

Earning volatility is taken as control variable. In order to measure EV, initially ratio of EBIT to
total assets is calculated and then squared it for all the years (Hussainey et al. , 2011) .

27

EV= (EBIT/Total assets)2

Size of the Firm (SZ):

Size of the firm is taken as Second control variable is calculated by taking Natural log of the total
assets of the firms (Chae et al., 2009).

Firm Size = Log (Total Asset)

Growth in Assets (GIA):

Third control variables taken are growth in assets of firm which is calculated as changes in assets
from the beginning to the end (Asghar et al., 2011).
GIA= P2 P1
P1

3.5 Statistical Tools:

Based on research conducted by (Allen & Rachim, 1996;Adesola & Okwong ,2009;
Kyle & Frank, 2013; and Kanwal et al., 2011) different following techniques were used.

3.5.1 Descriptive statistics :

Descriptive statistics summarizes a certain data set, which can either be a representation of
the entire population or a sample. The measures that used to describe the data set are
measures of central tendency which includes mean, median and mode and measures of
variability or dispersion which includes the standard deviation, the maximum and
minimum variables.

28

3.5.2 Correlation:
Correlation is the degree of linear association between the two or more variables. It shows
the strength and direction of the relationship between two variables.

3.5.3 Regression:
Regression is also used as the Statistical tool in this research study. Regression is used
because the core purpose of our study is to find out and investigate the relationship
between dividend policy and stock price volatility.
It consists of different methods and techniques to determine and analyze the
relationship between and among different variables. The Co efficient of regression
analysis shows the variation of dependent variables with that of the variation in
independent variables. R square represents the Coefficient of regression. That shows the
fit of the model that how much dependent variable has been explained by independent
variables. The value of co efficient of regression always varies between 0 and 1. There is
said to be a strong relationship between the dependent and independent variables if the
result is 1 or near 1. The variation in the dependent variable is 100% due to independent
variables if the value of R square turns out to be 1. If the value of R square turns out to be
zero, it shows that there is no relationship between the dependent and independent
variables. Regression identifies that which independent variable or variables is/are related
to dependent variable. It also finds out that the independent variable is negatively or
positively related to dependent variable.
On basis of studies conducted by Zakari et al.,2012; Hussain et al.,2009; Ilaboya & Aggreh,
2013; Hashemijoo et al.,2012; and Ahmed & Javaid, 2009) a model is developed to observe and
test the relationship of dividend policy and stock price volatility.
This model includes one dependent variable and two independent variables along with three
control variables.
SPV=+ 1(POR)+2(DY)+ 3(SZ)+ 4(EV)+ 5(GIA)+ e
Where

29

SPV= stock price volatility.

= constant.
1, 2, 3, 4 &5 = coefficients.
POR= Payout ratio.
DY= Dividend yield.
SZ= Size of the firm
EV= Earning Volatility
GIA= Growth in Assets
e = Random error

Chapter # 4
EMPIRICAL ANALYSIS
This chapter includes the sample of the study, which consist of 20 commercial banks listed on
Karachi Stock Exchange. The secondary data is collected from the Karachi Stock Exchange
website, annual reports of the firms and other related websites for the period of 2009 to 2013.
4.1 Descriptive statistics:
Descriptive statistics for the dependent variable i.e. stock price volatility and independent
variables like dividend yield, dividend payout ratio, and also for controlled variables like size of
the firm, growth in assets and earning volatility are shown as under.

30

Table 4.1
Descriptive Statistics:
Variables

Obs.

Mean

Std. Dev.

Min

Max

SPV

100

27.24

30.3933

1.69

130.9689

DY

100

0.0025

0.00539

.02

POR

100

.1719

.3223296

1.3

ERV

100

0.0018

0.0071605

.04

SIZE

100

8.226

0.4803008

7.22

9.21

0.1221

0.5473578

0.98

4.4

100
GIA
Source: Researcher own work

In above table there are 100 observations in which SPV stands for stock price volatility having
maximum value of 130.9689, minimum value is 1.69 and mean is 27.24653 with the standard
deviation of 30.3933. Dividend yield has minimum, maximum and mean value of 0, -0.2 and 0.0025 respectively. Standard deviation has value of -0.0053889 for dividend yield. Payout ratio
has minimum value of 0 and having 1.3 maximum value. While it has mean value of -1719 and
have standard deviation of -3223296. Earning volatility has 0 as minimum value and -0.4 as
maximum value. While mean value is -0018 and having standard deviation of -0071605. Size of
the firm has maximum, minimum and mean value of 9.21, 7.22 and 8.226 respectively
furthermore its standard deviation is -4803008. Growth has maximum value of 4.4 and minimum
value of -98.While it has mean value of -1221 and standard deviation of -5473578.

31

4.2 Correlation analysis:

Correlation analysis among dependent and independent variables are as follow.
Table 4.2
Correlation analysis:

SPV
SPV

1.0000

DY

0.7448

DY

POR

ERV

SIZE

GIA

1.0000
32

POR

0.8736

0.8654

1.0000

ERV

-0.0377

-0.0393

0.0125

1.0000

SIZE

0.7158

0.6314

0.6598

0.1202

1.0000

GIA
-0.0873
-0.0402
Source: Researcher own work

-0.0841

-0.0342

-0.0881

1.0000

The correlation shows the degree of linear association between two variables. In above
table the correlation coefficient between the SPV and dividend yield is 0.7448 which suggested
that there exist a positive association between stock price volatility and dividend yield. The
higher is the dividend yield the higher would be the stock volatility. Spv and payout ratio have
0.8736 correlation coefficient which shows positive relation among both variables while there is
negative relation among spv and earning volatility by having correlation coefficient of -0.0377.
There exist positive relation among size of firm and spv by having 0.7158 correlation coefficient
value. Correlation coefficient between SPV and growth is -0.0873 which shows that there exist
negative association between both variables. The higher is growth, the lower would be stock
price volatility.

4.3 Multicollinearity:
One of the main assumptions for regression is that there should be no multicollinearity among
explanatory variables. Because it will resulted in error in regression. For the estimated regression
model multicollinearity is calculated by Variance inflation factor (VIF). The value of VIF comes
out less than 5.00 which show that there is no multicoolinearity in model. The results for
multicollinearity are as below.
Table 4.3

33

Multicollinearity Table:

S.NO

VARIABLES

VIF Values

Dividend Yield

2.88

Payout Ratio

2.6

Size

1.88

Earning Volatility

1.04

Growth

1.01

Mean VIF

2.50

4.4 Heteroskedasticity:
Regression variables have been also checked for heteroskedasticity. As it will affect the
significance of statistical tests. The Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
has been carried out that reject the null hypothesis and assure the problem of heteroskedasticity
in the regression data set by chi2(1) = 106.21, Prob > chi2 =0.0000 which shows that there are
inconsistent variances among variables. .

4.5 Regression analysis:

34

For applying statistical regression model, there are basically two techniques that is fixed effect
model and random effect model. By applying Haussmann test results found that fixed effect
model should be use for running regression model.
P>chi2 = 0.0094
As P value is less than 0.05 which suggest that fixed effect model should be use.

4.5.1 REGRESSION STATISTICS:

Table 4.5.1
Regression Statistics:

R Square

Adjusted R Square

Std. Error of the

Estimate

observations

0.832

0.82401

12.75027

100

35

The above table shows the summary of multiple regression model in which we
regressed dependent and independent variables. The R Square value in the above table is 0.832
which means that independent variables brought 0.832 or 83.2 % variations in the dependent
variable. Which means that proportion of variation caused by independent variables are 83.2%
that furthermore reflect strong association between dependent and independent variables.

4.5.2 ANOVA:
Table 4.5.2
ANOVA
Model

Sum of Squares

Df

Mean Square

Sig.

Regression

76168.93

15233.79

93.704

5.82E-35

Residual

15281.51

94

162.5693

Total

91450.45

99

Predictors: (Constant), GIA, EV, POR, SZ, DY

Dependent Variable: SPV
The above table shows that the significance value for the ANOVA model is 5.82E-35
which is less than the significant level kept as 0.05. As mentioned that 5.82E-35 <.05 which
means that overall model is significant and useful for the prediction of dependent variable.
4.5.3 REGRESSION ANALYSIS:
Table 4.5.3
Regression Analysis
Correlation

Standard

SPV

Coefficients

Error

INTERCEPT

-152.438

DY

588.4992

t states

P states

30.08973

-5.06613

2.02E-06

405.6195

3.45

0.120

36

POR

70.51914

5.037255

14.00

2.99E-16

SIZE

21.94768

3.966716

5.53

2.74E-07

ERV

-369.9906

74.33102

-4.98

0.043

GROWTH

-0.437285

1.424286

-0.67

0.540

Dependent Variable: SPV

Significance level = 5% or .05
The above table shows coefficients for multiple regression models. These are the values
for the regression equation for predicting the dependent variable from the independent variable.
Coefficient value of constant is-152.438 which means that if all the independent variables are set
to zero the dependent variable stock price volatility will vary by -152.438.
The coefficient of SPV with the dividend yield (DY) is 588.4992 which shows that there exists a
positive relationship between the SPV and DY. So for every unit increase in DY, 2724.92 unit
increase in SPV is predicted, holding all other variables constant. The t-value of the coefficient is
3.45 which is greater than the critical value i.e. 2 by rule of thumb so the relationship is
significant. Similarly the calculated P-value is 0.120 which is less than the critical value at 10%,
5% and 1% so the relationship between SPV and DY is significant.
For payout ratio (POR) the value of coefficient value 70.51914 which also show
positive per unit increase among SPV and POR. The t-value of the coefficient is 14.00 which is
greater than the critical value i.e.2, and p value is 2.99E-16 which is less than the critical value at
10%, 5% and 1% which shows significant relationship between SPV and POR.
The coefficient value of SPV for Earning volatility (ERV) is -369.9906 that shows
negative association among ERV and SPV. Earning volatility has t-value of 4.98 which is greater
than choose critical value, and having p-value of 0.043 which is less than critical value at 10%,
5% and 1% that shows positive significant relationship among SPV and ERV.

37

Stock price volatility has coefficient value of 21.94768 for size of the firm that also shows
positive association among both variables. Size has t-value of 5.53 which is greater than critical
value and p-value of 2.74E-07 which is less than critical value i.e. 0.05 that shows significant
relation among size of firm and stock price volatility.
Growth in assets has coefficient value of -0.437285 and has t-value -0.67 which is less
than critical value i.e. 2 and has p value of 0.540 which is greater than significance level which
states that there is insignificant relationship between growth in assets and stock prices variation.

CHAPTER#5
CONCLUSION AND RECOMANDATION
5.1 Conclusion:
In order to explore the effect of dividend policy on stock price volatility, lots of work have been
done by (Zakari et al.,2012; Hussain et al.,2009; Ilaboya & Aggreh, 2013; Allen & Rachim,
1996;Adesola & Okwong ,2009; Kyle & Frank, 2013; and Kanwal et al., 2011).

38

Presently, majority of them have been paying attention on different non financial firms. In all
these researches the most commonly used method for analyzing association among dividend
policy and stock price volatility are Regression Analysis.
In this research an attempt were made to explain the relation between determinants of
dividend policy and share price volatility. Where share price volatility were taken as dependent
variable and determinants of dividend policy that are dividend yield and payout ratio were taken
as independent variables along with size of firm, earning volatility and growth in assets as
controlled variables. Karachi stock exchange listed 20 commercial banks were selected as
samples.
In order to analyze the relationship between dividend policy and share price volatility,
fixed effect regression model is used as statistical tool. Findings show that there is positive
significant relation between dividend yield and share price volatility. That show that when
dividend yield increases, it will result in higher share price volatility (Nazir et al., 2010;
Hussainet et al., 2011). Second independent variable payout ratio also shows significant positive
relation with share price volatility (Kyle & Frank, 2013; Zakria et al., 2012). It also has been
observed that controlled variables like size of firm has positive significant relationship with share
prices. This means that when size of firm increases there will be more volatility observer in their
share prices (Upanda Pani, 2008). While earning volatility has negative significant relation with
share prices (Shafai, 2012) . Furthermore Growth of the firm showed that it does not have
significant relation with share price volatility (Asghar et al., 2011).

5.2 Future Work:

This study has been conducted by choosing banking sector listed on KSE for years 2009 to 2013.
But future research can be conducted by selecting other financial or non financial sectors.
Sample size can also be increased along with different exchange like KSE-30 moreover ISE and
LSE can also be considered for future studies.
39

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