Dividend Payment and Stock Price Movement: An Analysis With Respect to Select Indian Firms
Authors can be reached at pujamohata0304@gmail.com, rgbasak85@gmail.com and eboard@icai.in.
1. Introduction: The Dividend Dilemma & Value Relevance
The impact of dividend decisions on the market price of the share has been a subject of long-standing debate. But still, there is no single definite result concerning the relationship between dividend payment and the market price of the stock. When a firm’s earnings increase, the shareholders expect more dividends. But earnings are also a source of finance for the firm. The firm can see the impacts of such retained earnings in the form of a decreased leverage ratio, growth of activities, and rise in profit in subsequent years.
In contrast, if the firm distributes its earnings as dividends, it may need to raise capital through the capital market, which may dilute the ownership control of existing shareholders. If the firm takes a loan or raises debenture, it will affect the risk characteristics of the firm. But with the payment of dividend, shareholders’ expectation is contented and as a result, their confidence grows. This increased confidence of the investors is expected to be reflected through the firm’s stock price performance. Therefore, there are many dimensions to be considered on dividend theories, policies and practices.
Dividend, indeed, is the most exciting aspect of investment in shares of various companies for an investor. Even if dividend affects the firm’s value, unless management knows how they affect the value, there is not much that they can do to increase the shareholder’s wealth. So, the management must understand how the dividend policy affects the firm’s market value or stock prices, or the wealth position of the shareholders. Thus, the present study seeks to find out whether dividend payment has any relationship with the movement of the stock price. Besides, we would also determine whether the dividend policy of a firm is associated with its stock price volatility.
2. Theoretical Perspectives & Literature Review
There is a high debate among scholars and professionals on dividend policy and its potential impact on stock prices. In today’s rapidly expanding stock market, organizations must establish the most beneficial policy related to dividend matters. An organization that wants to be the market leader needs to focus on dividend payout and dividend supervision issues. A lot of researchers have analyzed the impact of dividend payment on stock prices earlier.
Competing Research Streams on Dividend Impact:
- Dividend Relevance (Positive Price Impact): The study conducted by Hasan et al. (2013) supports the dividend relevance theory as proposed by Prof. James E. Walter and Myron Gordon. Furthermore, studies by Nishat and Irfan (2004), Masum (2014), Matthew et al. (2014), Maharshi and Malik (2015), Sharif et al. (2015), and Velankar et al. (2017) demonstrated a significant positive impact of dividend policy on the stock price of a company.
- Volatility Dampening (Negative Volatility Impact): On the other hand, findings by Hussainey et al. (2011), Hashemijoo et al. (2012), and Song (2012) revealed a significant negative relationship between share price volatility and dividend payout, showing that regular dividend distributions anchor price stability.
It was observed that previous studies gave contradictory results in this context. While some studies found a positive link between dividend policy and stock prices, some other studies found this link to be negative at a given time. Thus, to bridge this gap of divided opinions, the present work was undertaken with two targeted objectives:
- To ascertain the nature and strength of association between payment of dividend and stock price movement.
- To explore the relationship between dividend policy and stock price volatility.
3. Data, Sample Selection & Econometric Methodology
Data Sources & Sample Selection
The present study is based on secondary data. Company financial data were gathered from annual reports and the Moneycontrol database. Stock prices were retrieved directly from BSE records.
The sample comprises 20 companies listed on the Bombay Stock Exchange selected on the basis of net profits (since dividend distributions depend directly on company surplus) retrieved as on 06/01/2021.
Sample Period & Time Lag Structure
Data across 11 financial years (2009-10 to 2019-20) were analyzed. Crucially, a one-year time-lag structure is implemented:
- Dividend Data: 10-year period from 2009-10 to 2018-19.
- Stock Price Data: 10-year period from 2010-11 to 2019-20.
- Rationale: The dividend decision of period t affects stock market prices in period t + 1.
Statistical Metrics & Relative Normalization Formulas:
Since the face value of stocks across the 20 companies is not uniform, relative measures were constructed to eliminate scale biases:
- Average Annual Closing Price: Computed from daily closing prices under the rationale that closing price captures the full trading sentiment of the day.
- Average Annual Closing Price Per Rupee Value: Normalized closing price per rupee of nominal face value.
- Coefficient of Variation (CV): A relative measure of dispersion (CV = Standard Deviation / Mean × 100) employed instead of absolute standard deviation to evaluate stock price volatility and dividend policy instability.
4. Empirical Findings: Dividend Payment vs. Stock Price Movement
For each of the selected 20 companies, average annual closing stock prices per rupee value of share and DPRSs of the past 10 years were computed. Thereafter, Pearson correlation coefficients between the two variables were determined individually and across the entire sample pool:
Table 1: Correlation between Average Annual Closing Stock Prices Per Rupee Value of Share and DPRSs
| Company Name | Correlation Coefficient (r) | Statistical Significance |
|---|---|---|
| TCS | .715* | Significant at 0.05 level |
| Reliance (RIL) | -.268 | Not Significant |
| HDFCs | .981** | Significant at 0.01 level |
| Infosys | .449 | Not Significant |
| ITC | -.229 | Not Significant |
| HDFC Bank | .949** | Significant at 0.01 level |
| ONGC | .947** | Significant at 0.01 level |
| Coal India | .047 | Not Significant |
| Power Grid Corp | .735* | Significant at 0.05 level |
| NTPC | -.375 | Not Significant |
| HCL Tech | .185 | Not Significant |
| Wipro | .901** | Significant at 0.01 level |
| Ruchi Soya | .951** | Significant at 0.01 level |
| Tata Chemicals | .659* | Significant at 0.05 level |
| Hind Zinc | .702* | Significant at 0.05 level |
| Tata Steel | .187 | Not Significant |
| HUL | .849** | Significant at 0.01 level |
| Larsen | -.719* | Significant (Neg) at 0.05 level |
| GAIL | .143 | Not Significant |
| Power Finance | .119 | Not Significant |
| Overall Correlation Coefficient | .888** | Significant at 0.01 level |
*Correlation is significant at the 0.05 level. **Correlation is significant at the 0.01 level.
From Table 1, it was observed that only 4 companies, namely Reliance (RIL), ITC, NTPC, and Larsen, showed a negative correlation, while the remaining 16 companies showed a positive correlation between the said variables. Therefore, we can say that the nature of association between dividend payment and stock price movement is positive for the majority of the companies.
The correlation was found to be positive and statistically significant at 5% level for TCS, Power Grid Corp, Tata Chemicals, and Hind Zinc. Larsen, however, showed a negative correlation which was statistically significant at 5% level. HDFC, HDFC Bank, ONGC, Wipro, Ruchi Soya, and HUL displayed positive correlation which was statistically significant at 1% level.
Pooled Market Confirmation: The overall value of correlation, i.e., 0.888 was found to be statistically significant at 1% level. Thus, we can say that overall, the nature of association between dividend payment and stock price movement is positive and statistically significant. This indicates that an increase in dividend payments increases the stock prices in the market and vice versa.
5. Objective 2: Dividend Policy Stability vs. Stock Price Volatility
Consistency in either DPS or DPR of a company is the reflector of its stable dividend policy. To measure the stability (or instability) in dividend policy, the CVs of DPSs, DPRSs and DPRs were calculated. Further, the CV of closing stock prices (daily, average annual and average annual per rupee value) was computed to measure stock price volatility.
Table 2: CV of Closing Stock Prices and Dividend Policy Stability Metrics Across 20 Companies
| Companies | CV of Closing Prices | CV of DPSs | CV of DPRSs | CV of DPRs | ||
|---|---|---|---|---|---|---|
| Daily | Average (Annual) | Average Annual Per Rupee Value | ||||
| TCS | 32.23 | 31.42 | 31.42 | 53.07 | 53.07 | 36.06 |
| Reliance (RIL) | 19.95 | 16.83 | 16.83 | 19.92 | 19.92 | 9.20 |
| HDFC | 45.55 | 38.60 | 49.59 | 43.77 | 31.86 | 8.01 |
| Infosys | 51.81 | 51.59 | 51.59 | 39.52 | 39.52 | 33.07 |
| ITC | 20.02 | 18.06 | 18.06 | 30.05 | 30.05 | 20.54 |
| HDFC Bank | 48.27 | 43.10 | 58.67 | 53.44 | 65.59 | 2.62 |
| ONGC | 88.71 | 85.41 | 44.21 | 71.35 | 29.67 | 24.14 |
| Coal India | 17.95 | 16.22 | 16.22 | 55.30 | 55.30 | 25.08 |
| Power Grid Corp | 28.14 | 28.75 | 28.75 | 64.62 | 64.62 | 22.29 |
| NTPC | 14.92 | 14.04 | 14.04 | 26.37 | 26.37 | 24.14 |
| HCL Tech | 40.78 | 39.26 | 39.26 | 58.43 | 58.43 | 51.88 |
| Wipro | 27.41 | 25.18 | 25.18 | 61.95 | 61.95 | 54.19 |
| Ruchi Soya | 74.91 | 74.72 | 74.72 | 103.71 | 103.71 | 156.05 |
| Tata Chemicals | 33.30 | 32.61 | 32.61 | 32.43 | 32.43 | 21.11 |
| Hind Zinc | 103.55 | 102.60 | 32.82 | 103.26 | 111.39 | 106.78 |
| Tata Steel | 27.48 | 24.83 | 24.83 | 19.31 | 19.31 | 33.79 |
| HUL | 59.59 | 61.64 | 61.64 | 39.95 | 39.95 | 17.47 |
| Larsen | 17.41 | 12.37 | 12.37 | 14.90 | 14.90 | 36.96 |
| GAIL | 23.69 | 21.83 | 21.83 | 19.21 | 19.21 | 16.56 |
| Power Finance | 39.62 | 38.31 | 38.31 | 54.30 | 54.30 | 60.07 |
Table 3: Correlation Matrix: Stock Price Volatility (CV of Prices) vs. Dividend Policy Stability (CV of DPS, DPRS, DPR)
| Price Volatility Measure | CV of DPSs | CV of DPRSs | CV of DPRs |
|---|---|---|---|
| CV of Average Annual closing prices | .765** | .620** | .550* |
| CV of Average Closing Annual Price Per Rupee Value of Share | .526* | .467* | .360 |
| CV of daily closing prices | .756** | .603** | .532* |
*Correlation is significant at the 0.05 level. **Correlation is significant at the 0.01 level. Source: Author’s computation.
All the values of correlation coefficients between the CVs of Stock prices and CVs of dividend policy measures were found to be positive. This indicates that if the stability in dividend policy increases (i.e. CV decreases), the stability in stock prices also increases (volatility decreases).
The correlation coefficients between CV of stock prices (average annual and daily) and CV of both DPSs and DPRSs were found to be statistically significant at 1% level. The correlation coefficients between CV of average closing annual price per rupee value of share and CV of DPSs and DPRSs, and the correlation coefficients between CV of stock prices (average annual and daily) and CV of DPRs were found to be statistically significant at 5% level. Thus, we can say that the more the stability in dividend policy, the less will be the volatility in stock prices.
6. Conclusion, Practical Implications & Research Limitations
The present study finds that the nature of association between the variables is positive, and the strength of association was found to be statistically significant. These findings are in line with the theories of James E. Walter and Myron Gordon and other researchers (Hasan et al., 2013; Nishat and Irfan, 2004; Maharshi and Malik, 2015; Sharif et al., 2015) who suggest that the dividend decision of a firm affects its market value.
Behavioral Mechanics of Investor Confidence:
Further, a positive correlation between the variables suggested that the more stability in dividend policy, the lesser the stock price volatility (Hussainey, 2011; Hashemijoo et al., 2012; Song, 2012). It is so because when companies display consistent dividend histories, they often gain the confidence of investors as they believe that the business is performing well. The investors assume that the firm is a reliable and safe investment venture. As a result, the share price of such companies is often found to be steadily rising in the market, owing to its high-demand among risk-averse individuals looking for stable investment ventures. Conversely, the companies choosing to retain their annual earnings for business development purposes fail to incite investors as investors often develop a mind-set that such businesses might have underperformed for a particular year.
Thus, it can be concluded that dividend payment is in a positive relationship with the market value of a firm. Moreover, a stable dividend policy is also desirable for attaining stability in stock price. In today’s world, for achieving steady expansion in the stock market, organizations have to establish the most effective policy related to dividend matters. An organization that wants to be the market leader needs to focus on dividend payout and dividend supervision issues.
Limitations of the Study:
Lastly, some limitations of the present study, in the absence of which the discussion remains incomplete, should be referred to. It must be noted that there are several other factors, besides dividend, which affect the stock prices of a company. The impact of such factors has not been considered in the present study. The sample period and sample size are also insufficient to conclude on all aspects. The present study considers only the nature of the relationship between dividend payment and stock price movement. It does not measure the impact of dividend policy on the stock price movement of a firm, or the impact of dividend yield on stock price movement. Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. Historically, dividend yield ratio has been found to have negative impact on the stock prices. Addressing these issues will further help to improvise the study results.
References
- Mohammed, N. and Mohammad, I.C. (2004). “Dividend policy and stock price volatility in Pakistan”. Paper presented at the PIDE-19th Annual General Meeting and Conference, pp. 13-15.
- Hussainey, K., Oscar-Mgbame, C. and Chijoke-Mgbame, A. M. (2011). “Dividend policy and share price volatility: UK evidence”. The Journal of Risk Finance, Emerald Group Publishing, vol. 12 (1), pp. 57-68.
- Hashemijoo, M., Ardekani, A. and Younesi, N. (2012). “The impact of dividend policy on share price volatility in the Malaysian Stock Market”. Journal of Business Studies, vol. 4(1), pp. 111-129.
- Song, X. (2012). “The relationship between dividend policy and stock price volatility”. Saint Mary’s University.
- Al-Hasan, M.A., Asaduzzaman, M. and Karim, R. (2013). “The Effect of Dividend Policy on SharePrice: An Evaluative Study”. Journal of Economics and Finance, vol. 1(4), pp. 06-11.