DOES DIVIDEND POLICY AFFECT SHAREHOLDERS WEALTH? Dr. Anas Khan 1, Prof. Nasir Zamir Qureshi 2

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1 DOES DIVIDEND POLICY AFFECT SHAREHOLDERS WEALTH? Dr. Anas Khan 1, Prof. Nasir Zamir Qureshi 2 1 Assistant Professor, Vidyotma Girls Degree College, Lawar, Meerut 2 Department of Commerce, Aligarh Muslim University, Aligarh Abstract The goal of each and every firm is to maximize the value of shareholders wealth in the firm through their investment, financing and dividend decisions. Investment decisions involve the selection of positive net present value projects whereas financing decisions determine the selection of a capital structure that would minimize the cost of capital of the firm. Dividend decisions explicate the reward which the potential shareholders of the firm receive from their investment in the form of dividend. Besides, managers need to decide whether paying out of earnings would essentially create value for the shareholders or not. A company has to take a decision whether to pay out earnings as dividends or to reinvest them. The present research examines the impact of dividend policy on shareholders wealth in Indian automobile industry. Tata Motors and Force Motors are the companies that are selected by the researchers. The period of study is seven years from 2011 to Data was collected from various published annual reports and financial statements of selected companies. Dividend policy is a comprehensive term and therefore dividend payout ratio, long term debt ratio; profitability, and liquidity are used as independent proxy variables for dividend policy. The results highlighted that there is a significant impact of dividend policy on shareholders wealth in Tata Motors but insignificant impact of dividend policy on shareholders wealth in Force Motors. Keywords: EPS, dividend policy, liquidity, profitability, automobile, companies. Introduction Dividend Policy is a policy uses to decide the amount of dividends paid by a company to its shareholders. It is the guiding principle for determining the portion of a company s net profit after taxes to be paid out to the residual shareholders as dividend during a financial year. It is more commonly an instrument of wealth distribution to shareholders than it is an instrument of wealth creation to stakeholders. A company has to take a decision whether to pay out earnings as dividends or to reinvest them. However, the patterns of dividend policies vary across firms and even countries. The purpose of a dividend policy is to maximize the wealth of shareholders. The essence of the dividend policy is to determine what portion of firms earnings that will be paid out as dividend or held back as retained earnings. Retained earnings are one of the important sources of financing of firms projects. A high rate of retained earnings translates to a lesser amount of disposable income to shareholders. Similarly, if a large portion of corporate earnings is paid out as dividend, the firm will not have enough for re- investment. Since retained earnings act as a buffer to the future earnings capacity of the firm, it is generally argued that a drop in retained earnings will precipitate a drop in the market value of stocks. Dividend, on the other hand, is that portion of a firm s after tax profit that is shared out to shareholders as reward for investment while dividend, puts disposable income in the hands of shareholders. Indian Automobile Industry The Indian automobile industry is one of the largest in the world. It has been described as the sunrise sector of the Indian economy. This sector 1

2 has witnessed tremendous growth during the last two decades. The industry accounts for 7.1 per cent of the country's Gross Domestic Product (GDP). The Two Wheelers segment with 80 per cent market share is the leader of the Indian Automobile market owing to a growing middle class and a young population. Moreover, the growing interest of the companies in exploring the rural markets further aided the growth of the sector. The overall Passenger Vehicle (PV) segment has 14 per cent market share. India is also a prominent auto exporter and has strong export growth expectations for the near future. Overall automobile exports grew per cent year-on-year between April-December In addition, several initiatives by the Government of India and the major automobile players in the Indian market are expected to make India a leader in the 2W and Four Wheeler (4W) market in the world by The Government of India allows 100 per cent FDI under the automatic route. According to Department of Industrial Policy and Promotion (DIPP), the industry has attracted Foreign Direct Investment (FDI) worth US$ till September Table 1 highlights the turnover, profit after tax (PAT), market capitalization, and assets of top ten automobile companies. Table 1: List of Top Automobile Companies No. Automobile Companies As on 31 st March, 2017 (Rs in Crores) Turnover PAT MCRP CR Assets 1 Tata Motors Ltd Mahindra & Mahindra Ltd Maruti Suzuki India Ltd Hero MotoCorp Ltd Bajaj Auto Ltd Ashok Leyland Ltd Sundaram Clayton Ltd TVS Motor Company Ltd Eicher Motors Ltd Force Motors Ltd Source: Tata Motors Limited: It is an Indian multinational automotive manufacturing company. It is a member of the Tata Group. The head quarter of the company is located in Mumbai. Its products include passenger cars, trucks, vans, coaches, buses, sports cars, construction equipment and military vehicles. It was founded in 1945 as a manufacturer of locomotives, the company manufactured its first commercial vehicle in 1954 in a collaboration with Daimler-Benz AG, which ended in In 1998, Tata launched the first fully indigenous Indian passenger car, the Indica. In 2008, Tata Nano, the world's cheapest car was launched. Tata Motors is listed on the (BSE) Bombay Stock Exchange, where it is a constituent of the BSE SENSEX index, the National Stock Exchange of India, and the New York Stock Exchange. The company is ranked 226th on the Fortune Global 500 list of the world's biggest corporations in Natarajan Chandrasekaran is the present chairman of the company. Tata Motors is at the top in terms of turnover, PAT, assets. in the list of ten Indian automobile companies. Force Motors Limited Force Motors Limited is the flagship company of the Dr. Abhay Firodia Group. It was originally a joint venture between Bachraj Trading Ltd. and Germany's Tempo. The company was known as Bajaj Tempo Motors from 1958 until The company is well known for brands like the Tempo, Matador, Minidor and Traveller. Force Motors is India s largest van maker and enjoys market leadership position. The company is completely vertically integrated, making its own engines, chassis, gear boxes, axles, bodies, etc. for the entire product range including Small Commercial Vehicles (SCV), Light Commercial Vehicles (LCV), Multi Utility Vehicles (MUV), Special Cross Country Vehicles and Agricultural 2

3 Tractors. Moreover, it manufactures a range of vehicles including Small Commercial Vehicles (SCV), Light Commercial Vehicles (LCV), Multi Utility Vehicles (MUV), Special Cross Country Vehicles and Agricultural Tractors. Review of Literature Rashid & Rahman (2008) in the study on 104 non-financial firms listed in Dhaka Stock Exchange highlighted that the relationship between the share price and growth in assets was positive. Asghar et al. (2011) conducted a research to find out the impact of dividend policy on stock price risk on Non-Financial Listed firms. The period of the study was from in Pakistan. The findings revealed that the correlation between earning volatility and share price was significant. Lam & Tam (2011) evaluated the relationship between liquidity and stock returns on 769 listed companies on board of Hong Kong Stock Exchange. The results showed that there was a significant positive relationship between liquidity and stock return. Hashemijoo et al. (2012) in the research paper entitled, The impact of dividend policy on share price volatility in the Malaysian stock market investigated that there is a significant negative relationship between dividend payout and share price changes. It showed that decrease in the dividend payout causes an increase in the share price volatility. A sample of 84 companies from 142 consumer product companies listed in main market of Bursa Malaysia were examined in this study and using multiple regression for a period of six years from year 2005 to year Mokaya et al. (2013) investigated the impact of dividend policy on the market share value in the National Bank of Kenya. Multiple regression was used as the statistical tool for analysis. The result shows that there is a strong and positive correlation between dividend payout and market share value and showed that an increase in a dividend payout result an increase in share price. Al-Kasasbeh and Qureshi (2017) in the research paper entitled, Impact of dividend policy on shareholders wealth in selected blue chip companies of Jordan examined the impact of dividend policy on shareholders wealth in selected blue chip companies of Jordan. The study covers a period of five years since 2012 to Data was collected from various published annual reports and financial statements of selected companies. Earnings per share (EPS) was used as a dependent proxy variable for shareholder s wealth where as dividend policy was used as independent variable. However, dividend payout ratio, long term debt ratio; ROE, and liquidity were used as independent proxy variable for dividend policy. The results highlighted that dividend payout ratio has significant negative impact on EPS in Jordan Telecom Group and Jordan Steel. However, its impact is positive and statistically insignificant in Jordan Phosphate Mines. Profitability has significant positive relationship (P<0.05) with Earning per share in all selected companies. Moreover, liquidity has significant positive relationship (P<0.05) with Earning per share in all selected companies except Jordan Phosphate Mines. The conclusion of the research was that dividend policy has significant impact on shareholder s wealth in Jordan Telecom Group and Jordan Steel. However, the impact of dividend policy on shareholder s wealth in Jordan Phosphate Mines was insignificant. Objectives of the Study 1. To evaluate the impact of dividend policy on shareholders wealth in Tata Motors. 2. To investigate the impact of dividend policy on shareholders wealth in Force Motors. Hypotheses Development H01: There is no significant impact of dividend Ha1: There is a significant impact of dividend H02: There is no significant impact of dividend policy on shareholders wealth in Force Motors. Ha2: There is a significant impact of dividend policy on shareholders wealth in Force Motors. Research Methodology The study is primarily based on secondary data and therefore annual reports of the selected automobile companies were approached and calculations were made out of it. The period of the study taken in this research is seven years which ranges from financial year to The research is based on two companies Tata Motors and Force Motors. Tata Motors is selected because it is biggest company in terms of market capitalization and profit among top ten automobile companies. On the 3

4 contrary, Force Motors is selected because it is smallest company in terms of market capitalization and profit among top ten automobile companies. The study used multiple linear regression to examine the impact of various proxy variables of dividend policy on EPS (Earning per Share). Fig. 1 highlights the research model of the study. The independent proxy variables for dividend policy are taken as dividend payout ratio, long term debt ratio, ROE, and liquidity whereas EPS (Earning per Share) was used as dependent proxy variable for shareholder s wealth. Fig.1:Research Model Dividend Payout Ratio Long Term Debt Ratio Return on Equity (ROE) Shareholder s Wealth [Earnings per Share] {Dependent Variable} Liquidity Source: Designed by the researchers Hypotheses Testing H 01: There is no significant impact of dividend H a1: There is a significant impact of dividend Multiple linear regression was applied to examine the impact of dividend policy on shareholders wealth. The null hypothesis is that there is no significant impact of dividend policy on shareholders wealth in Tata Motors. Table 2 shows the results of multiple linear regression analysis. EPS is the dependent variable whereas dividend payout ratio, long term debt ratio, ROE, and liquidity are the independent variables. Table 2: Regression Model: Tata Motors Independent Variables Beta SE t-statistics P Value Dividend Payout Ratio Debt Equity Ratio ROE Liquidity Adjusted R Square:0.634; Durbin Watson: 1.423; Dependent Variable: EPS Beta: Unstandardized Coefficients SE: Standard Error Source: Output of MS-Excel 4

5 The value of adjusted R square is which means 63.4 percent variation in shareholders wealth is explained by the dividend policy and the rest of the variation (1-R 2 ) is an unexplained variation. The dividend payout ratio has positive impact on EPS since the unstandardized beta coefficient is It indicates that for every one unit change in dividend payout ratio, there will be 0.34 units change in EPS. Its regression coefficient is statistically significant at 5% level of significance (P<0.05). However, the unstandardized beta coefficient of debt equity ratio is which indicates that one unit change in debt equity ratio will bring 0.32 units change in EPS. Its regression coefficient is statistically significant at 5% level of significance (P<0.05). ROE has significant positive relationship with Earning per share at 5% level of significance. The unstandardized beta coefficient value of ROE ratio is which highlights that for one unit change in ROE, there will 0.29 unit changes in EPS. The regression coefficient of ROE is statistically significant at 5% level of significance (P<0.05). Nonetheless, liquidity has significant positive relationship with Earning per. share at 5% level of significance. The unstandardized beta coefficient of liquidity ratio is which highlights that for one unit change in liquidity, there is 0.27 unit change in EPS. The regression coefficient of liquidity is statistically significant at 5% level of significance (P<0.05). Hence, it can be said that there is significant impact of dividend policy on Earning per share in Tata Motors. H 02: There is no significant impact of dividend policy on shareholders wealth in Force Motors. H a2: There is a significant impact of dividend policy on shareholders wealth in Force Motors. Multiple linear regression was applied to examine the impact of dividend policy on shareholders wealth. The null hypothesis is that there is no significant impact of dividend policy on shareholders wealth in Force Motors. Table 3 shows the results of multiple linear regression analysis. EPS is the dependent variable whereas dividend payout ratio, long term debt ratio, ROE, and liquidity are the independent proxy variables of dividend policy Table 3: Regression Model: Force Motors Independent Variables Beta SE t-statistics P Value Dividend Payout Ratio Debt Equity Ratio ROE Liquidity Adjusted R Square:0.134; Durbin Watson: 1.967; Dependent Variable: EPS Beta: Unstandardized Coefficients SE: Standard Error Source: Output of MS-Excel The value of adjusted R square is which means 13.4 percent variation in shareholders wealth is explained by the dividend policy and the rest of the variation (1-R 2 ) is an unexplained variation in shareholders wealth due to variables that has not been considered in this model. The dividend payout ratio has positive impact on EPS since the unstandardized beta coefficient is It indicates that for every one unit change in dividend payout ratio, there will be 0.05 units change in EPS. Its regression coefficient is statistically (P>0.05). Besides, the unstandardized beta coefficient of debt equity ratio is which indicates that one unit change in debt equity ratio will bring 0.02 units change in EPS. Its regression coefficient is statistically (P>0.05). ROE has significant positive relationship with Earning per share at 5% level of significance. The unstandardized beta coefficient value of ROE ratio is

6 which highlights that for one unit change in ROE, there will 0.09 unit changes in EPS. The regression coefficient of ROE is statistically (P>0.05). Furthermore, liquidity has significant positive relationship with Earning per share at 5% level of significance. The unstandardized beta coefficient of liquidity ratio is which highlights that for one unit change in liquidity, there is 0.08 unit change in EPS. The regression coefficient of liquidity is statistically (P>0.05). Hence, it can be said that there is insignificant impact of dividend policy on Earning per share in Force Motors. Conclusion Dividend is that portion of a firm s after tax profit that is shared among shareholders as reward for investment. Dividend Policy is a policy uses for determining the portion of a company s net profit after taxes to be paid out to the residual shareholders as dividend during a financial year. The purpose of a dividend policy is to maximize the wealth of shareholders. The essence of the dividend policy is to determine what portion of firms earnings that will be paid out as dividend or held back as retained earnings. The present research examines the impact of dividend policy on shareholders wealth in Tata Motors and Force Motors from 2011 to Tata Motors is selected because it is the biggest company in terms of market capitalization, assets, and profit whereas Force Motors is the smallest company in terms of market capitalization, assets, and profit among top ten automobile companies. Data was collected from various published annual reports and financial statements of the selected companies. Dividend policy is a comprehensive term and therefore dividend payout ratio, long term debt ratio; profitability, and liquidity are used as independent proxy variables for dividend policy. EPS is used as the dependent proxy variable for shareholder s wealth. The results highlighted that there is a significant impact of dividend policy on shareholders wealth in Tata Motors but insignificant impact of dividend policy on shareholders wealth in Force Motors. Limitations of the Study i. This research is based on a sample of two automobile companies and therefore, it is difficult to generalize the findings to other automobile companies. ii. The study includes only four independent variables of dividend policy. iii. This study took into consideration a period of seven years from iv. Shareholders wealth is the dependent variable in this research. However, earnings per share (EPS) is used as the measurement of shareholders wealth. REFERENCES 1. Al-Kasasbeh, MMG. & Qureshi, N.Z. (2017). Impact of dividend policy on shareholders wealth in selected blue chip companies of Jordan. International Research Journal of India, Vol.2, Issue 8. URL: irji.in/images/2035 Murad % 20 Mohammad %20Gafil.pdf 2. Asghar, M., et al. (2011). Impact of dividend policy on stock price risk: Empirical evidence from equity market of Pakistan. Far East Journal of Psychology and Business, 4(1), Braouezec, Y. & Lehalle, A. (2010). Corporate liquidity, dividend policy and default risk: optimal financial policy and agency costs. International Journal of Theoretical and Applied Finance. 13(4), Hashemijoo, M., Ardekani, A. M., & Younesi, N. (2012). The impact of dividend policy on share price volatility in the Malaysian stock market. Journal of Business Studies Quarterly, 4(1), Lam, K.S.K., & Tam, L.H.K. (2011). Liquidity and asset pricing: Evidence from the Hong Kong stock market. Journal of Banking & Finance, 35(9), Mokaya, S.O., Nyang ara, D.M., James, L.T. (2013). The effect of dividend policy on market share value in the banking industry; the case of National Bank of Kenya. International Journal of Arts and Commerce, 2(2), Naveed, M. Y., & Ramzan, M. (2013). A view about the determinants of changes in share prices: A case from Karachi Stock Exchange (Banking Sector). Interdisciplinary Journal of 6

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