Chapter 1 Research Methodology 1.1 Introduction: Of all the modern service institutions, stock exchanges are perhaps the most crucial agents and facilitators of entrepreneurial progress. After the independence, as the size of business enterprises grew, it was no longer possible for, proprietors or even partnerships to raise massive amount of money required for undertaking large entrepreneurial ventures. Such huge requirement of capital could only be met by the participation of very large number of individuals investors. These investors could be expected to invest actively in productive enterprise only if there was some return on investment. But the level of return is attached with some level of risk. The risk and return constitute the framework for taking investment decision. Risk in securities refers to the possibility that realized returns will be less than the expected returns. Risks in security can arise due to as market, interest rate, purchasing power, business and financial position risk of the company whereas return on the other hand refers to regular return in form of dividend and capital gain in form of rise in price of stock. It is certain that majority of 1
stocks prices rises in longer term but it is not certain when it will rise? And by how much amount it will rise? In this context, dividends play a vital role in attracting investments in shares. Dividends also act as barometers of financial soundness and solvency, management efficiency and overall growth of an organization. Investors expectations are mostly affected by the management s policy regarding dividends. The dividend policy of firm determines what proportion of earnings is paid to shareholders by way of dividends and what proportion is ploughed back in the firm for reinvestment purpose that is retained earnings. Both growth and dividends are desirable, but they are in conflict; a higher dividend means less provision of funds for growth and higher retained earnings means low dividends. Dividend payment should be preferred if it leads to maximization of shareholder s wealth. If not, retention is the suitable alternative. Dividend and value of firm should be taken as the overall consideration for affecting an optimal dividend policy. However, there are certain schools of thought who give conflicting opinions to this effect. According to MM hypothesis (Miller-Modigliani) that supports that dividends are of irrelevance and has no effect on the valuation of the firm. Contrary to this hypothesis, Walter and Gordon support and suggest that investment policy and dividend policy are interlinked and affects the price of the shares of a firm. Hence, dividend is relevant. 2
1.2 Review of Literature: 1) Merton H. Miller, Do Dividends Really Matter? Selected Paper No. 57, Graduate School of Business, The University of Chicago. Miller said: Both views are correct in their own ways. The academic is thinking of the expected dividend; the practitioner of the unexpected. Miller conveys us that the practitioners view that dividends matter very much and the academic view that dividends do not matter. 2) John F. Muth, Rational Expectations and The Theory of Price Movements 1961. In a world of rational expectations, unexpected dividend announcements would transmit messages about changes in earnings potential, which were not incorporated in the market price earlier. The re-appraisal that occurs as a result of these signals leads to price movements, which took like responses to the dividends themselves, though they are actually caused by an underlying revision of the estimate of earnings potential. 3) B. Graham and D.L. Dodd, Security Analysis: Principles and Techniques, 3 rd ed., New York, Mc Grew Hill Book Company, 1951. According to Graham and Dodd, the stock market places considerably more weight on dividends than on retained earnings. 4) James Walter, Dividend Policy: It s Influence on the Value of the Firm, Journal of Finance, May 1963. According to Walter, 3
dividend payout ratio do affect the share prices - (1) when the rate of return on investments exceeds the cost of capital, the price per share increases as the dividend payout ratio decreases, (2) when the rate of return on investment is equal to the cost of capital, the price per share does not changes in dividend payout ratio, (3) when the rate of return on investments is less than the cost of capital, the price per share increases as the dividend payout ratio increases. 5) M. H. Miller and F. Modigliani, Dividend Policy, Growth and the Valuation of Shares, Journal of Business, vol. 34, October 1961. Miller and Modigliani have advanced the view that the value of firm depends solely on its earnings power and is not influenced by the manner in which its earnings are split between dividends and retained earnings. The view is referred to as the dividend irrelevance theorem. 6) Myron J. Gordon, The Investment, Financing and Valuation of the Corporation, Homewood, III, Richard Irwin, 1962. Gordon leads to conclusions, which are similar to that of the Walter s. Moreover, Gordon s model contends that dividend policy of the firm is relevant and the investors put a positive premium on current incomes/dividends. He argues that dividend policy affects the value of shares even in a situation in which the return on investment of a firm is equal to the required rate (r = ke). 4
7) Subba Reddy Y. Dividend Policy of Indian Corporate Firms; An Analysis of Trends and Determinants, NSE Research Initiative, Dec. 2002, Serial No. 19. Subba Reddy examined the dividend trends in India for a large sample of stocks traded on NSE and BSE and found that the percentage of companies paying dividends has declined from 60.5% in 1990 to 32.1% in 2001 and that only a few companies have consistently paid the same levels of dividends. 8) Singhania Monica, Trends in Dividend Payout A Study of Selected Indian Companies, Journal of Management Research, Vol. 5, No. 3, Dec. 2005. Monica Sighania concluded that the sample companies declared dividend are declined from 448 companies in 1992 to 376 companies in 2004. However, the average dividend payout ratio increased significantly from about 25% - 68% during 1992-2004. 9) Dr. Debasish Sur, Dividend payout trends in the post liberalization era: A Case Study of Colgate Palmolive (I) Ltd. Management Accountant, March 2005, attempted to assess the dividend policy of the company with particular reference to its vital measures dividend per share and dividend payout ratio and three factors influencing dividend policy earning per share, capital employed and quick ratio. 5
1.3 Problem Identification & Title of the Study: As the shares income (dividend and appreciation) in the future is uncertain in both ways by amount and time, moreover majority of investors expects current earnings as they are in low or no tax bracket, so there is one perception that dividend distributions do affect the market share prices but the dividend distribution will decrease the reserves of the company and might create liquidity crisis for company project is another perception which is against dividend payment. Thus, change in share prices due to dividend is the most debatable and unsettled quarrel in financial plays. But whatever be the differences theoretically exists an effort is made to know that dividends do affect market share prices or not. That is why this topic is selected by the researcher. 1.3.1 The Topic: An Investigation to review the Impact of Dividend on Share Prices of Indian Companies 1.4 Research Methodology and Sampling: 1.4.1 Objectives of the Study: The broader objectives of the study are as under: - To know the effect of dividend decision on share price. - To know the relevant changes in share prices after declaring dividends are similar in all companies or not. 6
- To evaluate the information impacts on total volume, number of trades and net turnover. 1.4.2 Sampling Design: The universe of the study consists of all the Indian companies paying regular dividend. As the study is to be carried out by the individual researcher, it is not feasible to select all the companies paying dividend as the sample units for the study. So, the researcher has adopted multistage sampling. As such the universe of the study is Indian companies paying regular dividend is too many and scattered; so (i) The researcher has first prepared the list of different sectors operating in India (ii) The researcher selected randomly 10 different sectors of India. (iii) The researcher listed out all the companies (paying regular dividend) in the selected sectors (iv) Calculated average of dividend payments by companies in last five years (v) On the basis of average of last five years dividend the top ten companies (highest average of dividend payment) has been selected as the sampling units for the study. The collected data was suitably classified and tabulated in the form of simple tables and the data was objectively analysed and conclusions 7
were drawn on the basis of parametric tests at 5% level of significance with the help of statistical technique like t-test and analysis of variance (ANOVA). 1.4.3 Sampling Units: Separately, explained in the Chapter III of Sample Profile. 1.4.4 Nature of the Study: It is an empirical research as the sample size is of 100 companies which are selected from 10 different sectors. Moreover the study is mainly based on the secondary data. The share prices of selected 100 Companies were downloaded from www.capitaline.com and dividend declaring dates from www.bseindia.com, constituted the main sources of data for study. The study in itself is self explanatory. 1.4.5 Tools of Analysis: 1) Average: Average is most commonly used tool for analysis, also known as arithmetic mean, briefly referred as mean. The average can be found by adding the values of all the variables and dividing it by total number of variables. 8
2) Standard Deviation: The concept of standard deviation was introduced by Karl Pearson in 1823. It is most widely used measure of dispersion. It is denoted by the Greek letter called as Sigma. 3) Paired t-test: Paired t-test is a way to test for comparing two related samples, involving small values of n that does not require the variances of the two populations to be equal, but the assumption that the two populations are normal must continue to apply. Such a test is generally considered appropriate in a before and after treatment study. 4) Analysis of Variance: Prof. R. A. Fisher was the first man to use the term, Variance and in fact, it was he who developed a very elaborate theory concerning ANOVA, explaining its usefulness in practical field. ANOVA is essentially a procedure for testing the difference among different groups of data for homogeneity. There may be variation between samples and also within sample items. ANOVA consists in splitting the variance for analytical purpose. Hence, it is a method of analyzing the variance to which response is subject 9
into its various components corresponding to various sources of variation. 1.4.6 Hypothesis: On the basis of data collection, the researcher identified the following broader hypothesis for the study: (A) Hypothesis on the basis of t-distribution: A1. H 0 : There would be no significant difference between the Share s Average Prices of selected companies one month before and after declaring dividend in a sector. A2. H 0 : There would be no significant difference between the Share s High Prices of selected companies one month before and after declaring dividend in a sector. A3. H 0 : There would be no significant difference between the Share s Low Prices of selected companies one month before and after declaring dividend in a sector. A4. H 0 : There would be no significant difference between the Volume of Shares of selected companies one month before and after declaring dividend in a sector. 10
A5. H 0 : There would be no significant difference between the Share s Number of Trades of selected companies one month before and after declaring dividend in a sector. A6. H 0 : There would be no significant difference between the Net Turnover of Shares of selected companies one month before and after declaring dividend in a sector. (B) Hypothesis on the basis of analysis of variance (ANOVA): B1. H 0 : There would be no significant difference in Share s Average Prices within sample units during the study period. B2. H 0 : There would be no significant difference in Share s High Prices within sample units during the study period. B3. H 0 : There would be no significant difference in Share s Low Prices within sample units during the study period. B4. H 0 : There would be no significant difference in Volume of Shares within sample units during the study period. B5. H 0 : There would be no significant difference in Number of Trades of Share s within sample units during the study period. B6. H 0 : There would be no significant difference in Net Turnover of Shares within sample units during the study period. 11
1.5 Scope of the Study: The scope of the study is very wide. But for this study and meaningful research design, few parameters in relation to the share prices have been selected by the researcher like average share price (opening price + closing price / 2), share s high price of the day and share s low price of the day to review the change in share prices of selected sample units, total volume and number of trades to review the change in investors decision relating to buying, holding and selling the shares of the company and at last net turnover (in Rs.) to review the change in the market share of the selected companies. 1.6 Significance of the Study: The significance of the present study being made can be listed below: 1) The study would be useful for the financial manager s of the companies in formulating their dividend policy. The financial managers have to decide how much will be the dividend payout ratio and how much will be the retention ratio out of the earning per share; they should take such a decision which would maximize investor s wealth. 2) The study would also be useful for the investor s also. The investors should invest in companies, which pays dividends. As 12
investors prefer certain few small dividends in place of uncertain huge capital appreciation. 1.7 Chapter Plan: Chapter I Research Methodology Chapter II Conceptual Framework of Dividend Chapter III Sample Profile Chapter IV Analysis and Interpretations of the Data 1. Change in share prices (Average, High & Low) 2. Changes in number of trades and total volume of shares 3. Changes in Market Share through Net Turnover Chapter V Summary, Findings and Conclusions 1.8 Limitations of the Study: 1) The study is based on secondary data collected from websites. The limitation of secondary data, if any, will also influence study. 2) The researcher has also modified some of the formula used in the study. The arbitrariness, if any, in the modification of the formula will also influence the results of study. 3) As, the study is conducted on micro level with the samples of 10 Sectors, the generalization of results cannot not be made to whole Indian corporate world. 13
4) During the study period due to system failure researcher lost data and he was unable to recover data of four companies out of 100. So the researcher continued and concluded the study on rest 96 companies only. 14
Reference: 1. Banerjee B, Financial Policy and Management Accounting The World Press Pvt. Ltd., Kolkata, 1999 2. Banerjee, S. K., Financial Management, S. Chand & Co. Ltd., New Delhi, 2004 3. Chandra Prasanna, Financial Management: Theory and Practice, Tata McGraw-Hill Publishing Company Ltd., New Delhi, 6 th edn. 2005 4. Hampton J. J., Financial Decision Making: Concepts, Problems and Cases, Prentice Hall of India Pvt. Ltd., New Delhi, 2001 5. Khan M. Y. & Jain P. K., Financial Management: Text and Problems, Tata Mc Graw Hill Publishing Company Ltd. New Delhi, 3 rd edn 6. Kothari C. R., Research Methodology, New Age International (P) Ltd, New Delhi, 2004, Edn. 2 nd. 7. Kuchhal S. C., Corporation Finance Principles and Problems, Chaitanya Publishing House, Allahabad, 2001. 8. Pandey I. M. Financial Management, Vikas Publishing House Pvt. Ltd., 8 th edn. 9. Van Horne J. C. Financial Management and Policy, Prentice Hall of India Pvt. Ltd. New Delhi, 2000 15