A SYNOPSIS ON

IMPACT OF DIVIDEND POLICY

ON VALUE OF THE FIRM
CHAUDHARY DEVILAL UNIVERSITY, SIRSA
(SESSION 2018-2019)
SUBMITTED BY: SUPERVISED BY:
GARIMA RANI DR. KAPIL CHAUDHARY
MBA (FINANCE) ASSISSTANT PROFESSOR
18199210305 DEPARTMENT OF COMMERCE
SUBMITTED TO:
MBA DEPTT. (UCDL)
CDLU
 INTRODUCTION
The prime objective of financial management in organizations is to
maximize its value to the owners and the shareholders. Though this is
challenged by many researchers, the value here often understood to
be reflected in the company’s share price. According to Barman if
dividends are the key indicator of share price and then share price is
the key indicator of firm value, so as to maximize shareholders wealth,
the company should adopt a dividend policy that will increase the
share price. When a company makes profits, it can either decide to
retain the profits for investments in new projects or pay out to the
shareholders as dividends.

Dividend policy refers to the set of rules or norms that a company

follows to decide how much of its profit it will pay out to shareholders.
However, the choice of paying dividends is ultimately decided by the
board of directors of the company, and once dividends have been
declared, it becomes a debt to the firm and cannot be overturned
easily. There are various forms and ways in which dividends can be
paid; a company may decide to pay dividends in the form of cash once
or twice in a year or declare bonus shares. According to Erasmus, from
an investor’s perspective, it is not only the level of dividend payment
that may be imperative, but also the stability of dividend payments
for a considerable period. Thus, management should be cognizant of
the fact that unanticipated changes in dividend payments could
alienate existing and potential investors. Unstable dividend policy
may have an adverse investors’ perception of the company
performance in the financial markets.

This paper intends to provide an understanding of dividend policy by

reviewing the existing theories on dividend policy and their empirical
findings. Furthermore, the paper examines the empirical studies
carried out by investigating the relationship between dividend policy
and firm value as measured by its share price and company
performance.
 THEORIES ON DIVIDEND POLICY
When it comes to dividend theories, there are two foremost schools of
thought, the first is that dividends have an impact on firm value and
the second is that dividends do not have an impact on firm value. This
section presents a review of existing theories on dividend policy and
their empirical evidence. The theories on dividend policy are divided
into two groups main that include dividends relevant theories and
dividends irrelevant theories. It was seen that the beginning of
dividend policy as important to investors was, to some extent,
determined by the evolving state of financial markets. Investing in
shares was initially seen as comparable to bonds, so consistency of
dividend payments was important. It was also seen that in the
absence of regular and precise corporate reporting, dividends were
often preferred to retained earnings, and often even observed as a
better sign of corporate performance than published earnings
accounts. However, as financial markets developed and became more
efficient, it was thought by some researchers and academicians that
dividend policy would become increasingly irrelevant to investors.
Dividend policy remaining evidently important for researchers has
been a theoretically controversial.

Three main opposing theories of dividends can be acknowledged.

Some argue that increasing dividend payments increases a firm’s
value. Another view claims that high dividend payouts have the
opposite impact on a firm’s value; means, it reduces the firm value.
The third theoretical approach emphasizes that dividends should be
irrelevant and all effort spent on the dividend decision is wasted.
These views are incarnated in three theories of dividend policy: high
dividends increase the share price theory (‘bird-in-the- hand’
argument), low dividends increase share price theory (argument of
the tax-preference), and the dividend irrelevance hypothesis. Dividend
debate is not narrowed to these three approaches. Several other
theories of dividend policies have been existing, which further
intensifies the complexity of the dividend puzzle. Some of the very
popular of this dividend policy theory include the information content
of dividends (signaling), the clientele effects, and the agency cost
hypotheses.

REVIEW OF LITERATURE
1. Black stated that, “The harder we look at the dividend
picture, the more it seems like a puzzle, with pieces that
don’t fit together”.
2. Frankfurter et al. (concluded in the same vein as Black and
Scholes that: The dividend “puzzle”, both as a matter of
policy and for shareholder value enhancement ,is one of the
most difficult and most-argued topics in the field of Financial
Economics.
3. According to Bhattacharya dividend decision of a firm can
be seen as a source of signal which shows that profitable
firms with good project investment opportunities will pay
higher dividends in order to separate themselves from other
firms which are having projects with fewer profits.
 RESEARCH OBJECTIVES:
The study is focused on achievement of following four objectives:

1. To empirically examine the determinants of dividend smoothing by

firms and find out its linkage with information content of dividends.

2. To analyze the influence of firms’ characteristics like profitability,

growth, risk, cash flows, agency cost and on dividend payment
pattern. i.e. to identify various determinants of dividend payout.

3. To investigate the association between various ownership groups

and dividend payout policies of Indian corporate firms.

4. To find the impact of dividend announcement on shareholders’

wealth.

RESEARCH METHODOLOGY
The following hypothesis has been formulated for the present study.

Ho: There is no significant impact of dividend policy on shareholders’

wealth of the companies in India.

Ha: There is a significant impact of dividend policy on shareholders’

wealth of the companies in India.
 ANNEXURE
1. www.scribd.com
2.