EXECUTIVE SUMMARY

The topic of the research is “impact of dividend on the value of the firm”. This study shows that to pay or not to pay dividend is a critical decision any management takes. Maximizing the value of the firm or maximizing the shareholders wealth is the ultimate objective of any firm. So any decision of the management has to be valued on the basis of its effect on the value of the firm.

Dividends are payments made to shareholders from a firms earning, whether those earnings were generated in the current period or in previous year. The dividend may be as fixed annual percentage of paid up capital as in the case of preference shares or it may vary according to the prosperity of company as in the case of ordinary shares.

Dividends are commonly defined as the distribution of earnings (past or present) in real assets among the shareholders of the firm in proportion to their ownership. Management’s primary goal is shareholders’ wealth maximization, which translates into maximizing the value of the company as measured by the price of the company’s common stock. This goal can be achieved by giving a “fair’ payment on their investment. However, the impact of the firm’s dividend policy on shareholders wealth is still unresolved.

Aim of the study is to understand impact of dividend policies on the value of the firm. Along with dividend other variables such as retained earnings, Debt –equity and the return on equity share policies of the Indian public limited companies are studied to understand the relationship between the dividend and the share prices. The main objective of the study were;

To find out whether decisions affect the share prices.

To find the extent to which the debt equity ratio affects the share prices.

To describe the samples in terms of its pattern of dividend distribution and debt and to find out the relationship between the dividend and debt and the return on the equity shares.

A descriptive research, which is quantitative in nature, was conducted. convenient sample of 25 companies, shares of which are traded in Bombay stock exchange and National stock exchange was studied. The historical data were collected from the websites of the Bangalore stock exchange, Bombay stock exchange and National stock exchange. The relationship between the value of the firm and dividend policies of the firm and the capital structure of the firm is studied using Multiple Regression Model.

Results of the study show that there is no evidence of significant association between dividend policies on the value of the firm(significance at 5% level “t” test.) the findings include both cross-sectional interpretation for the entire sample companies for five years(2007/8 to 2012/13) and time series interpretation for each of the sample companies separately for five years(2007/8 to 2012/13). The findings also include the dividend distribution and debt patterns of the samples under study.

The salient findings of the study are:

There is no significant effect of dividend/retention and debt equity ratio on share prices.

Out of the variables under study it can be noticed that dividend and share prices does not have a notable relationship between each other.

Out of the sample under study the software companies showed a deviation from others by having least debt equity some even 0 for more than 5 years and least dividend payout ratio and still maintaining a good of return on share prices.

In conclusion, the study was conducted in three stages:

Collection of the required data namely the income statement, balance sheet and the share prices for ten years of the samples under study

Calculation and tabulation of the variables under study.

Analysis and interpretation.

INTRODUCTION

Dividend policy has been in issue of interest in financial literature since joint stock companies came into existence. Dividends are commonly defined as the distribution or earnings ( past or present) in real assets among the shareholders of the firm in proportion to their ownership. Dividend policy connotes to the payout policy, which managers pursue in deciding the size and pattern of cash distribution to shareholders overtime. Management’s primary goal is shareholders’ wealth maximization, which translates into maximizing the value of the firm as measured by the price of the firm’s common stock. This goal can be achieved by giving the shareholders a “fair” payment on their investments. However, the impact of firm’s dividend policy on shareholders wealth is still unresolved.

The area of corporate dividend policy has attracted attention of management scholars and economics culminating into theoretical modeling and empirical examination. Thus, dividend policy is one of the most complex aspects in finance. three decades ago, black(1976)in his study on dividend wrote, “the harder we look at the dividend picture the more it seems like a puzzle, with pieces that just don’t fit together” why shareholders like dividends and why they reward managers who pay regular increasing dividends is still unanswered.

According to Brealey and Myers (2002) dividend policy has been kept as the top ten puzzles in finance the most pertinent question to be answered here is that how much cash should firms give back to their shareholders through dividends or by repurchasing their shares, which is the least costly form of payout from tax perspective? Firms must take these important decisions period after period (must be repeated and some need to be revaluated each period on regular basis.)

Dividend policy can be two types: managed and residual. In residual dividend policy the amount of dividend is simply the cash left after the firm makes desirable investments using NPV rule. In this case the amount of dividend is going to be highly variable and often zero. If the manager believes dividend policy is important to their investors and it positively influences share price valuation<they will adopt managed dividend policy. The optimal dividend policy is the one that maximizes the company’s stock price, which leads to maximization of shareholder’s wealth. Whether or not dividend decisions can contribute to the value of firm is a debatable issue.

Firms generally adopt dividend policies that suit the stage of life cycle they are in. for instance, high- growth firms with larger cash flows and fewer projects tend to pay more of their earnings out as dividends. The dividend policies of firms may follow several interesting patterns adding further to the complexity of such decisions. Firstly, dividends tend to lag earnings, that is, increases in earnings are followed by increases in dividends and decreases in earnings sometimes by dividend cuts. Second, dividends are “sticky” because firms are typically reluctant

to change dividends; in particular, firms avoid cutting dividends even when earnings drop. Third, dividends tend to follow a much smoother path than do earnings. Finally, resulting from changes in growth rates, cash flows, and macroeconomic vicissitudes, such as those in cyclical industries, are less likely to be tempted to set a relatively low maintainable regular dividend so as to avoid the dreaded consequences of a reduced dividend in a particularly bad year.

Shareholders wealth is represented in the market price of the company’s common stock, which, in turn, is the function of the company’s investment, financing and dividend decisions. Among the most crucial decisions to be taken for efficient performance and attainment of objectives in any organization are the decisions relating to dividend. Dividend decisions are recognized as centrally important because of increasingly significant role of finances in the firm’s overall growth strategy. The objective of the finance manager should be to find out an optimal dividend policy that will enhance value of the firm. It is often argued that the share prices of a firm tend to be reduced whenever there is a reduction in the dividend payments. Announcements of dividend increases generate abnormal positive security returns, and announcements of dividend decreases generate abnormal negative security returns. A drop in share prices occur because dividends have signaling effect. According to the signaling effect mangers have private and superior information about future prospects and choose a dividend level to signal that private information. Such a calculation, on the part of the management of the firm may lead to a stable dividend payout ratio.

Dividend policy of a firm has implication for investors, mangers and lenders and other stakeholders (more specifically the claimholders). For investors, dividends- whether declared today or accumulated the provided at a later date are not only a means of regular income, but also an important input in valuation of a firm. Similarly, managers’ flexibility to invest in projects is also dependent on the amount of dividend that they can offer to shareholders as more dividend may mean fewer funds available for investment. Lenders may also have interest in the amount of dividend a firm declares, as more the dividend paid less would be the amount available for servicing and redemption of their claims. The dividend payments present an example of the classic agency situation as its impact is borne by various claimholders. Accordingly dividend policy can be used as a mechanism to reduce agency costs. The payment of dividend reduces the discretionary funds available to managers for perquisite consumption and investment opportunities and require managers to seek financing in capital markets. This monitoring by external capital markets may encourage the managers to be more disciplined and act in owners’ best interest.

Companies generally prefer a stable dividend payout ratio because the shareholders expect it and reveal a preference for it. Shareholders may want a stable rate of dividend payment for a

variety of reasons. Risk averse shareholders would be willing to invests only in those companies which pay high current returns on shares. The class of investors, which includes pensioners and other small savers, are partly or fully dependent on dividend to meet their day-to-day needs. Similarly, educational institutions and charity firms prefer stable dividends, because they will not be able to carry on their current operations otherwise. Such investors would therefore, prefer companies, which pay a regular dividend every year. This clustering of stockholders in companies with dividend policies that match their preference is called clientele effect.

In an ever increasing Indian economy, globalization, liberalization and privatization together with rapid strides made by information technology, have brought intense competition in every field of activity. so Indian companies at present are dazed confused, and apprehensive. to maintain the competiveness of , and value to the companies, today’s finance manager have to make critical business and financial decisions which will lead to long –run perspective with the objective of maximizing the shareholder’s wealth. shareholders wealth is represented in the market price of the company’s common stock, which, in turn is the function of the company’s investment, financing and dividend decision. management’s primary goal is shareholders wealth maximization. which translate in to maximizing the value of the company as measured by the price of the company’s common stock. shareholders like cash dividends ,but they also like the growth in EPS that result from ploughing earning back in to the business. The optimal dividend policy is one that maximizes the company’s stock price which leads to maximization of shareholders wealth and there by ensures more rapid economic growth. the present study is intended to study how far the dividend payout has impact on the value of the firm in general: and in particular to study the relationship between the firms value and dividend payout to analyze whether the level of dividend payout affects to the wealth of the shareholders

The dividend decision of the firm is the crucial area of financial management. the important aspect of dividend policy is to determine the amount of earnings to be retained and the amount to be distributed to shareholders retained earnings are most significant internal source of financing .on the other hand, dividends may be considered desirable from shareholders point of view as they tend to increase their current return. during the first part of the 20th century, dividends were the primary reason investors purchased stocks .it was literally said, “the purpose of the company is to pay dividends’ today the investors view is a bit more refined; it could be stated , instead ,as, “the purpose of a company is to increase my wealth. ”indeed, today’s investor looks to dividends and capital gains as a source of increase.

The objective of any dividend policy should be to increase the shareholders returns so that the value of his investment is maximized. shareholders return has two components; dividend and capital gains. there are many reasons for paying dividends and there are many reasons for not paying dividends. As a result, “dividend policies controversial. A higher payout of dividend

means lower retained earnings which may affect the growth of the firm and perhaps a lower market price per share. the decisions became more critical than their exists and investment opportunity to the firm. if the profits earned is distributed to investors then the retained earnings to that extent will be reduced which will result in increase in debt to finance the investment opportunity. on the other hand the investments requirement must be satisfied by providing the optimal dividend. All these factors which go through the minds of shareholders will be reflected in the market price of the shares. The dividend decision is very vital to any organization.

2.1 BACKGROUND OF THE STUDY

How share prices differ from each other? To what extent financial decisions of the management have a bearing on the shareholder’s wealth? These are some of the several arose in the minds of investors and other stakeholder of the firm. No matter what type of industry, growth prospective ,capital structure etc.. of a firm the ultimate objective is maximizing the shareholder’s wealth. shareholders wealth is the total value of the firm being the final goal, all the decisions of the management is directed towards it. The next question arises is how to value of these decisions. it is always believed that the market value of the share reflects the emotion and exactions of the investors to each and every decision the management takes.

The major decision of financial management is dividend decision, in the sense that the firm has to choose between distributing the profit to the shareholders and ploughing back the profits in the business. the choice would obviously hinge on the affect of the decision on the maximization of shareholders wealth. given these objectives firm should guide by the consideration has to which alternative use is consistent with the goal of wealth maximization. Affirm will be well advised to distribute the net profits of dividends in such a distribution results in maximizing the shareholders’ wealth; if not it would be better to plough back the profits in the business for future investments on growth. there are however conflicting view regarding impact of dividend on the value of the firm. on the relationship between the dividend policy and value of the firm different theories have been advanced .one school of thought treats it as relevant and other is irrelevant. there are two extreme views that are; a) dividends are good as it increases the shareholders value; b)dividends are bad as it decreases the shareholders value. the crux of the arguments is whether to distribute the earnings or retained earnings.

Another point financial decision is capital structure decision. under normal conditions the earnings per share increases when the leverage is more. more debt or leverage also increases the risk of a firm. thus it cannot be clearly said whether the value of the firm, the capital structure or leverage, decision should be examined from the point of view of its impact if the

capital structure affects the value of the firm, then every firm will try achieve the optimal capital structure which maximizes the value of the firm. there exists conflicting theories on the relation between the capital structure and the value of the firm. Thus there exists a research gap and the purpose of the current study is therefore to describe whether the dividend decisions really influence the value of the firm or not. in the study an attempt has also been made to understand the relationship between the capital structure and value of the firm.

2.2 REVIEW OF LITERATURE

A dividend is a part of a corporation’s cash flow that is distributed to its owners. A corporation can do several things with its free cash flow. company’s can take their cash flows and save it, reinvest it, purchase their own stock, payback that, and/or pay it out to its shareholders in the form of dividends.

Previous empirical studies have focused mainly on developed economies the study undertaken looks at the issue from emerging markets perspective by focusing exclusively on Indian information technology, FMCG and service sector. Respectively. The major objective of his research is to empirically examine rationale for stable dividend payments by finding the applicability of Lintner model in Indian scenario. The present research work also seeks to examine and identify the relative importance of some of known determinants of dividend policy in Indian context. the research work also has made an endeavor to bring to light the influence of ownership groups of a company on dividend payout behavior of a firm. This research tries to unfold the relationship between the shareholders wealth and the dividend payout and analyze whether the dividend payout announcements affects the wealth of the shareholders.

Given the diversity in corporate objectives and environments, it is conceivable to have divergent dividend policies that are specific to firms, industries, markets or regions. through the research an attempt has been made to suggest how dividend policy can be set at micro level. finance mangers would be able to examine how the various market frictions such as a symmetric information, agency, costs, taxes, and transaction costs affect their firms, as well as their current claimholders, to arrive at reasonable dividend policies. Previous research studies have focused on dividend payment pattern and policies of developed markets, which may not hold trye of emerging markets like India. In Indian context, few studies have analyzed the dividend behavior of corporate firms and focused on Indian cotton textile industry and manufacturing sector. However, it is still not apparent what the dividend behavior of corporate firms in India is. very few studies have analyzed the dividend behavior of corporate firms in the Indian context . to date, most studies have paid attention on influence of cash flows or earnings on the dividend payment of a firm.

RELEVANCE OF DIVIDENDS

These approach supports that the value of the firm is affected by the dividend policy and optimal dividend policy is the one, which maximizes the firms value. These variable consider dividend decisions to be an active variable n determining the value of a firm, two famous models in support of these are explained below.

Walters Model (James and Walter,1963)

Walter model supports that the dividend policy of the firm is relevant. the investment policy of the management cannot be separated from its dividend policy and both are interrelated. thus the choice of dividend policy does affect the value of the firm. Walter model is built around assumptions such as constant return, constant cost of capital, constant earning and dividend. he also made an assumption that financing of new investment is done through retained earnings and debt and no new equity shares are being issued.

Walter in his argument explains three situations

. if the return on investment exceeds the cost of capital then the firm has to retain the earnings and should not be distributed as dividends.

. if the cost of capital exceeds the return on investment then the firm has to pay entire earning as dividend.

. if the return on investment and the cost of capital is same then rate of dividend payout can be 0 to 100

According to this model if the firm retain the earnings it gives a single that the investment opportunities are more and it increases the shares prices. Similarly when the firm distributes the entire earnings as dividends, share prices will automatically increase, as the income on the shares are more. The Walter model is criticized on the unrealistic assumptions on which it is made such as no debt financing ,constant return, cost of capital and earnings etc…are not practically possible.

Gordon Model (Gordon Myron j,1962)

Myron Gordon (1962) came up with a dividend relevance model which is popularly known as the “bird in the argument”. The crux of the argument is that the

. Investors are risk averse and

.They put a premium on the “certain” return and discount or penalize the “uncertain” returns.

Gordon says that the current dividends are certain and the reinvestment of current dividend for future returns is uncertain. Thus the investors would be inclined to pay higher prices of shares on which dividends are post pond.ths model is based on the belief that a bird in the hand worth two in the bush. Thus incorporating the uncertainty in to the model Gordon concludes that the dividend policy affects the value of the firm. his model, justifies the behavior of investors who value a rupee of dividend income more than a rupee of capital gains. However this model is also not free of criticism because of the assumptions on which it is based.

CAPITAL STRUCTURE vs. FIRM’S VALUE

The two principal sources of finance for a company are equity and debt. What should be the proportion of equity and debt in the capital structure of the firm? One of the key issues in the capital structure decision is the relationship between the capital structure and the value of the firm. There are several views on how this decision affects the value of the firm.

Optimal capital structure Theory

Optimal capital structure theory of Modigliani-Miller (1958) suggest there exist optimal leverage at which the firm obtains a maximum value by minimizing its weighted leverage costs of capital, given the market imperfections and tax deductibility of interest costs from pre-tax income firms. The proposition asserts that the value of the firm with tax-deductible interest is equal to the value of an all-equity firm as enhanced by the tax savings. According to this approach, the capital structure decision of a firm is irrelevant. This approach supports the NOI approach and provides a behavior justification for it. This approach indicates that the capital structure is irrelevant because of the arbitrage process which will correct any imbalance i.e expectations will change and a stage will be reached where further arbitrage is not possible.

Durand D (1959) identified two views; Net income approach and Net operating approach. Under the net income approach the cost of debt equity are assumed to be independent to the capital structure . this approach says that the weighted average cost of capital of the firm

declines and the total value of the firm rise with increased use of leverage. Under the net operating income approach, the cost of the equity is assumed to increase linearly with leverage. As a result, the weighted average cost of capital remains constant and the total value of the firm also remains constant as the leverage is changed.

Davidson N W,(1994) in their report on “the effect of firm and industry debt ratios on market value” analyzed 183 firms and studied the effect of debt ratios to the market value of the firm. Overall conclusion of the study is that the relationship of the firm’s debt level and that of its industry does not appear to be of concern to the market. Arsiraphoongphisit O and Ariff M(2003) in their report on “optimal capital structure and firm value an Australian evidence,1991-2003” (corporate finance) analyzed 654 observations for a period of 1991 to 2003 in Australia market on the effect of capital structure change and firm’s value. The findings indicate that the market reacts positively to announcements of financing that lead to capital structure moving closer to their relative industrial debt-equity ratio has an impact on market value of the firm.

From an overall review of the literature it is clear that there exist certainly a contradicting view on the impact of the dividend policy on the value of the firm.

The studies on the effect of debt equity combination on share price show that the relationship is almost zero. But theoretically as the debt increases because of the tax shield available the earnings must also increase in earnings always increase the market price of the shares. Thus we can see that there exists a knowledge gap in the subject.

To examine whether the dividend policies has any impoact on the stock reaction

To explain the dividend distribution/retention and the debt equity patterns of the samples.

To understand the relationship between the dividend policies of the company and the value of the firm.

To study the effect of capital structure decisions on the value of the firm.

2.3 DIFFERENT TYPES OF DIVIDEND POLICIES

1) REGULAR DIVIDEND

By dividend we mean regular dividend paid annually, proposed by the board of directors and approved by the shareholders in general meeting. it is also known as final dividend because it is

usually paid after the finalization of accounts it is generally paid in cash as a percentage of paid up capital, say 10% or 15% of the capital. sometimes, it is paid per share. No dividend is paid on calls in advance or calls in arrears, the company is, authorized to make provisions in Articles prohibiting the payment of dividend on shares having calls in arrears.

2) INTERIM DIVIDEND

If articles so permit, the directors may decide to pay dividend at any time between the two annual general meeting before finalizing the accounts. It is generally declared and paid when company has earned heavy profits or abnormal profits during the year and directors which to pay the profits to shareholders. Such payment of dividend in between the two annual general meeting before finalizing the accounts is called interim dividend. No interim dividend can be declared or paid unless depreciation for the full year (not proportionately) has been provided for. It is, thus, an extra dividend paid the year requiring no need of approval of the annual general meeting. It is paid in cash.

3) STOCK DIVIDEND

Companies , not having good cash position, generally pay dividend in the form of shares by capitalizing the profits of current year and of past years. Such shares are issued instead of paying dividend in cash and called “Bonus shares”. Basically there is no change in the equity of shareholders. Certain guidelines have been used by the company Law Board in respect of Bonus shares.

4) SCRIP DIVIDEND

Scrip dividends are used when earnings justify a dividend, but the cash position of the company is temporarily weak. So, shareholders are issued shares and debentures of other companies. Such payment of dividend is called scrip dividend. Shareholders generally do not like such dividend because the shares or debentures , so paid are worthless for the shareholders as directors would use only such investment is which were not. Such dividend was allowed before passing of the companies (Amendment) Act 1960, but there after this unhealthy ptactice was stopped.

5) BOND DIVIDEND

In rare instances, dividends are paid in the form of debentures or bonds or notes for a long term period. The effect of such dividend is the same as that of paying dividend in scrip. The shareholders become the secured creditors are the bonds has a lien on assets.

6) PROPERTY DIVIDEND

Sometimes, dividend is paid in the form of assets instead of payment of dividend in cash. The distribution of dividend is made whenever the assets is no longer required in the business such as investment or stock of finished goods.

2.4 FACTORS EFFECTING DIVIDEND POLICY.

1. STABILITY OF EARNINGS.

The nature of business has an important bearing on the dividend policy. Industrial units having stability of earnings may formulate a more consistent dividend policy than those having an uneven flow of incomes because they can predict easily their savings and earnings. Usually, enterprises dealing in necessities suffer less from oscillating earnings than those dealing in luxuries or fancy goods.

2. AGE OF CORPORATION.

Age of the corporation counts much in deciding the dividend policy. A newly established company may require much of its earnings for expansion and plant improvement and may adopt a rigid dividend policy while, on the other hand, an older company can formulate a clear cut and more consistent policy regarding dividend.

3. LIQUIDITY OF FUNDS.

Availability of cash and sound financial position is also an important factor in dividend decisions. A dividend represents a cash outflow, the greater the funds the liquidity of the firm the better the ability to pay dividend. The liquidity of a firm depends very much on the investment and financial decisions of the firm which in turn determines the rate of expansion and the manner of financing. If cash position is weak, stock dividend will be distributed and if cash position is good, company can distribute the cash dividend.

4. EXTENT OF SHARE DISTRIBUTION.

Nature of ownership also affects the dividend decisions. A closely held company is likely to get the assent of the shareholders for the suspension of dividend or for following a conservative dividend policy. On the other hand, a company having a good number of shareholders widely distributed and forming low or medium income group would face a great difficulty in securing such assent because they will emphasize to distribute higher dividend

5. NEEDS FOR ADDITIONAL CAPITAL.

Companies retain a part of their profits for strengthening their financial position. The income may be conserved for meeting the increased requirements of working capital or of future expansion. small companies usually find difficulties in raising finance for their needs of increased working capital for expansion Programs. They having no other alternative, use their ploughed back profits. Thus, such companies distribute dividend at low rates and retain a big part of profits.

6. TRADE CYCLES

Business cycles also exercise influence upon dividend policy. Dividend policy is adjusted according to the business oscillations. During the boom, prudent management creates food reserves for contingencies which follow the inflationary period. Higher rates of dividend can be used as a tool for marketing the securities in an otherwise depressed market. The financial solvency can be proved and maintained by the companies in dull years if the adequate reserves have been built up.

7. GOVERNMENT POLICIES.

The earnings capacity of the enterprise is widely affected by the change in fiscal, industrial, labor, control and other government policies. Sometimes government restricts the distributon of dividend beyond a certain percentage in a particular industry or in all spheres of business activity as was done in emergency. The dividend policy has to be modified or formulated accordingly in those enterprises.

8. TAXATION POLICY.

High taxation reduces the earnings of the companies and consequently the rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of dividend beyond a certain limit. It also affects the capital formation. N India, dividends beyond 10% of paid –up capital are subject to dividend tax at 7.5%.

9. LEGAL REQUIREMENTS.

In deciding on the dividend, the directors take the legal requirement too into consideration. In order to protect the interests of creditors an outsiders, the companies Act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend. Moreover , a company is required to provide for depreciation on its fixed and tangible assets before declaring dividend on shares. It proposes that dividend should not be distributed out of capital,

in any case. Likewise, contractual obligation should also be fulfilled. For example, payment of dividend on preference shares in priority over ordinary dividend

10. PAST DIVIDEND RATES.

While formulating the dividend policy, the directors must keep in mind the dividend paid in past years. The current rate should be around the average past rat. if it has been abnormally increased the shares will be subjected to speculation, in a new concern, the company should consider the dividend the dividend policy of the rival organization.

11. ABILITY TO BORROW.

Well established and large firms have better access to the capital market than the new companies and may borrow funds from the external sources if there arises any need. Such companies may have a better dividend pay-out ratio. Whereas smaller firms have to depend on their internal sources and therefore they will have to built up good reserves by reducing the dividend payout ratio for meeting any obligation requiring heavy funds.

12. POLICY OF CONTROL.

Policy of control is another determining factor is so far as dividends are concerned. If the directors want to have control on company, they would not like to add new shareholders and therefore, declare a dividend at low rate. Because by adding new shareholders they fear dilution of control and diversion of policies and programs of the existing management. So they prefer to meet the needs through retained earnings. If the directors do not bother about the control of affairs they will follow a liberal dividend policy. Thus control is an influencing factor in framing the dividend policy.

13. REPAYMENTS OF LOAN.

A company having loan indebtedness are vowed to a high rate of retention earnings, unless one other arrangements are made for the redemption of debt on maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly institutional lenders) put restrictions on the dividend distribution still such time their loan is outstanding. Formal loan contracts generally provide a certain standard of liquidity and solvency to be maintained. Management is bound to hour such restrictions and to limit the rate of dividend payout.

14. TIME FOR PAYMENT OF DIVIDEND.

When should the dividend be paid is another consideration. Payment of dividend means outflow of cash. It is, therefore, desirable to distribute dividend at a time when is least needed by the company because there are peak times as well as lean periods of expenditure. Wise

management should plan the payment of dividend in such a manner that there is no cash outflow at a time when the undertaking is already in need of urgent finances.

15. REGULARITY AND STABILITY IN DIVIDEND PAYMENT.

Dividends should be paid regularly because each investor is interested in the regular payment of dividend. The management should, in spite of regular payment of dividend, consider that the rate of dividend should be all the most constant. for this purpose sometimes companies maintain dividend equalization in funds.

MAJOR PLAYERS

The major players in this study are of 25 companies as follows;

Associated Cement Company Ltd.

Bajaj Auto Ltd.

Cipla Ltd.

Dr.Reddy’s Lab Ltd.

Grasim Industries Ltd.

Ambuja Cement Ltd.

HDFC

Hero Honda Ltd.

Hindalco Ltd.

Hindustan Unilever Ltd.

Infosys Technology Ltd.

Ranbaxy Laboratories Ltd.

Reliance Energy Ltd.

Reliance Industries Ltd.

Tata Motors Ltd.

Tata Power Ltd.

Wipro Ltd.

ABB Ltd.

Bharat Petroleum Corporation Ltd.

Britannia Industries Ltd.

Colgate-Palmolive Ltd.

Mahindra & Mahindra Ltd.

Steel Authority of India Ltd.

Mahanagar Telecom Nigam Ltd.

2.5 OPERATIONAL DEFINITIONS CONCEPTS

1. DIVIDEND PAYOUT RATIO

A ratio showing the percentage of net profits paid out in dividends on common stock,after reducing net profits by the amount of dividends paid on preferred stock.it calculated as the percentage of dividend paid on profit after tax. In this study dividend payout ratio is expressed as the ratio of dividend paid to the net profit after tax.

=yearly dividend per share/Earnings per share

Or equivalent:

=Dividend/Net income

2. RETENTION RATIOS

Retention ratio shows the rate of earnings retained by the company for financing the investments needs. Retained earnings are the main internal source of finance for the company. This explains to what extent the earnings of the firm are ploughing back to the business. Technically it is one minus the dividend paid out ratio.

Retention ratio=1-D/P Ratio

3. DEBT EQUITY RATIO

Debt equity shows capital structure of the firm. This represents the capital structure of the company. It is defined as the ratio of debt to equity of the firm.

4. RETURN ON SHARES

Return on shares is calculated by dividend the previous year’s price from the current year price and the log natural of the resultant figure is calculated as it gives a continuously compounded rate of return.

Ln (P1/Po)

5. VALUE OF THE FIRM

The effect on the value of the firm is analyzed by studying the return on equity shares. Return on equity shares=P1/P0, where P1 is the market price of equity share for current year and Po is the market price of the equity share of the equity share for previous year.

6. DIVIDEND COVERAGE RATIO

The ratio between a company’s earnings and net dividend paid to shareholders- known as dividend coverage- remains a well-used for measuring whether earnings are sufficient to cover dividend obligation. The ratio is calculated as earnings per share dividend by the dividend per share. When coverage is getting thin, odds are good that there will be a dividend cut, which can have a dire impact on valuation. Investors can feel safe a coverage ratio of 2 or 3. In practice, the coverage ratio becomes a pressing indicator when coverage slips below 1.5, at which point prospects start to look risky. If the ratio is under 1, the company is using its retained earnings from last year to pay this year’s dividend.

KEY TERMS

DIVIDEND POLICY; The policy a company uses to decide how much it will pay out to shareholders in dividends.

SHAREHOLDER’S VALUE: The value delivered to shareholders because of management’s ability to grow earnings, dividends and share price. In other words, shareholder value is the sum of all strategic decisions that affect the firm’s ability to efficiently increase the amount of free cash flow over time.

LINTNER MODEL:A model stating that dividend policy has two parameters(1) the target payout ratio and (2) the speed at which current dividends adjust to the target.

AGENCY COST: A type of internal cost that arises from, or must be paid to, an agent acting on behalf of a principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish for Management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of Shareholders.

DIVIDEND SMOOTHING: A concept that has its genesis in the dividend model proposed by John Lintner (1956). It states that the firms strive towards dividend stability and consistency .the dividend paid during current year is governed by dividend paid during previous year and variations in the earnings should not be reflected in the dividend payout.

INFORMATION ASSYMETRY: A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party’s lack of knowledge.

EVENT STUDY: An empirical study performed on a security that has experienced a significant catalyst occurrence, and has subsequently changed dramatically in value as a result of that catalyst. The event can have either a positive or negative effect on the value of the security. Event studies can reveal important information about how a security is likely to react to a given event, and can help predict how other securities are likely to react to different events.

PECKING ORDER HYPOTHESIS: This hypothesis states that a company which prefers retention of profits for financing the capital expenditure from internal resources distributes fewer dividends compared to a firm which finances the investment expenditure from external sources. Thus, a negative relationship exists between CAPEX and dividend payout.

ENTRENCHMENT HYPOTHESIS: The hypothesis suggests a inverted U shaped relationship between dividends and level of insider ownership. Dividend may act as a substitute for corporate governance below the entrenchment level insider ownership leading to a negative relationship between these two variables. After such critical entrenchment level, however, when insider ownership increases are associated with additional entrenchment related agency costs, dividend policy may become a compensating monitoring force and accordingly a positive relationship with insider ownership would be observed.

DIVIDEND SIGNALING: A theory that suggests company announcements of an increase in dividend payouts act as an indicator of the firm possessing strong future prospects. The rationale behind dividend signaling models stems from game theory. A manager who has good investment opportunities is more likely to “signal” than one who doesn’t because it is in his or her best interest to do so.

ABNORMAL RETURNS: A term used to describe the returns generated by a given security or portfolio over a period of time that is different from the expected rate of return. The expected rate of return is the estimated return based on an asset pricing model, using a long run historical average or multiple valuations.

FACTOR ANALYSIS: Factor analysis is a statistical procedure used to uncover relationships among many variables. This allows numerous inter-correlated variables to be condensed into fewer dimensions, called factors.

PANEL DATA: Panel data is data from a (usually small)number of observations over time on a (usually large) number of cross- sectional units like individuals, households, firms, or government.

MULTIPLE REGRESSION ANALYSIS: Statistical procedure that attempts to assess the relationship between a dependent variable and two or more independent variables. Example: sales of a popular soft drink(the dependent variable) is a function of various factors, such as its price, advertising, taste, and the prices of its major competitors(the independent variables)

CHAPTER 2 TITLE OF THE PROJECT:

A CRITICAL ANALYSIS ON THE IMPACT OF DIVIDEND POLICY ON THE VALUE OF THE FIRM.

STATEMENT OF THE PROBLEM

There exist conflicting views with regard to the impact of dividend decisions on the value of the firm. Some are of the opinion that dividends do affect the market price of the shares while other argues it does not. Thus there exists a knowledge gap. There search problem under consideration is as follows. to what extent does the dividend decision affect the value of the widely held public limited companies in India?

OBJECTIVES OF THE STUDY

To find the extent to which the debt equity ratio affects the share prices.

To find out whether decisions affect the share prices.

SCOPE OF THE STUDY.

In this study an attempt is made to understand increase or decrease in the share price due to the difference payout ratios. Here the ratios such as dividend payout, retention ratio, debt equity ratios, and return on the shares are studied. The findings of the study can be used to understand the influence of dividend decisions and capital structure on the value of the firm

METHODOLOGY

The methodology is the major phase of research in which the investigator makes a number of decisions about the methods and materials to be used to study the research problem , basically through collection of data. The methodological decision generally has control implications for the validity of the findings.

3.1 TYPE OF RESEARCH

Type of research is Descriptive research, which is Quantitative in nature.

3.2 STUDY SETTING

* Indian public Limited companies.

* The equity shares of companies are traded in Indian stock exchanges. (BSE&NSE)

3.3 POPULATION

A population is a group whose members possess specific characteristics that a researcher is interested in studying. In this study the population includes all widely held public companies whose shares are publically traded through a stock exchange.

3.4 SAMPLING FRAME WORK

This study includes analysis of public limited companies, which are listed in Bombay stock exchange and national stock exchange of India.

3.5 SAMPLING TECHNIQUE

A sample is a portion of the population that has been selected to represent the population of interest. Here in this study 25 companies are selected which are listed in Bombay stock exchange and National stock exchange, India. Sampling technique used here is convenient sampling.

3.6 HYPOTHESIS

Ho: Dividend policies do not affect the value of the firm

H1: Dividend policies do affect the value of the firm.

3.7 SAMPLE

The sample size is 25 companies listed in BSE and NSE. The companies studied are the followings.

Associated Cement Company Ltd.

Bajaj Auto Ltd.

Cipla Ltd.

Dr.Reddy’s Lab Ltd.

Grasim Industries Ltd.

Ambuja Cement Ltd.

HDFC

Hero Honda Ltd.

Hindalco Ltd.

Hindustan Unilever Ltd.

Infosys Technology Ltd.

Ranbaxy Laboratories Ltd.

Reliance Energy Ltd.

Reliance Industries Ltd.

Tata Motors Ltd.

Tata Power Ltd.

Wipro Ltd.

ABB Ltd.

Bharat Petroleum Corporation Ltd.

Britannia Industries Ltd.

Colgate-Palmolive Ltd.

Mahindra & Mahindra Ltd.

Steel Authority of India Ltd.

Mahanagar Telecom Nigam Ltd.

The shares of the above companies are commonly traded in the stock exchange for the period under study i.e,; 2000/01-2009/10

3.8 DATA COLLECTION

Secondary Data

Income statement of companies under study

Balance sheet

Historical stock prices

Data obtained

Figures and facts

Unclassified raw data

3.9 Method of data collection and steps

The data required for the study has been collected from the data base maintained in the Bangalore Stock Exchange, Bangalore and from the data base of the Bombay stock Exchange and National stock Exchange through their web sites. The raw data collected were converted in to the ratios and classified according to the requirement of the study.

3.10 STATISTICAL ANALYSIS

Descriptive statistical is used to describe the pattern of dividend payout, Debt equity and the return on shares.

Five Year Moving Average is used to estimate the expected Dividend payout, Retention Ratio of the successive years. This approach is used to estimate the values incorporating its behavior for the past five years.

Expected Value for the year 6=(Y5+Y4 +Y3+ Y2+Y1)/5

Statistical model used: the model used here is multiple-regression model.

The regression equation for the study is as under.

Y=a+b1X1+b2X2

A=Y-intercept

Y=Actual Return on Equity (For the year)

X1=Expected Debt-Equity Ratio(Moving Average for five years)

X2=Expected Dividend payout(moving average for five years)

B 1&b2=slopes associated with X1 and X2

Normal equation used is

For cross sectional regression analysis the above variables X1 and X2 for ten years are converted into five year moving averages. For time series analysis the actual data for the years are taken. As there exist high correlation between the dividend payout and retention ratio there will be Multi Co-linearly effect on the regression analysis to avoid this retention ratio is not included in the regression model. “t” test significance at 5% level is used to accept or reject the hypothesis.

R- square (R^2) is the proportion of variation in the dependent variable(Y) that can be explained by the predictors (X variables) in the regression model. As predictors (X variables) are added to the model, each predictor will explain some of the variance in the dependent variable(Y) simply due to chance. One could continue to add predictors to the model which would continue to improve the ability of the predictors to explain the dependent variable, although some of this increase in R- square would be simply due to chance variation. The adjusted R-square attempts to yield a more honest value to estimate R- square. Adjusted R-square is computed using the formula 1-(1-R^2)*(N-1)/(N-K-1)

The F statistic or the F-observed value is used to determine whether the observed relationship between the dependent and independent variables occurs by chance.

3.11 LIMITATIONS OF THE STUDY.

1. The sampling technique used is a convenient sampling technique, which limits the generalization of the findings.

2. the time span for the study was short and hence only major aspects are considered.

CHAPTER 3

ANALYSIS AND INTERPRETATION OF DATA.

CHAPTER 4

FINDINGS , RECOMMENDATIONS AND CONCLUSSIONS

SUMMARY AND FINDINGS

The study started with reviewing the previous research papers explaining the impact of the dividend decisions on the value of the firm. Among them the most popular research paper is that of Modigliani and Miller. It proves that dividend is irrelevant. As against this theory Walter and Gordon through their model explained that dividend is very relevant. Here the study focused on finding out whether dividend affects the value of the firm or not.

Through convenient sampling 25 Indian Public Limited companies actual data were analyzed. Here under the study the effect on the return on equity is considered as an attempt is made to establish the relationship between the return on equity & debt and dividend of the companies selected for the study. Here the expected values of the dividend payout and debt to equity are regressed with actual return to find out the association, if any.

The results of the study show that the impact of the dividend on the value of the firm is not significant. Out of the 25 sample companies studied only two companies showed a significant association between the dividend and the return on equity. Where as none of the company showed any evidence of significant relation between debt and return on shares. thus it can be observed that in cross sectional analysis of the companies the return on equity shares does not show any significant relationship with debt equity and dividend payout. But in case of company wise time series analysis certain companies as explained above ,shows relationship between the variables. thus we infer that investor do not give importance to capital structure and the dividend policy of the companies as a whole. they give importance of the structure of selected companies.

FINDINGS OF THE STUDY

CROSS SECTIONAL REGRESSION ANALYSIS

The results of the cross regression for the five years from 2007/2008 to 2012/2013(Table no.16) show that for the selected samples there is no evidence of any significant relationship between Return and Equity &the debt equity ratio and dividend payout.

TIME SERIES REGRESSION ANALYSIS

The results of the time series Regression for five year data(2007/2008 to 2012/2013)as per the Table no.II26 shows that there does not exist any significance relationship between the Return on equity and debt equity and dividend payout other than for the following.

Samples:

BAJAJ AUTO LTD;

The regression analysis shows that the “t” value calculated for the variable X2.i.e; dividend payout ratio is 2.499. thus shows that it is significance at 5% level. The coefficient of the variable of dividend payout ratio (b2) is 4.52; it also shows that to Bajaj Auto Ltd. There exist a significant relationship between the Return on equity and capital structure.

WIPRO;

This sample also shows that there exist a significant relationship between the return on the equity and the dividend payout ratio. The “t” calculated value is 66.645 and the coefficient is 0.094, for dividend payout ratio.

Hypothesis Testing

H0; Dividend policies do not affect the value of the firm.

H1; Dividend policies do affect the value of the firm.

The hypothesis is tested by using “t” test significant at 5%. The cross regression results as per table N0 16 show the “t” value calculated for the period of analysis i.e 2007/2008 to 2012/2013. It can be seen that the ”t” values calculated show no significance relationship between the return on equity & dividend payout. The time series regression results as per table N0.II26 shows the “t” value calculated for each share prices and h sample for five

years(2007/2008 to 2012/2013). Here also there is no evidence of relationship between return on equity share prices and dividend payout. Thus at 5% level of significance using “t” tests HO IS ACCEPTED, which implies there is no effect.

DIVIDEND AND DEBT PATTERNS

The descriptive cross sectional tables and time series tables explain the trend in the various ratios of the companies under study for the various periods. Software companies such as Infosys Technologies Ltd. Pay comparatively very low rate of dividend and most of the earnings are retained for investment in the business where as Wipro pay high rate dividend. FMCG companies like Hindustan Lever Ltd, and Colgate Palmolive Ltd. Pay high rate of dividend and retained earnings are less, it shows that the investment opportunities in this sector shows a decreasing trend and the growth rate is limited. The cement industries like Ambuja cement pay very less dividend and earnings are retained in business. The dividend payout of the Automobile companies under study ranges from 25 to 1. The pharmaceutical companies under study have a dividend of less than 0.5 the payout ratios are almost consistent for each company in this group. It has more growth prospective, as the retention ratio is high.

RECOMMENDATIONS

The company may not be bother to borrow the debt to the market value of the share.

The dividend policy can be designed keeping the growth concept into consideration.

Software companies can improve debt equity ratio and bring into standard.

In the present scenario dividend impact on the firm is negligible; hence dividend payout ratio can be fixed based on the economic factor.

Software companies should be conscious while declaring the dividend as it has a big impact of market value of the firm.

CONCLUSION

The main objective of the study were

To find out whether decisions affect the share prices.

To find the extent to which the debt equity ratio affects the share prices.

To describe the companies under study in terms of their payout ratio, retention ratio and debt equity ratios.

The study was conducted in these stages

1. Collection of the required data namely the income statement, balance sheet and the share prices for ten years (2002-2012) of the samples under study.

2. Calculation and tabulation of the variables under study namely Dividend payout ratio, retention ratio, debt equity ratio and return on equity share prices.

3. Analysis and interpretation

The study was focused on finding the relationship existing between the dependent variable; return on equity share prices and the independent variables, dividend and debt equity ratio. The data were collected through verification of financial statement of the company and the historical price data available in the NSE and BSE websites. The data were interpreted using descriptive statistics and multiple Regression Analysis.

The salient findings of the study are;

There is no significant effect of dividend/retention and debt equity ratio on share prices.

Out of the variables under study it can be noticed that dividend and share prices does not have a notable relationship between each other.

Out of the sample under study the software companies showed a deviation from others by having least debt equity some even 0 for more than 5 years and least dividend payout ratio and still maintaining a good of return on share prices.

BIBLIOGRAPHY

BOOKS

Khan M Y and Jain P K(2004). “FINANCIAL MANAGEMENT.” Tata McGraw Hill Publications, Bangalore, pp 259.

Prasanna Chandra,(2004) “FINANCIAL MANAGEMENT.” Tata McGraw Hill Publications. Bangalore, pp 340

Gupta. S.P, (2001) ‘’ STATISTICAL METHODS.’’ Sultan Chand & Sons, Bangalore, pp 340

Pandey I M (2000), ‘’ FINANCIAL MANAGEMENT’’. Vikas Publications pvt Ltd. Bangalore, pp 92.

WEBSITES

www.finance24.com

www.edelweiss.co.in

www.moneycontrol.com

www.yahoofinance.com

www.studyfinance.c EXECUTIVE SUMMARY

The topic of the research is “impact of dividend on the value of the firm”. This study shows that to pay or not to pay dividend is a critical decision any management takes. Maximizing the value of the firm or maximizing the shareholders wealth is the ultimate objective of any firm. So any decision of the management has to be valued on the basis of its effect on the value of the firm.

Dividends are payments made to shareholders from a firms earning, whether those earnings were generated in the current period or in previous year. The dividend may be as fixed annual percentage of paid up capital as in the case of preference shares or it may vary according to the prosperity of company as in the case of ordinary shares.

Dividends are commonly defined as the distribution of earnings (past or present) in real assets among the shareholders of the firm in proportion to their ownership. Management’s primary goal is shareholders’ wealth maximization, which translates into maximizing the value of the company as measured by the price of the company’s common stock. This goal can be achieved by giving a “fair’ payment on their investment. However, the impact of the firm’s dividend policy on shareholders wealth is still unresolved.

Aim of the study is to understand impact of dividend policies on the value of the firm. Along with dividend other variables such as retained earnings, Debt –equity and the return on equity

share policies of the Indian public limited companies are studied to understand the relationship between the dividend and the share prices. The main objective of the study were;

To find out whether decisions affect the share prices.

To find the extent to which the debt equity ratio affects the share prices.

To describe the samples in terms of its pattern of dividend distribution and debt and to find out the relationship between the dividend and debt and the return on the equity shares.

A descriptive research, which is quantitative in nature, was conducted. convenient sample of 25 companies, shares of which are traded in Bombay stock exchange and National stock exchange was studied. The historical data were collected from the websites of the Bangalore stock exchange, Bombay stock exchange and National stock exchange. The relationship between the value of the firm and dividend policies of the firm and the capital structure of the firm is studied using Multiple Regression Model.

Results of the study show that there is no evidence of significant association between dividend policies on the value of the firm(significance at 5% level “t” test.) the findings include both cross-sectional interpretation for the entire sample companies for five years(2007/8 to 2012/13) and time series interpretation for each of the sample companies separately for five years(2007/8 to 2012/13). The findings also include the dividend distribution and debt patterns of the samples under study.

The salient findings of the study are:

There is no significant effect of dividend/retention and debt equity ratio on share prices.

Out of the variables under study it can be noticed that dividend and share prices does not have a notable relationship between each other.

Out of the sample under study the software companies showed a deviation from others by having least debt equity some even 0 for more than 5 years and least dividend payout ratio and still maintaining a good of return on share prices.

In conclusion, the study was conducted in three stages:

Collection of the required data namely the income statement, balance sheet and the share prices for ten years of the samples under study

Calculation and tabulation of the variables under study.

Analysis and interpretation.

INTRODUCTION

Dividend policy has been in issue of interest in financial literature since joint stock companies came into existence. Dividends are commonly defined as the distribution or earnings ( past or present) in real assets among the shareholders of the firm in proportion to their ownership. Dividend policy connotes to the payout policy, which managers pursue in deciding the size and pattern of cash distribution to shareholders overtime. Management’s primary goal is shareholders’ wealth maximization, which translates into maximizing the value of the firm as measured by the price of the firm’s common stock. This goal can be achieved by giving the shareholders a “fair” payment on their investments. However, the impact of firm’s dividend policy on shareholders wealth is still unresolved.

The area of corporate dividend policy has attracted attention of management scholars and economics culminating into theoretical modeling and empirical examination. Thus, dividend policy is one of the most complex aspects in finance. three decades ago, black(1976)in his study on dividend wrote, “ the harder we look at the dividend picture the more it seems like a puzzle, with pieces that just don’t fit together” why shareholders like dividends and why they reward managers who pay regular increasing dividends is still unanswered.

According to Brealey and Myers (2002) dividend policy has been kept as the top ten puzzles in finance the most pertinent question to be answered here is that how much cash should firms give back to their shareholders through dividends or by repurchasing their shares, which is the least costly form of payout from tax perspective? Firms must take these important decisions period after period (must be repeated and some need to be revaluated each period on regular basis.)

Dividend policy can be two types: managed and residual. In residual dividend policy the amount of dividend is simply the cash left after the firm makes desirable investments using NPV rule. In this case the amount of dividend is going to be highly variable and often zero. If the manager

believes dividend policy is important to their investors and it positively influences share price valuation<they will adopt managed dividend policy. The optimal dividend policy is the one that maximizes the company’s stock price, which leads to maximization of shareholder’s wealth. Whether or not dividend decisions can contribute to the value of firm is a debatable issue.

Firms generally adopt dividend policies that suit the stage of life cycle they are in. for instance, high- growth firms with larger cash flows and fewer projects tend to pay more of their earnings out as dividends. The dividend policies of firms may follow several interesting patterns adding further to the complexity of such decisions. Firstly, dividends tend to lag earnings, that is, increases in earnings are followed by increases in dividends and decreases in earnings sometimes by dividend cuts. Second, dividends are “sticky” because firms are typically reluctant to change dividends; in particular, firms avoid cutting dividends even when earnings drop. Third, dividends tend to follow a much smoother path than do earnings. Finally, resulting from changes in growth rates, cash flows, and macroeconomic vicissitudes, such as those in cyclical industries, are less likely to be tempted to set a relatively low maintainable regular dividend so as to avoid the dreaded consequences of a reduced dividend in a particularly bad year.

Shareholders wealth is represented in the market price of the company’s common stock, which, in turn, is the function of the company’s investment, financing and dividend decisions. Among the most crucial decisions to be taken for efficient performance and attainment of objectives in any organization are the decisions relating to dividend. Dividend decisions are recognized as centrally important because of increasingly significant role of finances in the firm’s overall growth strategy. The objective of the finance manager should be to find out an optimal dividend policy that will enhance value of the firm. It is often argued that the share prices of a firm tend to be reduced whenever there is a reduction in the dividend payments. Announcements of dividend increases generate abnormal positive security returns, and announcements of dividend decreases generate abnormal negative security returns. A drop in share prices occur because dividends have signaling effect. According to the signaling effect mangers have private and superior information about future prospects and choose a dividend level to signal that private information. Such a calculation, on the part of the management of the firm may lead to a stable dividend payout ratio.

Dividend policy of a firm has implication for investors, mangers and lenders and other stakeholders (more specifically the claimholders). For investors, dividends- whether declared today or accumulated the provided at a later date are not only a means of regular income, but also an important input in valuation of a firm. Similarly, managers’ flexibility to invest in projects is also dependent on the amount of dividend that they can offer to shareholders as more dividend may mean fewer funds available for investment. Lenders may also have interest

in the amount of dividend a firm declares, as more the dividend paid less would be the amount available for servicing and redemption of their claims. The dividend payments present an example of the classic agency situation as its impact is borne by various claimholders. Accordingly dividend policy can be used as a mechanism to reduce agency costs. The payment of dividend reduces the discretionary funds available to managers for perquisite consumption and investment opportunities and require managers to seek financing in capital markets. This monitoring by external capital markets may encourage the managers to be more disciplined and act in owners’ best interest.

Companies generally prefer a stable dividend payout ratio because the shareholders expect it and reveal a preference for it. Shareholders may want a stable rate of dividend payment for a variety of reasons. Risk averse shareholders would be willing to invests only in those companies which pay high current returns on shares. The class of investors, which includes pensioners and other small savers, are partly or fully dependent on dividend to meet their day-to-day needs. Similarly, educational institutions and charity firms prefer stable dividends, because they will not be able to carry on their current operations otherwise. Such investors would therefore, prefer companies, which pay a regular dividend every year. This clustering of stockholders in companies with dividend policies that match their preference is called clientele effect.

In an ever increasing Indian economy, globalization, liberalization and privatization together with rapid strides made by information technology, have brought intense competition in every field of activity. so Indian companies at present are dazed confused, and apprehensive. to maintain the competiveness of , and value to the companies, today’s finance manager have to make critical business and financial decisions which will lead to long –run perspective with the objective of maximizing the shareholder’s wealth. shareholders wealth is represented in the market price of the company’s common stock, which, in turn is the function of the company’s investment, financing and dividend decision. management’s primary goal is shareholders wealth maximization. which translate in to maximizing the value of the company as measured by the price of the company’s common stock. shareholders like cash dividends ,but they also like the growth in EPS that result from ploughing earning back in to the business. The optimal dividend policy is one that maximizes the company’s stock price which leads to maximization of shareholders wealth and there by ensures more rapid economic growth. the present study is intended to study how far the dividend payout has impact on the value of the firm in general: and in particular to study the relationship between the firms value and dividend payout to analyze whether the level of dividend payout affects to the wealth of the shareholders

The dividend decision of the firm is the crucial area of financial management. the important aspect of dividend policy is to determine the amount of earnings to be retained and the amount to be distributed to shareholders retained earnings are most significant internal source of

financing .on the other hand, dividends may be considered desirable from shareholders point of view as they tend to increase their current return. during the first part of the 20 th century, dividends were the primary reason investors purchased stocks .it was literally said, “the purpose of the company is to pay dividends’ today the investors view is a bit more refined; it could be stated , instead ,as, “the purpose of a company is to increase my wealth. ”indeed, today’s investor looks to dividends and capital gains as a source of increase.

The objective of any dividend policy should be to increase the shareholders returns so that the value of his investment is maximized. shareholders return has two components; dividend and capital gains. there are many reasons for paying dividends and there are many reasons for not paying dividends. As a result, “dividend policies controversial. A higher payout of dividend means lower retained earnings which may affect the growth of the firm and perhaps a lower market price per share. the decisions became more critical than their exists and investment opportunity to the firm. if the profits earned is distributed to investors then the retained earnings to that extent will be reduced which will result in increase in debt to finance the investment opportunity. on the other hand the investments requirement must be satisfied by providing the optimal dividend. All these factors which go through the minds of shareholders will be reflected in the market price of the shares. The dividend decision is very vital to any organization.

2.1 BACKGROUND OF THE STUDY

How share prices differ from each other? To what extent financial decisions of the management have a bearing on the shareholder’s wealth? These are some of the several arose in the minds of investors and other stakeholder of the firm. No matter what type of industry, growth prospective ,capital structure etc.. of a firm the ultimate objective is maximizing the shareholder’s wealth. shareholders wealth is the total value of the firm being the final goal, all the decisions of the management is directed towards it. The next question arises is how to value of these decisions. it is always believed that the market value of the share reflects the emotion and exactions of the investors to each and every decision the management takes.

The major decision of financial management is dividend decision, in the sense that the firm has to choose between distributing the profit to the shareholders and ploughing back the profits in the business. the choice would obviously hinge on the affect of the decision on the maximization of shareholders wealth. given these objectives firm should guide by the consideration has to which alternative use is consistent with the goal of wealth maximization. Affirm will be well advised to distribute the net profits of dividends in such a distribution results in maximizing the shareholders’ wealth; if not it would be better to plough back the profits in

the business for future investments on growth. there are however conflicting view regarding impact of dividend on the value of the firm. on the relationship between the dividend policy and value of the firm different theories have been advanced .one school of thought treats it as relevant and other is irrelevant. there are two extreme views that are; a) dividends are good as it increases the shareholders value; b)dividends are bad as it decreases the shareholders value. the crux of the arguments is whether to distribute the earnings or retained earnings.

Another point financial decision is capital structure decision. under normal conditions the earnings per share increases when the leverage is more. more debt or leverage also increases the risk of a firm. thus it cannot be clearly said whether the value of the firm, the capital structure or leverage, decision should be examined from the point of view of its impact if the capital structure affects the value of the firm, then every firm will try achieve the optimal capital structure which maximizes the value of the firm. there exists conflicting theories on the relation between the capital structure and the value of the firm. Thus there exists a research gap and the purpose of the current study is therefore to describe whether the dividend decisions really influence the value of the firm or not. in the study an attempt has also been made to understand the relationship between the capital structure and value of the firm.

2.2 REVIEW OF LITERATURE

A dividend is a part of a corporation’s cash flow that is distributed to its owners. A corporation can do several things with its free cash flow. company’s can take their cash flows and save it, reinvest it, purchase their own stock, payback that, and/or pay it out to its shareholders in the form of dividends.

Previous empirical studies have focused mainly on developed economies the study undertaken looks at the issue from emerging markets perspective by focusing exclusively on Indian information technology, FMCG and service sector. Respectively. The major objective of his research is to empirically examine rationale for stable dividend payments by finding the applicability of Lintner model in Indian scenario. The present research work also seeks to examine and identify the relative importance of some of known determinants of dividend policy in Indian context. the research work also has made an endeavor to bring to light the influence of ownership groups of a company on dividend payout behavior of a firm. This research tries to unfold the relationship between the shareholders wealth and the dividend payout and analyze whether the dividend payout announcements affects the wealth of the shareholders.

Given the diversity in corporate objectives and environments, it is conceivable to have divergent dividend policies that are specific to firms, industries, markets or regions. through the

research an attempt has been made to suggest how dividend policy can be set at micro level. finance mangers would be able to examine how the various market frictions such as a symmetric information, agency, costs, taxes, and transaction costs affect their firms, as well as their current claimholders, to arrive at reasonable dividend policies. Previous research studies have focused on dividend payment pattern and policies of developed markets, which may not hold trye of emerging markets like India. In Indian context, few studies have analyzed the dividend behavior of corporate firms and focused on Indian cotton textile industry and manufacturing sector. However, it is still not apparent what the dividend behavior of corporate firms in India is. very few studies have analyzed the dividend behavior of corporate firms in the Indian context . to date, most studies have paid attention on influence of cash flows or earnings on the dividend payment of a firm.

RELEVANCE OF DIVIDENDS

T hese approach supports that the value of the firm is affected by the dividend policy and optimal dividend policy is the one, which maximizes the firms value. These variable consider dividend decisions to be an active variable n determining the value of a firm, two famous models in support of these are explained below.

Walters Model (James and Walter,1963)

Walter model supports that the dividend policy of the firm is relevant. the investment policy of the management cannot be separated from its dividend policy and both are interrelated. thus the choice of dividend policy does affect the value of the firm. Walter model is built around assumptions such as constant return, constant cost of capital, constant earning and dividend. he also made an assumption that financing of new investment is done through retained earnings and debt and no new equity shares are being issued.

Walter in his argument explains three situations

. if the return on investment exceeds the cost of capital then the firm has to retain the earnings and should not be distributed as dividends.

. if the cost of capital exceeds the return on investment then the firm has to pay entire earning as dividend.

. if the return on investment and the cost of capital is same then rate of dividend payout can be 0 to 100

According to this model if the firm retain the earnings it gives a single that the investment opportunities are more and it increases the shares prices. Similarly when the firm distributes the entire earnings as dividends, share prices will automatically increase, as the income on the shares are more. The Walter model is criticized on the unrealistic assumptions on which it is made such as no debt financing ,constant return, cost of capital and earnings etc…are not practically possible.

Gordon Model (Gordon Myron j,1962)

Myron Gordon (1962) came up with a dividend relevance model which is popularly known as the “bird in the argument”. The crux of the argument is that the

. Investors are risk averse and

. They put a premium on the “certain” return and discount or penalize the “uncertain” returns.

Gordon says that the current dividends are certain and the reinvestment of current dividend for future returns is uncertain. Thus the investors would be inclined to pay higher prices of shares on which dividends are post pond.ths model is based on the belief that a bird in the hand worth two in the bush. Thus incorporating the uncertainty in to the model Gordon concludes that the dividend policy affects the value of the firm. his model, justifies the behavior of investors who value a rupee of dividend income more than a rupee of capital gains. However this model is also not free of criticism because of the assumptions on which it is based.

CAPITAL STRUCTURE vs. FIRM’S VALUE

The two principal sources of finance for a company are equity and debt. What should be the proportion of equity and debt in the capital structure of the firm? One of the key issues in the capital structure decision is the relationship between the capital structure and the value of the firm. There are several views on how this decision affects the value of the firm.

Optimal capital structure Theory

Optimal capital structure theory of Modigliani-Miller (1958) suggest there exist optimal leverage at which the firm obtains a maximum value by minimizing its weighted leverage costs

of capital, given the market imperfections and tax deductibility of interest costs from pre-tax income firms. The proposition asserts that the value of the firm with tax-deductible interest is equal to the value of an all-equity firm as enhanced by the tax savings. According to this approach, the capital structure decision of a firm is irrelevant. This approach supports the NOI approach and provides a behavior justification for it. This approach indicates that the capital structure is irrelevant because of the arbitrage process which will correct any imbalance i.e expectations will change and a stage will be reached where further arbitrage is not possible.

Durand D (1959) identified two views; Net income approach and Net operating approach. Under the net income approach the cost of debt equity are assumed to be independent to the capital structure . this approach says that the weighted average cost of capital of the firm declines and the total value of the firm rise with increased use of leverage. Under the net operating income approach, the cost of the equity is assumed to increase linearly with leverage. As a result, the weighted average cost of capital remains constant and the total value of the firm also remains constant as the leverage is changed.

Davidson N W,(1994) in their report on “the effect of firm and industry debt ratios on market value” analyzed 183 firms and studied the effect of debt ratios to the market value of the firm. Overall conclusion of the study is that the relationship of the firm’s debt level and that of its industry does not appear to be of concern to the market. Arsiraphoongphisit O and Ariff M(2003) in their report on “optimal capital structure and firm value an Australian evidence,1991-2003” (corporate finance) analyzed 654 observations for a period of 1991 to 2003 in Australia market on the effect of capital structure change and firm’s value. The findings indicate that the market reacts positively to announcements of financing that lead to capital structure moving closer to their relative industrial debt-equity ratio has an impact on market value of the firm.

From an overall review of the literature it is clear that there exist certainly a contradicting view on the impact of the dividend policy on the value of the firm.

The studies on the effect of debt equity combination on share price show that the relationship is almost zero. But theoretically as the debt increases because of the tax shield available the earnings must also increase in earnings always increase the market price of the shares. Thus we can see that there exists a knowledge gap in the subject.

To examine whether the dividend policies has any impoact on the stock reaction

To explain the dividend distribution/retention and the debt equity patterns of the samples.

To understand the relationship between the dividend policies of the company and the value of the firm.

To study the effect of capital structure decisions on the value of the firm.

2.3 DIFFERENT TYPES OF DIVIDEND POLICIES

7) REGULAR DIVIDEND

By dividend we mean regular dividend paid annually, proposed by the board of directors and approved by the shareholders in general meeting. it is also known as final dividend because it is usually paid after the finalization of accounts it is generally paid in cash as a percentage of paid up capital, say 10% or 15% of the capital. sometimes, it is paid per share. No dividend is paid on calls in advance or calls in arrears, the company is, authorized to make provisions in Articles prohibiting the payment of dividend on shares having calls in arrears.

8) INTERIM DIVIDEND

If articles so permit, the directors may decide to pay dividend at any time between the two annual general meeting before finalizing the accounts. It is generally declared and paid when company has earned heavy profits or abnormal profits during the year and directors which to pay the profits to shareholders. Such payment of dividend in between the two annual general meeting before finalizing the accounts is called interim dividend. No interim dividend can be declared or paid unless depreciation for the full year (not proportionately) has been provided for. It is, thus, an extra dividend paid the year requiring no need of approval of the annual general meeting. It is paid in cash.

9) STOCK DIVIDEND

Companies , not having good cash position, generally pay dividend in the form of shares by capitalizing the profits of current year and of past years. Such shares are issued instead of paying dividend in cash and called “Bonus shares”. Basically there is no change in the equity of shareholders. Certain guidelines have been used by the company Law Board in respect of Bonus shares.

10) SCRIP DIVIDEND

Scrip dividends are used when earnings justify a dividend, but the cash position of the company is temporarily weak. So, shareholders are issued shares and debentures of other companies. Such payment of dividend is called scrip dividend. Shareholders generally do not like such

dividend because the shares or debentures , so paid are worthless for the shareholders as directors would use only such investment is which were not. Such dividend was allowed before passing of the companies (Amendment) Act 1960, but there after this unhealthy ptactice was stopped.

11) BOND DIVIDEND

In rare instances, dividends are paid in the form of debentures or bonds or notes for a long term period. The effect of such dividend is the same as that of paying dividend in scrip. The shareholders become the secured creditors are the bonds has a lien on assets.

12) PROPERTY DIVIDEND

Sometimes, dividend is paid in the form of assets instead of payment of dividend in cash. The distribution of dividend is made whenever the assets is no longer required in the business such as investment or stock of finished goods.

2.4 FACTORS EFFECTING DIVIDEND POLICY .

16. STABILITY OF EARNINGS.

The nature of business has an important bearing on the dividend policy. Industrial units having stability of earnings may formulate a more consistent dividend policy than those having an uneven flow of incomes because they can predict easily their savings and earnings. Usually, enterprises dealing in necessities suffer less from oscillating earnings than those dealing in luxuries or fancy goods.

17. AGE OF CORPORATION.

Age of the corporation counts much in deciding the dividend policy. A newly established company may require much of its earnings for expansion and plant improvement and may adopt a rigid dividend policy while, on the other hand, an older company can formulate a clear cut and more consistent policy regarding dividend.

18. LIQUIDITY OF FUNDS.

Availability of cash and sound financial position is also an important factor in dividend decisions. A dividend represents a cash outflow, the greater the funds the liquidity of the firm

the better the ability to pay dividend. The liquidity of a firm depends very much on the investment and financial decisions of the firm which in turn determines the rate of expansion and the manner of financing. If cash position is weak, stock dividend will be distributed and if cash position is good, company can distribute the cash dividend.

19. EXTENT OF SHARE DISTRIBUTION.

Nature of ownership also affects the dividend decisions. A closely held company is likely to get the assent of the shareholders for the suspension of dividend or for following a conservative dividend policy. On the other hand, a company having a good number of shareholders widely distributed and forming low or medium income group would face a great difficulty in securing such assent because they will emphasize to distribute higher dividend

20. NEEDS FOR ADDITIONAL CAPITAL.

Companies retain a part of their profits for strengthening their financial position. The income may be conserved for meeting the increased requirements of working capital or of future expansion. small companies usually find difficulties in raising finance for their needs of increased working capital for expansion Programs. They having no other alternative, use their ploughed back profits. Thus, such companies distribute dividend at low rates and retain a big part of profits.

21. TRADE CYCLES

Business cycles also exercise influence upon dividend policy. Dividend policy is adjusted according to the business oscillations. During the boom, prudent management creates food reserves for contingencies which follow the inflationary period. Higher rates of dividend can be used as a tool for marketing the securities in an otherwise depressed market. The financial solvency can be proved and maintained by the companies in dull years if the adequate reserves have been built up.

22. GOVERNMENT POLICIES.

The earnings capacity of the enterprise is widely affected by the change in fiscal, industrial, labor, control and other government policies. Sometimes government restricts the distributon of dividend beyond a certain percentage in a particular industry or in all spheres of business activity as was done in emergency. The dividend policy has to be modified or formulated accordingly in those enterprises.

23. TAXATION POLICY.

High taxation reduces the earnings of the companies and consequently the rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of dividend beyond a certain limit. It also affects the capital formation. N India, dividends beyond 10% of paid –up capital are subject to dividend tax at 7.5%.

24. LEGAL REQUIREMENTS.

In deciding on the dividend, the directors take the legal requirement too into consideration. In order to protect the interests of creditors an outsiders, the companies Act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend. Moreover , a company is required to provide for depreciation on its fixed and tangible assets before declaring dividend on shares. It proposes that dividend should not be distributed out of capital, in any case. Likewise, contractual obligation should also be fulfilled. For example, payment of dividend on preference shares in priority over ordinary dividend

25. PAST DIVIDEND RATES.

While formulating the dividend policy, the directors must keep in mind the dividend paid in past years. The current rate should be around the average past rat. if it has been abnormally increased the shares will be subjected to speculation, in a new concern, the company should consider the dividend the dividend policy of the rival organization.

26. ABILITY TO BORROW.

Well established and large firms have better access to the capital market than the new companies and may borrow funds from the external sources if there arises any need. Such companies may have a better dividend pay-out ratio. Whereas smaller firms have to depend on their internal sources and therefore they will have to built up good reserves by reducing the dividend payout ratio for meeting any obligation requiring heavy funds.

27. POLICY OF CONTROL.

Policy of control is another determining factor is so far as dividends are concerned. If the directors want to have control on company, they would not like to add new shareholders and therefore, declare a dividend at low rate. Because by adding new shareholders they fear dilution of control and diversion of policies and programs of the existing management. So they prefer to meet the needs through retained earnings. If the directors do not bother about the control of affairs they will follow a liberal dividend policy. Thus control is an influencing factor in framing the dividend policy.

28. REPAYMENTS OF LOAN.

A company having loan indebtedness are vowed to a high rate of retention earnings, unless one other arrangements are made for the redemption of debt on maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly institutional lenders) put restrictions on the dividend distribution still such time their loan is outstanding. Formal loan contracts generally provide a certain standard of liquidity and solvency to be maintained. Management is bound to hour such restrictions and to limit the rate of dividend payout.

29. TIME FOR PAYMENT OF DIVIDEND.

When should the dividend be paid is another consideration. Payment of dividend means outflow of cash. It is, therefore, desirable to distribute dividend at a time when is least needed by the company because there are peak times as well as lean periods of expenditure. Wise management should plan the payment of dividend in such a manner that there is no cash outflow at a time when the undertaking is already in need of urgent finances.

30. REGULARITY AND STABILITY IN DIVIDEND PAYMENT.

Dividends should be paid regularly because each investor is interested in the regular payment of dividend. The management should, in spite of regular payment of dividend, consider that the rate of dividend should be all the most constant. for this purpose sometimes companies maintain dividend equalization in funds.

MAJOR PLAYERS

The major players in this study are of 25 companies as follows;

Associated Cement Company Ltd.

Bajaj Auto Ltd.

Cipla Ltd.

Dr.Reddy’s Lab Ltd.

Grasim Industries Ltd.

Ambuja Cement Ltd.

HDFC

Hero Honda Ltd.

Hindalco Ltd.

Hindustan Unilever Ltd.

Infosys Technology Ltd.

Ranbaxy Laboratories Ltd.

Reliance Energy Ltd.

Reliance Industries Ltd.

Tata Motors Ltd.

Tata Power Ltd.

Wipro Ltd.

ABB Ltd.

Bharat Petroleum Corporation Ltd.

Britannia Industries Ltd.

Colgate-Palmolive Ltd.

Mahindra & Mahindra Ltd.

Steel Authority of India Ltd.

Mahanagar Telecom Nigam Ltd.

2.5 OPERATIONAL DEFINITIONS CONCEPTS

7. DIVIDEND PAYOUT RATIO

A ratio showing the percentage of net profits paid out in dividends on common stock,after reducing net profits by the amount of dividends paid on preferred stock.it calculated as the

percentage of dividend paid on profit after tax. In this study dividend payout ratio is expressed as the ratio of dividend paid to the net profit after tax.

=yearly dividend per share/Earnings per share

Or equivalent:

=Dividend/Net income

8. RETENTION RATIOS

Retention ratio shows the rate of earnings retained by the company for financing the investments needs. Retained earnings are the main internal source of finance for the company. This explains to what extent the earnings of the firm are ploughing back to the business. Technically it is one minus the dividend paid out ratio.

Retention ratio=1-D/P Ratio

9. DEBT EQUITY RATIO

Debt equity shows capital structure of the firm. This represents the capital structure of the company. It is defined as the ratio of debt to equity of the firm.

10. RETURN ON SHARES

Return on shares is calculated by dividend the previous year’s price from the current year price and the log natural of the resultant figure is calculated as it gives a continuously compounded rate of return.

Ln (P1/Po)

11. VALUE OF THE FIRM

The effect on the value of the firm is analyzed by studying the return on equity shares. Return on equity shares=P1/P0, where P1 is the market price of equity share for current year and Po is the market price of the equity share of the equity share for previous year.

12. DIVIDEND COVERAGE RATIO

The ratio between a company’s earnings and net dividend paid to shareholders- known as dividend coverage- remains a well-used for measuring whether earnings are sufficient to cover dividend obligation. The ratio is calculated as earnings per share dividend by the dividend per

share. When coverage is getting thin, odds are good that there will be a dividend cut, which can have a dire impact on valuation. Investors can feel safe a coverage ratio of 2 or 3. In practice, the coverage ratio becomes a pressing indicator when coverage slips below 1.5, at which point prospects start to look risky. If the ratio is under 1, the company is using its retained earnings from last year to pay this year’s dividend.

KEY TERMS

DIVIDEND POLICY; The policy a company uses to decide how much it will pay out to shareholders in dividends.

SHAREHOLDER’S VALUE: The value delivered to shareholders because of management’s ability to grow earnings, dividends and share price. In other words, shareholder value is the sum of all strategic decisions that affect the firm’s ability to efficiently increase the amount of free cash flow over time.

LINTNER MODEL: A model stating that dividend policy has two parameters(1) the target payout ratio and (2) the speed at which current dividends adjust to the target.

AGENCY COST: A type of internal cost that arises from, or must be paid to, an agent acting on behalf of a principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish for Management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of Shareholders.

DIVIDEND SMOOTHING: A concept that has its genesis in the dividend model proposed by John Lintner (1956). It states that the firms strive towards dividend stability and consistency .the dividend paid during current year is governed by dividend paid during previous year and variations in the earnings should not be reflected in the dividend payout.

INFORMATION ASSYMETRY: A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party’s lack of knowledge.

EVENT STUDY: An empirical study performed on a security that has experienced a significant catalyst occurrence, and has subsequently changed dramatically in value as a result of that catalyst. The event can have either a positive or negative effect on the value of the security.

Event studies can reveal important information about how a security is likely to react to a given event, and can help predict how other securities are likely to react to different events.

PECKING ORDER HYPOTHESIS: This hypothesis states that a company which prefers retention of profits for financing the capital expenditure from internal resources distributes fewer dividends compared to a firm which finances the investment expenditure from external sources. Thus, a negative relationship exists between CAPEX and dividend payout.

ENTRENCHMENT HYPOTHESIS: The hypothesis suggests a inverted U shaped relationship between dividends and level of insider ownership. Dividend may act as a substitute for corporate governance below the entrenchment level insider ownership leading to a negative relationship between these two variables. After such critical entrenchment level, however, when insider ownership increases are associated with additional entrenchment related agency costs, dividend policy may become a compensating monitoring force and accordingly a positive relationship with insider ownership would be observed.

DIVIDEND SIGNALING: A theory that suggests company announcements of an increase in dividend payouts act as an indicator of the firm possessing strong future prospects. The rationale behind dividend signaling models stems from game theory. A manager who has good investment opportunities is more likely to “signal” than one who doesn’t because it is in his or her best interest to do so.

ABNORMAL RETURNS: A term used to describe the returns generated by a given security or portfolio over a period of time that is different from the expected rate of return. The expected rate of return is the estimated return based on an asset pricing model, using a long run historical average or multiple valuations.

FACTOR ANALYSIS: Factor analysis is a statistical procedure used to uncover relationships among many variables. This allows numerous inter-correlated variables to be condensed into fewer dimensions, called factors.

PANEL DATA: Panel data is data from a (usually small)number of observations over time on a (usually large) number of cross- sectional units like individuals, households, firms, or government.

MULTIPLE REGRESSION ANALYSIS: Statistical procedure that attempts to assess the relationship between a dependent variable and two or more independent variables. Example: sales of a popular soft drink(the dependent variable) is a function of various factors, such as its price, advertising, taste, and the prices of its major competitors(the independent variables)

CHAPTER 2 TITLE OF THE PROJECT:

A CRITICAL ANALYSIS ON THE IMPACT OF DIVIDEND POLICY ON THE VALUE OF THE FIRM.

STATEMENT OF THE PROBLEM

There exist conflicting views with regard to the impact of dividend decisions on the value of the firm. Some are of the opinion that dividends do affect the market price of the shares while other argues it does not. Thus there exists a knowledge gap. There search problem under consideration is as follows. to what extent does the dividend decision affect the value of the widely held public limited companies in India?

OBJECTIVES OF THE STUDY

To find the extent to which the debt equity ratio affects the share prices.

To find out whether decisions affect the share prices.

SCOPE OF THE STUDY.

In this study an attempt is made to understand increase or decrease in the share price due to the difference payout ratios. Here the ratios such as dividend payout, retention ratio, debt equity ratios, and return on the shares are studied. The findings of the study can be used to understand the influence of dividend decisions and capital structure on the value of the firm

METHODOLOGY

The methodology is the major phase of research in which the investigator makes a number of decisions about the methods and materials to be used to study the research problem , basically through collection of data. The methodological decision generally has control implications for the validity of the findings.

3.1 TYPE OF RESEARCH

Type of research is Descriptive research, which is Quantitative in nature.

3.2 STUDY SETTING

* Indian public Limited companies.

* The equity shares of companies are traded in Indian stock exchanges. (BSE&NSE)

3.3 POPULATION

A population is a group whose members possess specific characteristics that a researcher is interested in studying. In this study the population includes all widely held public companies whose shares are publically traded through a stock exchange.

3.4 SAMPLING FRAME WORK

This study includes analysis of public limited companies, which are listed in Bombay stock exchange and national stock exchange of India.

3.5 SAMPLING TECHNIQUE

A sample is a portion of the population that has been selected to represent the population of interest. Here in this study 25 companies are selected which are listed in Bombay stock exchange and National stock exchange, India. Sampling technique used here is convenient sampling.

3.6 HYPOTHESIS

Ho: Dividend policies do not affect the value of the firm

H1: Dividend policies do affect the value of the firm.

3.7 SAMPLE

The sample size is 25 companies listed in BSE and NSE. The companies studied are the followings.

Associated Cement Company Ltd.

Bajaj Auto Ltd.

Cipla Ltd.

Dr.Reddy’s Lab Ltd.

Grasim Industries Ltd.

Ambuja Cement Ltd.

HDFC

Hero Honda Ltd.

Hindalco Ltd.

Hindustan Unilever Ltd.

Infosys Technology Ltd.

Ranbaxy Laboratories Ltd.

Reliance Energy Ltd.

Reliance Industries Ltd.

Tata Motors Ltd.

Tata Power Ltd.

Wipro Ltd.

ABB Ltd.

Bharat Petroleum Corporation Ltd.

Britannia Industries Ltd.

Colgate-Palmolive Ltd.

Mahindra & Mahindra Ltd.

Steel Authority of India Ltd.

Mahanagar Telecom Nigam Ltd.

The shares of the above companies are commonly traded in the stock exchange for the period under study i.e,; 2000/01-2009/10

3.8 DATA COLLECTION

Secondary Data

Income statement of companies under study

Balance sheet

Historical stock prices

Data obtained

Figures and facts

Unclassified raw data

3.9 Method of data collection and steps

The data required for the study has been collected from the data base maintained in the Bangalore Stock Exchange, Bangalore and from the data base of the Bombay stock Exchange and National stock Exchange through their web sites. The raw data collected were converted in to the ratios and classified according to the requirement of the study.

3.10 STATISTICAL ANALYSIS

Descriptive statistical is used to describe the pattern of dividend payout, Debt equity and the return on shares.

Five Year Moving Average is used to estimate the expected Dividend payout, Retention Ratio of the successive years. This approach is used to estimate the values incorporating its behavior for the past five years.

Expected Value for the year 6=(Y5+Y4 +Y3+ Y2+Y1)/5

Statistical model used: the model used here is multiple-regression model.

The regression equation for the study is as under.

Y=a+b1X1+b2X2

A=Y-intercept

Y=Actual Return on Equity (For the year)

X1=Expected Debt-Equity Ratio(Moving Average for five years)

X2=Expected Dividend payout(moving average for five years)

B 1&b2=slopes associated with X1 and X2

Normal equation used is

For cross sectional regression analysis the above variables X1 and X2 for ten years are converted into five year moving averages. For time series analysis the actual data for the years are taken. As there exist high correlation between the dividend payout and retention ratio there will be Multi Co-linearly effect on the regression analysis to avoid this retention ratio is not included in the regression model . “t” test significance at 5% level is used to accept or reject the hypothesis.

R- square (R^2) is the proportion of variation in the dependent variable(Y) that can be explained by the predictors (X variables) in the regression model. As predictors (X variables) are added to the model, each predictor will explain some of the variance in the dependent variable(Y) simply due to chance. One could continue to add predictors to the model which would continue to improve the ability of the predictors to explain the dependent variable, although some of this

increase in R- square would be simply due to chance variation. The adjusted R-square attempts to yield a more honest value to estimate R- square. Adjusted R-square is computed using the formula 1-(1-R^2)*(N-1)/(N-K-1)

The F statistic or the F-observed value is used to determine whether the observed relationship between the dependent and independent variables occurs by chance.

3.11 LIMITATIONS OF THE STUDY.

1. The sampling technique used is a convenient sampling technique, which limits the generalization of the findings.

2. the time span for the study was short and hence only major aspects are considered.

CHAPTER 3

ANALYSIS AND INTERPRETATION OF DATA.

CHAPTER 4

FINDINGS , RECOMMENDATIONS AND CONCLUSSIONS

SUMMARY AND FINDINGS

The study started with reviewing the previous research papers explaining the impact of the dividend decisions on the value of the firm. Among them the most popular research paper is that of Modigliani and Miller. It proves that dividend is irrelevant. As against this theory Walter and Gordon through their model explained that dividend is very relevant. Here the study focused on finding out whether dividend affects the value of the firm or not.

Through convenient sampling 25 Indian Public Limited companies actual data were analyzed. Here under the study the effect on the return on equity is considered as an attempt is made to establish the relationship between the return on equity & debt and dividend of the companies selected for the study. Here the expected values of the dividend payout and debt to equity are regressed with actual return to find out the association, if any.

The results of the study show that the impact of the dividend on the value of the firm is not significant. Out of the 25 sample companies studied only two companies showed a significant association between the dividend and the return on equity. Where as none of the company showed any evidence of significant relation between debt and return on shares. thus it can be observed that in cross sectional analysis of the companies the return on equity shares does not show any significant relationship with debt equity and dividend payout. But in case of company wise time series analysis certain companies as explained above ,shows relationship between the variables. thus we infer that investor do not give importance to capital structure and the dividend policy of the companies as a whole. they give importance of the structure of selected companies.

FINDINGS OF THE STUDY

CROSS SECTIONAL REGRESSION ANALYSIS

The results of the cross regression for the five years from 2007/2008 to 2012/2013(Table no.16) show that for the selected samples there is no evidence of any significant relationship between Return and Equity &the debt equity ratio and dividend payout.

TIME SERIES REGRESSION ANALYSIS

The results of the time series Regression for five year data(2007/2008 to 2012/2013)as per the Table no.II26 shows that there does not exist any significance relationship between the Return on equity and debt equity and dividend payout other than for the following.

Samples:

BAJAJ AUTO LTD;

The regression analysis shows that the “t” value calculated for the variable X2.i.e; dividend payout ratio is 2.499. thus shows that it is significance at 5% level. The coefficient of the variable of dividend payout ratio (b2) is 4.52; it also shows that to Bajaj Auto Ltd. There exist a significant relationship between the Return on equity and capital structure.

WIPRO ;

This sample also shows that there exist a significant relationship between the return on the equity and the dividend payout ratio. The “t” calculated value is 66.645 and the coefficient is 0.094, for dividend payout ratio.

Hypothesis Testing

H0; Dividend policies do not affect the value of the firm.

H1; Dividend policies do affect the value of the firm.

The hypothesis is tested by using “t” test significant at 5%. The cross regression results as per table N0 16 show the “t” value calculated for the period of analysis i.e 2007/2008 to 2012/2013. It can be seen that the ”t” values calculated show no significance relationship between the return on equity & dividend payout. The time series regression results as per table N0.II26 shows the “t” value calculated for each share prices and h sample for five years(2007/2008 to 2012/2013). Here also there is no evidence of relationship between return on equity share prices and dividend payout. Thus at 5% level of significance using “t” tests HO IS ACCEPTED, which implies there is no effect.

DIVIDEND AND DEBT PATTERNS

The descriptive cross sectional tables and time series tables explain the trend in the various ratios of the companies under study for the various periods. Software companies such as Infosys Technologies Ltd. Pay comparatively very low rate of dividend and most of the earnings are retained for investment in the business where as Wipro pay high rate dividend. FMCG companies like Hindustan Lever Ltd, and Colgate Palmolive Ltd. Pay high rate of dividend and retained earnings are less, it shows that the investment opportunities in this sector shows a decreasing trend and the growth rate is limited. The cement industries like Ambuja cement pay very less dividend and earnings are retained in business. The dividend payout of the Automobile companies under study ranges from 25 to 1. The pharmaceutical companies under study have a dividend of less than 0.5 the payout ratios are almost consistent for each company in this group. It has more growth prospective, as the retention ratio is high.

RECOMMENDATIONS

The company may not be bother to borrow the debt to the market value of the share.

The dividend policy can be designed keeping the growth concept into consideration.

Software companies can improve debt equity ratio and bring into standard.

In the present scenario dividend impact on the firm is negligible; hence dividend payout ratio can be fixed based on the economic factor.

Software companies should be conscious while declaring the dividend as it has a big impact of market value of the firm.

CONCLUSION

The main objective of the study were

To find out whether decisions affect the share prices.

To find the extent to which the debt equity ratio affects the share prices.

To describe the companies under study in terms of their payout ratio, retention ratio and debt equity ratios.

The study was conducted in these stages

4. Collection of the required data namely the income statement, balance sheet and the share prices for ten years (2002-2012) of the samples under study.

5. Calculation and tabulation of the variables under study namely Dividend payout ratio, retention ratio, debt equity ratio and return on equity share prices.

6. Analysis and interpretation

The study was focused on finding the relationship existing between the dependent variable; return on equity share prices and the independent variables, dividend and debt equity ratio. The data were collected through verification of financial statement of the company and the historical price data available in the NSE and BSE websites. The data were interpreted using descriptive statistics and multiple Regression Analysis.

The salient findings of the study are;

There is no significant effect of dividend/retention and debt equity ratio on share prices.

Out of the variables under study it can be noticed that dividend and share prices does not have a notable relationship between each other.

Out of the sample under study the software companies showed a deviation from others by having least debt equity some even 0 for more than 5 years and least dividend payout ratio and still maintaining a good of return on share prices.

BIBLIOGRAPHY

BOOKS

Khan M Y and Jain P K(2004). “ FINANCIAL MANAGEMENT.” Tata McGraw Hill Publications, Bangalore, pp 259.

Prasanna Chandra,(2004) “ FINANCIAL MANAGEMENT.” Tata McGraw Hill Publications. Bangalore, pp 340

Gupta. S.P, (2001) ‘’ STATISTICAL METHODS. ’’ Sultan Chand & Sons, Bangalore, pp 340

Pandey I M (2000), ‘’ FINANCIAL MANAGEMENT’’. Vikas Publications pvt Ltd. Bangalore, pp 92.

WEBSITES

www.finance24.com

www.edelweiss.co.in

www.moneycontrol.com

www.yahoofinance.com

www.studyfinance.com

om