Imapct factor(SJIF): 5.889
Shareholder’s Wealth and Dividend Behavior: A Study with reference to Indian Auto Industry
Ranjit Kumar Paswan
Assistant Professor in Commerce
Asansol Girls' College
A Dividend is the distribution of a portion of company’s profit among the shareholders. A company when earns a profit or surplus, it can re-invest it in the business as retained earnings an pay a fraction of the earnings as a dividend to the shareholders. The shareholders get the amount of dividend in proportion to the amount paid on the shares held by them. The declaration of dividend protects the interest of the shareholders. The dividend policy not only creates the value for the enterprise but also maximize wealth of the shareholders. New investors always expecting stable dividend behavior of a company in which they are going to invest. In this paper an attempt has been made to examine the impact of dividend declaration on shareholders' wealth of selected auto industry in India. The study is conducted for a period of ten years started from 2008-09 to 2013-14. Relevant statistical tools and techniques have been applied to conduct the study.
Keyword: Dividend, Earnings, Auto Industry
Dividend policy occupies an important role in the financial management of an enterprise. It is more crucial decision making process in which amounts of earnings to be distributed t the shareholders is to be determined. Dividend is one of the components of the return expected by the shareholders. Therefore, it can be considered as the desirable from the viewpoint of shareholder as it increases their return. Dividends however, constitute the use of the firm’s funds. Dividend policy involves the balancing of the shareholders’ desire for current dividends and the firm’s need for funds for growth (Pandey, 2014). The ultimate choice would however, depend upon the effect of the decision on maximization of the value of the firm or that of its shares (Banerjee, 2002). The main objective of the firm should be to maximize shareholders’ return. When a firm operates successfully and generates cash inflows, then the firm can use the funds for making payment of dividends to its shareholders. Dividends are periodic cash payment by the company to its shareholders. For payment of dividends, company must earn distributable profits from which the actual payment of dividend will be made (Kishore, 2002). Payment of dividend involves outflow of cash. The cash generated from the operation can be affected by the financial decision. If the company decides to invest more in the capital expenditure then there will be less distributable profit available to the shareholders. In general the shareholders prefer to receive regular dividend. A firm’s dividend policy involves how much the amount of profit to be distributed and how much amount will be retained in business. Retained earnings provide employment of funds for a firm’s long term growth. Dividends are part of the return to equity investment so it is tempting to think that they are value for shareholders. Indeed, fundamental analysts once believed that higher payout meant higher value. But modern finance theory sees it differently. Dividends are not what they appear Penman (2014).
When dividend decision is treated as financing decision, the net earnings of the firm may be considered as a source of long-term funds. If the firm has no better investment opportunities then the firm will pay the dividend. The firm may prefer retained earnings than the external finance, as the cost of external financing is much higher than the retained earnings. Thus, retention and dividend payment are two sides of the same coin. If more and more profits are retained, the rate of dividend gets reduced. On the other hand payment of entire profit as dividend will have impact o the future growth of the firm. Thus, a balance between dividend distribution and retention is desirable for the interest of the firm. In this paper an attempt has been made to analyze the impact of dividend policy on the shareholders wealth of select Auto Companies in India.
Ramachandran and Packkirisamy (2010) revealed that dividend trend of previous year plays a vital role in determining the current year dividend payout. The author states that there are chances of reduction in dividend payout with increase in debt fund. Bawa and Kaur (2013) observed that there is significant difference in average market value relative to book value of equity between dividend payers and non payers of selected IT sector companies. It is also stated that dividend is considered as an important factor which determine the shareholders wealth. . Wet & Mpinda (2013) conducted study to examine the relationship between dividend payments and stock prices of selected companies listed in Johannesburg Securities Exchange and it was found that dividend payments have a significant positive relationship with shareholders’ wealth.
The study conducted by Ajanthan (2013) revealed that dividend payout has a significant impact on the profitability of listed firms in Sri Lanka. The firms which have financial strength they tend to positively affect the dividend payout level of firms. Further it was also observed that there is a significant positive relationship between revenue and the profitability of firms.
Yegon et. al. (2014) conducted study to investigate the impact of dividend policies on the financial performance of manufacturing companies in Kenya. It was observed that the dividend policies of organizations have a significant positive relationship with profitability, investments and EPS.
Chhatoi (2015) observed while declaring dividend the selected steel companies exercised precautionary measure. It is also asserted that the companies have maintained consistent EPS, DPS and DPR.
Objective of the Study
The main objective of the study is to find out the impact dividend policy on the shareholders wealth of select Auto Companies in India. The study also seeks to ascertain the relationship between the dividend policy and shareholders wealth.
Methodology and Data collection
The study is empirical in nature based on secondary data. Seven Auto Companies have been selected for the study. The study was conducted for a period of six years from 2008-09 to 2013-14. The data of the selected companies have been taken from the annual reports and accounts of the respective companies. For the purpose of the study Market Price Per Share (MPS) is taken as the dependant variable and Price Earnings Ratio (PER), Earnings Per Share (EPS), Dividend Per Share (DPS) and Retained Earnings (RE) have been considered as independent variable. For analyzing the data Correlation and Regression have been applied.
H01: There is no significant impact of dividend policy on the shareholders’ wealth
H01: There is no significant relationship between dividend policy and the shareholders’ wealth
Interpretation and Findings
Table 1: Descriptive Statistics
Source: Compiled from Annual Reports and Accounts
The above table shows the descriptive statistics of the variables taken with respect to dividend policy and shareholders’ wealth.
Table 2: Correlation Matrix
Source: Annual Reports and Accounts
The above table shows the correlation between the sample variables. The table shows that MPS is positively related with EPS, DPS and RE and has negative relation with PER. The above table states that MPS has a high degree of positive correlation with EPS, DPS and RE. PER has negative relationship with all other variables. EPS has a moderate degree of positive correlation with DPS and Retained Earnings. Whereas DPS has very low degree of positive relation with Retained Earnings.
Table 3: Multiple Regression
Source: Compiled from Annual Reports and Accounts
Table 3 shows the multiple regression test where MPS is taken as dependent variable and PER, EPS, DPS and RE are taken as independent variables.
The multiple correlation coefficients between the dependent and independent variables are 0.99. This indicates that there is high degree of positive relation between them. The coefficient of determination i.e. R2 is 99% which implies that only 99% of the variance in the dependent variable has been explained by the independent variable and the remaining 1% of the variation is due to other factors.
The table gives the regression coefficients and the constant of the dependent variables. Regression coefficient of Price Earnings Ratio (PER) at 2.33 indicates that when Price Earnings Ratio increases by 1% then the MPS increase by 233%. It means the companies have adequate market price per share. Regression coefficient of Earning Per Share (EPS) at 9.01 indicates that when the firm’s per equity share earnings increases by 1% then Market price per share will increase by 901%. Regression coefficient of Dividend Per Share (DPS) at 9.74 indicates that when Dividend Per Share (DPS) increases by 1% the MPS will decrease by 974%. Regression coefficient of Retained Earnings (RE) at 0.43 states that when Retained Earnings increases by 1% the MPS will decrease by 43%. From the table it is apparent that Null hypothesis is rejected as the calculated value of F (361.28) exceeds the tabulated value and hence it can be said that there is significant impact of dividend policy on the shareholders’ wealth.
The study has been conducted to examine the relationship between dividend policy and shareholders’ wealth of the Indian Auto industry. From the study it can be concluded that Earning Per Share (EPS), Dividend Per Share (DPS) and Retained Earnings (RE) have positive relationship with the Market Price Per Share (MPS) while Price Earnings Ratio (PER) has negative relationship. It is also concluded that there is significant impact of dividend policy on the shareholders’ wealth of the Indian Auto companies during the period of study. Apart from that there is positive relationship between the Dividend policy and the shareholders’ wealth.
Ajanthan, A. (June, 2013). The Relationship between Dividend Payout and Firm Profitability: A Study of Listed Hotels and Restaurant Companies in Sri Lanka. International Journal of Scientific and Research Publication , 1-6.
Banerjeee, B. (2002). Financil Policy and Management Accounting. Calcutta: The World Press Private Limited.
Bawa, S. K., & Kaur, P. (2013). Impact of Dividend Policy on Shareholders Wealth: An Empiricial Analysis of Indian Information Technology Sector. Asia Pacific Financie and Accounting Review , 17-24.
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial Management. Delhi: Cengage Learning India Private Limited.
Chandra, P. (2008). Financial Management. New Delhi: Tata McGraw-Hill.
Chhatoi, B. P. (July, 2015). A Study on Relation between Profitability and Dividend Payment in Iron and Steel Industries in India. Pacific Business Review International .
Dhagat, A. K. (2012). Financial Management. New Delhi: Dreamtech Press.
Khan, M. Y., & Jain, P. K. (2001). Financial Management. New Delhi: Tata McGraw Hill Publishing Company Limited.
Kishore, R. M. (2002). Financial Management. New Delhi: Taxmann Allied Services (P.) Ltd.
Pandey, I. M. (2014). Financial Management. New Delhi: Vikas Publishing House Pvt Ltd.
Penman, S. H. (2014). Financial Statement Analysis and Security Valuation. New Dewlhi: McGraw Hill Education (India) Pvt Ltd.
Ramachandran, A., & Packkirisamy, V. (2010). The Impact of Firm size on Dividend Behaviour: A Study with reference to Corporate Firms across Industries in India. Managing Global Transitions , 49-78.
Sinha, G. (2012). Financial Statement Analysis. New Delhi: PHI Learning Private Limited.
Subramanyam, K. R., & Wild, J. J. (2014). Financial Statement Analysis. New Delhi: McGraw Hill Education (India) Private Limited.
Wet, J. d., & Mpinda, M. (November, 2013). The Impact of Dividend Payments on Shareholders' Wealth: Evidence from the Vector Error Correction Model. International Business & Economics Research Journal , 1451-1466.
Yegon, C., Cheruiyot, J., & Sang, J. (2014). Effects of Dividend Policy on Firm's Financial Performance: Econometric Analysis of Listed Manufacturing Firms in Kenya. Research Journal of Finance and Accounting , 136-144.
Pacific Institute of Management, Pacific Hills, Airport Road, Udaipur - 313001,