Effect of dividend policy on share

Since board directors know the most about the company, the positive signals it sends should be viewed by investors as a reason to buy shares and thus raise share prices. While the dividend history of a given stock plays a general role in its popularity, the declaration and payment of dividends also has a specific and predictable effect on market prices.

DPS can be calculated by subtracting the special dividends from the sum of all dividends over one year, and dividing this figure by the outstanding shares. Dividend Discount Model The dividend discount model posits that the current stock price is equal to the present value of all future dividend payments.

It is the belief of this researcher therefore that results got from this study will go a long way to influence business managers in designing their dividend policy and shareholders response to share market price.

Despite the seemingly complex nature of the market, most activity truly boils down to the cumulative effect of investors trying to predict what their peers are thinking.

The Effects of Dividend Policies on Stock Prices

Empirical evidence, while not uniform, does suggest that higher dividends raise stock prices, while dividend cuts hurt prices.

There have been theories on the variable that influences the market price of a share more than the other between dividend rate and retained earnings. Therefore appropriate balance has to be maintained so as to satisfy the two conflicting interest.

Ho -Dividend policy does not affect market price of share more than retained earnings. To use this model, the company must pay a dividend and that dividend must grow at a regular rate over the long-term.

Thus, higher dividends translate directly into higher stock prices. If correct, it predicts that the amount of retained earnings spent on dividends, which raise stock prices, is offset by the effect of issuing new stock to replace the money spent on dividends, which lowers stock prices.

The dividend yield shows the annual return per share owned that an investor realizes from cash dividend payments, or the dividend investment return per dollar invested. There are problems with the model, however.

How Dividends Affect Stock Prices

Essentially, it is the amount of money a business has on account that it can use to pay dividends or fund growth projects. The objective of wealth maximization would cause financial managers to take decisions, which balance returns and risk in such a manners as to maximize the benefits, through dividends and enhancement of share price, to the shareholders.

The ability of the company to determine appropriate dividend policy would influence the prospective investors and even the existing shareholders to be invested in company stocks or buy additional ones.

Conversely, shareholders who think a stock is about to take a dive sell quickly to avoid losses. The discount rate must also be higher than the dividend growth rate for the model to be valid.

To examine the variable that mostly influences the market prices of shares. It stands to reason that the possibility of creating recurring investment income encourages investors to purchase and retain shares of stock.

I cannot, but say that the research work is faced with some limitations. Having discussed the broad objective of the study, there is needed to specifically state the specific objectives of this research work.

Especially among individual retail investorsthe baseline assumption is generally that others know more than you do, so it behooves you to follow the herd. If a company announces a higher-than-normal dividend, public sentiment tends to soar. Get a free 10 week email series that will teach you how to start investing.

Suppose a dividend-paying company is not earning enough; it may look to decrease or eliminate dividends because of the fall in sales and revenues. This mentality often results in previously neutral investors suddenly entering the fray to avoid missing out on profits or incurring losses, further exacerbating the effect.Jul 26,  · Effects of dividends policy on the market price of share.

(a case study of first bank of nigeria plc) ABSTRACT. The efficient and effective financial administration in corporate organization is sine quad non’ to the achievement of the. Formal dividend policy gives shareholders the assurance of predictable dividend payments.

0. 0. The study revealed that the dividend policy has been and continues to be an important factor driving NBK share value as supported by 80% of the respondents.

Effect of Dividend Policy on Share Price Performance: A Case of Listed Insurance Companies at the Nairobi Securities Exchange, Kenya.

International Journal of Accounting, Finance and Risk Management. The purpose of this study was to determine the effect of dividends policy on share price performance of insurance companies listed at the Nairobi Securities Exchange (NSE). Many companies work hard to pay consistent dividends to avoid spooking investors, who may see a skipped dividend as darkly foreboding.

The Effect of Dividend Declaration and Distribution. Before a dividend is distributed, the issuing company must first declare the dividend amount and the date when it will be paid.

Dividend policy has significant effect on share price So the hypothesis is-Ho: There is no significant effect of dividend policy on share price H A: There is a significant effect of dividend policy on share price III. Methodology of the Study: Data Collection Technique: This study is based on the secondary data.

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Effect of dividend policy on share
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