Impact of Dividend Policy on Stockholders’ Wealth: Empirical Evidences from KSE 100-Index

Abstract

There are two different schools of thought one believes in relevancy of dividend policy with stockholders’ wealth and second believes in irrelevancy of dividend policy. This work was done to study the impact of dividend policy in Pakistani context. For that purpose the financial data was collected from all listed firms in KSE-100 Index for the period of 15 years. The high variation studied within the data. Three methods were chosen for analysis correlation, multistage regression and Granger causality test. Dependent variable market price per share has strongly significant positive relationship with dividend per share and also has strongly significant causal relationship. There was no relationship found between market price per share and capital gain. So it can be concluded from this study that in Pakistani markets investors prefer dividend instead of capital gain because of uncertainty of future prices and it can also be concluded that the dividend policy is relevant to the stockholders’ wealth. Therefore by improving payout policy a listed firm in Karachi Stock Exchange can improve its value but management must be very sound for making best strategic decisions for payout and retention.

Keywords: Dividend Policy, Firms’ Value, Relevancy & Irrelevancy Framework, Discrete Returns, Linear Relationship, Causal Relationship, Investors Preferences.