International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-3, Issue-4, Aprl.

-2017
http://iraj.in
IMPACT OF DIVIDEND ON INVESTMENT DECISION
1
DASARI SRUTHI, 2CH. ROJA RANI, 3CH. LAVANYA
1,2,3
II -MBA Student, GVR& S College of Engineering and Technologies, Guntur
Andhra Pradesh- India
E-mail: 1d.sruthi95@gmail.com, 2rojaranichinta@gmail.com

Abstract - Dividend policy has been an issue of interest in financial literature since Joint Stock Companies came into
existence. 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. Dividend policy connotes to the pay-out policy, Stability Dividend
and Bonus shares and Stock splits. which managers pursue in deciding the size and pattern of cash distribution to
shareholders over time. Managements’ 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 the
shareholders a “fair” payment on their investments. However, the impact of firm’s dividend policy on shareholders’ wealth
is still a debatable issue
Accordingly, the paper attempts to answer the question: How to impact Dividend Policy determinants and Bonus shares and
Stock splits, Stability dividend given more significance by the Investment Decion in the Indian context.

Keywords - Dividend policy determinants, Stability dividend and Bonus Shares.

I. INTRODUCTION policy since they believe the value of the firm is

determined by its investment decisions. In other
Dividend policy is very important in the management words, the value of firms is independent of how they
of company’s earnings. So decisions related to set their dividend policy. Assumptions of a perfect
dividend policy have a significant effect on credit capital market that Miller and Modigliani based their
standing of the firm, its share prices and its future theory on can be summarized as follows: 1. No tax
growth. The valuation of any company depends differences between dividends and capital gains. 2.
on its earnings. Due to decentralization of ownership No transaction costs. 3. Information is equally
and management in company’s organizational available to everyone at no cost. (symmetrical
structure, it is obvious that should decide the dividend information) 4. Conflict between managers and
policy in which the trusts of shareholders are shareholders do not exist. (No agency cost) 5. All
maintained. The study reveals the correlation of investors are price takers and do not have power to
different variables such as Liquidity, control the security price. Miller and Modigliani’s
Leverage, Size and growth, provision for taxation (M&M) model (1961) assumed the investment of a
with dividend payout. Remarkable observations were firm is fixed because all positive net present value
found among this variables for different companies in projects are financed irrespective of the firm’s
different industries. Moreover the study has also dividend strategy, accordingly dividends are firm’s
shown the influence of profitability on residual free cash flow. Conventional wisdom
dividend payout ratio for different companies. Apart recommends that dividend payments are critical to
from this, the study also shows the firm’s value and an appropriate dividend policy is
how the fluctuations in dividend payout ratio has important to shareholders because it will affect their
taken place, year by year due to wealth as well as the share price. Usually investors
variation in different independent variables. Dividend faced with inaccurate information regarding a firm’s
Policy Theories This section analyzes theories about performance consequently 10 they use dividend
dividend policy including dividend irrelevance payments as a signal (Frankfurter & Wood, 1997). To
hypothesis and relevancy theories such as bird in summarize, in the perfect capital market, the only
hand, signalling, tax preference and agency costs. determinant of firm’s value is the future cash flow
Researchers identified three contradictory theories from investment decisions. Market imperfections
about dividend decisions in firms. Some state that such as asymmetric information, agency costs,
raising the dividend payouts influence and increase transaction costs and taxes should be considered in
the firm’s value (this is called the bird in hand dividend relevancy (Lease, et al., 2000). Over years
theory). Dividend Irrelevance Theory In the 1960’s, of researches, four main theories of dividends
with a new wave of finance, Miller and Modigliani relevancy have been offered:
explain the dividend payment is irrelevant to the
value of the company based on certain conditions of II. LITERATURE REVIEW
perfect capital market and rational behavior (Miller &
Modigliani, 1961). Based on the M&M’s model, in a 1) (Prof. Manpreet Kaur, 2014) Investigated the
perfect market the share price of a firm and concept and scope of dividend policy and to study the
shareholder’s wealth is not affected by the dividend irrelevance theory(Modigliani-Miller Model)

Impact of Dividend on Investment Decision

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 International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-3, Issue-4, Aprl.-2017
http://iraj.in
dividend theory and to know the relationship between found that the payout decision of Sensex firms
dividend policy approach and share prices(companies depends on the factors like earnings, cash earnings,
listed in CNX Dividend opportunities Index was lagged dividends and capital expenditure. It can also
chosen as population universe) and for sample 5% be found that Linter Model holds good to a large
companies listed in index was considered. Analysis extended in case of Sensex firms. In short the study
has been made by using secondary data and simple support prevalence and relevance of Linter model of
random sampling is used during period 2013- dividend policy. This simply suggested that managers
2014.The study found that there is neither positive can’t ignore the variables like earnings capacity and
nor negative relationship between the market price of lagged dividends while designing dividend policy.
shares and dividend payout. Author said that due to
other factors share-prices are affected. It can be 5)(Pasricha, 2012) Investigated links between the
concluded that irrelevance theory shows true picture dividend policy and value of firms. For survey
in current scenario in comparison to relevance theory purpose 20 sample companies of information
in short time period. technology and pharmaceuticals industries of India
have been taken during the period 2001 to 2010.The
2) (Dr.T.Sobha Rani, 2013)The purpose of this sample has been chosen from S& P CNX Index on
research paper was to evaluate the profitability and its the basis of their Net- 23 Worth. The data mainly
growth rate in selected pharmaceuticals companies in used for study purpose has been obtained from
India. secondary data used for study purpose during prowess database of the Centre for monitoring Indian
the period 2002-2011.For an analysis purpose annual Economy (CMIE) India. Multiple Regression model
compound rate, Profit before interest and tax, profit used for study purpose and graphical pictorial
after tax, earnings 22 per share, dividend per share previews were used for presenting data. The study
variables were used. The study found that the concluded that the dividend payouts having
profitability of pharmaceutical companies are considerable bearing and positive and significant
affected by determinants of dividend and it also relationship with the value of firms.
revealed that annual compound growth rates of Data and Methodology As it is discussed in
dividends determination give the profitability and the literature the relationship among the variables is
growth rate. Author also suggested that decisions measured by using different variables, the appropriate
regarding companies’ performance depend not only data will be extracted to measure the short term and
on highest dividend per share but more on broad long term relationship among the variables. The data
decision, dividend payout ratio and several other will be collected from 1999 to 2011, listed companies
factors. from stock exchange. In this study annual data on a
sample of firms from annual reports of listed
3) (Gayathridevi & Mallikarjunappa, 2012) The companies will be collected from 1999 to 2011. It
aim of this paper was to analyse the trends and will be assured that; Firms do not have missing data
determinants of dividend decisions. For survey for at least 10 years on gross property, plant total
purpose NSC listed 114 Indian Textiles companies assets, net income before extraordinary items. Firms
have been taken during the period 1989-2009.The do not have negative data of earnings for at least 5
simple Regression model was used to evaluate the years. Sample is representative of all the sectors of
study. Study revealed that most of the dividends the stock exchange. Data is collected from the
paying companies are profit making companies. The website of State bank and Karachi Stock Exchange.
study also showed that absolute value of dividends Pre-Tax earnings will be taken to avoid the impact of
and dividend paid-up capital shows the significant tax rate changes. Incremental investment will be
and positive relationship between dividend policy and taken i.e. value of fixed assets after accumulated
lagged earnings belonging to common shareholders, depreciation of current year minus fixed assets after
profit after tax, earnings belonging to shareholders accumulated depreciation of previous year plus
cash flows, size, cash dividends and lagged depreciation because the data of earnings and
dividends. It also showed that current Ratio and dividends peculiar to that year are extracted.
capital structure have insignificant influence on Marchical (2007) have adopted that method to
dividend policy. calculate investment.

4) (N. R. Parasuraman, 2012) The aim of this CONCLUSION

research paper was to study the effectiveness of
Linters’ model for dividend payout. Analysis made Johansen and Juselius multivariate co integration
on BSE Sensex firms during the period 2002- disclosed the presence of long term relationship
2011.For study purpose Linter model and another among earning, investment and dividends.
three basic models were used. Multiple regression The traditional view regarding the dividend
were used to test the variables namely, cash earnings, irrelevance theorem is rejected by this research and
basic earnings, lagged dividends and capital results show that dividend and investment are
expenditure .By using Linter model as a base, it is dependent on each other. The results of Multivariate

Impact of Dividend on Investment Decision

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 International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-3, Issue-4, Aprl.-2017
http://iraj.in
cointegration both trace statistics and maximum [6] managers: new survey evidence", International Journal of
Managerial Finance, Vol. 3 Iss:1, pp.70 – 91
eigenvalue tests showed 3 cointegrating equations
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[8] John Goddard, David G. McMillan, John O.S. Wilson, (2006)
"Dividend smoothing vs dividend signalling: evidence from
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