IDEAS home Printed from https://ideas.repec.org/a/ssi/jouesi/v7y2019i2p862-874.html
   My bibliography  Save this article

Dividend policy and stock price volatility in Indian capital market

Author

Listed:
  • Sumathi Kumaraswamy

    (University of Bahrain, Bahrain)

  • Rabab Hasan Ebrahim

    (University of Bahrain, Bahrain)

  • Wan Masliza Wan Mohammad

    (University of Bahrain, Bahrain)

Abstract

As argued by Modigilani & Miller, the dividends are irrelevant only in perfect markets but in an emerging market like India, the dividends are expected to show its relevance. Indian capital market have surpassed a sea change in the recent past including demonetization, implementation of new tax regimes, political controversies and the like. Despite these facts, the Indian capital markets soars at many a times due to its active trading. Against this backdrop, this research paper seeks to examine the relationship between dividend policies and share price volatility. The motivation behind this research is to first time employ a powerful unbiased volatility estimator, created by Yang and Zhang that is 14 times as efficient as close to close estimate. A sample of 116 textiles companies, listed and actively traded in Bombay Stock Exchange of India (BSE) from 2008 to 2017 selected for the study. In examining the impact of dividend policy on share price volatility in Indian capital market, multiple least squares regressions is employed. Empirical results shows that dividends are affecting stock prices variations in India which fits in with the bird in hand and signaling theories of dividends. Due to the volatile nature of the market, Indian investors’ prefer demanding more dividends from firms rather keeping retained earnings on reinvestment. The outcomes of this study supports the fact that dividends policy influence stock price variations in Indian capital market. The results of this study provides an insight to the financial managers in developing their dividend policies to maximizing the shareholders wealth.

Suggested Citation

  • Sumathi Kumaraswamy & Rabab Hasan Ebrahim & Wan Masliza Wan Mohammad, 2019. "Dividend policy and stock price volatility in Indian capital market," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 7(2), pages 862-874, December.
    • Handle: RePEc:ssi:jouesi:v:7:y:2019:i:2:p:862-874
    DOI: 10.9770/jesi.2019.7.2(5)
    as

    Download full text from publisher

    File URL: https://jssidoi.org/jesi/uploads/articles/26/Kumaraswamy_Dividend_policy_and_stock_price_volatility_in_Indian_capital_market.pdf
    Download Restriction: no
    File URL: https://jssidoi.org/jesi/article/408
    Download Restriction: no
    File URL: https://libkey.io/10.9770/jesi.2019.7.2(5)?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Miller, Merton H & Scholes, Myron S, 1982. "Dividends and Taxes: Some Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1118-1141, December.
    2. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    3. Khaled Hussainey & Chijoke Oscar Mgbame & Aruoriwo M. Chijoke-Mgbame, 2011. "Dividend policy and share price volatility: UK evidence," Journal of Risk Finance, Emerald Group Publishing, vol. 12(1), pages 57-68, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kashif Islam & Ahmad Raza Bilal & Syed Anees Haider Zaidi, 2022. "Symmetric and asymmetric nexus between economic freedom and stock market development in Pakistan," Economic Change and Restructuring, Springer, vol. 55(4), pages 2391-2421, November.
    2. Norlaile Salleh Hudin & Nur Shafiqa Azrin Khairil Annuar & Ahmad Zainal Abidin Abd Razak, 2019. "The Influence of Hedonic and Utilitarian Shopping Value Towards Consumer Behavioral Intention Among Youth Mall Shoppers," Research in World Economy, Research in World Economy, Sciedu Press, vol. 10(5), pages 1-8, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eleni Gkeka & Kosmas Kosmidis & Georgios Simitsis, 2018. "The value relevance of dividend announcement: An empirical study of the Greek Stock Market," International Journal of Business and Economic Sciences Applied Research (IJBESAR), International Hellenic University (IHU), Kavala Campus, Greece (formerly Eastern Macedonia and Thrace Institute of Technology - EMaTTech), vol. 11(2), pages 44-50, September.
    2. Sven-Olov Daunfeldt & Carina Selander & Magnus Wikstrom, 2009. "Taxation, Dividend Payments and Ex-Day Price-Changes," Multinational Finance Journal, Multinational Finance Journal, vol. 13(1-2), pages 135-154, March-Jun.
    3. Thomas McCluskey & Aoife Broderick & Amanda Boyle & Bruce Burton & David Power, 2010. "Evidence on Irish financial analysts' and fund managers' views about dividends," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 2(2), pages 80-99, June.
    4. du Jardin, Philippe & Séverin, Eric, 2011. "Dividend policy," MPRA Paper 44382, University Library of Munich, Germany.
    5. Ghulam Mujtaba Chaudhary & Shujahat Haider Hashmi & Aqeel Younis, 2016. "Does Dividend Announcement Generate Market Signal? Evidence from Pakistan," International Journal of Economics and Financial Issues, Econjournals, vol. 6(1), pages 65-72.
    6. Sabur Mollah, 2011. "Do emerging market firms follow different dividend policies?," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 28(2), pages 118-135, June.
    7. Mohit Gupta & Navdeep Aggarwal, 2018. "Signaling Effect of Shifts in Dividend Policy: Evidence from Indian Capital Markets," Business Perspectives and Research, , vol. 6(2), pages 142-153, July.
    8. Mohammad Shahidul Islam & ATM Adnan, 2022. "Determinant Factors of Dividend Policy Using a Structural Equation Modeling Approach: A Study of the Banking Sector of Bangladesh," Oblik i finansi, Institute of Accounting and Finance, issue 1, pages 49-58, March.
    9. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2002. "Dividend Policy inside the Firm," NBER Working Papers 8698, National Bureau of Economic Research, Inc.
    10. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    11. Morgan, Gareth & Thomas, Stephen, 1998. "Taxes, dividend yields and returns in the UK equity market," Journal of Banking & Finance, Elsevier, vol. 22(4), pages 405-423, May.
    12. Blau, Benjamin M. & Fuller, Kathleen P. & Van Ness, Robert A., 2011. "Short selling around dividend announcements and ex-dividend days," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 628-639, June.
    13. Baker, H. Kent & De Ridder, Adri & Råsbrant, Jonas, 2020. "Investors and dividend yields," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 386-395.
    14. John R. M. Hand & Wayne R. Landsman, 2005. "The Pricing of Dividends in Equity Valuation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(3‐4), pages 435-469, April.
    15. Mian Sajid Nazir & Muhammad Musarrat Nawaz, 2012. "Corporate Payout Policy and Market Capitalization: Evidence from Pakistan," Journal of Economics and Behavioral Studies, AMH International, vol. 4(6), pages 331-343.
    16. Syed Akif Shah & Umara Noreen, 2016. "Stock Price Volatility and Role of Dividend Policy: Empirical Evidence from Pakistan," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 461-472.
    17. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
    18. Thomas McCluskey & Bruce Burton & David Power, 2007. "Evidence on Irish financial directors' views about dividends," Qualitative Research in Accounting & Management, Emerald Group Publishing Limited, vol. 4(2), pages 115-132, June.
    19. Krishnamoorthy Charith & Andrey Davydenko, 2021. "Informational Value of Dividend Initiations: Impact of Cash Dividends on Share Prices of Manufacturing Companies in Sri Lanka," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(3), pages 1-13, March.
    20. Baker, H. Kent & Powell, Gary E. & Veit, E. Theodore, 2002. "Revisiting the dividend puzzle: Do all of the pieces now fit?," Review of Financial Economics, Elsevier, vol. 11(4), pages 241-261.

    More about this item

    Keywords

    dividends; share price volatility; dividend payout;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G40 - Financial Economics - - Behavioral Finance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ssi:jouesi:v:7:y:2019:i:2:p:862-874. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Manuela Tvaronaviciene (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.