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RADS Vol 3, No. 2, June 2016, 01-10
Impact of Dividend Policy on Market Capitalization of Firms Listed in
Automobile Sector of KSE
Maha Haider, Faiza Maqbool (Asst. Prof.)
Department of Business Administration, Jinnah University for Women
Abstract
Dividend policy is an important tool use by companies to determine the ratio of dividend
payments and reserves for future investments. This study attempts to explore the impact of a
firms’ dividend policy on its market capitalization. For this purpose 10 years data beginning
from 2005 to 2014 of companies listed in automobile assembler sector of Karachi stock
exchange was gathered. Sample size of the study was determined by randomly selecting five
companies from the respective sector. Dividend policy is kept as an independent variable
which is measured through dividend yield and payout ratios while market capitalization is
the dependent variable which is quantify through share prices and volume of shares traded.
Statistical tools like correlation and regression tests were applied to verify the hypothesis.
Correlation shows a positive but weak relationship among sub variables of dividend policy
and market capitalization. However linear regression states that dividend yield has no relation
with share price and volume of shares traded. These findings reveal that dividend policy has an
insignificant relationship with market capitalization of firms listed in automobile sector. The
study will facilitate policy makers in developing suitable policies in the respective sector and
guide investors in designing their investment strategy.
Keywords: Dividend Policy, Market Capitalization, Dividend Payout Ratio KSE.
Introduction
stock prices are the risk and income generated
from firm’s assets. Later (Gordon 1962) states
that dividend policy is directly related with
market value of shares and in future it will be
use to determine price sensitivity. The concept
of relationship between dividends and price
volatility was first originated by Friend and
Puckett (1964). The results suggest positive
relationship but Baskin (1989) persuaded that
dividends and price volatility are negatively
related. Nishat and Irfan (2004) were the first
in Pakistan to study dividend policy and its
impact on volatility of share prices.
Dividend policy is an essential tool that the
management of a firm uses to decide the level
of dividend paid to investors and the amount
of money preserve for future investments Lee
(2009). Decision for timings and amount of
dividend payments to investors is the basically
focus in payout policy. It is important for an
organization to design such dividend policy
that helps in maximizing it share’s market worth
Kandpal and Kavidayal (2015). Fluctuations in
stock prices or amount of outstanding share
disturbs market capitalization of a firm in
equity market as market capitalization and
dividend payout policy are strongly associated
Nazir (2012).
Problem Statement
Previously many researches has been conducted
in Pakistan to study the association between
firms dividend policy and its stock price but
there was lack of studies for the impact of
dividend policy on the quantity of shares trades
which may affect a firm’s market capitalization
It was first argued by (Franco Modigliani and
Merton H. Miller 1961) that dividend policy is
irrelevant because value of stock does not effected
from dividend policy. The key determinants of
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RADS Vol 3, No. 2, June 2016, 01-10
market capitalization through both share prices
and quantity traded. The study will guide
investors in constructing a suitable investment
strategy.
in equity market. Secondly there was a no study
regarding the selected topic was conducted on
automobile sector of KSE Therefore the study
aims to fill the gap by taking both stock price and
quantity as a measure of market capitalization
and exploring that how a dividend policy
impact over it in automobile sector.
Limitation of the study
The research is limited for a 10 year time period
and results applicable only at the automobile
sector of Karachi stock exchange would be
highlighted as findings. Therefore the study
is barely restricted for firms in auto sector of
Pakistan and the outcomes maybe change for
other scenarios.
Research Question
Research questions for the study are based on
the queries raised by Nazir and Nawaz (2012)
about the relation of payout policy with market
capitalization.
Literature Review
a. Does a dividend policy of a firm affect over
its market capitalization in equity market?
Corporate payout policy is a widely researched
topic in corporate finance but still researchers
did not reach to a definite conclusion about the
effect of dividend policy on stock price due to
which the market capitalization of a firm may
also be hurt.
b. Do some other factors also impact on
market capitalization of firms’ individual
stock?
c. Does dividend payout ratio influence on
the market capitalization of firms?
Hussainey and Mgbame (2011) explore the
relation of stock price variations with dividend
policy in United Kingdom. The study was
carried out for 10 years time phase from 1998 to
2007. For sampling publicly quoted firms listed
at London Stock Exchange were chosen. The
outcomes determine that stock price variations
rise with an increase in yield and decrease in
payout and these are strongly related with
growth rate and leverage. It was recommended
that in United Kingdom variations in stock
price are primarily due to modifications in
payout policy.
d. Does volume of shares traded increase with
higher dividend yields?
e. Does higher volume of shares traded
reduces the payout ratio?
Objective
Karachi stock exchange is considered as a
riskier equity market of Pakistan where huge
proportions of investments are made by many
investors. (Suliman, M., Ahmad, S., Anjum, M.
J., & Sadiq, M. (2013). Therefore major intention
behind the study is to judge that does dividend
policy impact on market capitalization of firms
in automobile sector of KSE as no studies have
been conducted on this sector.
Song (2012) studied Canadian stock market
to investigate the association between stock
price instability and dividend policy. The study
compiles data of 100 dividends paying public
firms since 2001 to 2011 selected from Toronto
stock exchange. Results affirm that a negative
relationship exists between price volatility and
determinants of payout policy. It was quoted
that managers can use dividend policy to fairly
manage the risk of stock and hence influence
Significance
The study will guide in exploring the connection
of a firms market capitalization with its
dividend policy. It will direct the policy makers
of automobile firms in Pakistan and provide
assistance for automobile firms in raising their
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RADS Vol 3, No. 2, June 2016, 01-10
from 2007 to 2011. Multivariable regression
model was applied to test the hypothesis. The
results notify that price instability is negatively
affected from payout ratio however growth rate
positively influence on stock price volatility.
on investors’ investment choice.
Kenyoru, Kundu and Kibiwott (2013) carried a
research in Kenya to examine the level of share
price volatility dependent on dividend policy. 10
years data since 1999 to 2008 of actively trading
firms in Nairobi Securities Exchange was obtain
to continue the study. Multiple regression tests
were applied for testing hypothesis. Outcomes
of the study illustrate that key determinants of
share price instability are dividends. The study
concludes that whenever the yield or payout
ratio increases, share price volatility would
reduce.
Kandpal and Kavidayal (2015) highlights that
one of the key issues of corporate finance is
the declaration of dividend policy by listed
companies as it influence on firm’s value and
investor’s wealth. An exploratory study was
carried out in Indian region by selecting thirty
banks listed and traded in Bombay stock
exchange (BSE) among which 15 were publicly
owned and 15 were in ownership of private
sector. The study includes 10 years data of these
banks on which multiple tests like regressions,
F-value, T test and coefficient of determination
were applied to obtain results. Outcomes
conclude that payout policy extensively impact
on share prices.
Ilaboya and Aggreh (2013).examine firms
traded in Nigerian equity market to find the link
between their dividend policy and share price
fluctuations. By using simple random sampling
method 26 firms from multiple sectors were
chosen and the financial data since 2004 till
2011 was obtain to test hypothesis. Regression
model was applied to acquire results. Outcomes
were similar with that of Hussainey (2011) that
share price fluctuations are positively linked
with yield and negatively linked with payout
ratio.
Dewasiri and Banda (2014) investigate over the
link between dividend policy and share price
volatility in Sri Lanka. Ten years data ranging
from 2003 to 2012 of 40 listed companies
in Colombo Stock Exchange was gathered
as a sample size for the study. Cross section
Random effect model and granger causality
test were used to accept or reject alternative
hypothesis. Findings reveal that stock price
volatility reduces with the rise in payout ratio
and decrease in firm size. However in short run
high dividend yield leads to increase in price
volatility.
Ramadan (2013) inquires in Jordan for the
impact of dividend policy on share price
instability. Consequently financial data of
12 years since 2000 till 2011 of 77 Jordanian
entities that were traded in Amman Stock
Exchange was gathered for sampling. The data
was analyzed through correlation and multiple
regression models. Findings of the study
conclude that share price instability negatively
affected from both yield and payout. It was
propose that by adapting suitable dividend
policy firms can control their shares to become
volatile in Jordan.
Zakaria Muhammad and Zulkifl (2012) explore
the extent to which share price instability is
linked to dividend policy in Malaysia. The study
was based on material and construction sector
therefore 5 years data since 2005 till 2010 of 77
listed entities at Kuala Lumpur Stock Exchange
was gather for sampling. Outcomes reveals that
payout ratio impacts on share price instability
but other variable like dividend yield, earnings
and growth rate irrelevantly influence share
Lashgari and Ahmadi (2014) conduct a research
in Tehran stock exchange to find the effect of
dividend policy on share price instability. From
a total of 470 firms only 51 companies were
chosen for sampling that fulfills certain criteria
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it was concluded that yield and payouts are
negatively related to price volatility. However
prices of a firms stock rises with the rise in
firm’s earnings. Outcomes suggest that dividend
policy significantly determines market value of
firms that lies in financial sectors of developing
economies.
price instability.
Hashemijoo, Ardekani and Younesi (2012)
study consumer product sector from Malaysian
equity market to find the relation of stock
price instability with dividend policy. Out of
142 entities 84 firms were selected from stock
market of Bursa Malaysia and 6 years data of
these consumer product firms compiled for
data analysis. Regression model was used to
obtain results. Experimental outcomes of the
study illustrate a negative relationship between
price volatility and dividend policy.
Suliman, Ahmad, Anjum and Sadiq (2013)
analyses the relation of stock price instability
with dividend policy in non financial sector
of Karachi stock market. 35 firms were chosen
for sampling. To examine hypothesis 10 years
historic data of these firms since 2001 till 2011
was gathered and regression test was applied for
data analysis. It was identified that a negative
relation exit among price instability, yield and
EPS but size and growth are positively related
to price instability
Nazim-ud-Din (2014) carried a research
in Bangladesh to discover the influence of
dividend announcements on share price
instability in stock markets. Sample size of 25
A category companies was selected and their
financial data during 2004 to 2012 was used for
study. Outcomes of the study reveal that stock
price sensitivity has no affect from dividend
announcements in Bangladesh. The study
recommends that firms must make dividend
payments inconsistent with price sensitivity
and investment prospect.
Nazir, Rakha, and Nawaz, (2012) explore the
correlation of firm’s market capitalization with
its payout policy. 68 firms from KSE 100 index
were chosen for sampling and their past 5 years
data since 2006 till 2010 was use to examine
hypothesis. Multiple statistical tools were
applied among which correlation and regression
were the major tests use for data analysis. It was
identified that market capitalization of a firm
has significant impact of its payout policy.
Nishat and Irfan (2004) carried a study in
Pakistan to find out the relationship between
stock price risk and dividend policy. For
experimental analysis historic data of 160
companies that were listed at Karachi stock
exchange during 1981 till 2000 was compiled.
Cross sectional regression test was apply on the
variables. The results indicate that stock prices
instability is affected from dividend policy.
Theoretical Framework
Independent Variables
Dependent Variable
Dividend Yield
Nazir,Abdullah and Nawaz, (2012) tried to find
that how intensely dividend policy impacts
on price volatility by selecting 75 listed firms
in financial sector of Karachi stock exchange
(KSE). The descriptive study comprise of 5
years starting from 2006 and ending in 2010.
Assets growth, financial leverage firm’s earnings
volatility and size were some control variables
use in study to get clear results. By applying
correlation and regression test on the study
Market capitalization
(Share prize + volume of shares traded)
Dividend Payout Ratio
Market Capitalization
Market capitalization is a dependent variable in
the study. Share prices of a firm during the year
are multiplied with the total amount of its shares
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RADS Vol 3, No. 2, June 2016, 01-10
Methodology
traded to measure the market capitalization.
Market capitalization illustrates the market
value of firm outstanding shares. It is calculated
by applying similar formula prescribed in
studies of Nazir and Nawaz. (2012) which is as
follows:
Following past researches of Baskin (1989),
Nishat and Irfan (2004) and Hashemijoo,
Ardekani and Younesi (2012) the study design
is completely quantitative therefore various
statistical tools are used to test the hypothesis
and interpret results.
Market Capitalization = current share price *
quantity of shares traded
Statistical Technique
Dividend Policy
Allen and Rachim (1996) explore that a
positive link exits between price instability
and dividend yield however price volatility
and dividend payout are negatively linked by
using regression test. Similarly Nazir, Rakha,
and Nawaz, (2012) by using regression and
various other tools proof that a payout and
market capitalization are strongly associated.
Therefore based on previous researches the
study employs correlation and linear regression
test as a statistical technique to explore the
impact of automobile firms’ dividend policy
on their market capitalization in Karachi stock
exchange. Market capitalization is taken as a
dependent variable and dividend policy is kept
as an independent variable.
Nishat and Irfan (2001) persuade that payout
ratio and yield are independent variables that
together have significant influence on stock
price instability which is a dependent variable.
Following past researches, independent variable
of the study is dividend policy which is measure
through two sub variables dividend yield and
payout ratios.
Payout Ratio
Payout ratio is an independent variable
through which dividend policy is quantified.
It is measured as a percentage of net profits
rewarded to shareholders in a form of dividends.
Subsequent to the studies of Nazir and Nawaz
(2012) dividend payout ratios is calculated by
using the similar formula:
Hypothesis
From the foundation of previous researches,
projected hypothesis for testing the data are as
follow:
Payout Ratio = total dividend paid in a year /
net profits in a year
H01: Dividend yield has no relationship with
share prices of automobile assembling firms.
Dividend Yield
HA1: Dividend yield has relationship with share
prices of automobile assembling firms.
Dividend yield is another independent variable
through which dividend policy is measured.
According to Nazir and Nawaz (2012) dividend
yield is a fraction of all cash dividends paid
periodical or annually to investors and average
market worth of firm’s shares. Following the
suggested formula by Nazir and Nawaz (2012)
it is computed as
H02: Dividend yield has no relationship with
shares volume traded at KSE
HA2: Dividend yield has relationship with shares
volume traded at KSE
H03: Dividend payout ratio has no relationship
with shares volume traded at KSE
Dividend Yield = cash dividends per share /
market price per share
HA3: Dividend payout ratio has relationship
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RADS Vol 3, No. 2, June 2016, 01-10
Data Analysis
with shares volume traded at KSE
Data Collection and Sources
Descriptive Analysis
The table above elaborates descriptive statistics
of the variables used in the study. Price which is
To investigate the impact of dividend policy
Descriptive Statistics
N
Minimum
Maximum
Mean
Std. Deviation
Skewness
Statistic
Statistic
Statistic
Statistic
Statistic
Statistic
Std. Error
price
50
8.64
880.32
246.4290
203.76495
1.400
.337
volume
50
31
676500
37258.98
103174.195
5.248
.337
yield
42
1.00
21.30
6.6326
4.04635
1.541
.365
payout
42
17.60
132.36
58.4326
24.68955
1.257
.365
Valid N (list wise)
42
a sub dependent variable has minimum value
of 8.64 and maximum value of 880.32 during
the studied period. However average stock
price of selected automobile firms is 246.4290.
This data deviates from the mean value at the
level of 203.76495. The graph of price skewed at
the level of 1.400. Volume which is another sub
dependent variable has a minimum value of 31
and maximum value of 676500. The average
volume of shares traded during this time frame
is 37258.98 and these are highly deviated from
the mean value at the level of 103174.195.
Volume has a highest skewed value as compare
to other variables which is 5.248.
on firms’ market capitalization appropriate
financial information of the selected sample size
is required. Therefore related data for the study
is purely collected from secondary sources
among which financial reports of automobile
assembler companies and official website of
KSE are the most prominent reference.
The sample size for the study is determine by
randomly selecting 5 companies listed and
traded at Karachi stock exchange from 2005
to 2014. The research consists of 10 years data
collection of the selected sample. Only those
companies make up the sample size which
paid dividends during this period and has
large market capitalization in the respective
sector. Non dividend paying companies were
eliminated from the model. Secondly those
companies whose related data was not available
also ignored in sampling.
Dividend yield which is a component of
independent variable was 1 at the minimum
level and 21.30 at maximum level. Average yield
gain by stockholders during the studied period
was 6.6326 and the standard deviation of the
data from mean value is 4.04635.The graph
of dividend yield skewed at 1.541. Dividend
payout ratio, another independent variable
was 17.60 at the minimum level and 132.36 at
the maximum level. The variable deviates at
the level of 24.68955 from the mean value of
58.4326. Its graph skewed at the value of 1.257.
The focus of the study is purely on automobile
industry as it is one of the untapped areas for
research related to the impact of dividend
policy on market capitalization. Therefore
companies that were listed and traded in
automobile assembler sector of Karachi stock
exchange from 2005 to 2014 and fulfills above
conditions were the only data source.
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RADS Vol 3, No. 2, June 2016, 01-10
Regression Analysis
to reject so it means that there is insignificant
relationship between dividend yield and share
Above tables present the results of regression
Model Summary
Model
R
1
.266a
a. Predictors: (Constant), yield
R Square
Adjusted R
Square
.048
.071
Std. Error of the
Estimate
196.191
Coefficientsa
Unstandardized
Coefficients
Model
B
Std. Error
1
(Constant)
194.840
58.642
yield
13.225
7.572
a. Dependent Variable: price
Standardized Coefficients
Beta
t
3.323
1.747
.266
Sig.
.002
.088
The regression equation is: Price = 194.840 + 13.225 yield
prices in automobile assembling sector listed in
test applied to dependent variable prize and
independent variable dividend yield. There KSE. Regression equation states that 1 percent
increase in yield will raise stock price by 13.225
is a positive but weak correlation between
price and yield having values of 0.393. Since R units in automobile assembler sector of KSE.
square value is 0.071 therefore only 7.1 percent
variation in stock prices of listed automobile These tables present the results of test applied
firms is explain by dividend yield. P value of the to dependent variable volume and independent
variable dividend yield. Volume of shares
model is 0.088 at 5 percent significance level
therefore first null hypothesis of the study is fail
traded and dividend yield are positively
Model Summary
Model
R
R Square
Adjusted R Square
Std. Error of the
Estimate
1
.026a
.001
-.024
108159.476
a. Predictors: (Constant), yield
Coefficientsa
Model
1
(Constant)
yield
Unstandardized
Coefficients
B
Std. Error
28981.435
32329.098
695.042
4174.548
Standardized Coefficients
Beta
.026
t
.896
.166
a. Dependent Variable: volume
The regression equation is: Volume = 28981.435 + 695.042 yield
7
Sig.
.375
.869
RADS Vol 3, No. 2, June 2016, 01-10
fail to reject. It means there is insignificant
relationship between dividend payout ratio
and volume of share traded in automobile
assembling sector of KSE. However regression
analysis shows a negative relation between
volume and payout ratio. The above regression
equation demonstrates that 1 percent increase
in dividend payout ratio will cause volume of
share traded decrease by 548.697 units.
correlated having values 0.451 but the
correlation is moderate. R square value of 0.001
showed that model fit is weak. Only 0.1percent
of the variations in volume can be explained
by variability in dividend yield. Since P value
of the model is 0.869 at 5% significance level
which is higher than 0.05 therefore second
null hypothesis is also fail to reject so it means
that there is insignificant relationship between
Model Summary
Model
R
1
.127a
a. Predictors: (Constant), payout
R Square
.016
Adjusted R
Square
-.009
Std. Error of the
Estimate
107324.124
Coefficientsa
Unstandardized
Standardized Coefficients
Coefficients
Model
B
Std. Error
Beta
t
Sig.
1
(Constant)
65653.209
42986.655
1.527
.135
payout
-548.697
678.879
-.127
-.808
.424
a. Dependent Variable: volume
The regression equation is: Volume = 65653.209 – 548.697 payout ratio
dividend yield and share prices in automobile
sector listed in KSE. Regression equation
demonstrates that 1% increase in yield will
boost volume of shares traded by 695.042 units
in automobile sector.
Conclusion
This study investigates the impact of a firms’
dividend policy on its market capitalization.
For this purpose 10 years data from 2005
to 2014 of listed companies in automobile
assembler sector of Karachi stock exchange was
gathered to conduct the study. Dividend policy
was kept as an independent variable and it was
measured through dividend yield and payout
ratio. Market capitalization was the dependent
variable which was quantify through two sub
variables share prices and volume of shares
traded. These variables were tested through
spearman’s correlation and linear regression
test. The data for the study was not normally
distributed therefore it was preferable to use
spearman’s correlation to test the relationship
between the variables.
Above tables present the results of regression
test applied to dependent variable volume and
independent variable dividend payout ratio.
There is a positive but weak correlation between
volume of share traded and dividend payout
ratio having values of 0.262. Since value of
coefficient of determination is 0.016 therefore
only 1.6 percent variation in volume of shares
traded is explain by dividend payout ratio in
automobile assembler sector of KSE. P value
of the model is 0.424 at 5 percent significance
level which is a higher value than 0.05 therefore
third null hypothesis of the study is also
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RADS Vol 3, No. 2, June 2016, 01-10
References
The outcomes of the test applied showed mixed
results. Correlation test declared a positive
but weak correlation among sub variables of
dividend policy and market capitalization in the
respective sector. Only volume and yield have a
moderate correlation. But regression analysis
states that the relationship of dividend yield
with share price and volume of shares traded
in automobile sector is insignificant. However
payout ratio has negative relation with volume
of shares traded in automobile sector of Karachi
stock exchange.
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Outcomes of correlation test proved that
dividend policy has a weak or moderate
association with market capitalization of firms
but the results of linear regression shows that
the relationship between dividend policy and
market capitalization of firms in the respective
sector is insignificant. When a firm increases its
payout ratio, its share prices may increase but
the volume of shares traded decreases making
market capitalization of a firm lower. Firms
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conclude that usually investors preferred capital
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Recommendation
It is recommended that firms listed in the
automobile sector must avoid paying higher
dividends and increase reserves for future
investments. For further studies on this topic it
is advice that other variable like retention ratios
must also be viewed to explore the impacts
of dividend policy on market capitalization.
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