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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 1 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 2 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 3 RADS Vol 3, No. 2, June 2016, 01-10 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 4 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 5 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. 6 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 8 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. 1. Ali, M. B., & Chowdhury, T. A. (2010). Effect of dividend on stock price in emerging stock market: A study on the listed private commercial banks in DSE. International journal of Economics and Finance, 2(4), p52. 2. Allen, D. E. & Rachim, V. S. (1996). Dividend policy and stock price volatility: Australian evidence. Applied Financial Economics, 6(2), 175-188. 3. Baskin, J. (1989). Dividend Policy and the Volatility of Common Stock. Journal of Portfolio Managment, 15(3), 19-25. 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 having higher payout ratios usually seen to have lower volume of shares traded. These results conclude that usually investors preferred capital gains in the respective sector in Pakistan during the studied period instead of receiving frequent dividend payments. Secondly investors choose to buy more shares of those companies having lower payout ratio. 4. Dewasiri, N. J., & Weerakoon Banda, Y. K. (2014). Impact of Dividend Policy on Stock Price Volatility Evidence from Sri Lanka. 5. Duke, S. B., Nneji, I. D., & Nkamare, S. E. (2015). Impact of Dividend Policy on Share Price Valuation in Nigerian Banks. Archives of Business Research, 3(1). 6. Friend, I. & Puckett, M. (1964). Dividend and Stock Prices. The American Economic Review, 54(5), 656-682. 7. Gordon, M. J. (1962). The Investment, Financing, and Valuation of the Corporation (Homewood, Illinois: Irwin Publishers. 8. Hashemijoo, M., Mahdavi Ardekani, A., & Younesi, N. (2012). The impact of dividend policy on share price volatility in the Malaysian stock market. Journal of business studies quarterly, 4(1). 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. Other sectors of KSE may also be considered for future researches. 9.Hussainey, K., Oscar Mgbame, C., & Chijoke-Mgbame, A. M. (2011). Dividend policy and share price volatility: UK evidence. the journal of risk finance, 12(1), 57-68. 10.Ilaboya, O. J., & Aggreh, M. (2013). Dividend Policy and Share Price Volatility. Journal of Asian Development. 9 RADS Vol 3, No. 2, June 2016, 01-10 11.Kandpal, V., & Kavidayal, P. C.(2015). A Study Of Dividend Policy And Its Effect On Market Value Of Shares Of Selected Banks In India. 19.Nishat, M., & Irfan, C. M. (2004). Dividend policy and stock price volatility in pakistan. In PIDE-19th Annual General Meeting and Conference (pp. 13-15). 12.Kenyoru, N. D., Kundu, S. A., & Kibiwott, L. P. (2013). Dividend policy and share price volatility in Kenya. 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(2014). Impact of Dividends on Stock Price Volatility-Evidence from Some Selected listed Companies in Bangladesh. Abasyn University Journal of Social Sciences, 7(1). 22.Rashid, A., Rahman, A. Z., & Anisur, M. (2008). Dividend policy and stock price volatility: evidence from Bangladesh. Journal of Applied Business and Economics, 8(4), 71-81. 16.Nazir, M. S., & Abdullah, M. M. N. (2012). How Dividend Policy Affects Volatility of Stock Prices of Financial Sector Firms of Pakistan. 23.Song, X. (2012). The Relationship between Dividend Policy and Stock Price Volatility— (Doctoral dissertation, JiMei University). 24.Suliman, M., Ahmad, S., Anjum, M. J., & Sadiq, M. (2013). Stock Price Volatility in Relation to Dividend Policy; A Case Study of Karachi Stock Market. Middle-East Journal of Scientific Research, 13, 426-431. 17.Nazir, M. S., Nawaz, M. M., Anwar, W., & Ahmed, F. (2010). Determinants of stock price volatility in karachi stock exchange: The mediating role of corporate dividend policy. International Research Journal of Finance and Economics, 55, 100-107. 25.Zakaria¹, Z., Muhammad, J., & Zulkifli, A. H. (2012). THE IMPACT OF DIVIDEND POLICY ON THE SHARE PRICE VOLATILITY: Malaysian Construction and Material Companies. Management, 2(5), 01-08. 18.`Nazir, M. S., Rakha, A., & Nawaz, M. M. (2012). Corporate Payout Policy and Market Capitalization: Evidence from Pakistan. Journal of Economics and Behavioral Studies, 4(6), 331-343. 10