CHAPTER-I

INTRODUCTION

1.1 Background of the Study

Dividends are payments made by a corporation to its shareholders. It is the portion of
corporate profits paid out to stockholders. When a corporation earns a profit or
surplus, that money can be put to two uses: it can either be re-invested in the business
i.e. retained earnings, or it can be paid to the shareholders as a dividend. Many
corporations retain a portion of their earnings and pay the remainder as a dividend.

The development of an economy requires expansion of productive activities, which in

turn is the result of the capital formation, which is the capital stock of the country.
The change in the capital stock of the country is known as investment. Investment is
key factor for capital formation. Investment promotes economic growth and
contributes to a nation’s wealth. Investor desire to earn some return from the
investment, without any return there is no any investment. Investment will block, if
there is no return. The total expected return include two components one is capital
gain and other is dividend. It is fact that dividend work as a simple sufficient signal of
management’s interpretation of the firm’s recent performance and its future prospects.
The effect of a firm's dividend policy on the current price of its shares is a matter of
considerable importance, not only to the corporate officials, who must set the policy,
but to investors planning portfolios and to economists seeking to understand and
appraise the functioning of the capital markets (Miller & Modigliani, 2061). It is
important for investors because investors consider dividends not only the source of
income but also a way to assess company from investment point of view (Gordon,
1963). Thus, dividend policy cannot be over-emphasized because it may have direct
impact on share price. The result shows that the earnings per share is positively
related to market price per share. The results are also significant at 1 percent. Retained
ratio and liquidity is negatively related to market price per share. The result also
shows that dividend payout ratio and growth of total assets is positively related to
share price volatility whereas dividend yield ratio, size of total assets and leverage has
insignificant effect on share price volatility.

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Effect of dividend policy on stock prices has remained debatable issue among
managers, policy makers and researchers for many years since Miller and Modigliani
(1961) dividend hypothesis. Miller and Modigliani (1961) have asserted that given
firms optimal investment policy, the firm’s choice of dividend policy has no impact
on shareholders wealth. However, Gordon (1963) argues that dividend policy does
affect the value of firm and market price of shares. The author asserts that
shareholders prefer the early resolution on uncertainty, and will pay a higher price for
a share which has a greater dividend payout ratio. The author contends that investors
always prefer secure and current income in the form of dividends over capital gains.
Various studies such as Travlos, Trigeorgis, and Vafeas (2001), Baker, Powell, and
Veit (2002), Myers and Frank (2004), Dong, Robinson, and Veld (2005), Maditinos,
Sevic, Theriou, and Tsinani (2007) have supported dividend relevance theory.
Gustavo and Michaely (2007) conclude that changes in dividend policy convey news
about future cash flows; specifically, dividend increases convey good news and
dividend decreases convey bad news. These past empirical evidences have indicated a
strong relationship between dividend changes and price volatility. However, Baskin
(1989) has found inverse relation between stock prices and dividend policy.

Although, under the Miller and Modigliani proposition, there are no priori reasons for
enterprises to follow any systematic dividend policy, there are also no penalties if
they choose to do so. In addition, managers need to decide dividend decision on a
regular basis that involves with whether to payout earnings to shareholders to reduce
agency problem (Jensen and M., 1976). To the perplexity of their academic
counterparts, corporate executives continue to flood the market with cash dividends
(Asquith and Mullins, 1986). The clue to stock dividend distribution may lie in their
perceived substitution for relatively low cash dividends (Josef and Lev, 1987). The
impact of dividends is more pronounced than that of the retained earnings in an Indian
context (Chawla and Srinivasan, 1987). The dividend policy has remained a
contentious issue ever since the early stage of corporate development, making it one
of the unresolved puzzles in corporate finance theory. The payment of dividends
despite adverse personal taxation is a puzzle with a long-standing tradition in finance
(Thakor, 1989).

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Financial managers make inter-alia three decisions pertaining to financing, investment
and dividends simultaneously. While financing decision is influenced by the dividend
decision through retained earnings, the investment decision depends on the amount of
retained earnings and the amount that can be raised externally (Olowe, 1998). There is
conceptual conflict about the dividend payout policy- paying in cash versus internal
financing (Garrett and Priestley, 2000). Dividends are taxed twice, once at the
corporate level since enterprises pay dividends from after-tax earnings, and then again
at the level of the investor, who must pay tax on dividends received. Dividends are
taxed more heavily than capital gains in the United States and many other countries
(Allen et al.,2000).

Nepal is a country trying to develop its economy through global trend and cooperation
with developed countries. The most widely accepted objective of a firm is to
maximize the value of the firm and to maximize shareholder wealth. In general, there
are three types of financial decisions which might influence the value of a firm:
investment decisions, financial decisions and dividend decisions. These three
decisions are interdependent in a number of ways. The investments made by a firm
determine the future earnings and future potential dividends; and dividend policy
influences the amount of equity capital in a firm’s capital structure and further
influences the cost of capital. In making these interrelated decisions, the goal is to
maximize shareholder wealth.

In Nepal only few companies are paying dividend and the other companies are not
stable in the payment of dividend. There are some companies who have never paid
dividend to their investors throughout their historical background. The Price of the
share see a rise when the company about to announce the dividend. Once the divided
are distributed, the share price is almost plummets immediately. In many case this fall
in the share price is almost equal to the dividend that has be announced. It seems to
suggest that dividend so matter, is affecting the stock price of the company but several
researchers argue the fact that dividend affect stock price, rather it is the information
declaration of dividend that affect the stock price. Common stocks represent
ownership in a company. The holders of common stock are called shareholder or
stockholder. They are the legal owners of the company. "People buy common stock of

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the banks or any other institution expecting to earn dividend plus capital gain when
they sell their shares at the end of some holding period". (Thapa, 2003,P-147)

"The expected level of cash dividend is the key variable from which owners and
investors in the market place determine share value. The establishment of effective
dividend policy is therefore key importance to the firm's overall objectives of the
owner's wealth maximization"(Gitman1982, P-507)

According to Miller and Modigliani -"The value of firm depends solely on its earning
power and is not influenced by the manner in which its earning are split between
dividend and retained earnings".(Chandra, 1990, p-602)

Dividend is the most inspiring factor for the investment on shares of the company is
thus desirable from the stockholder's point of view. In one hand the payment of
dividend makes the investors happy. But in the other hand the payment of dividend
decreases the internal financing required for making investment in golden
opportunities. This will hamper the growth of the firm, which in turn affects the value
of the stock. Earnings are also treated as financing sources of the firms. The firm
retains the earning; its impact can be seen in many factors such as decreased leverage
ratio, expansion of activities and increase in profit in succeeding years. Whereas if
firm pays dividend, it may need to raise capital through capital that will effect on risk
characteristics of the firm. Therefore there are many dimensions to be considered on
dividend theories, policies and practices.

Therefore this study is related with the dividend policy & its impact on share price of
commercial banks of Nepal.

1.1.1 Brief Profile of Sample Bank

This research is concerned with dividend policy of some commercial banks of Nepal.
So the sampled banks are briefly introduced below.
Himalayan Bank Limited
Himalayan Bank Limited was established in 1993 in collaboration with Habib Bank
Limited, Pakistan. It is fourth Joint venture bank in Nepal and it was listed in NEPE in
1993. The paid up capital of the bank in the fiscal year 1995\96 was only Rs 120

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million, which gradually reached up to about Rs8,115 million in the year 2017/18.
Himalayan Bank has more then 57 branches all over Nepal.

Nabil Bank Limited

Nabil Bank Limited, the first foreign bank of Nepal, started operation in July 1984.
Nabil was incorporated with the objective of extending international standard modern
banking services to various sector of the society. Pursuing its objectives, Nabil
provides a full range of commercial banking services through its, 19 points of
representation across the kingdom and over 170 reputed correspondent Banks across
the globe. The bank was listed in NEPSE in the year 1985 A.D. The paid up to the
capital of the bank in fiscal year 2017/18 paid up capital is Rs. 9,008 Million. It has
73 branches all over Nepal.

Nepal SBI Bank Ltd.

(NSBL) is the first Indo-Nepal joint venture in the financial sector sponsored by three
institutional promoters, namely State Bank of India (SBI), Employees Provident Fund
and Agricultural Development Bank of Nepal through a Memorandum of
Understanding signed on 17 July 1992. Under the Banks & Financial Institutions Act,
2063, Nepal Rastra Bank granted fresh license to NSBL classifying it as an "A" class
licensed institution on 26 April 2006 under license no. NRB/I.Pra.Ka.7/062/63. Paid
up Capital is Rs.8,034 million in the financial year 2017/18. All together 77 branch
over the Nepal.

Everest Bank Limited

Everest Bank Limited started its operation in 1994 with a view and objectives of
extending professional and efficient banking services to various segment of the
society. The bank is providing customer friendly services through a network of 92
branches in 2017/18. The bank has conferred with "Bank of the year 2006, Nepal" by
the banker, a publication of financial times, London. EBL is one of the first bank to
introduce 'Any Branch Banking System' in Nepal. The paid up capital worth of 8026.8
million in the financial year 2017/18.

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Standard Chartered Bank Limited
Standard Chartered Bank was established in 1987 as with the joint venture of Nepal
Grindlays Bank. This was the second Joint ventured Bank after Nabil. Today the
Standard Chartered group holds the 72.21 % shares and remaining 29.79 % are
Nepalese Public. The current Paid up capital is 8011 million in 2017/18. It has 12
branches all over Nepal.

1.2 Statement of Problem

Dividend policy is an integral part of financial management decision of a business
firm. Dividend refers to that portion of a firm’s net earning which are paid out to the
shareholders. Whether dividends have an influential on the value of the firm is the
most critical question in dividend policy. If dividends are irrelevant, the firm should
retain earnings for investment opportunities. If there are not sufficient investment
opportunities providing expected returns in excess of the required return, the unused
funds should be paid out as dividends.

Shareholders make investment in equity capital with the expectation of making

earnings. Dividend is kind of earning that the shareholders expect form their
investment. But, the dividend decision is still a fundamental as well as controversial
area of managerial finance. The effect of dividend on market price of stock is the
subject matter of the study. The capital market is an important part of corporate
development of a country .Even through the capital marketer is in the early stage of
development in Nepal, Nepalese investors have heavily made investment on newly
established companies, especially in financial sector -This trend will remain to
continue until the investors are satisfied by the decision made by the management of
the companies. Dividend is most inspiring aspect for the investment in the shares of
various companies for an investors, Even if dividend affect the firm's value, unless
management knows exactly how they affect value, there is not much that they can do
to increase the shareholder's wealth. So it is necessary for the management to
understand how the dividend policy affects the market value of the firm or market
price of the stock or the wealth position of the shareholders. Thus, this study seeks to
answer the following question:
 What is the position of DPS, EPS and MPS of listed banks?

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  Is there any effect of DPS, EPS DPR, EY, DY on MPS?
 Is there any uniformity in dividend distribution among the sample firm?
 This study will try to answer the above mentioned issues on the basis of major
finding.

1.3 Objective of the Study

The major objective of the study is to determine the trend and practices of dividend
payment by the Nepalese “A” class listed companies of Nepal. This study may be
helpful for management committee of commercial bank in setting suitable dividend
policy. However the specific objective is are as follows.
 To examine the relationship between DPS, EPS, DPR, DYR, EYR MVPS of
sample banks.
 To analysis out the impact of dividend on Market share price.
 To assess the regularity and uniformity of dividend paying financial institutions.

1.4 Significance of the Study

In the capital market the investor can earn return in two ways, one is dividend and
another is capital gain. The term dividend is defined as a return from investment in
equity shares. So dividend is important factor for investor while investing in equity
shares. This study helpful to investor to take rational decision like where to invest,
how to invest, what portfolio should be made to obtain maximum profit from their
investment? When a new company floats shares through capital market, large
numbers of people gathers to apply for owner's certificate. It indicates people's
expectation on higher return of investment in shares.

Dividend is a source of return to shareholders. Shareholders invest in shares for the

purpose of getting high return and maximize their wealth position .The dividend
policy is an effective way to attract new investors, retain existing investors, and
make them happy as well as to maintain the goodwill and desired controlling power
in the management of the firm.

In Nepalese context, most of investors are investing in the stock without adequate
knowledge of the company and performance and dividend policies. This study helps

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to aware the Nepalese investors. This study is expected to fill the research gap and
add to the inputs to financial literature relating to dividend.
The importance of the study can be pointed out as follows:
To the Management
Dividend policy is the controversial topic of financial management. In may affect
value of the firm. Moreover, most common objective of the firm is to maximize
shareholders wealth. So management may adopt appropriate dividend policy.

To shareholders
Shareholders are more concerned with the amount of dividend paid by the firm. So
they have more curiosity on the dividend policy, adopted by their concerned banks.
With this study they can make their mind more comparable in terms of dividend
pattern and value of the firm.

To the Investors
Generally, most of the investors prefer to invest in profitable firm and expect high
return. Corporate sector is expanding but there is information gap between the
management of Nepalese companies and Nepalese investors who are eager to invest
in shares they are just investing in the shares in trial and error methods. So, the
dividend behavior should be effective to attract new investors keeping the previous
investors satisfied and should maintain the reputation of the firm.

To the researcher
It can be used by researcher as guideline to fulfill the partial requirement of Master of
Business Studies. It may help others who want to study in similar topic.
Besides these, it will also be beneficial for the policy makers from the comparative
study of dividend policy. They can get important findings, which are useful in policy
making about dividend policy formation. Dividend policy of banks helps the
customers, financial agencies, stock brokers, interested person and scholars to find out
appropriate dividend policy. It is believed that other banks will also benefit with this
study.

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1.5 Limitations of the Study
The study is mainly concentrated on the dividend practice and its influence in
prospect of Nepal of “A” class listed companies in Nepal and present study has been
limited as specific as below:
 The data being taken from secondary source, therefore authenticity of the data is
dependent on the accuracy of the information used.
 The result and the interpretation are completely rigid and from the view point of
the researcher.
 Among the different determinants of the market price of the stock, only cash
dividend, stock dividend and earnings are taken for the analysis.
 This study covers only dividend policy of selected commercial banks and its
impact on stock price.
 The study cover only five Banks & period covers only latest5years .

1.6 Organization of the Study

The whole study has been divided into five chapters.
Chapter-I Introduction
In this chapter, deal with the introductory part of the study which includes background
of the study, statement of the problem, objective of the study, significance and
limitation of the study.

Chapter-II Review of Literature

This chapter deals with review of the different literature in regard to the theoretical
analysis and review of book, articles and thesis related to this study.

Chapter-III Research Methodology

This chapter deals with research methodology used to carry out the research. It is
includes research design, population and sample, source and technique of data
collection, data analysis tools.

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Chapter-IV Presentation and Analysis of Data
This chapter is the main part of the study, which includes analysis and interpretation
of the data using financial and statistical tools. Similarly this chapter also includes the
major finding of the study.

Chapter-V Summary and Conclusions

Hence, the summary and conclusions of the study and recommendations for further
studies.

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