Dividend policy and share price volatility: DSE evidence

Divided policy and share price volatility:

Dhaka Stock Exchange Evidence

Asadujjaman
(MBA ID # 18-899)

Abstract
Contrary to the previous studies that denied the relevance of dividend policy, the modern
corporate finance recognized the importance of dividend policy. So, the focus of this paper is
to study the relationship between dividend policy and share price changes. The study will
determine the relationship by including several control variables that are related to the
relationship. The data from the secondary sources was collected from the datastream of 2016.
The study was done mainly on the stocks of the Dhaka stock exchange for the year 2016. The
measures used for dividend policy were dividend yield and dividend payout which was taken
from the model developed by Baskin. Diagnosis tests were run to find out the nature of the
data and correlation matrix between the variables was developed to examine the extent of
correlation among the variables used here. The insignificant values found in the coefficients
of the regression among the variables showed that the data set failed to show any kind of
significant relationship between dividend policy and share price volatility. But positive
insignificant relationship was found between dividend yield and share price volatility. On the
other hand insignificant negative relationship was found between dividend payout and share
price volatility.
Key words: Dividend policy, Share price volatility, Dhaka stock exchange, Firm size, Debt
ratio

1. Introduction
Dividend was considered irrelevant to the stock price in some of the earlier studies of
corporate finance (Miller and Modgliani, 1961). Moreover, in the corporate finance of that
period dividend policy was merely a decision as to how much to distribute and how much to
retain for future growth. But in the corporate world of today, dividend policy is far from
taking the decision of retaining and distribution. But studies by Gordon (1996) and DeAngelo
et al. (1996) left space for examining the actual outcome of dividend policy on the volatility
of stock price. With time there have come other theories and effects like agency cost theory
of dividend policy, bird-in-hand fallacy, signaling theory of dividend, pecking order theory of
dividend policy and clientele effect of dividend policy which have been able to show the
impact of dividend policy in the stock price from different perspectives (Baker, 1985).
Dividend policy has been always considered as one of the crucial factors that an investor will
focus on while determining their investment strategy. By having regular information on
dividend yield and dividend payout ratio, an interested investor may perform an effective and
more accurate financial analysis on the firm, together with other financial ratios. As payout
ratio and dividend yield are two of the key factors that an investor would check during
making an investment decision, the overall dividend policy may have an influence on share

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 Dividend policy and share price volatility: DSE evidence

price volatility. Moreover, dividend policy historically has a negative relationship with
outside directorship (Al-Malkawi, 2007). With the information content of dividend policy
and other impacts of dividend policy, dividend policy has the capability of affecting share
price in various ways. Investors usually prefer less risky investment to high risky investment
(Kinder, 2002) and the price of the less risky stocks are more predictable than that of more
risky investments. And dividend, by its capability of ensuring yield for investors, is capable
of bringing stability in the stock price. That relationship between share price volatility and
dividend policy is the matter of study for this project.
The capital market of Bangladesh consists of two large stock exchanges (Dhaka Stock
Exchange and Chittagong Stock Exchange). The largest stock exchange of Bangladesh is the
Dhaka Stock Exchange and there have been events of huge price falls and unexpected
changes in prices in the stock markets of Bangladesh. As one major portion of the investors
of Bangladesh does their daily consumption spending from the gains they earn from their
stock investments, it is generally accepted that a huge portion of the investors of stock
markets in Bangladesh has a choice to make between dividend payment and capital gains. So,
the investors in Bangladesh have a choice to make between dividend payment and capital
gain according to their income pattern and consumption pattern. So, theoretically, the
dividend policy of stocks in Bangladesh has a role to play in the stock price of Bangladesh.
But there have been no research on the impact of dividend policy on share price volatility
after the year 2013. So, this is how the examining of the impact of dividend policy on share
price volatility gets a rational background.

2. Literature Review
The most prominent and mostly cited theory about the empirical irrelevance of dividend
policy was introduced by Miller and Modigliani (1961). Their theory had, in itself; some
assumed conditions which are somewhat unrealistic as well as too optimistic for real word
most of the times. They basically held the concept that there is no general transaction cost
involved in the stock market in general and moreover, there is either no tax, or the tax
rates decided by the government are equal for both dividends and capital gains. It was also
assumed by their theory that a perfectly working capital market prevails in the economy
where the market price of the stocks cannot be controlled or manipulated by a single buyer or
seller. An additional assumption of the hypothesis was that information about the market
is available to all the buyers and sellers in the market with no additional cost. In such
situations, the stocks will be properly priced in the stock exchange and in markets like this,
managers’ have tendency to act as the best agent of shareholders which means that there is no
agency problem.
There have been some later studies with different models and different economies which
have agreed with the basic view of Miller and Modgliani (1961). For example, according to
Brennan (1971), the denial of the theory provided by Miller and Modgliani is dependent on
the denying of the principle of proper market rationality and the basic idea of independence
of irrelevant information. Another prominent and one of the most cited studies on the topic
was been published by Black and Scholes (1974). They worked with 25 portfolios of
common stock in NYSE for studying the impact of those companies’ dividend policy on
share price from the year of 1936 to the year of 1966. They found that there is no real market
evidence or logic that change in dividend policies may lead to change in stock prices. Their
findings were echoed perfectly with dividend irrelevance hypothesis provided earlier.
Baskin (1989) tried to examine the inner impact and relationship between share price
volatility and dividend policy. He took the basic model and also changed the model to add
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some relevant control variables for examining the existent association between share price
volatility and dividend yield. These used control variables for the model are earning
volatility, firm’s size, debt and growth. These control variables do not only have significant
effect on stock price volatility but they can also affect dividend yield theoretically. He
extracted data from 2344 U.S. firms over a period of 1967 to 1986. Using the control
variables, he found a significant negative correlation between dividend yield and stock price
volatility among the firms used which was expectedly greater than correlation between share
price volatility and any of other variables. He suggested that dividend policy can be used for
controlling the share price volatility. So, according to his study it can be concluded that
dividend yield is a major determining factor of stock price volatility. He reported that for 1 %
dividend yield increase for stocks in US, the standard deviation of stock price movement
decreases by 2.5 %.
Ho (2002) used a different model. He used fixed effect regression model to examine the
relevance of dividend policy. Findings of his study demonstrated a positive relation between
dividend policy and size of the Australian firms and liquidity of the Japanese firms. He found
a negative relation between dividend policy and riskiness of the firms. But that is in the cases
of only Japanese firms. Adesola and Okwong (2009) stated that dividend policy is reportedly
related with EBIT, EPS and dividends of the previous declared year but they also found that
growth of asset and size of the firm had actually no effect on dividend policy. Akbar and Baig
(2010), later on, collected data from a sample of seventy nine companies listed at KSE
(Karachi Stock Exchange) for the years of 2004 to 2007. The findings of their study
demonstrated that announcement of initiation dividends; (cash dividend or stock dividend)
had historically positive effect on stock prices in Pakistan.
Nazir et al. (2010) used data stream from 73 firms listed in Karachi Stock Exchange (KSE)
for same model and tried to examine and study the relationship between share price volatility
and dividend policy for the time period of 2003 to 2008. They reported that share price
volatility has significant negative interaction with dividend yield and dividend payout. They
reported about the control variables that both size and leverage have non-significant negative
effect (expected) on share price volatility.
Suleman et al. (2011) studied the relationship between dividend policy with share price
volatility in Pakistan. They took data from KSE regarding 5 most important sectors of KSE
for the period of 2005 to 2009. The result of their study showed a result opposite to that of
Baskin (1989). Their findings demonstrated that share price volatility has positive
relationship with dividend yield. They also demonstrated in line with the expectation that
share price volatility possesses a significant negative relationship with growth in KSE.
Hussainey et al.(2011), taking data from 123 English companies for the years 1998 to 2007,
took an effort to examine the relationship between share price volatility and dividend policy
in UK. In line with the model of Baskin (1989), they used multiple regression analyses for
determining the extent and side of the relationship of share price with dividend yield and
dividend payout ratio. Consistent to Allen & Rachim, (1996), which was based on Australian
results, Hussainey et al., (2011) found a notable negative relationship between share price
volatility and payout ratio. They also demonstrated a positive relationship between share
price volatility and dividend yield. They stated payout ratio as the most important
determinant or deciding factor of share price volatility.
There have been more researches on this issue in the stock markets of Asia. In Malaysia,
there have been done two studies on this issue. Hashemijoo et al. (2012) collected data from
datastream on consumer goods companies from the time period of 2005 to 2010. They
reported an inverse relationship between share price volatility and dividend policy. Similar

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 Dividend policy and share price volatility: DSE evidence

research was also conducted in the same year by Zakaria et al. (2012), who targeted a
different sector. They took construction and material companies in Malaysia. Their findings
also stated that dividend payout ratio significantly influenced the changes in share price. The
studies conducted in Malaysia used different proxies for the variables that suited the market
pattern of Malaysia.

3. Methodology

3.1 Data
The study has been done on Dhaka Stock Exchange for the year 2016. For the analysis, data
against the variables have been collected for the companies that declared cash dividend for
the year 2016 or financial year 2016. Although there were 300 companies in total in Dhaka
Stock Exchange, 167 companies were selected among them.
To sum up the criteria of the selection of sample, it can be said that companies were taken in
the study on their declaration of dividend for the year 2016. In fact, more than 175 companies
paid cash dividends in the year 2016. Some outliers’ data from each variable were excluded
from the sample to make the dataset more eligible for examining the relationship between
variables.
The outliers’ ranges were excluded by the following rule:
Mean +/- 3.5 * Standard deviation
All the data used in the study are secondary data and hence they were collected from various
sources like financial statements of the companies, websites of Dhaka Stock Exchange, and
websites of other asset management companies and websites of the companies.
3.2 Variables
Share price volatility: This is the dependent variable. It is based on the annual range of
stock price for each of the sampled companies obtained from secondary data sources for the
year 2016. The range is then divided by the average of the highest and lowest prices obtained
in the year 2016 and then squared. Then a square root transformation was applied in the
variable so as to obtain a variable comparable to a standard deviation (Baskin, 1989).
Dividend yield: Dividend yield is one of the two main indicators of company’s dividend
policy (Baskin, 1989). This is expressed as the dividend per share as a percentage of the share
price. The data for this variable was collected from the secondary sources.
Dividend Payout: Payout ratio is another indicator of dividend policy. This variable is the
ratio of DPS (Dividend per share) to EPS (Earnings per share) for all available years.
Size: This variable is the share price multiplied by the number of ordinary shares. Log10
transformation is used in this size to reflect the magnitude in a comparable from properly.
Earnings volatility: The data for this variable were obtained from the financial statements of
the companies. These figures are representing EBIT. Earnings volatility is calculated by
taking the standard deviation of EBIT for the most recent five years for each of the
companies.
Long term debt: This variable is basically the ratio of long term debts (debts that are of
maturity greater than 1 year) to total asset from the balance sheet. The data for this variable
has directly been collected from financial statements of the company.

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 Dividend policy and share price volatility: DSE evidence

Growth in assets: This variable is the ratio of change is total asset of the company to the
initial level of total asset of the company. The data for this variable has directly been
collected from financial statements of the company.
Variable Expected result
Dividend yield (-)
Dividend Payout (-)
Size of the firm (-)
Earnings volatility (+)
Debt (+)

3.3 Methods
Although there were several options in the selection of software for conducting the study,
STATA13 has been used to conduct the study. The data analysis started with descriptive
statistics which will calculate basic things of the dataset collected against variables. With the
descriptive studies, several diagnosis tests will be done to examine the nature of the data. The
hypotheses for this study are:
H0: There is no association between share price volatility and dividend policy.
H1: There is association between share price volatility and dividend policy.
The diagnosis test part of the study will test the heteroscedasticity of the data. The
heteroscedasticity of the data will be tested by STATA13. The existence of any
multicolinearity will also be tested by STATA13 by VIF function.
The second tool of data analysis is the correlation matrix to find out the correlation among the
variables and the final tool of data analysis is the regression analysis using the variables. The
inclusion of the control variable has been done to properly test the proper impact of the
independent variables of the study. The inclusion of control variables will actually show how
much the independent variables can affect the dependent variables by their own. Finally
multiple regression analysis using OLS model has been used to find the regression equation
among the variables. The regression analysis was also done using STATA13 and the results
presented in the analysis chapter have been directly extracted from STATA13 results.

4. Data analysis

4.1 Descriptive analysis

Looking at the basic measures for the dataset, we can easily understand from the standard
deviations that there are presences of extreme values in almost all the variables as they are
data collected for just one year. In the variable of earning volatility the gross earnings figures
have been used for the calculation of standard deviation and mean.
This is the reason why the mean and SD of this variable are showing extreme values
compared to others. The mean of the payout is normal although there are negative values of
the payout that occurred because of the fact that almost all the other values against these
variables are normal. The variable size of the firm shows limited standard deviation because
the inputs collected against this variable have been applied LOG10 to give them
comparability with the other variables.

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 Dividend policy and share price volatility: DSE evidence

Name of Variables Mean Standard Deviation

P.Vol 0.4917 0.1944
Payout 0.8283 2.898564
Yield 0.031857 0.020878
Size 3.672499 0.5855
Earning 342.6979 873.6751
Debt 0.548069 0.293983
Growth 0.190325 0.743015
Table: Basic measures of all the variables
4.2 Heteroscedasticity measure and multicollinearity measure
Heteroscedasticity refers to data with unequal variability (scatter) across a set of second,
predictor variables. The Breusch–Pagan test in STATA13 will be used to examine the
presence of heteroscedasticity. The results showed probability of 0.5095 for the test. The
result of the test is way above 0.05 and so this value leads to reject the presence of any
heteroscedasticity in the variables. So the data of the analysis can be called homoscedastic.
For testing multicollinearity variance inflation factor test has been used. The mean VIF has
been found 1.19 and all of the VIF values are around 1.00 to 1.50. These values of VIF show
a very low degree of multicollinearity in the variables. VIFs above 10 are generally seen as a
concern. So, this can be concluded that the data used for the study is free from
multicollinearity.
4.3 Correlation matrix
PVol DYield DPayout Size EVol Debt Growth
PVol 1
DYield 0.0021 1
DPayout -0.0258 -0.0556 1
Size -0.2983 0.2063 -0.1012 1
EVol -0.1490 0.0812 -0.0373 0.4509 1
Debt -0.0191 0.0979 0.0752 0.2338 0.1309 1
Growth -0.0724 0.1261 -0.0022 0.1258 -0.0108 0.3650 1
Table: Correlation Matrix
From the above table, we can clearly see that dependent variable price volatility and
independent variable dividend yield are positively correlated with the value of 0.0021. This
positive correlation between the two variables is not in line with the findings of Basin (1989).
But the finding here is in line with the finding of Allen and Rachim (1996). When Baskin
(1989) found that these variables are negatively correlated at the value of -0.643, Allen and
Rachim (1996) found that these variables are positively correlated at the value of 0.006.
The next relationship is between dependent variable price volatility and independent variable
dividend payout. Both the past studies mentioned above have found negative relations
between these two variables. The finding here is according to the finding of both the studies

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 Dividend policy and share price volatility: DSE evidence

as it shows a negative correlation between price volatility and dividend payout of the stocks
of Dhaka Stock Exchange. In the finding of Baskin (1989), he found that price volatility and
dividend payout are negatively correlated at the value of -0.542 and a later study by Allen
and Rachim (1996) found that these variables here are negatively correlated at -0.210. And in
this analysis, it is found that these variables are negatively correlated at -0.0258.
4.4 Regression
The first regression analysis is the regression of the dependent variable with the independent
variables only. The positive relationship between dividend yield and share price volatility is
in line with the findings of Allen and Rachim (1996) but it is against the expectation of the
variable and the findings of Baskin (1989) which is also a basic model. The second
relationship is between share price volatility and dividend payout. The negative relationship
between dividend payout and share price volatility is in line with the expectation and
previous findings of both Baskin (1989) and Allen and Rachim (1996).
The R-square of the regression was 0.0007 and the adjusted R-square was -0.0115. These
things mean that the model can’t explain the variability of the dataset properly. As the R-
square and adjusted R-squared are abnormally low, it can be concluded that the model used
for the study can’t properly explain the variability of the data and the model is not a good-fit.
Coefficient t-stat p-values
Intercept .4929552(*) 17.46 0.000
Dividend Yield .0057595 0.01 0.994
Dividend Payout -.0017288 -0.33 0.742
R2: 0.0007
(* significant at 95% confidence level) Adjusted R2: -0.0115
Table: Regression analysis among with the independent variables only

Coefficient t-stat p-values

Intercept 0.8503* 8.36 0.000
Payout -0.0040 -0.79 0.429
Yield 0.5685 0.80 0.427
*
Size -0.1069 -3.69 0.000
Earning -4.12e-06 -0.22 0.826
Debt .0377844 0.74 0.462
R2: 0.0994
(* significant at 95% confidence level) Adjusted R2: 0.0714
Table: Regression analysis including the control variables
The inclusion of control variables show that the inclusion of control variables doesn’t change
the way of impact of the independent variables but they change the degree how much
dividend policy is going to play a role on the volatility of the stock price. In the regression
without the control variables, where the payout had a negative relationship with the price
volatility to a very small extent, the extent of their negative relationship with the control
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 Dividend policy and share price volatility: DSE evidence

variables became higher in the case where control variables have been included. The -0.0017
negative coefficients in the regression equation without the control variable was a sign of
very little degree of relationship between dividend payout and price volatility. The negative
coefficients between the same variables became higher in this case with control variables.
Same goes with the relationship between dividend yield and price volatility. In this case after
adding the control variables, the values of R-square and adjusted R-square are 9.94% and
7.14%. With control variables added, the model can explain a better degree of variability
which is still not at the satisfactory level. Both the main independent variables show very
high p-values which signify the fact that these results are not significant at 5% confidence
level. The F-value for this regression analysis is 0.0045.
Now the independent variable dividend payout is dropped to examine how much the absence
of one independent variable of the study affects the other one. Here, the main focus is to
examine how the other independent variable reacts without the presence of dividend payout.
As we can see, the coefficient of the variable dividend yield doesn’t change much without the
change of dividend payout. So, it can be said that the power of dividend yield to put an
impact on share price volatility is not dependent on dividend payout.
Coefficient t-stat p-values
*
Intercept 0.839782 8.34 0.000
Yield 0.5918 0.83 0.407
Size -0.1045* -3.63 0.000
Earning -4.21e-06 -0.23 0.822
Debt .0335549 0.66 0.511
R2: 0.0959
(* significant at 95% confidence level) Adjusted R2: 0.0735
Table: Regression dropping dividend payout
But the impact of the control variable still remains there. In this case after adding the control
variables and dropping dividend payout, the values of R-square and adjusted R-square are
9.59% and 7.35%. With control variables added and one of the independent variables
excluded, the model can explain a better degree of variability which is still not at the
satisfactory level. The main independent variables show very high p-values which signify the
fact that these results are not significant at 5% confidence level. The F-value for this
regression analysis is 0.0025.
Coefficient t-stat p-values
Intercept 0.8527* 8.4 0.000
Payout -0.00419 -0.83 0.409
*
Size -0.1029 -3.61 0.000
Earning -4.34e-06 -0.23 0.816
Debt .0400 0.78 0.434
R2: 0.0958
(* significant at 95% confidence level) Adjusted R2: 0.0735
Table: Regression dropping dividend yield
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 Dividend policy and share price volatility: DSE evidence

The negative relationship between share price volatility and dividend payout sustains even
without the existence of dividend yield. But the control variable still exists. In this case after
adding the control variables and dropping dividend yield the values of R-square and adjusted
R-square are 9.58% and 7.35%. With control variables added and one of the independent
variables excluded, the model can explain a better degree of variability which is still not at
the satisfactory level. The main independent variables show very high p-values which signify
the fact that these results are not significant at 5% confidence level. The F-value for this
regression analysis is 0.0025.
In the first two tables presented above, the control variables debt and earnings volatility have
been dropped. The coefficients of relationship between share price volatility and dividend
yield in these two cases are 0.5983 and 0.5708. These values are pretty close to the values
that were found from regression equation including all the control variables. So the control
variables earning volatility and debt to asset ratios have very less to do with the relationship
between share price volatility and dividend yield. We also see that the correlations
coefficients between share price volatility and dividend payout are -0.00369 and -0.0040307.
These values are also pretty close to that of the correlations coefficients found with all the
control variables. So, the control variables earnings volatility and debt don’t have much role
to play in the relationship between share price volatility and dividend payout.
Coefficient t-stat p-values
Intercept 0.8544* 8.43 0.000
Payout -0.0036349 -0.72 0.472
Yield 0.5983 0.84 0.402
Size -0.1027* -3.62 0.000
Earning -3.72e-06 -0.20 0.842
R2: 0.0963
(* significant at 95% confidence level) Adjusted R2: 0.0740
Table: Regression analysis dropping debt

Coefficient t-stat p-values

Intercept 0.8591328* 9.21 0.000
Payout -0.0040307 -0.80 0.427
Yield 0.5708925 0.80 0.423
*
Size -0.1096804 -4.20 0.000
Debt 0.8591328 0.74 0.462
R2: 0.0991
(* significant at 95% confidence level) Adjusted R2: 0.0769
Table: Regression analysis dropping earnings volatility

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 Dividend policy and share price volatility: DSE evidence

Coefficient t-stat p-values

Intercept 0.5006281* 13.16 0.000
Payout -.0020724 -0.4 0.693
Yield .1159289 0.16 0.874
Earning -.0000337 -1.93 0.056
Debt .0011907 0.02 0.982
R2: 0.0234
(* significant at 95% confidence level) Adjusted R2: -0.0008
Table: Regression analysis dropping firm size
Finally, the control variable size was excluded from the regression equation. In this case, a
significant change in the correlations coefficient is found. The positive relationship between
dividend yield and share price volatility has still been existent but with a lower degree. From
0.5983 in the previous case, the coefficient of this relationship has now come to 0.1159. The
absence of the control variable doesn’t change the relationship between dividend yield and
share price volatility; rather it changes the extent to which these variables are related with
each other.In the relationship between dividend payout and share price volatility, it is also
obvious that the negative relationship between these two variables sustain but to a smaller
extent without the existence of the control variable size.
In the regression results, a positive relationship between share price volatility and dividend
yield has been detected but the relationship has not been found significant and same goes
with the negative relationship between share price volatility and dividend yield. The control
variable size has always shown significant on price volatility.

5. Conclusion
The basic focus of the study was to examine the relationship between share price volatility
and dividend policy (through the variables dividend payout and dividend yield) in Dhaka
Stock Exchange. By putting the data into OLS regression model, the relationship of the data
against 7 variables for the year 2016 have been tested for examining the relationship. It has
been found by OLS regression model that there exists a little weak negative relationship
between dividend payout and share price volatility. The finding of negative relationship is in
line with the findings of Allen and Rachim (1996). The finding is also in line with the recent
findings of Hussainey et at. (2011) for the UK stocks, Nazir et al. (2010) for the Pakistani
stocks and Hashemijoo et al. (2012) for Malaysian stocks. The relationship between share
price volatility and dividend yield is found positive. The positive relationship between share
price volatility and dividend yield is in line with the findings of Suleman et al. (2011) and
Hussainey et al. (2011). Among the control variables used here, size has significant
relationship with price volatility of DSE stocks and the size of the firm has significant power
to affect the relationship between share price volatility and dividend yield. But, it has to be
mentioned that the relationship found from the model for one year data didn’t show
significant value. The various measures to determine the fit of the variables and dataset
showed that variables can at best explain 7% to 9% variability of the variables. Moreover, in
the regression models by STATA13 showed that in most of the cases, the independent
variables used in the analysis have shown insignificant results. In fact, none of the main
independent variables showed significant p-values in the regression model which can be a

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 Dividend policy and share price volatility: DSE evidence

result of the bad fit of the model. So, it can be concluded that the regression model run from
one year’s data showed positive relationship between share price volatility and dividend yield
but the p-value of the regression was not a significant one. On the other hand, the dividend
payout and share price volatility consistently showed negative relationship between them but
the same problem exists here too. The P-value didn’t show a value that will be enough to call
the relationship a significant one.
The use of dummy variable to separate service firms from manufacturing firms would give a
more accurate measure of the relationship between share price volatility and dividend policy.
Moreover, as the data of only one year is used, the chances are high that the temporary good
or bad state of a particular firm or particular sector or particular business may easily affect the
results of the study as dividend payout ratio is used as independent variable and one of the
two indicators of dividend policy.
Keeping in consideration the issue that the findings of this study demonstrate that there exist
mixed results in the effects of various measures of dividend policy on share price volatility,
this project holds that whatever stand that a firm chooses to adopt between the two extreme
stands, companies should be always tactful in their adoption of a proper stand of maximizing
the wealth of shareholders and,at the same time, meeting the company’s ways to finance its
investments.

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