DIVIDEND AND ITS IMPACT ON STOCK PRICE

A COMPARATIVE STUDY OF NEPAL INVESTMENT BANK

A Research Proposal

By:

STUDENT NAME

T.U. Registration Number:

COLLEGE NAME

Submitted to:

The Faculty of Management

Tribhuvan University

Kathmandu

In the Partial Fulfillment of the Requirement for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)

Bhaktapur, Nepal
December, 2020
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CHAPTER I: INTRODUCTION

1.1 Background of the Study

Dividend is defined as that portion of the net earnings of the firm, which is distributed to
the shareholders either in the form of cash or stock, as per its dividend policy. Dividend payments
are usually part of the company’s strategic policy to return a portion of its profits to its
shareholders. The dividend ratio provides information about the financial strength and maturity of
the company along with reflection about its investor’s expectations. The dividend can be
distributed either in cash or by capitalization of profits as bonus shares.
Investors in underdeveloped countries like Nepal mostly look at the profitability of the firm
while purchasing equity shares from the secondary market. Since dividend paid to the shareholders
is one of the best indicators of profitability, it is generally believed that dividend plays a crucial
role in determining market price of the corporate share (Khadka, 2012). A firm generally pays
stock dividend if it plans to increase the capital so as to expand the business. The objective of
dividend policy should be to maximize the shareholders return so that the value of their investment
is maximized. Dividend decision is one of the major decisions taken by the firm. The amount of
dividend declared by a firm is one of the factors that show the actual position of the earnings of
the firm. The firm issues equity shares to raise ownership capital and the investors buy them with
the ultimate expectation to receive a share of profit. The value of the firm is said to be high when
the market price of the company’s common stock is higher.
Firms that perform better than others have higher stock prices and can raise additional fund
(both debt and equity) in more favorable terms. Therefore, it is important to identify the factors
that determine the market price of equity shares of any organization. Financial institutions,
including commercial banks in Nepal, are the institution that mobilize monetary resources in the
society. During 1990’s along with the economic liberalization in Nepal many joint venture banks
were established in the private sector, which mandatorily subscribed shares widely to the general
public. Commercial banks appeared as the most profitable business and therefore in the beginning
the price of shares of commercial banks continuously went up. However, the stock market had
been much volatile in Nepal during the last decade because of internal conflict, political instability,
poor corporate governance and various other reasons.
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It is said that when the firm needs to retain a high % age of earning, they issue stock
dividends so that the shareholders of the firms remain content. Managers strongly agree that stock
dividends have a positive psychological impact on investors receiving them (Baker and Philips,
1992). By issuing dividends, management is forced to go to the capital market for additional
financing. Higher dividends can directly benefit shareholders because they reduce the free
resources which managers can use sub-optimally. Some economists believe that management
decides to pay dividends in order to reduce agency costs (Easterbrook, 1984). Each time it attempts
to raise fresh capital, its operations are intensely scrutinized by investment bankers, accountants
and other market professionals because these parties have a comparative advantages over the
bondholders in monitoring the firm’s activities. Dividend payments accompanied by subsequent
new financing may lower monitoring costs and thereby increase firm’s value (Rao, 1992).
When dividends go up, the stock becomes more attractive to buyers. That increased
demand will cause sellers to raise the price to gain more profits. If you hold this dividend stock,
the share price will go up as the dividend rises. Investors generally consider rising dividends a sign
of a company’s good wealth. Always make sure the company that issues the dividend stock reports
growing profits along with the increased dividend. Avoid companies that raise their dividends
without increased profits to make their stock look more attractive, because those companies may
not be able to pay the increased dividend over time.
Although, many commercial banks are in the nation; all together twenty seven commercial
banks are listed in security board, on the Nepal Stock Exchange. Out of which one commercial
bank have been considered for the study; Nepal Investment Bank Limited. This study is concerned
with examining the interrelation between dividend and stock price of Nepal Investment Bank
Limited as the representation of entire commercial banking industry of Nepal.

1.2 Statement of the Problem

Dividend policy is recognized as one of vital strategic decisions of a firm. The dividend
policy describes what amount of dividend should be paid, when to release dividend in which form,
when and how much to retain for future investment and to deal with situational issues. A decline
in release of dividend can reduce the value of share. But the dividend decision is still a fundamental
as well as controversial area of managerial function. The effect of dividend policy on market price
of share is a subject of long standing arguments. But, still there is no single conclusive result
regarding the relationship between dividend payment and market price of the share. Dividend is
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most inspiring aspect for the investment in the shares of various companies for and 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. The questions therefore to be asked
are:

 What is the position of DPS, EPS and MPS of bank?

 Should the firm pay out money to its shareholders or should the firm take that money and
invest it for its shareholders?
 If a firm decides to pay a dividend, of what percentage of its earnings?

1.3 Objectives of the Study

My research topic is a comparative study on dividend and its impact on stock price of
NIBL. Therefore, to empirically evaluate the impact of dividend on stock price this research is
been done. The major objectives of this study are:

 To obtain in-depth knowledge about the impact of dividend policy adopted by the bank to
its market price of shares.
 To examine existing trend of Earning Per Share (EPS), Market Price Per Share (MPS),
Dividend Per Share (DPS), Price Earnings Ratio (P/E ratio) and dividend payout ratio
(DPR) of the bank.
 To know the relationship between dividends with earning per share, market price per share
and dividend payout ratio of the bank.

1.4 Rationale of the Study

Investment concept has been broadly increasing day by day in our country Nepal. Many
people are involved in investing their money in market shares rather than saving money in banks
knowing benefits of share market. How dividend policy decisions affect a firm’s stock price is a
widely researched topic in the field of investments and finance but still it remains a mystery that
whether dividend policy affects the stock prices or not. Therefore, I have chosen this topic for my
research.
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1.5 Limitations of the Study

The limitations of the study ate those characteristics of design or methodology that
impacted or influenced the interpretation of the findings from your research. In simple words
limitation refers to not availability of required data and information for the study. Each and every
research has some limitations. Therefore, some of limitations of my study are as follows:

i. The accuracy of secondary data depends on the reliability of the annual report of the
concerned bank.
ii. The study is focused only on dividend and stock price only and does not cover the other
financial aspects.
iii. Time limit and resources are also constraints.
iv. This study is based on the five year data starting from 2072/73 to 2076/77.
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CHAPTER II: REVIEW OF LITERATURE

Review of literature is an important part of any research work. The main purpose of
literature review is to find out what works have been done in the areas of research problem under
the study and what has been done in the field of the research they being undertaken. It provide
basis for the researcher to explore the relevant and true facts for the reporting purpose in the field
of research study. Literature here means the related printed material about the subject matter of the
research work. It may be in various forms like book, booklet, thesis, reports etc.

2.1 Theoretical Framework

Theoretical framework is an important aspect of literature review which provide the basis
or foundation upon which the study is established. It presents logically to the previous research
results and develops scientific base relating to the assumptions with theories. It presents the
relationship between dependent and independent variables that helps to develop hypotheses.

2.2 Conceptual Framework

A conceptual framework is an analytical tool with several variations and contexts. It can
be applied in different categories of work where an overall picture is needed. It is used to make
conceptual distinctions and organize ideas. Strong conceptual frameworks capture something real
and do this in a way that is easy to remember and apply. For example, dividend payout policy has
a close relationship with the majority of the company’s investments as most of the investors are
interested in maximum return on their investments and maximize their wealth.

2.3 Empirical Review: Review of Related Previous Studies

Empirical review is research using empirical evidence. It is also a way of gaining

knowledge by means of direct and indirect observation or experience. Empirical evidence (the
record of one’s direct observations or experiences) cab be analyzed quantitatively or qualitatively.
Research design varies by field and by the question being investigated. Many researcher combine
qualitative and quantitative forms of analysis to better answer questions which cannot be studied
in laboratory settings, particularly in the social sciences and in education.
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Shrestha, A. (2013), conducted a study on “Dividend policy and its impact on share price:
A study on Nepalese commercial banks.” The major objective of the study was to analyze the
relationship between dividend policy and its impact on price of the shares listed in the Nepal stock
exchange. Specifically, it examined the impact of earnings per share, retained ratio, return on
equity and profit after tax, liquidity, dividend payout ratio, dividend yield ratio, growth of total
assets, and size of total assets and leverage on market price per share and volatility of share price.
He collected data based on secondary data, which were gathered from 17 banks in Nepal. The main
source of data is supervision report of Nepal Rastra Bank, annual report of commercial banks and
so on.

2.4 Definition of Terminology

It is imperative that both key technical and non-technical terms used in research are defined
clearly. This type of review summarizes and integrates current state of knowledge on the topic
under study. It helps us to gain knowledge about present status of knowledge about a particular
subject matter.
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CHAPTER III: RESEARCH METHODOLOGY

Research methodology, according to Kothari (2004), refers to the logical sequence of the
research, the research methods and instruments used. It is a useful information for both the readers
and researchers to be clear how the research to be carried out. In order to achieve the objective of
the study, certain method of research has to be used which as follows:

3.1 Population and Sample

Population refers to entities or individual who share the similar characteristics. Sample
refers to any procedure to draw conclusions based on the population. Area of this study is
comparative study of dividend and its impact on stock price of Nepal Investment Bank Ltd.
(NIBL). At present there are twenty seven commercial banks operating in Nepal, which has been
taken as population.

3.2 Nature of Data

Factual information that is measurable and can be performed statistically is called data.
Hence, data are collected facts such having values or measurement. There are mainly two types of
nature of data, they are: Quantitative and Qualitative data. Quantitative data are anything that can
be expressed as a number or quantified whereas; qualitative data cannot be expressed as a number.
This study mainly focus on quantitative data.

3.3 Data Source

Data can be collected from different sources on demand of research. There are two sources
of data i.e. Primary data and Secondary data. This study is based on the secondary data source. To
attain the study objective required data has been collected from previous repot and various articles
published by various people and organization. And other data has been collected from previous
5yrs annual report of Nepal Investment Bank.
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3.4 Data Presentation

Graph and chart are ways of presenting data in diagrammatic structure. Processed data
illustrated in graphic and diagrammatic structure are easily readable, visible, understandable and
comparable. For this study, data are presented in simple line graphs and tables to show highest and
lowest value of Nepal Investment Banks and also to present impact of dividend on stock price.

3.5 Data Analysis

Statistical data analysis can be done through two ways; descriptive statistic and inferential
statistics. In my study I am mainly using descriptive statistic (maximum, minimum, mean, standard
deviation, etc.) for the purpose of this study. Excel will be used to process and analyze the data.

3.6 Tools used for Analysis

Collected data are analyzed and interpreted with the help of various fundamental financial
and statistical tools. Following tools are used while conducting this research.

a) Financial Tools
It mainly provides support to analyze the strength and weakness of a firm. It helps to show
the mathematical relationship between two figures. Mainly following financial tools are
used in this study:
 Dividend Per Share
 Earnings per share
 Market Price Per Share
 Dividend Payout Ratio
 Price Earnings Ratio
b) Statistical Tools
For the presentation and proper analysis of the data to get the objective study, following
statistical tools are used in this research:
 Mean
 Standard Deviation
 Coefficient of Variation
 Correlation
 BIBLIOGRAPHY

Devkota, P. (2015). Comparative study of dividend practice and effect on price of Stock. Shankar
Dev Campus, Faculty of Management, Tribhuvan University, Kathmandu, Nepal.
Hashemijoo, M. (2012). The Impact of Dividend Policy on Share Price Volatility in the Malaysian
Stock Market. Journal of Business Studies Quarterly Vol. 4, No. 1, pp. 111-129.
Malla, B.B. (2009). Dividend Policy and Its Impact on Share Price (Analysis of Selected “A” Class
Listed Companies). Faculty of Business Administration, Pokhara University, Kathmandu,
Nepal.
Masum, A. A. (2014). Dividend Policy and Its Impact on Stock Price – A Study on Commercial
Banks Listed in Dhaka Stock Exchange. Faculty of Business, ASA University Bangladesh,
Bangladesh.
Pant, P. R. (2016). Fundamentals of Business Research Methods. Anamnagar, Kathmandu: Nepal
Buddha publication.
Pradip, R. (2010). A Comparative study on dividend policy of Everest Bank Limited and Bank of
Kathmandu Limited (Published Thesis).Faculty of Management, Tribhuvan University,
Kathmandu, Nepal.
Shrestha, A. (2013). Dividend policy and its impact on share price: A study on Nepalese
commercial banks (Published Master’s Thesis). Faculty of Business Administration, Pokhara
University, Kathmandu, Nepal.

Websites:
www.nibl.com.np/about-us/investor-relation/annual-reports
www.google.com
www.investopedia.com
www.nepalstock.com