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A Study on Impact of Dividend Policy on Shareholders' Wealth of Selected

Information Technology Companies

Article · October 2015

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 A Study on Impact of Dividend Policy on An International Peer Reviewed Research
Shareholders’ Wealth of Selected Information Journal (ISSN-2321-5968) Vol-2 Issue-2,
Technology Companies September 2015

A Study on Impact of Dividend Policy on Shareholders’ Wealth of

Selected Information Technology Companies

Yagnesh Dalvadi, Jaykirti Patel

Introduction
Abstract Shareholders’ wealth is represented in the market price of the
This paper is aimed at company’s equity share, which in turn, is the function of the company’s
analyzing the impact of investment, financing and dividend decision. Managements' primary
dividend policy of goal is shareholders' wealth maximization, which translates into
shareholders’ wealth in maximizing the value of the company as measured by the price of the
Selected Information company’s common stock (Shim 2001). Shareholders like cash
Technology (IT) Companies. dividends, but they also like the growth in EPS that result from
To measure impact, we have ploughing earning back into the business (Khan, 1992). The optimal
selected companies that are dividend policy is the one that maximizes the company's stock price
Dividend paying and non- which leads to maximization of shareholders' wealth and thereby
paying from 2004-05 to ensures more rapid economic growth. The present study is intended to
2012-13. To measure the study how far the dividend payout has impact on shareholders' wealth
impact of dividend on in general; and in particular to study the relationship between the
wealth, total 16 companies shareholders' wealth and the dividend payout and to analyze whether
were selected on the basis of the level of dividend payout affects the wealth of the shareholders or
dividend payment i.e. not.
dividend payer and dividend
non-payer companies. To Literature Review
measure the impact of
dividend policy on Taylor& Francis (2012) found that size; profitability and liquidity
shareholders’ wealth, factors increase the probability to pay dividends. However, investment
multiple regression method opportunity, financial leverage and business risk decrease the likelihood
and stepwise regression to pay dividends.
models are used by taking Chandrasekhar Krishnamurti (2012) state that Dividend reductions that
DPSit (Dividend per Share), are not associated with share repurchases are statistically significantly
REit (Retained Earnings per related to future abnormal earning and provide strong support for the
Share), Pet-1 (Lagged Price information contain of dividend reductions. The percentage of dividend
Earning Ratio) and MPSit-1 reduction is stronger for interim that for final dividend reduction.
(Lagged Market Price) S.O Bbadmus, S.O Ashamu, James O Adiolo (2012)
(MVit-1) as independent This study investigated the effect of dividend policy on the value of the
variables, and MPSit (Market firm, it examined relationship between dividend payment and payout
Price Per Share) as ratio, found out the percentage of earning to the retained in to the
dependent variables. To company and identified the various factors that determine the pricing of
determine the proportion of share. Secondary data obtained from Nigeria stock exchange fact book
explained variation in the were used for the study. Data obtained were analyzed with regression
dependent variable, the co- packages for social science. The study find out among other thing that
efficient of determination the changes in the payout ratio of a company. It was therefore
(R2) has been tested with the recommending in the study that the policy of regular dividend payout
help of F value. It has been should not be changed arbitrarily since it has a serious effect on the
found that there is a investor’s attitude and the financial standing of the organization.
significant impact of Azhagaiah R., Sabari P (2008)
dividend policy on This paper examined the impact of dividend policy on shareholders’
shareholders’ wealth in IT wealth in Organic and Inorganic Chemical Companies in India during
companies. 1996 – 1997 to 2005-2006. There is a significant impact of dividend
policy on shareholders’ wealth in Organic Chemical Companies while
the shareholders’ wealth is not influenced by dividend payout as far as
Inorganic Chemical companies are concerned.

Page 24 SEMCOM Management & Technology Review

 A Study on Impact of Dividend Policy on An International Peer Reviewed Research
Shareholders’ Wealth of Selected Information Journal (ISSN-2321-5968) Vol-3 Issue-1,
Technology Companies October 2015

Objectives
2. To examine impact of dividend on shareholders’
1. To study dividend policy adopted by Dividend wealth in selected IT companies that are paying
paying companies and Dividend non-paying dividend and dividend non-paying companies.
companies of selected IT companies.
Dividend Paying Companies:
1. 3I InfoTech Ltd.
Research Methodology 2. Financial Technologies Ltd
The present study mainly analyses how far the 3. HCL Technologies Ltd
level of dividend payout affects the shareholders’ 4. Infosys Ltd
wealth, particularly in (dividend paying and non- 5. United Interactive Ltd
paying) IT companies in India. For this purpose, 6. Tata Consultancy Services Ltd.
total 16 companies have been selected (8 Dividend 7. Wipro Limited
payer companies and 8 Dividend non payer 8. Zensar Technologies Ltd
companies) on the basis of convenient sampling
technique. Population of this study is all Indian IT Dividend Non-paying Companies:
companies. Data collected for 9 years starting from 1. Accentual Technologies Ltd
2004-05 to 2012-2013. The study has been carried 2. Dion global Solution Ltd
out on the basis of secondary data only. Data of 3. Frontline Business Solution Ltd
sample companies are collected from capital line 4. Allsec Technologies Ltd
database (Source www.capitaline.com). Share 5. HOV Services Ltd
market data are collected from website of Bombay 6. X-changing Solution Ltd
stock exchange and National stock exchange. 7. Trico India Ltd
Following are the sample companies for the study: 8. ShreeJal Info Ltd
Data Analysis
Table:1 Descriptive Statistics of Dividend Payers and Dividend Non-Payers

Particular Dividend Non-Payers Dividend Payers

Mean Std. Deviation Mean Std. Deviation
Market Value of
99.4874 159.98793 597.1050 726.37710
the Company
Avg. Dividend
.3354 1.31853 658.7762 1042.54160
Per Share
Dividend Ratio 3.7821 13.24558 482.8800 618.73513
Earnings Per Share 36.7038 62.39419 13113.2767 26761.17231
Price Earnings
23.5250 68.67870 51.5245 136.41710
Ratio
Avg. Profit before
2.8680 9.88407 2243.9950 3514.11142
Tax (Rs. in Cr)
Avg. PAT
2.3019 9.37062 1893.9991 2802.91003
(Rs. in Cr)
We can observe that the company that pays Table No: 2 Dividend Policy of Selected Dividend
dividend have higher PBT and PAT compared to Paying IT Companies
Dividend non-paying companies. Similar is the Types of Dividend Policy Companies
case with Avg. Dividend per Share, Dividend Regular Dividend Policy 6
Ratio, and Earning per Share & Price Earnings Stable Dividend Policy 2
Ratio. Naturally, the market value of the dividend Irregular Dividend Policy 0
paying company is far better compared to Dividend No Dividend Policy 0
Non-paying Company. We can see that the Market Total 8
value of the companies that pay dividend are very
high compared to dividend non-paying companies. Table No. 2 and graph given show dividend policy
of Dividend Paying Companies. We can observe
Dividend Policy of Selected Information that companies pay either Regular Dividend or
Technology Companies have stable dividend policy during the study
Dividend Policy of Selected Dividend Paying IT period. Majority companies pay regular dividend to
Companies. their shareholders.

SEMCOM Management & Technology Review Page 25

 A Study on Impact of Dividend Policy on An International Peer Reviewed Research
Shareholders’ Wealth of Selected Information Journal (ISSN-2321-5968) Vol-2 Issue-2,
Technology Companies September 2015

Dividend Policy of Selected Dividend Table No: 3 Dividend Policy of Selected Dividend
Non-Paying IT Companies. Non-Paying IT Companies.
Types of Dividend Policy Companies
Regular Dividend Policy 0
Stable Dividend Policy 0
Irregular Dividend Policy 3
No Dividend Policy 5
Total 8

Table No: 3 indicate dividend policy of Dividend Table No: 4 Trend of Market Value of Dividend
Non-paying Companies. We can see that the Paying Companies
companies that do not pay dividend are having
either Irregular dividend or No Dividend Policy. Trend Companies
Three companies follow Irregular dividend and five Increasing 0
companies did not pay any dividend during the Decreasing 0
study period. Fluctuating 8
Total 8
Market Value trend of Dividend paying Companies
and Non-paying Dividend Companies

Page 26 SEMCOM Management & Technology Review

 A Study on Impact of Dividend Policy on An International Peer Reviewed Research
Shareholders’ Wealth of Selected Information Journal (ISSN-2321-5968) Vol-3 Issue-1,
Technology Companies October 2015

Table No: 5 Trend of Market Value of Dividend Table No: 5 show market value of dividend non-
Non-Paying Companies paying companies. We can observe that out of total
Trend Companies dividend non-paying companies, market value of
Increasing 0 six companies were in fluctuating trend whereas
Decreasing 0 the market value of two companies is not available
Fluctuating 6 during the study period.
Not given 2
Total 8

Dependent Variable: Market Value of the

Companies
Hypothesis
Independent Regression Model
Variables
H0= There is no significant impact of Dividend on
1 2
Shareholders’ wealth in IT companies.
Constant 223.044 30.841
(4.436) (1.066)
The equations and variables used for the study are
given below Dividend 478 105
MPSit = a + b DPSit + c REit + (MPS)it-1 + eit per share (DPS) (8.547) (2.948)
Where, Retained Earnings -003 -001
MPSit -- Market price per share Per share (RE) (-1.215) (-764)
DPSit -- Dividend per share Leg PEt-1 200 112
REit -- Retained Earning per share (548) (545)
PEt-1 -- Lagged Price Earning Ratio Leg MV t-1 ---- 889
MPSit-1 -- Lagged Market Price (MVit-1) (18.576)
The Multiple regression technique and stepwise R2 0.395 0.842
regression method have been used to ascertain the Adjusted R2 0.381 0.837
best fitted model for predicting the dividend policy F value 27.876 161.069
and shareholders’ wealth.
Figures show t-values, Significant at 1% level.
Above table shows the regression result for
selected IT companies with regard to impact of

SEMCOM Management & Technology Review Page 27

 A Study on Impact of Dividend Policy on An International Peer Reviewed Research
Shareholders’ Wealth of Selected Information Journal (ISSN-2321-5968) Vol-3 Issue-1,
Technology Companies October 2015

dividend policy on shareholders’ wealth. Result Asquith, P. and Mullins, D., (1983)., “The impact
indicates that the fit of two models is significant at of initiating dividend payments on shareholders
1 per cent level (F =27.876, p < 0.01 for model 1, F wealth”, Journal of Business, Vol. 56, pp. 77-96.
= 161.069, p <0.01 for model 2). Among the two
models, F value for model 2 is high. Further, the Azhagaiah, R., Sabari, P., (2008)., “The Impact of
coefficients of DPS in two models are highly Dividend Policy on Shareholders’ Wealth”,
significant at 1 per cent level and positive in sign International Research Journal of Finance and
(B=478, t=8.547, p < 0.01 in model 1; B=105, t= Economics, ISSN 1450-2887, Issue 20, Euro
2.94, p < 0.01 in model 2). Journals Publishing Inc.,
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variable in the model 2 could together explain
0.837 per cent of the variance in market value, Bhalla, V. K., (2005)., “Investment Management
when explanatory variables in model 1 explain Security Analysis and Portfolio Management”,
0.381 per cent respectively model 2 is the 12th Edition, S. Chand & Company Ltd., New
appropriate one for the final interpretation. Delhi.
As show in table Leg PE and DPS has a positive
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The coefficient of DPS in model 2, though Journal of Portfolio Management, Winter 1976,
statistically significant, has declined considerable pp.634-639.
in the presence of RE and lagged MV, even though
the coefficients of those variables are insignificant. Chandra, P., (2008)., “Financial Management”, 7th
Also the first model becomes significant in two Edition, Tata McGraw-Hill Education.
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Dhagat, A., (2011)., “Financial Management”,
Conclusion Dreamtech Press., New Delhi.
We can conclude that dividend policy of Dividend Joe, K., Shim, Joel, G. Siegel., (ND)., “Financial
Paying Companies have either Regular Dividend or Management”, source www.Netlibrary.com
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Majority companies pay regular dividend to their Khan, M. and Jain, P., (1992)., “Financial
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This study attempts to answer to the question: Is Delhi.
there any Impact of Dividend Policy on
Shareholders’ Wealth? The main purpose of the Miller, M. and Modigliani, F., (1961)., “ Dividend
study is to shed some light on the above Policy, Growth, and Valuation of Shares”, Journal
association. Result of Statistical tests show that of Business, Vol. 34, PP. 411-433.
market value of companies mainly depends on
dividend per share and price earnings ratio.
Therefore, it can be concluded that the companies www.bseindia.com.
that pay dividend to their shareholders also give www.capitaline.com.
boost to shareholders’ wealth. As far as the www.nseindia.com
dividend paying companies are concerned, there is
a significant impact of dividend policy on Authors’ Profile
shareholders’ wealth.
Dr. Yagnesh Dalwadi
References Asst. Professor,
Aivazian, V. and Booth, L., (2003)., “Do emerging PG Department of Business Studies, Sardar
firms follow different dividend policies from US Patel University
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Ms. Jaykirti Patel
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[email protected]

Page 28 SEMCOM Management & Technology Review

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