IMPACT OF DIVIDEND POLICY ON SHAREHOLDER’S WEALTH AND COMPANY PERFORMANCE
[Name of Writer]
[Date of Submission]
ABSTRACT
The main aim towards which this research is focused on is to highlight the importance of dividend policy on the shareholder’s wealth and company’s performance. In order to fulfill this aim, eight listed companies of UK have been considered that are listed on the FTSE 30 index. The data for this research was collected from the official website of London Stock Exchange in order to ensure the authenticity and accuracy of the figures. Companies from different industries were taken into consideration for this study in order to ensure the generalizability of the findings and conclusion. Considering the fact that the data was obtained in the form of panel, Panel Least Squares (PLS) Regression has been applied on the data set via E-views. The overall findings of this research have concluded that the shareholder’s wealth is impacted positively and significantly by the dividend policy of the company however, the dividend policy does not have a statistically significant impact over the financial performance of the company. In consideration to the results of this research, it is recommended that the companies need to be transparent and consistent with respect to their dividend policy as it has an association with the shareholder’s wealth. The companies should pay their shareholders in the case of increase in the value of their share to increase the overall value of their company. Also, the decision making of the company should be conducted in consideration to the various market factors including the dividend policy of the company.
Table of Contents
CHAPTER 1: INTRODUCTION
Introduction
The following research is aimed towards assessing the importance of dividend policy on the wealth of shareholders and performance of company. This chapter aims to define the contextual background of the study in which information regarding the topic of the study is being provided by the researcher. Moreover, problem statement has also been discussed as the problem statement which is one of the most important elements as it contains the reasoning of the issue which is going to be addressed in the study.
Third section consists of the aims of the study, in which usually four to five aims have been settled by the researcher. However, the most important aim is the point of recommendations where the researcher provides the recommendation to the company, organisation or the country regarding the issues which have been studied in the research. An aim of the study helps to design the research questions which summarises the focus of the study. In last sections of the chapter, scope of the study is being provided that who would be benefited by the research and what would be issues which will be solved through this study along with the structure of the thesis. Another section which is being included in this chapter which describes the key terms of the study based upon the topic of the research in order to strengthen the understanding of the readers.
Contextual Background
As the companies are required to meet their financial obligations they are required to have cash in their hand and for that particular reason the organisation have been issuing their shares in the market (Ansar, Butt and Shah, 2015). It has been observed that an organisation can float a large number of shares in the market until there are investors which are ready to invest in the company. However, there are various elements which make the company attractive for the investors such as the profit that the company is being making (AsmaTahir, 2014). However, the profit that has been made by the company is being distributed among the shareholders by the ratio of earning per share which is different from the dividend. When it comes to discuss about the dividend, it was observed that dividend is the amount which is being paid to the shareholders of a company which means that the amount that the company has made will also be distributed among the shareholders to keep them interested for making investment in to the company.
Furthermore, the companies are required to calculate that how much amount they have earned during the given period of time which helps them to identify that how much amount they should pay in terms of dividend so that the investors would be influenced to make decision of investing in the company (Agyei and Marfo-Yiadom, 2011). There are ranges which have been identified by the applied researches that what the percentages are being considered as the favourable condition for the investors so that they start purchasing the share of the company based upon the fact that the firm would be providing them the dividend based upon their policy. Dividend policies of the companies usually being made by the analysis of the capabilities and abilities of the company that whether they are capable of paying it to the investor on monthly basis, quarterly basis or annual basis.
Moreover, dividend is the liability of the company which is to be paid to the real owners of the company. However, there are some of the practices when the companies hold the cash and delay the dividend pay-out to fulfil their short term liabilities. Where this practice makes them able to meet the financial obligations at the same time it affect the shareholders’ value and gives a perception to the market that the firm is no more able to make profit in sufficient amount if they are even paying less amount of dividend. On the other hand, if the firm holds the cash and delays the dividend in case where the company is being usually providing the higher amount of dividend, it is being considered that the company was paying more than their capacity which can also be called as imbalanced manner Therefore, it is necessary that the company should keep a balance in this activity and fix the percentage they would be providing to their shareholders in return of their investment.
Problem Statement
According to Adediran and Alade (2013) examine that there is combination method pay-out, dividend and execution of firm in capacity of profitable asset which increases earning for each share of an organisation. Most of the studies are accompanied to discover this connection whereas, investigators determined that dividend pay-out and each share earnings are two dissimilar perceptions which must be engaged into concern on the basis so that wanted proficiency and profitability might be achieved. As it has been studied that dividend pay-out is being acknowledged to define the proprietorship of the stockholder within the organisation, though on other side each share earnings is the revenue that the business has produced for the duration of the specified time duration. This profit is being delivered to the investors as their revenue which is isolated from the dividend pay-out. Al-Haddad et al. (2011) reflect that these consequences cannot be executed on unindustrialized countries. But numerous researches have determined that operational profitability and cash flow have important effect on other organisation however there has been irrelevant relationship with proprietorship, responsiveness of cash flow, resistance and size, (Afzal & Mirza, 2010).
In spite of all the concepts, the policy of dividend pay-out have been evaluated with several variables to recognise the policy nature of dividend but not a particular suitable statement has been establish which can determine the positive outcome on companies dividend pay-out, (Agyei & Marfo- Yiadom, 2011). Furthermore, it is necessary to mention that where the amount which is being paid in terms of dividend pay-out is the amount that is in the favour of the shareholder, while the company would have to bear the additional transaction. This would affect the cash flow of the company in significant manner and there are the chances that the company would run out of cash as there are some of the examples where the companies hold the cash for their business process (Ye, 2018). However, the policy of dividend pay-out impact on stakeholders capital and its’ effect on organisations performance will be assessed allowing for UK listed corporations to have an understanding of dividend strategy influence on variables. Several researches have been done on developing countries view due to which the aims and objectives of this study is to discover and analyse the influence of organisation performance by dividend policy on developed countries and wealth of shareholders.
Aim of the Study
Analysing the topic and the problem statement of the study, below are the aims which have been settled to be achieved in this study.
- To recognise the conceptual consequence of dividend policy and wealth of shareholders
- To regulate the features of dividend policy that impacts wealth of shareholders and organisation performance
- To analyse the effect on shareholder wealth and organisation performance by dividend policy in UK listed organisations.
- To deliver set of recommendations for companies to increase distribution of dividend for stakeholders to increase performance of an organisation.
Research Question
Based upon the aims of the study, two specific research questions has been designed which will be answered through the findings of the study.
- What is the influence of dividend policy on stockholders wealth in context of UK listed organisations?
- What are the features of dividend policy that impact wealth of shareholders?
Scope of the Study
In accordance to the study of Ouma (2012), the earning from different firms indicates that whether the performance of firm generates profit or not. The amount that is paid by a firm to its stake holders despite knowing its risks related to the profit to the company is known as dividend payment. This dividend payment is considered as a significant factor for stake holders while investing in any organization. The earning and the profit that is produced by the firm is critically evaluated by the stakeholders. As such, the focus of this research study is to emphasize on the factors which increases the wealth of Stake holders and firms in UK enhancing their performance. Moreover, the policies which different organizations can apply for dividend payments and to increase the trust of stake holders on that particular organizations are also analysed critically throughout the research.
Structure of the Study
This research study includes five chapters as per requirements of making the thesis comprehensive which have also been described by the study of (Schmied, 2018). First chapter of the study is providing the introduction of the study and the major elements which have been includes the problem statement, aims, research question and the scope of the study. Second chapter is providing the literature review of the selected topic, where the understanding of the topic is being created by the critical analysis of the studies being conducted by multiple researchers. Furthermore, this chapter also identifies the factors of the independent variable which affect the dependent variable, based upon which the conceptual framework is being designed. In addition, there is a theoretical framework as well, where the researcher has compared different theories relating to the research topic. Third chapter of this study is providing the methodology that has been used in this study. Major elements of this chapter are the research approach, research philosophy, type of the study, data collection method, methods of data analysis as well as the ethics and limitations of the study are also made part of discussion in chapter three. Moreover, fourth chapter of the study is being done by the researcher where the findings of the study have been provided and discussed in the light of work done by different researchers on similar topic. The fifth and the final chapter of the study includes the conclusion of this research study, where the results and findings of the study have been summarised to make a concise conclusion which helped the researcher to provide recommendation in the last section of the last chapter of the study.
Key Terms
Dividend Policy
In this study, one of the most used terminology is dividend policy, which is a financial term being used for the policy of the company to distribute the amount the company has earned in a specific time period. This amount is being divided among the shareholders by the finance officers to maintain the trust and interest of the shareholders. However, it has been studied that the companies are required to hold cash for their ongoing business process, in such a case, the companies which are not performing well in terms of their financial ratios are likely to hold the dividend pay-out. Reason being holding the dividend to make themselves capable of paying their short term liabilities. In addition to that, it has also been studied that there are four different type of dividend policies which include regular dividend policy, stable dividend policy, irregular dividend policy and no dividend policy. However, these are the financial decisions which are being made over the factual conditions of any organization by the board of directors representing shareholders in board meetings. Another aspect that has been studied is that there are some of the relaxations have been provided to the companies which have been practicing the dividend policies pay-out policies in order to benefit their shareholders and increase their value.
Shareholders Wealth
It has been studied that there are multiple factors which defined the shareholders wealth such as the stakeholders of the company maximising the shareholders’ value by increasing the market value of the company. Another study has contributed that when it comes to define the wealth of the stakeholders, an expected value of the company in future is being evaluated for it. However, for that particular reason, the current market value of the share is also necessary to be determined which helps to evaluate the future projection. Furthermore, it was also observed that the managers and the people at the decision making position of the company are required to make decision which are in the favour of the company in monetary terms which would be maximising the market value of the company. Therefore, in such a case, when the firm size is being maximize, it becomes easier for the individuals holding the shares of the company to maximise their wealth as well. As per the study of Mishra, and Modi, (2016), shareholders’ wealth is the aspect which is being targeted for the long term benefits of the company, however, this is being derived from the decisions which are focused towards the short-term benefits of the company.
Firm Performance
When it comes to discuss about the firm performance, it is necessary to analyse that there are multiple elements which contribute the firm performance including the major role being played by the sustainability of the business. In order to make a company sustainable in the competitive environment where their competitors have already sustained the market challenges, it is necessary that the strategies of the company should be focused towards the process of managing and creating knowledge among their employees. Knowledge management and creation is process which is usually being derived by various activities such as training and development. However, these aspect contribute the firm performance in the indirect manner, as the employees of a company when having knowledge regarding the business and its environment, they would be able to make decision in the favour of the organisation. This enables the organisation to enhance their performance and the professionals are required to keep on analysing the performance of the company over various parameters such as the profit that the firm has been generating. Along with that the position that the firm is holding in the market should also be determined as together these elements contribute the firm performance. In accordance to the study of Sheikh, et al. (2018), companies which are able to sustain the cut throat market challenges are likely to be performing better when their firm performance is to be evaluated.
CHAPTER 2: LITERATURE REVIEW
Introduction
This section mainly highlights portion of collected works review which consists of theoretical part related to dividend policies. The chapter mainly focused on some of concepts of dividend policy and its role that how it shows significant role for the investors of the organisation and for the company itself. Two dividend policies have also discussed in this portion which are being accepted by the organisation management. There are diverse features that are accountable for the policies of dividends and those three factors are also highlighted in this chapter. Shareholders’ are also regarded as asset for company as they paly significant role in this regard. Furthermore, EPS and firm performance are related to those methods by the help of them shareholders’ wealth can be measured. This chapter explained them too that how they are important and how the significantly the role is being played by them.
In the same firm’s performance is measured by the help of different factors and financial ratios. Two of the ratios among them are being highlighted and discussed in detail that how they these ratios are calculated what outcomes can be achieved from these ratios. These ratios are ROE and ROA. As dividends policy have great impact on the shareholders’ wealth as well as on financial performance of any firm. These factors are being explained in detail in the same chapter. Last part of chapter is theoretical portion and in that few dividends based theories have been discussed in detail. These theories will be considered in this report. These are bird in hand theory, agency theory and signaling effect theory. Conceptual framework relates to the pictorial representation of the studies that will indicates that how the flow of study will be carryout. In that framework variables have been defined in both ways (i.e. dependent and independent) in order to evaluate results after computations are performed on them.
Concept of Dividend Policy
Concept of dividend policy is concerned with different policies connected to finance. The terminology of dividend policy is related to dividend’s amount that is being paid out by the corporate organisations. This amount is being paid the company shareholder according to intervals. Moreover, dividends are being paid out according to some policies that are defined. Amount of payment will only be compensated to the stakeholder if and only if company or firm successfully manage to earn profit (Becker and Ivković, 2011). Therefore, when the profit is made by a company than the management is going to decide that which decision is going to be taken by it. Either it had decided to keep that profit as a retained earnings of the company or it had decided to distribute it among shareholders. On the other hand, there is also another terminology in this regard and that is of “dividend puzzle” which refers extent of effect on dividend policy (Shapiro and Zhuang, 2015).
Dividend policy also explained by the help of different earnings strategies that are being adopted by management of companies. On the basis of these strategies, they are able to decide well regarding distribution of dividends. There are two policy options in this regard and that are as “No Dividends” and “Regular Dividends Policy”. In the first policy, (i.e. No Dividend Policy) there is no obligatory for the companies to pay disbursements to the investors and in this way profits of companies are being used for expansion of company. Expansion can be made by acquiring new plant etc. However, in other policy of dividends (i.e. Regular Dividends Policy), dividends are being distributed on regular predetermined intervals. These intervals can be, quarterly, monthly and every six months or yearly (Zakaria, Muhammad, 2012).
Importance of Dividend Policy
As shares are the amount of extra profit that is earned by the organisation in different ways. These dividends are of great significance in terms of investors of companies as well as for the company itself. Amount of dividends are being paid out form the portion of real earnings and moreover this amount cannot be manipulated by creative accounting. Ian Mortimer and Matthew Page in (2015), have published a research article which describes the importance of dividend and its policies for the perspective of shareholders of company as well as for company itself. They have studied that investors are mostly interested in those stocks which are dividend paying stocks and for that purpose S&P have been taken as an example. In S&P during the last 10 years, it has been a trend that their dividends paying stocks have more weightage as compared to others. There is another key factor to investors from these dividends policies as well as dividend strategies that systematic approaches are being offered in order to reach financial goals of companies. Moreover, these goals are being achieved by the strategy of “buy low” and “sell high” strategy.
Factors of Dividend Policy
There are number of ratios that are being used by the investors in order to have access to their portfolio. Following are few ratios in this regard that mostly used by the investors.
Dividend Pay-out Ratio
According to Gill along with other two members in 2010, DPR (Dividend Pay-out Ratio) is regarded as ratio that is mostly being used in order to calculate dividend that can be obtained from a stock of company. This ratio explains the amount in Euro going to be rewarded by the firm as the compared to the amount of net revenue in Euros. Moreover, it also expresses the amount in percentage being paid out by company to its owners. On the other hand, if company is failed to do so even after earn profit than there may be the reason of retained earnings of company. Whereas reserved earnings of the organisation is an amount that is invested in order to expand the business. Furthermore, Surplus Pay-out Ratio is not capable to define the financial health of company rather it provides knowledge to investors regarding the priority of investment of a company for future goals. From the given formula it can be calculated.
Dividend Yield
DY is all about the proportion of yearly dividend of a company along with its comparison to the share value of a business. In the same way it is being measured by dividing the yearly dividend to share price. It is also the money amount that is paid by an organisation to its stakeholders because shareholders’ have owed the shares of that company. The mature companies always have a tendency to to pay payments to their financiers and in the same way those companies which are retail based pay high dividend as compared to other according to the studies concluded by Maio and Santa-Clara (2015). Moreover, DY is also calculated by the help of following mathematical equation.
It is not always mandatory that investors always attracted towards those companies whose dividend yield are higher. This is due to the reason that increase in the percentage of DY can lower amount of share price of a particular company.
Dividend per Share
Third and last factor of dividend policy with respect to this study is DPS. As there are two types of shares in organisations and that are of preferred shares and outstanding shares. Outstanding shares are those which are sold out to investors. Therefore, terminology of “DPS” is related to these holders of outstanding shares. It is about sum of declared dividends that are paid by company against each outstanding shares to investors (Bawa and Kaur, 2013). In this way, it mainly dependent on three factors and it is calculated by the help of following equation.
Concept of Shareholder's Wealth
Concept of shareholder’s wealth is related to business term which is also known as shareholder value. The term simply implies in order to measure the rate of success of a company in order to evaluate that to which extent shareholders have been enriched by company. This value is being delivered to its investors by the company as they have owned stocks of that company. Furthermore, there is an association among stockholders and organisation management. This is due to the reason that if there will be an increases in the amount of shareholder’s wealth, ultimately it will indicate the efficiency of management of that particular company that how well different segments are being managed efficiently in order to gain profit (Krüger, 2015).
Maximising Shareholder wealth
Whenever management of a firm decided to increases the wealth of a company than actually they are try to raise value of its stock. This is due to the reason of two factors that are highly dependent on share price of a company. These factors are market value of firm and wealth of shareholders’. In this way if there will be change in one variable ultimately it will have impact on other variables as well. Wealth of an investor is such a difficult task to influence by manager, therefore, it is divided into sub parts which are usually known as value drivers. Ruth Bender have also studied a model which is comprised of seven values in order to provide guidance to managers. Those seven values are of income, functioning profit, rate of cash tax, incremental capital expenses, asset in operational capital, capital cost and the last value is competitive advantage period (Sharfman, 2014).
In this way, established on these seven components, all functions are planned in order to have positive impact on these values and ultimately it influence the wealth of shareholder. However, this model is also being criticized widely after the financial crises. According to many of the researchers it provides information and benefit to the owners of the company only but it is unable to provide measurement of some issues. These issues are like employment, ethical business practices and environmental issues. Moreover, studies in this regard have concluded that decisions of management can only maximise the wealth of shareholder but for that it can also lower the amount being utilized for third party (Jones and Felps, 2013).
Importance of Shareholders’ Wealth
Shareholders are considered as integral part of the organisation because they play vital role in rise the value of the business in stock market and contributes greatly in development of the firm through substantial amount of financial investments (Kieschnick et al, 2013). In current era where economic prospects of the country undergo constant reform and possess the greater influence over the corporate firms it has become essential for organisations to keep the potential shareholder adhered with them to get the investments for large scale profitable projects (AsmaTahir, 2014). According to the study conducted by Oberholzer (2012) highlights that shareholders are considered as the principle agent and driving source for the sustainable development of the organisation. In this regard, Mujahid and Abdullah (2014) asserted that shareholder wealth hold significant position in growth of the firm and increasing the market price of organisation’s share. Profit rates and generated income are key features to measure business performance and convincing the shareholders to invest in certain projects initiated by the particular organisation (Chenchehene and Mensah, 2015). In addition to this Arowoshegbe and Emeni (2014) advocated that shareholders’ wealth represents the value and market price of share that is outcome of dividend policy decisions and financial investments made by the organisation. However, Mishra and Modi (2016) implied that selection and implementation of optimal dividend policy is necessary to give the substantial and adequate profit to the customers that can add value to their wealth and motivate them to invest in the future projects of the frim.
In the study accumulated by Gul et al (2012) implies that expansion of the investor’s wealth is considered as one the prime and eventual goal of the organisation because usually value of the firm is estimated and measured according to the price of the common stocks of the firm. Moreover, in order to attain the specified goals, it is imperative for upper management and board members to fair return to shareholder in their investments that can increase their wealth and create the sense of satisfaction among them that it is profitable to invest in the projects related to certain firm (Sarwar, 2013). Shareholders possess the authority to pull back investments if they do not manage to retain the reasonable amount in return according to their investments. However, in the study assembled by Iqbal et al (2014) argued that the firms that totally inclines towards the maximisation of the shareholder wealth might indulge in poor business practices and decline in recession. Sometimes to increase the shareholder wealth and grab sufficient investments from them organisation include false information in financial statements and there is a lack of transparency between management and shareholders (Alam and Hossain, 2012). Moreover, Hussainey et al (2011) asserted that in the efforts of increasing the shareholder’s wealth organisation losses the focus over the customers and provide them with poor quality of services or product because most of the returned profits are presented to the shareholders. Shareholders wealth holds great significance for the development of firm as well as the economic conditions of the country. When shareholder get the sufficient return number of investments on project increases accordingly that adds value to the economy of the country and that strengthen the market position of organisation operating in corporate sector (Oyinlola and Ajeigbe, 2014).
Measures of Shareholder's Wealth
Investors of company are always interested to gain more profit and minimum level of risks. There are number of ways through which wealth of shareholders can be measured. There are always smart decisions that are taken by the management which make unable to company to increase their productivity. Following are two measures through which shareholder’s wealth can be measured.
Earnings per Share
It is known as the significant terms in the finance field which try to indicate profitability of company. Incomes per Share is regarded as one of the portion of profits of company that is allocated to each individual stock of company. All those people who interested to invest in the capital markets and in this way they buy some of the shares of companies, these investors pay high importance to these ratios. The main reason behind this is that more the value of the Earnings per Share is, more the chances of profitability for an investor (Talamati and Pangemanan, 2015). Earnings per Share is calculated by dividing the net income of the company to the total number of outstanding shares. Investors are always get help regarding the sources of income of companies by this ratio.
Firm Performance
The terminology of “firm Performance” is need to calculate financial performance of a particular firm. Although company performance is not mainly dependent on a single factor but it also depends on many factors. These factors can be explained like efficiency and market share of company where it operates. Moreover, it also the financial stability of company which is mainly depends on revenue stream, return on assets, return on equity, liquidity ratio, net profit margin, operating profit and stock prices as well as market value of company etc. Nature of a firm also very important in this regard as there are few financial ratios which are established on operations nature that are being supported out by a company (Margaritis and Psillaki, 2010). For instance, firm performance can be measured for a manufacturing company by total number of units that are being sold, return gain from its assets and inventory turnover ratio etc.
Measures of Firm Performance
As the financial performance of a company is mainly dependent on measurements of its financial ratios. Following two ratios are of great significance in this regard as they are directly related to the return that is being earned by company by efficiently managing their assets.
ROA (Return on Assets)
According to Khadafi along with other two members in (2014), Return on Assets is the ratio that is calculated by net income dividend of company to its overall assets. It is regarded as one of the financial indicator for company as well as for investors which determines the profitability of a company. An idea is being given by the help of this ratio to investors that how well, assets are being managed and used efficiently by a company. RAO can be calculated by following formula.
Above formula explains that how earnings are being generated and from the term “Invested Capital”. In this way this is regarded as one of the important ratio for perspective of investors as higher the value is calculated of this ratio, higher will be interest of investors because more earnings are being generated by less amount of investment.
Return on Equity
Return on Equity is on the other hand that looks same to that Return on Assets ratio but there is little difference in this ratio. This is measured by dividing net income of the company to the normal amount of shareholders’ equity. Net income is mainly comprised of revenue, cost of sold goods, operating profit, EBIT and EBT etc. In this way the comparison of Return on Equity is being done from industry to other industry. This ratio is calculated by the help of following equation.
There is another significance of Return on Equity ratio as it helps to estimate growth rates as well as dividend growth rates of companies. However, as there are advantages of this ratio, it also has some limitations which cannot be ignored as well (Khadafi, 2014).
Impact of Dividend Policy on Shareholder's Wealth
The current age of rapid development and technological advancement has made the economic dynamics of all the country highly critical and increased the competition in business sector substantially (Iqbal et al, 2014). It has made the organisation quite apprehensive and anxious to compete with the leading players and manage to gather the adequate amount of investments to drive their organisation. In this regard, shareholder plays vital role in investing the projects development and drive the company towards achievement (Hashemijoo et al, 2012). However, in this concern Ansar et al (2015) asserted that dividend policy holds dominant position in convincing the shareholder to purchase the shares of the certain firm and invest in their projects. If dividend pay out to shareholders is not fair and optimal they can pull back their resources and sell of the shares to unreliable third party or to the competitors that might overtake the business (Azhagaiah and Priya, 2008). The study accumulated by Sarwar (2013) highlighted that there is important influence of surplus policy on stakeholders’ wealth because structuring of returns and rate of pay out shareholders can get relates with the rise and fall in their wealth.
However, the study assembled by Hussainey et al (2011) that there is no important impact of dividend policy on shareholder because firm value is not related to dividend policy therefore it does not impact the shareholders’ wealth because it is evident that the investment by shareholder depends upon the value and firm performance. However, in the survey carried out by Kapoor (2011) implies that the firm dividend policy has imperative impact over the shareholders’ wealth because when investors earns constant return and favourable amount of pay out on their profit it increases their wealth and boosts up the confidence. In this regard, Suwanna (2012) asserted that investors selects to participate in the organisation that offers the high share of dividend to them because it increase their wealth and permits them to invest in more projects. The research carried out by AsmaTahir (2014) implies that in UK market dividend policy is considered as the significant variable because positive change in dividend and its announcement increase the market value of shares that contributes in maximising the wealth of the shareholders.
Generally, there are there different kinds of dividend policy such as unchanging, constant and remaining (Majanga, 2015). Stable dividend policy follows the pursuit of giving the predictable and predefined pay out to the shareholders disregarding the fact that earnings of the organisation are rising or falling. This category of dividend policy are mostly preferable by the shareholder because poor firm performance do not affect their wealth in negative way and they continuously get their share according to the stable dividend policy, On contrary, constant dividend policy pays the shareholders according to percentage of their earnings it allows the shareholders to enjoy the high share when organisation is earning well rather than stable dividend policy where shareholders are required to adhered with single specified amount (Profilet, 2013). Moreover, residual dividend policy pays out to the shareholder from the amount that is remained after paying for the capital expenditures of the firm. Saravanakumar (2011) highlighted that residual dividend policy is the least preferable by shareholders because no investors wants to engage with the firm where they have to compromise with the return in their investments and wealth.
Impact of Dividend Policy on Firm Performance
Adediran and Alade (2013) advocated that dividend policy of the firm creates the attractive pathways for the organisation to gain the effective financial outcomes. However, it is crucial to draw the optimal dividend policy that prove as beneficial for both shareholders as well as organisation (Ali et al, 2015). Effective dividend policy and financial decisions helps the frim to fetch the adequate amount of investments from the potential shareholders the can contribute in development and progress of the different organisational project that increases the firm performance. The study conducted by Hafeez et al (2018) implied that there is a major control of dividend policy over the organisation performance because when the wealth of shareholders is high it contributes in increasing the shares prices of the organisation in the market that attracts more potential investors. However, Hunjra et al (2010) argued that continuous high dividend pay-out can threaten the financial position of the firm effecting their performance. It is essential to for the firm to manage their dividend pay-out by considering the financial conditions of the firm instead of declining in recession. It can be analysed by the dividend pay-out of Barclays, multinational bank based in UK, in 2017 Barclays total dividend pay-out to shareholders was 392 million GBP that was raised to 680 million GBP in 2018 (Statista, 2019). Profits earned by the organisation should be divided accordingly and share policy must be flexible according to the financial position of the firm.
In the frim sector dividend policy and organisation’s performance are most discussed and argued prospects because these both phenomenon holds prominent issue in competitive market environment (Uwuigbe et al, 2012). The research accompanied by Farrukh et al (2017) advocated that performance of the firm has significant impact over rise and falls of the shares assessment in the market. Moreover, financial managers tend to make the dividend pay-out decisions according to the financial conditions, resources and earnings of the organisation (Agyei et al, 2011). If the larger share of the earning goes to the shareholders and organisation left with the insufficient balance they might decline into debts to pay the capital expenditures and run the daily business operations. Moreover, improper dividend policy can engage the organisation in fraudulent activities such as lack of accountability and transparency with shareholders including the data manipulation in financial investments of the firm. Kajola et al (2015) asserted that dividend policy of the firm should not be inclined towards the maximisation of wealth of shareholders’ financial performance of firm should be regarded before returning the amount to shareholders on their investments. It is not essential that increase in shareholder wealth through optimal dividend policy can definitely upscale the organisation performance because expenditures related to operating cost and human capital needs to be paid that reduces the financial balance of the firm (Mujahid and Abdullah, 2014).
Theoretical Framework
Agency Theory
Agency theory also referred as free cash flow theory highlights the relation between to significant components of the organisation that is principal as shareholders and agents as executive of the firms. Agency theory highlights the disputes amid agent regarding priorities of utilising and investing the finances of the firm (Farukh et al, 2017). The agency theory emphasis over the prospects pertaining to struggles of concern among management and shareholders (Al-Malkawi, 2010). The manager intends to increase the wealth of shareholders and control the business operations accordingly. However, agency issues occur amid both parties when there is as excessive cash flow into the organisation and all the earned profits are used for the personal interests rather than investing them in other profitable projects or returning to the shareholders (Aggarwal et al, 2010). For this purpose, shareholder is required to observe every action of managers and demands for high level transparency and accountability from them. Dividend policy is essential to take along the division of profits in the structured and logical manner. Executives of the firm might intend to expand the business into different market and invest the earnings into while shareholders might oppose to the idea and demands for immediate returns.
Bird-in-hand Theory
The bird-in-hand theory also refers as the share preference theory highlights that shareholders only prefer those stocks that possess the potential to given them stable and high dividends. Bird-in-hand theory implies that investors prefers the dividend above any sort of capital gains of the organisation. Furthermore, the underlying theory implies that investors and shareholders are risk avoiders and always aims to grab the substantial amount of dividend instead of capital gains (Farukh et al, 2017). Hussainey et al (2011) asserted that shareholders observes and dividend policy of the firms over anything else before making investment in certain organisation and compare both dividend and capital gains with each other. This particular theory follows the pursuit that it is better to have the bird in hand rather than bird in bush. Here, bird hand refers to dividend while bird in bush is taken as capital gains (Aggarwal et al, 2010). It means that it is logical to receive the return on investment immediately and short time rather than waiting for the organisations to achieve their long term goals and wait for future gains. Farukh et al (2017) highlighted that the birds in hand theory was proposed in the response of irrelevancy theory which implies that stockholders are not concern with the firm’s dividend policy because they have the choice available to sell off their equities to get the cash.
Signaling effect theory
The signalling effect theory suggests that announcement by the organisation to increase their dividend pay-out indicates the future development and performance of the organisation. It implies that shareholders forecast the performance and profits of the firm by considering the rate or percentage of dividend certain firm is offering to its shareholders (Farukh et al, 2017). High share of dividends demonstrates the positive signal for the profitability and gives the information to investors concerning the performance of the organisation. Habib et al (2012) advocated that announcement of the dividend policy in the market increases the value and prices of firm’s share and potential investors can predict the market position of organisation in terms of profitability. Generally, rise in dividend payment signals for the sustainable performance of the firm and builds the positive reputation that motivates the shareholders to purchase the shares and invest in the firm. On other hand, low dividend rate creates the contrasting effect that is share prices of the firm declines along with its reputation and market value. Moreover, it gives the negative signal to the shareholders.
Conceptual Framework
The aforementioned conceptual framework highlights the association among independent and reliant on components of the research. Dividend policy has been taken as the independent variable along with its factors named as dividend pay-out ratio, dividend yield and dividend per share that can influence the shareholder wealth and firm performance. Furthermore, there are two dependent variables in the underlying study that are shareholder wealth and firm performance. EPS and Firm performance has been taken as the factors of shareholder wealth that can influenced by dividend policy. Moreover, ROE and ROA has been taken as the factors of firm performance that can impact the impact of dividend policy over firm performance.
Chapter Summery
In current era of rapid development and growth has made the business dynamics quite complicated and dynamic. Every minor prospects creates the substantial effect on organisation’s performance and its financial position. In this chapter of research different in-depth discussion over different aspects pertaining to dividend policy and its influence on wealth of shareholder and organisation performance. Dividend policy discusses to the share or percent of pay-out share should be given to shareholder as the return on their investment. From the analysis carried out in this chapter it is obvious that share policy of the firm can impact the shareholder’s wealth and frim performance by the influence of numerous factors. Therefore, Firm performance, EPS, ROA and ROE has been taken as the factors of dependent variable. Whereas, dividend pay-out ratio, dividend yield and dividend per share has been taken as the factors of independent variable. For this purpose, theories, findings and reasoning from the previous journal articles has been incorporated in this chapter to critically analyse the phenomenon based on evidence including the detailed theoretical and conceptual framework.
CHAPTER 3: METHODOLOGY
Chapter Introduction
This methodology chapter is concentrated towards providing a detailed methodological design that has been followed in this research. The chapter is divided in to different sections and each section specifically explains an aspect of the methodology that is being followed. Research philosophy, approach and design are being made the initial sections of the chapter. Whereas the further sections includes the methods of data collection, sampling techniques and data analysis tools and techniques. However ethical consideration and limitations of the study are also taken in to account in the chapter of methodology.
Research Philosophy
The belief or faith under which the research has been carried out is basically known as the philosophy of the research. Positivism, pragmatism and interprevitism are the three philosophies that are commonly used by researchers. Philosophy of positivism is where the natural phenomenon is taken in to consideration. External factors are not relevant to this and are not taken in to account (Idowu, 2016). Interprevitism is another philosophy and this the external factors are considered. Difference of opinions and choices of people are the main focus on this philosophy. Pragmatism is the third research philosophy which is the mixture of both the above mentioned philosophies. However, positivism is used for this research in particular. The reason behind choosing the philosophy of positivism is because the study is merely a quantitative one where the hypothesis is being formulated so that relationship between two variables which includes dividend policy and wealth of stake holders and firm performance especially in the United Kingdom.
Research Approach
Approach is the direction towards which the field of study is led. Inductive and deductive are two approaches that are adopted in researchers for their researches. Inductive approach is when the whole study is specific including the case or subject but it ends up with a conclusion that is more of a generic one. Whereas, deductive approach on contrary is where the conclusion is specific but the whole study is general (Zalaghi and Khanzaei, 2016). The researcher has adopted deductive approach because basic aim of this research is to find the influence of wealth of shareholders dividend policy and performance of the firm. Apart from this the nature of the study is quantitative and deductive approach is the most suitable approach for that.
Research Design
Researchers basically use two to three types of research design. Qualitative research design is more detailed as compared to the other two as it is based on experiences and perceptions of others (Flick, 2018). On the other hand, quantitative design is more concerned with the statistical data and numbers. Graphs and tables are also included in quantitative data (Gray, 2019). Third research design is the mixed design method where the researcher uses both of these designs in the research (Brannen, 2017). However, this research is a quantitative one because variables on which the whole research is based on have been collected from the reports generated annually that consists of numerical data. Information is also converted from mathematical to arithmetic data. Qualitative data is not chosen because there was no need to know about the perception or experience of an individual and get the facts that are related to dividend policy, firm performance and share holders wealth.
Data Collection Method
There are three types of methods through which the data is gathered for the research. Primary data collection method is the first method where the researcher interacts with participants in order to get the first-hand information. This type of data is regarded as more authentic data because there are less chances for manipulation. Interviews and questionnaires are major components for primary data collection (Dreyer et al, 2019). Secondary data is another method for data collection where the data is collected from already existing information on the internet in some articles or journals (Johnston, 2017). Researcher has used the secondary method for data collection as first hand data was not appropriate for this study. Data of variables of the study could only have been collected through annual reports. Apart from that United Kingdom’s data bank has been approached for this study.
Sampling Size and Methods
Sample is the representation a researcher takes in to consideration for a specific place or participants (Chatterjee and Diaconis, 2018). It is important for the researcher to decide the sample size prior conducting a research or else it will fail to bring the expected results due to the misunderstanding and wastage of time. Eight listed companies are taken as a sample size of the research. These companies are listed in the FTSE30 Index of the London Stock Exchange. The researcher has used authentic databases to get the updated information. For that purpose, annual reports of 5 years have been taken in to account by the researcher.
Data Analysis Tools and Techniques
Data analysis is the stage where the collected data is analysed using relevant technique. These tools and techniques help raw data convert in to refined results. This study is merely a quantitative study therefore all methods and tools have been used that have relevance with numbers and statistics. However, in this research, regression technique has been used which includes correlation to study about the relationship or the influence that dividend policy has on the wealth of shareholders and performance of firm. Regression model has been in order to provide an explanation of variables and the research phenomenon that is again the influence that dividend policy has on the wealth of shareholders and performance of firm.
Ethical Considerations
Ethics have always been important in every field of study. It is essential for researchers to not ignore ethics while conducting the research. It holds a significant importance as it also affects the end result (Grix, 2018). It depends on the quality of researcher to make respondents feel comfortable in taking part of the research. It should be entirely on to their will and if they are not willing to participate in the research or want to back out at any time than the researcher has no right to force them or make them participate anyhow. It is also observed that when participants feel comfortable and are ensured confidentiality then they freely share their experiences. In this research, the researcher has taken care of ethics in every step of the study. Data that has been collected is secondary so for that purpose only authentic sources have been selected to get the needed data. Companies were also ensured by the researcher that their shared material will not be used for any other reason except for this study. Companies were also told that the information will not be kept forever but only till the exact time that researcher is allowed by the company
Limitations of the Study
Limitations are constraints or challenges that are usually faced by the researcher while conducting the research (Nelcoh, 2017). Budget has been one of the limit of the study as the researcher was not able to access a few paid authentic sources due to limited amount of budget. Many companies were also reluctant in sharing their information which resulted in waste of time and efforts. Time was a major limitation as more companies could have been taken in to consideration by the researcher if more time was given. The study was centered around a specific country of the United Kingdom and this came up as a big constraint as the researcher was unable to take other companies in to account that could have added a lot of information due to their relevance with the topic. The researcher has tried to bring positive results with all the resources available.
CHAPTER 4: FINDINGS AND ANALYSIS
Introduction
This chapter is aimed towards presenting the findings of this research in accordance to the aim of the research. The main aim towards which this research is focused on is to highlight the importance of dividend policy on the shareholder’s wealth and company’s performance. In order to fulfill this aim, eight listed companies of UK have been considered that are listed on the FTSE 30 index. The data for this research was collected from the official website of London Stock Exchange in order to ensure the authenticity and accuracy of the figures. Companies from different industries were taken into consideration for this study in order to ensure the generalizability of the findings and conclusion. Considering the fact that the data was obtained in the form of panel, Panel Least Squares (PLS) Regression has been applied on the data set via E-views. Detailed explanation and interpretation of the quantitative data is followed by a comprehensive discussion which is followed by a discussion over the objectives which has taken into consideration both the results of this research and the findings of the previously executed research papers on dividend policy and its impact on shareholder’s wealth and company performance.
Quantitative Analysis
Descriptive Statistics
Descriptive statistics have been applied for variables that are incorporated in the model of this research. This has allowed to summarise the large amount of data that has been considered in this study. The following table shows the values of the descriptive analysis that has been carried with the help of E-views:
The total number of observations for each variable is 40 because 8 companies were selected for which 5 years of data was collected. The mean value of EPS for the companies selected is found to be £109.04 but there is a deviation of £290.22. The average value of dividend per share for the time period of 2015-2019 for the selected companies is found to be £47.78 with a deviation of £57.2. The average ratio of ROA is found to be 1.83 which is lower as compared to the average ROE for the selected companies that is 3.2.
Correlation Analysis
In order to assess the significance of nexus between the predicting variable i.e. dividend policy with the criterion variables that are firm performance and shareholder’s wealth, correlation analysis has been conducted. Correlation analysis is mainly conducted for the purpose of determining the linear association among two or more variables. From the assessment of the literature it has been determined that the both company’s performance and the wealth of the shareholder has a linear relationship with the dividend policy of the company. The model used under this research has also tested this relationship, for which the results are given below:
As shown in the above table, there is a moderately high relationship of the dividend policy of the UK companies with the shareholder’s wealth as the value given in the correlation analysis is 0.61 or 61%. Moreover, the relationship among the variables is found to be positive which indicates a direct association among them. However, with the performance of the company, which is measured with the help of Return on Assets and Return on Equity, the relationship of dividend policy is negative. This indicates that as the company increases their dividend per share, the performance of the company reduces. The relationship of ROA with dividend policy is moderate (31% or 0.31) and the relationship of ROE with dividend policy is weak (14% or 0.14).
Impact of Dividend Policy on Shareholder’s Wealth
Considering that the data of this study was in panel, hence panel least squares has been chosen as the data analysis technique. Among the fixed and random effects model, the fixed model has been selected after the rejection of the null hypothesis for the Hausman test where the p-value was found to be 0.028 (Table 4). The overall model is found to be statistically significant as the p-value in consideration to the F-statistic (3.98) is computed to be 0.0024. This indicates that the dividend policy of listed firms in UK which is measured with the help of dividend per share is considered to have a significant impact over the shareholder’s wealth which is measured with the help of Earning per Share in this model. 50.09% of the variation caused in the shareholder’s wealth can be explained by the dividend policy of the company as shown by the value of R-square given in the table below. Moreover, after adjusting the value of R-square, it can be said that only 37.9% of the variation in the model can be explained by the predicting variable. The value of coefficient in the table indicates that a single unit increase in the dividend per share will cause the earning per share to increase by 12.10 units. Overall, the results of this model are significant and the null hypothesis pertaining to dividend policy having no significant influence over the shareholder’s wealth is rejected.
Impact of Dividend Policy on Company’s Performance
ROA
There are two performance metrics that have been used in this model in order to accurately predict the influence of dividend policy of UK listed firms on their performance, the first performance metric is Return on Assets (ROA). Considering that the data of this study was in panel, hence panel least squares has been chosen as the data analysis technique. Among the fixed and random effects model, the random model has been selected after the acceptance of the null hypothesis for the Hausman test where the p-value was found to be 0.645 (Table 6). The overall model is not found to be statistically significant as the p-value in consideration to the F-statistic (1.01) is computed to be 1.01. This indicates that the dividend policy of listed firms in UK which is measured with the help of dividend per share is considered not to have a significant impact over the company’s performance which is measured with the help of ROA in this model. 2.60% of the variation caused in the financial performance can be explained by the dividend policy of the company as shown by the value of R-square given in the table below. Moreover, after adjusting the value of R-square, it can be said that only 0.03% of the variation in the model can be explained by the predicting variable. The value of coefficient in the table indicates that a single unit increase in the dividend per share will cause the ROA to decrease by 0.02 units however, the p-value show no statistical significance in this case. Overall, the results of this model are insignificant and the null hypothesis pertaining to dividend policy having no significant influence over the company’s performance is accepted.
ROE
The second financial performance related metric that has been taken into consideration for this model is Return on Equity. This metric has been selected because it accurately interprets the performance of the company with respect to its total equity. For this dependent variable (ROE), Hausman testing is not carried out because both the fixed and random effects model has indicated statistically insignificant results. Thus, the interpretation of the model has been carried out with the help of fixed effects model. The overall model is not found to be statistically significant as the p-value in consideration to the F-statistic (0.26) is computed to be 0.61. This indicates that the dividend policy of listed firms in UK which is measured with the help of dividend per share is considered not to have a significant impact over the company’s performance which is measured with the help of ROE in this model. 0.68% of the variation caused in the financial performance can be explained by the dividend policy of the company as shown by the value of R-square given in the table below. Moreover, after adjusting the value of R-square, it can be said that only -1.98% of the variation in the model can be explained by the predicting variable. The value of coefficient in the table indicates that a single unit increase in the dividend per share will cause the ROE to decrease by 0.03 units however, the p-value show no statistical significance in this case. Overall, the results of this model are insignificant and the null hypothesis pertaining to dividend policy having no significant influence over the company’s performance is accepted.
Hypothesis Assessment
In the above section, each of the statistical test has been presented and interpreted in detail in the light of the aim and objectives of this research. The following table summarises the results with the help of hypothesis statements and their respective results:
Thus, the overall findings of this research have concluded that the shareholder’s wealth is impacted positively and significantly by the dividend policy of the company however, the dividend policy does not have a statistically significant impact over the financial performance of the company. In the following section of this chapter, a detailed discussion has been carried out regarding the comparison of the findings of this research with the results of the previously conducted studies.
Discussion of Objectives
This section of the study discusses the main objectives of the research that what were the aims of the study and what related information is being reviewed while studying for these objectives. In this study, there were mainly three objective which were need to be achieved. However the fourth objectives was to provide recommendations to the UK listed companies to increase their amount of dividend in order to enhance the shareholder value which would result in the increased level of interest from the investors towards making investment in an organisation. First objective of the study was to understand the conceptual significance of the dividend policy and the shareholders wealth which is usually focused towards the investors. While the second objective of the study was to identify the factors of the dividend policy which influence the shareholders wealth and the overall firm performance, these two are the necessary elements of the analysis of an organisation in terms of benefits they have been providing to their shareholders.
Objective 1:
To understand the conceptual significance of dividend policy and shareholders wealth there are multiple aspect which have been determined in order to analyse the significance of dividend policy and the shareholders wealth, as it has been studied that the investors are interested to invest in the companies where they have opportunity to earn better. Therefore, in such a case, it becomes clear that the companies should not only be focused towards the earning per share but also the dividend which is being paid to the shareholders in the form of their reward in return of their investment in the company. However, the dividend pay-out decision also affects the firm’s long term benefits in positive manner as the company is being considered as favourable to the market investors. Furthermore, it has also been studied that the company should balance the element of shareholders wealth along with the growth of the company while paying the dividend to the shareholders. As per the study of Cundill, Smart, and Wilson, (2018), it was observed that value of the company is also being evaluated by their policies which are regarding the financial decisions of a company for their shareholders.
Another aspect which was observed that there are examples when the companies have paid the less amount to their shareholders in terms of dividend, however they have been making profit which can be observed by their financial statement. Therefore, in such a case, overall value of the firm is being affected which reduces the market price of the company and makes it less preferable for the investors to make investment. This results in the form of reduced investment in the shares of the company creating the sustainability issues for the company. There are some of the studies which have focused that the company should focus the element of shareholders wealth more than any other. For that particular reason, there are some of the companies which start focusing the growth of their business or business expansion in various fields which demands the organisation to make more effective strategies countering the ongoing issues occurring during the strategy execution (Bryson, 2018; Broman, and Robèrt, 2017).
Shareholders wealth is being defined as the major element for influencing the decision of the investors while investing in an organisation. Therefore, it becomes evident that the organisation should make their policies in a way that the shareholders wealth should be maximised so that there would be large number of investors ready to invest in the organisation. Dividend policies are one of the players in the process of maximising the shareholders wealth for the organisation. These policies enhances the level of satisfaction among the shareholders as they start realising the fact that the company is in their favour and their investment would be returning them in better ways. According to the study conducted by Starks, Venkat, and Zhu, (2017), it was observed that the element should be focused by the organisation to further strengthen the position of the company in the market attracting more investors towards the organisation due to the policies of paying-out dividend instead of holding the amount to meet their liabilities.
Objective 2:
To determine the factors of dividend policy that influences shareholders wealth and firm performance as it has been studied that the dividend policy plays a vital role for the shareholders wealth and firm performance, it becomes evident that there must be some of the factors which have been influencing the dividend policy. In this study, it was observed that there are mainly three factors which affect the dividend policy such as dividend pay-out ratio, dividend yield and the dividend per share. However, all these factors have different intensity of influencing the dividend policy, as the dividend pay-out ratio is being calculated by dividing the total dividend payments with net income added with noncash expanses which is subtracted by noncash sales. As per the study of Bajaja, and Jain, (2019), there are some of the scales which determines the company’s importance for the shareholders in terms of paying out the dividend such as the company paying more than 55% and limited to 75% are considered as better companies to make investment. Another aspect which was observed that the dividend pay-out ratio shows that how much the company is sustainable, on the other hand, the companies which have been sharing the higher amount of its earning in terms of dividend pay-out are sharing their major part of earning with the shareholders which indicates that there are the chances that the company would ran out of the cash which would make it difficult for the company to meet their short term liabilities (Dugan, 2018).
In addition to this, dividend yield is also being identified as one of the major player in this regard, it is also a ratio which is being calculated by the total amount of dividend and with the current price of stock in the market. Furthermore, it has also been studied that investors by the time of making investment are likely to know the dividend yield of the company as they are focused towards the opportunity of earning well through their investment. This makes it clear that the dividend yield has a direct influence over the shareholders wealth. As per the study conducted by Ali, and Waheed, (2017), it was observed that the companies which possess the dividend yield between 4 to 6 % are likely to be considered as the better options for the investment. However, the companies which are paying the lesser percentage for their dividend yield are not considered as justified in terms of making investment which affects the business of the company in significant manner. While studying about the dividend yield, it was also observed that when the companies lower their dividend, the market analyses the move and reduces the price of the stock share in the market. This affects the overall wealth of the organisation as well as the shareholders’ value which increases the element of risk for the company to sustain in the market.
Moreover, dividend per share is being calculated by dividing the annual dividend of the company with the purchase price, which makes it easier for the company to calculate that how much amount should be paid to a specific shareholder. This factor is of the most important factor as it shows that how much amount the company is being paying to the investors against their investment. This makes it easier for the investors to evaluate that which of the company is better for investment and where they should invest which would be enabling to earn in significant manner. In such a case where the dividend per share is being calculated, it is necessary to mention that some of the companies pay the dividend annually, some of them pays it quarterly. However, there are lesser practices of paying it on monthly basis as well.
Objective 3:
To identify the impact of dividend policy on shareholder’s wealth and firm performance in UK listed firms. This study was focused towards the identification of the impact of the dividend policy over the shareholders wealth and the firm performance specifically for the company which have been registered and working in UK. It has been observed that the approach of investors may differ from country to country, therefore this study was limited to the case of UK listed companies. While looking for the related literature regarding the factors of the study, it was observed that dividend policy is the major player in terms of evaluating that how much the investors are interested to pay for buying the shares of a specific company. Another aspect that has been studied is that the organisations are required to have cash in hand which would enable them to meet their expanse on daily basis. Therefore, it is necessary that the organisation should focus that the investors should have better opportunity to invest in the organisation. The only interest that the investors are associated with the decision of investing in any organisation is the amount that they would be able to earn in return of their investment.
Furthermore, it has also been observed that some of the times the company hold the amount of dividend to meet their liabilities, however in such a case it is necessary to analyse that what was the history of the organisation. If the company has a better history which would enable the organisation to be in the line of making money and the investors would not be asking for the dividend at the crucial stages of the company. Additionally, the firm performance is being calculated for various purpose such as maintain the financial statements for the investors in future. It has been studied that there are some of the ratios which help the investors to analyse that how much the company has been earning, what were their expenses and other elements related to their financial matter. These elements helps the investors to analyse that whether they should start investing in that particular organisation or not.
In addition to this, shareholders wealth is the vital element in this study as the companies earning profit and paying out dividend are actually contributing the shareholders wealth. Therefore, it is necessary that the investors should keep themselves focused towards the dividend yield and dividend per share, as it would make it easier for the investors to make decision before investing. Related literature review has made it clear that there are different dividend pay-out policy which have been accepted by the organisation themselves depending on their financial abilities. Another aspect that has been studied is that the dividend policies are being made to keep the interest of the shareholders and maintain the moral higher as they are being provided to specific share of the total market value of the company. This study aims to identify the effects of the dividend policy of the company over the shareholders wealth and the firm performance of the company as the major role is being played by the opportunities which have been provided to the investors when they are going to make investment in any company.
CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS
Conclusions
The purpose of this study was to assess the connection among dividend policy and performance of organisation as well as with shareholders wealth. In order to analyse the association this study was established on quantitative research method. The investigator acquired financial data of eight FTSE 30 index listed companies from London stock exchange and record collected of five years for examination. The variables selected for investigation were each share of dividend, earnings every share, ROA and ROE. Based on the statistical analysis, this study concludes that there is positive affiliation amongst wealth of stakeholders and dividend policy and corporate performance. The results presented that the statistical model using two performance indicators was developed to have accurate predictions regarding the dividend policy influence in circumstance listed firms in the UK. The primary indicator of corporate performance was Return on Assets (ROA) and the panel data analysis indicates that there is positive impact. The study moreover determines that although there is encouraging link found in the sample of companies but there is lack of statistical significance as shown by the results of the fixed and unplanned effects model and the Hausman test (p=0.645, see Table 6). From this it can be inferred that if dividend policy is evaluated using the dividend per share than the historical data of listed firms in the UK do not show important impact on organisation ROA. The dividend per share indicator only explains a very and insignificant variation in the ROA measure which is 2.60%. Established on the consequences of the model this research accepted the null hypothesis which assumed that dividend policy has no significant impact on corporate performance measured using ROA.
In addition, the study also used ROE as a performance indicator and assesses the statistical relationship with dividend per share. The main characteristic of ROW as a performance metric is its accuracy in interpreting the corporate performance with regards to total equity. The Hausman test for ROE shows similar results as in case of ROA and both the fixed and random effects model show insignificant results. From these results this research achieves that when dividend policy is being evaluated using the dividend per share indicator the listed firms in the UK show that there is no important effect on organisation performance which is measured through ROE. Only 0.68% of the change in ROE can be explained using dividend per share model. Hence the study accepted the worthless hypothesis that dividend policy has no important influence on performance of an organisation. Finally, this study concludes that in case of effect of dividend each share on wealth of stakeholders which is being measured through earnings per share, there is a significant and positive impact of the former on the latter.
It is important to mention that the outcomes above are in contrast with the findings of the theoretical debate that led to develop of conceptual framework in second chapter. From the conceptual framework it was inferred that as per the signalling effect theory announcement by the organisation to increase their dividend pay-out indicates the future development and performance of the firm. Therefore the stakeholders imply that the performance and profits of the firm will lead and rise to enhance in dividend in future. Therefore stable and increasing dividends demonstrate a positive signal for the investors who interpret it as increasing profitability of the firm and translate it into the firm performance. In addition, the debate also showed that dividend pay-outs rise the share value of the firm in the marketplace because the demand for share increase and thus push the prices up which also indicate a positive performance for the corporation. Generally, rise in dividend payment signals for the sustainable performance of the firm and builds the positive reputation that motivates the shareholders to purchase the shares and invest in the firm. On other hand, low dividend rate creates the contrasting effect that is share prices of the firm declines along with its reputation and market value. Moreover, it gives the negative signal to the shareholders. However, the empirical evidence gathered in this study indicates that there is no important influence of increasing pay-outs of dividend on ROA and ROE and thus firm performance does not improve but the wealth of shareholders is significantly and positive affected by dividend payouts.
Recommendations
Farrukh, et al., (2017) suggested that corporations must develop an effective and unchanging dividend policy that is target oriented. This policy should be paired with an effective supervisory or corporate governance framework that meets the requirements of capital market and relevant regulatory bodies. Such a policy is likely to have optimistic influence on ROA and ROE. In addition, the study also recommended that an adequate level of disclosure in the annual statements should be maintained regarding dividend per share and dividend payout ratio to guide the potential investors and attract them towards directing their investment decisions.
In addition, Ofori‐Sasu, Abor, and Osei, (2017) conducted a study to explore how dividend policy can be used to enahcne firm performance and suggested that financial managers should consider using the dividend produce as a dividend policy measures and design their policy according to the trends and impacts on investor behaviour. Established on the outcomes found in the research the study concluded that each share of dividend showed encouraging influence on shareholder value and the latter was negatively affected by high dividend yield. The authors recommended that financial managers should be very careful in designing a prudent policy and wise investment choices to increase the returns (for both capital and dividend gains) so that they can have positive impact on shareholder value through their dividend policy.
Hakeem and Bambale, (2016) also made a number of recommendations that can be utilise to recognise how dividend policy can be used to relate and affect corporate performance. The study suggested that there is positive connection among return on investment and Dividend pay-out and therefore it recommended that the managers, board and management can use a steady and consistent increase in dividend payments with respect to invite more stockholders and enhance resource pool and ultimately increase firm performance. In addition, it was recommended that there is an important influence of retained revenues on the corporate profitability as indicated by the return on investment. However, the study recommended that there must be effective corporate governance framework that ensures that investment decisions are made prudently and risky short term gain behaviour and rogue behaviour of managers and decision makers is prevented and controlled. Finally the study recommended that management and board of directors must implement an influential internal regulator system and manage cash dividend as an improve in cash dividend rise the demand for company shares and thus increases cash turnover and volume and ultimately translates into corporate performance enhancement.
Priya and Mohanasundari, (2016) recommended that businesses can improve their performance by enhancing satisfaction of current investors and increase expectations of potential investors and a clear dividend policy which is consistent and predictable can be a useful tool in this regard. Therefore the study reocommended that financial managers should develop a stable policy which is reflected by consistent dividend payout for long term period. In addition, a gradual increase in the dividend payments with respect to earnings of the firm is also a useful strategy to attract investors and increase shareholder wealth and maintain their confidence.
Hafeez, et al., (2018) recommended that there is a need for financial managers to constantly monitor the factors that affect dividend policy. With respect to maintain a consistent and maintain dividend policy, managers need to observe their earnings margin. The profit margin shows the dividends level that can be circulated among investors and retained for further investments. This can be used as a indication for shareholders that the corporation is making effective investment that will ensure that there will be an increase in the returns and the consistent increase and stable increase in in dividends will increase their wealth.
Bokhari, et al. (2019) recommended that the policy of dividend developed by financial managers needs to be strengthened through effective corporate control mechanisms and governing laws. The aim is to enforced an effective dividend policy and maintain frequency and positive trend in dividend payment. This in turn will increase and improve the company market value and has positive influence on share prices. Furthermore, the study recommended that profitability is the main driver of the dividend policy and dividend payments are drivers of the market share prices therefore managers can use this phenomenon and signal information to investors through dividend payments. In addition, the study also suggested that the administration should develop policies to closely monitor the behaviour of firms regarding profitability reporting which is the fundamental signal for the investors to make investment in firms in their desire to receive dividends and increase their wealth.
In addition, M’rabet and Boujjat, (2016) suggested that financial managers may exploit various types of dividends payout and not limit their dividend policy to cash dividends only. These other types can be stock splits, bonus issue, among others. When shareholder receive different forms of dividends they might be able to diversify their portfolios and minimise risk that is typically higher in case of cash dividends. In order to formulate the most adequate dividend policy, the study recommended that the managers must analyse following features that have significant effect on payment of dividend, past dividend patterns, profitability, investment opportunities, financial leverage, stage of growth, legal rules, and investment structure.
Idris, et al., (2019) made following recommendations regarding dividend policy and how it can be used to enhance company performance. The study recommended that policies formulation should be assigned to the Capital Markets Authority that can play a pivotal role in managing unclaimed dividends. The same can be useful in various situations where risks related to unclaimed dividends can be managed properly. For the directors, the study recommended that they maintain a more comprehensive and reliable record of shareholders and use the data related to their investment behaviour to identify opportunities for improvement in dividend payments. The investment trends may indicate change in expectations of investors and thus provide the firm the information to enhance their satisfaction and confidence.
Future Research Recommendations
Although the results in this study provide reliable and validity results, yet there are a few methodological limitations that offer more research opportunities and new avenues to explore association among performance of an organisation and dividend policy as well as shareholders wealth. Firstly, this study collected data from eight companies and for five years only and thus there were only forty observations. It is important fair to assume that a larger sample would provide more evidence and enhance the reliability and validity of the results and thus future researchers are encouraged to conduct large scale studies with large and more diversified sample size. Furthermore, this study collected quantitative data only and does not integrate qualitative evidence such as experiences and opinions of investors, shareholders, and financial managers, regarding how they would or would not use dividend policy to effect performance of business and wealth of shareholders. Therefore, it is recommended that future researchers can conduct interviews or focus group based studies to acquire qualitative evidence and triangulate results. Furthermore, this study was specifically focused in case of the UK listed firm only and more studies can be conducted such as comparative studies with other developed countries in Europe and the US as well as with developing and emerging economies and assess the differences or similarities therein.
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