Back ground

In the corporate finance, dividend policy is the key issue that the management has to deal
with analytically. Dividend policy involves the base question: whether the firm should
disburse all or some proportion of earning to shareholders; or should retain earned profits
in business? Firms adopt different dividend policies to answer this question. Dividends
usually take form of cash dividends or stock dividends. Cash dividend is the most
common form of dividend. It is directly transferred to shareholders account. Stock
dividend is the additional shares issue by a firm to its current shareholders. Additional
shares are usually issued as a specific proportion to shares owned. When a firm decides
to distribute its earnings, then another question arises concerning the proportion of
earnings that should be distributed. it depends upon potential investment opportunities.
The remaining portion of earning after dividend distribution is known as retained
earnings. Managers are responsible for not only deciding the proportion of the earnings
required for investment, but also for considering the probable effects of such decisions on
stock prices (Bishop, Crapp, Faff, &Garray J.Twite, 2000). Management strives to adopt
such dividend policy that not only meet investment needs but also prevent negative
effects on share prices.
The research work on dividend policy started with the exclusive study of Lintner (1995).
He raised a query which is still crucial for managers what choices made by managers do
affect the size, shape and timing of dividend payments? The study answered the critical
questions regarding dividend policy, frequently asked by managers in 1950s. the
questions resolved by Linter (1956) are the following.
a) Whether dividend payments need to be altered or remained at current level?
b) Whether owners wish to receive static dividend payments, or they require revised
dividend payment along with earnings?
c) Whether younger or older investor dividend policy should attract?
PROBLEM STATEMENT OF THE STUDY
Dividend policy has been extensively researched topic in the finance research field. As
the managements chief objective is to maximize shareholders wealth, so it strive to
achieve such optimal dividend policy that positively influence a firms stock market
value. On the other hand, investors being risk avert, prefer a firms stock which is less

volatile and has a dividend policy with a stable dividend growth rate. However, some
investors prefer dividend paying stocks, and some do not. Managers are of the view that
by adopting a particular dividend policy, price volatility of stock can be minimized.
Here, the question arises; does dividend policy really affect stock price movements?
Furthermore, the implication of this theory depends upon particular market situation, size
and many other economic factors. So the basic research question is:
Whether there exists any relationship between dividend policy and stock price volatility
in textile sector of Pakistan?
RESEARCH QUESTION

What is the relationship between dividend policy and stock price volatility in textile

sector?
Whether of control variables like firm size, asset growth, leverage, earning volatility,

earnings per share and return on equity impact on textile Listed Companies at KSE?
What is the impact of dividend policies on firms value?

RESEARCH OBJECTIVES

To analyze the prevailing dividend practices in the textile sector at KSE

To test the relationship between dividend policy and stock price volatility in textile

companies listed at KSE;

To investigate whether other internal factor of firm such as size, asset growth, leverage,
earning volatility, earnings per and return on equity have an impact on stock price

behavior of textile Listed Companies at KSE;

To examine the impact of dividend policies on firms value?

HYPOTHESES OF STUDY
The alternative hypotheses of the study are:
H1: There is a significant relationship between Dividend Payout Ratio (DPR) and Stock
Price Volatility (PV)

H2: There is a significant relationship between Dividend Yield (DY) and Stock Price
Volatility (PV)
H3: There is a significant relationship between Firm size (SZ) and Stock Price Volatility (PV)
H4: There is a significant relationship between Financial Leverage (LV) and Stock Price
Volatility (PV)
H5: There is a significant relationship between Assets Growth (GR) and Stock Price
Volatility (PV)
H6: There is a significant relationship between Earning Volatility (EV) and Stock Price
Volatility (PV)
H7: There is a significant relationship between Earnings per Share (EPS) and Stock Price
Volatility (PV)
H8: There is a significant relationship between Return on Equity (ROE) and Stock Price
Volatility (PV)
VARIABLE DESCRIPTION

PRICE VOLATILITY
PV is the studys independent variable. Parkinson (1980)s method of extreme values
is used to calculate PV. Parkinson (1980)s method is considered to be superior to
traditional method of volatility estimation. It has been calculated by dividing annual
range of high and low prices by average of such prices for each year. Several
researchers like Parkinson (1980), Baskin (19890), Allen and Rachim (1996), Nishat
and Irfan (2003), Rashid and Rahman (2008), M.S. Nazir et al.(2010), Hussainey et
al. (2011), Ramadan (2013) and N. Nazir et al. (2014) also study price volatility in
their studies.
PV it
Where,
H it

= Share Price Volatility

= Highest stock price

Lit = Lowest stock price of firm i in year t

H it Lit
H it +Lit
2

( )

PV it =

DIVIDEND YIELD (DY)

Many research studies attempted to find out the impact of DY on PV, major studies
include; (Baskin, 1989), (Allen & Rachim, 1996), (Nishat & Irfan, 2003), (Rashid &
Rahman, 2008), (M.S. Nair et al., 2010), Hussainey et al., 2011), (Ramadan, 2013),
(N .Nazir et al., 2014)
DPS it
DY it =
AP it
Where,

DY it

= Dividend yield of firm i in year t

DPS it

= Dividend per share of firm i in year t

APit = Average market price of firm i in year t

DIVIDEND PAYOUT RATIO (DPR)
Several studies are conducted to explore the influencing nature of dividend payout
such as Baskin (1989), Allen & Rachim (1996), Nishat and Irfan (2003), Rashid &
Rahman (2008) M.S. Nazir et al. (2010), Hussainey et al. (2011), Ramadan (2013)
and N. Nazir et al. (2014) significantly contributed to the literature
DPRit =
Where,

DPS it
EPS it

DPRit

= Dividend payout ratio of firm i in year t

DPS it

= Dividend per share of firm i in year t

EPSit = Earnings per share of firm i in year t

FIRM SIZE (SZ)
As firm size is an important explanatory variable many researchers such as Baskin
(1989), Allen & Rachim (1996), Nishat and Irfan (2003), Rashid & Rahman (2008)
M.S. Nazir et al. (2010), Hussainey et al. (2011), Ramadan (2013) and N. Nazir et al.
(2014) and many other studies analyze size along with other related variables.
SZ it =TA it
Where,

SZ it

= Firm siz of firm i in year t

TA it

= Total assets of firm i in year t

FINANCIAL LEVERAGE(LV)
Long term debt is widely researched variable. It has been studied in many research
studies like Baskin (1989), Allen & Rachim (1996), Nishat and Irfan (2003), Rashid
& Rahman (2008) M.S. Nazir et al. (2010), Hussainey et al. (2011), Ramadan (2013)
and N. Nazir et al. (2014) and many.
LD it
LV it =
TA it
Where,

LV it

= Leverage of firm i in year t

LD it

= Long term debt (excluding interest free loan and deferred

liabilities) of
firm i in year t
TAit = Total assets of firm i in year t
ASSETS GROWTH (GR)
Several researchers like Baskin (1989), Allen & Rachim (1996), Nishat and Irfan
(2003), Rashid & Rahman (2008) M.S. Nazir et al. (2010), Hussainey et al. (2011),
Ramadan (2013) and N. Nazir et al. (2014) also analyze the impact of assets growth
on price volatility.
TA it
GR it =
TA i ( t 1 )
Where,

GR it

= Growth in assets of firm i in year t

TA it
TAi (t 1)

= Change in total assets of firm i in year t

= Total assets of firm i in year t

EARNING VOLATILITY (EV)

Earning volatility has also been a critical variable in finance related research work. It
has been studied in many well-known studies such as Baskin (1989), Allen & Rachim
(1996), Nishat and Irfan (2003), Rashid & Rahman (2008) M.S. Nazir et al. (2010),
Hussainey et al. (2011), Ramadan (2013) and N. Nazir et al. (2014) also analyzed its
effects on PV.

R it Ri

EV it =

Where,

EV it
Ri

= Earnings volatility of firm i in year t

= Ratio of EBIT to total assets of firm i in year t

= Mean of entire study periods EBIT/Total Assets of firm i in year

t
EARNING PER SHARE (EPS)
Most of the studies in this field like (Al-Mawed, 2005), (Al-Tamimi, 2007),
(Azhagaiah & Sabari, 2008), (Sharma, 2011), (K. I. Khan, 2012) and (Hunjra et al.,
2014) studied the effects of EPS on stock market price. Only A.A. Khan and Khan
(2012) and N. Nazir et al. (2014) studied its impact on price volatility.
E
EPS it = it
N it

Where,

EPS it

= Earnings per share of firm i in year t

Ei

= Earnings after tax and preferred dividend of firm i in year t

Ni

= No. of outstanding shareholders of firm i in year t

RETURN ON EQUITY (ROE)

Several studies added ROE in their studies to investigate its impact on stock prices
such as (K. I. Khan, 2012), (Hunjra et al., 2014), (Kumaresan, 2014) and (Al Masum,
2014). Only A.A. Khan and Khan (2012) and Javed and Naeem-Ullah (2014) studied
its impact on share price volatility.

ROEit =
Where,

PAT it
Eqit

ROEit
PAT i
Eqi

= Return on Equity of firm i in year t

= Profit after tax of firm i in year t
= Shareholders equity of firm i in year t

PV i = o+ 1 DY i + 2 DPR i +i

PV i = o+ 1 DY i + 2 DPR i +SZ i + LV i +GR i + EV i+ EPS i+ ROE i+ i

Dividend
Payout
Ratio
Dividend
Yield
Firm
Size
Asset
Growth
Earnings
per Share

Return on
Equity

Earning
Volatility

Financial
Leverage

Price
Volatility