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Dividend Policy and Share Price Volatility



Since many years, dividend policy has remained controversial issue, both at theoretical and empirical aspect. One of the most critical issues regarding the dividend policy is the relation between the stock price and the dividend policy. Generally, it is considered that risk can be greatly reduced by distributing higher dividends and thus, stock price is influenced by the dividends paid by the company and dividend policy (Sharpe, 1964). Stock price volatility is defined as change in the stock price, that is, either rise or fall in the prices of stock for a defined time frame. For any equity market, stock price volatility is very common phenomenon and is widely used for measuring the unanticipated variations in the prices of stock (Hussainey, Mgbame and Mgbame, 2011). Stock price volatility is considered as one for the prime factors that helps in maintaining the interest of the investors in the stock market substantially. Whenever any information is made available to the investors, it changes the intrinsic value. Therefore it can be said that stock price volatility can be considered as one of the measures of determining the arrival rate of new information. This is the reason why brokers, investors, dealers, regulators and academics show great concern about precariousness in the prices of a stock (Lee, Chiang and Lin, 2012).

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Significant importance is given to this parameter because, price volatility of stock not only impact the value of the firm and determines the risk associated with the stock, but investors, dealers and other interested entities also gets important information regarding the firm and its performance (Allen and Izan, 1992). There are various microeconomic factors that influence the prices of stocks. Some of the microeconomic factors are corporate bond yield, leverage, dividend yields and corporate earnings, changes in the interest rate, trading activities in the stock market, bond prices and many more, and many researchers have performed studies to draw relationship between these parameters and the volatility in the stock price and found out that out of all these factors, none plays any noteworthy role in elucidating the behavior of volatility in stock price over the period (Levin and Wright, 2006).

Many theoretical studies show that payout ratio and dividend yield varies indirect with the common stock volatility. This can be understood from the rate of return effect, duration effect, information effect and arbitrage pricing effect. According to duration effect, high dividend yield will assure high near term cash flow (Cochran and DeFina, 1995). According to it, if the dividend policy is stable, the duration of the high dividends stocks will be shorter. Gordon Growth Model is one of the best models so far to understand the relationship between dividend and stock price volatility (Baker and Powell, 2012). This model can be used for understanding that fluctuations in the discount rate do not affect the high dividend to greater extent and thus shows lower price volatility.

Moving the discussion towards the markets of the BRIC countries, that is, Brazil, Russia, India and Chine, and Pakistan, it can be said that, among all the developing countries, these are some of the most important emerging markets of the world. The main stock markets of India are National Stock Exchange (NSE) and Bombay stock Exchange (BSE), on the other hand the main stock market of Brazil is Brazil Stock Exchange (BOVESPA), Russia is Russian Trading System and Stock Exchange (RTS) and that of China is Shanghai Stock Exchange (SSE) (Abor and Bokpin, 2010). The stock market of Pakistan is Karachi Stock Exchange (KSE) and is considered as high risk and high return market. Investors invest in such markets so as to seek high risk premium. Some of the researcher have made attempt to study the long term behavior of stock markets and related issues but no one has deeply explore the effect of payout ratio and dividend yield on the share prices (Gay, 2008).

After the introduction of the reforms in 1990, it has become very important to study the role of dividend yield and payout for the Pakistani stock market. Due to the reforms, the Pakistani market was opened for the foreign investors and it injected competition in the market and thus, the volatility of the market got increased and responsiveness of the stock price volatility towards fundamental factors reduced (Nishat, 1992). Some of the major reforms in Pakistan specific to dividend policy are exemption of right and bonus shares from tax, tax sealing on cash dividend, government policy of easing restrictions on transfer of market profits, pattern shifting from cash to share dividend, etc. This work is an attempt to study the role of dividend policy measures, that is, payout ratio and dividend yield on the prices of share in longer time frame (Khan, Burton and Power, 2011).

Focus and Purpose of the Research


The main focus of this work is to gain knowledge on the dividend policy and the volatility in the stock price. Further, in order to narrow down the topic, the researcher has focused on drawing the relationship between dividend policy and the volatility in the prices of the stock. Pakistan and BRIC countries are selected by the researcher so as to identify which variable is more related to stock price volatility (Erasmus, 2011).
Aim: To draw relationship between dividend policy and stock price volatility in context to BRIC countries and Pakistan.

Objectives: In order to attain the stated aim, the below mentioned objectives are fulfilled:
To identify whether dividend payout or dividend yield have significant impact on stock price volatility?
To identify the impact of controlling different variables on stock price volatility
To compare & identify which variable is more related to stock price volatility in Pakistan & BRIC countries (Brazil, Russia, India and China)

Research Questions

How dividend payout or dividend yield impact the stock price volatility?
What are the impacts of different variables on stock price volatility?
Which variable is more related to stock price volatility in Pakistan & BRIC countries (Brazil, Russia, India and China)?


Various reforms were developed in the Pakistan related to the dividend policy such as, exemption of right and bonus shares from tax, tax sealing on cash dividend, government policy of easing restrictions on transfer of market profits, pattern shifting from cash to share dividend, etc (Hamada, 1972). So the purpose of this report is to determine the impact of these reforms on the share price and their volatility. In addition to this, in comparison to BRIC nations, the share market of Pakistan is comparatively developing, so through this study, the researcher will draw a comparison between the stock price volatility in Pakistan and that in other BRIC nations.

Potential Significance

This study is not only significant for the theoretical purpose but it also holds lot of significance for the practical purpose. The study conducted by the researcher will add a lot to the existing information and data available on the topic. It will assist both, academicians and the investors or other entities who are interested in gaining knowledge about the dividend policy and share market.

In addition to theoretical implications, this study has got many practical implications also that will enable the learners to get insight about the stock price volatility and the factors that impact it. It will assist the investors and learners to determine degree of volatility of the stock price.

Literature Review


Before proceeding for any study, it is very important for a researcher to review the existing literature. It enables the researcher to acquire plentiful knowledge on the subject so that researcher can effectively work on the topic. Moreover, it also helps the researcher to identify the existing gaps in the present work. The literature review of present report focuses on dividend policy and volatility in prices of share. It will throw light on different independent variables on which the variable ‘share price volatility’ depends.

Dividend Policy and Share Price Volatility

Management of a company has to make many kind of policies related to business. Dividend policy is one of the important policies among all. Dividend policy is defined as company’s decision or choice regarding the payment of dividends to the shareholders. Every year, after making profit, every organization has two options with it. It can either distribute the earnings in the form of dividends, or it can retain the earnings for re-investing in the firm. According to Modigliani and Miller, investors are interested in the financial information and annual results of the company, as cost of stock depends on the annual result of the company (Ahmed and Javid, 2009). On the basis of the annual information, market determines the earnings of an organization, and accordingly price the stock. If the results are not as per the expectations of the market, drastic variation can be seen in the stock option price, it can either go above or below the value placed by the industry, that is, the stock is said to be either overvalued or undervalued (Linter, 1956).

Till date many researchers, through their work have tried to established link between the dividend policy of the company and movements in their stock option values. Below are some of the theories that are used to elucidate relationship between share price and dividend policy.

Relation between Dividend Policy and Share Price

Study by Lintner shows that firm’s market value is dependent on dividend payout. Similarly, research by Gordon concludes that dividend policy has positive impact on the share price of a stock. Those firms which distribute large amount of earnings as dividends are less subjected to experience stock price volatility. But there are some studies also that were not able to link dividend policy with stock price (Nazir, Nawaz, Anwar and Ahmed, 2010). Study by Allen and Rachim failed to link dividend yield with stock price. Alternatively, it shows positive link between stock price and earnings, size and leverage, while negative link between payout ratio and stock price.

Critical Analysis

Thus, after analyzing various studies conducted by many renowned researchers it can be said that announcement of stock dividends or cash dividends positively affects the price of a stock. Those companies which distribute dividends are liked by the investors. On the basis of dividends distributed by the company, investors determine the performance of the firm (Pradhan, 2003). If a company is paying higher dividends, in that case, investors assume that the company is performing satisfactorily. On the other hand, if the firm is not distributing dividends, or is paying very low dividends, it is assumed by the investors that company is not able to perform well against its competitors.

For this reason, two of the most useful parameters used by the managers and investors are dividend payout ratio and dividend yield. Dividend payout ratio tells how much the company is paying to its investors put of its profit. Generally, higher dividends reflect that company is making higher profit and is performing well. In such cases, its stock price tends to remain stable and does not vary. On the other hand, if the firm pays no or less dividends, it means its earnings are low and the company is not performing well (Travlos, Trigeorgis and Vafeas, 2001). This is the reason investors do not show confidence in those stock and there stock price varies.

Dividend yield on the other hand, reflects the returns on the investment made by an investor. Stock price of those companies which maintains higher dividend yield are less volatile in comparison to those firms which have lower dividend yield rate. Reason being, those stocks are liked by the investors as they assume higher dividend yield means better performance and thus, less volatility (Yoon and Starks, 1995). In addition, investors give more importance to the dividend income in comparison to capital gains. Therefore, it can be said that share price of those companies which have higher dividend yield and higher dividend payout ratio is less volatile than those companies which have lower dividend yield and lower dividend payout ratio (Ho, 2002). This is due to the fact that performance of higher dividends paying companies is considered to be much better than the performance of low dividend paying companies and hence their stock price is less volatile.

Research Methodology

Research Data

This is very important part of a research process as authenticity of the work depends on the method through with the data is collected. Data collection can be categorized in two main categories; first is primary data in which the data is collected by the researcher for the first time, and another is secondary data, in which the researcher collects data from various publishers’ sources such as books, online sources, academic journals, newspaper articles, etc (Saunders, 2003). For the present work, the researcher has gathered all the data from the Datastream, Bloomberg and some of the other authenticated financial websites. For doing this, the researcher has selected companies listed on different stock markets of different country. Companies selected for this purpose are those which are listed on KSE-100 Index in case of Pakistan, listed on Bovespa Index-71 in case of Brazil, listed on RTS-50 in case of Russia, Listed on Shenzhen-100 in case of China and listed on Nifty-50 in case of India.

Research Methodology

For the present work, various factors have been selected to gauge their impact on the price volatility of the stocks of different companies listed on stock market of Pakistan, India, Brazil, Russia and China. Since, accessing and collecting data is the limitation of this study, therefore, for this research, instead of market values, book values are used.

Control Variable Definition

Parkinson (1980) used price volatility to determine its relationship with stock price volatility. Price volatility is determined by dividing the annual range of price with the average of low and high stock price (Chen, Huang and Cheng, 2009). This method is more authentic as compared to traditional method in which researcher either use closing or opening price or average of closing or opening price. It is taken as dependent variable. For determining the final value, the data is averaged for the entire period and then to obtain variable comparable to standard deviation, square root of transformation was applied (Harkavy, 1953). For the present study, annual range of adjusted stock price is gathered from the data stream.

Data Analysis


Data analysis is the penultimate chapter of a research report, and on the basis of this chapter only a researcher can conclude the final findings. Among all the variable under study exists multi collininearity problem, thus, it is difficult to compare them with some standard set. In order to overcome from this problem, Statistical Package for Social Science (SPSS) software has been used by the researcher in the present study to implement the regression model and to analyze the accumulated data.

According to general standards, the value of F signifies that if this value is less than 0.1, then there exists significance relation between the two variables, on the other hand, if it is more than 0.1, then there is no significance between the two variables under study. Similarly, the coefficient of regression, that is, R2, if it is 1 or near about 1, it shows greater impact of independent variable on the dependent variable, and if this value is 0 or near about 0, its shows that the independent variable does not have any impact on the dependent variable.

The tables plotted in the research methodology section represent descriptive statistical and correlation between the variables. They describe the characteristics of each of the dependent and independent variable. Te standard deviation of stock market returns equivalent to the measured volatility can be estimated by ignoring the minute impact of corporations going ex-dividend and assuming that stock prices will follow normal distribution. It can be achieved by multiplying the mean volatility of 0.691 in case of Pakistan, 1.001 in case of Brazil, 0.997 in case of Russia, 1.052 in case of India and 1.025 in case of China with a constant value, that is, 0.6008 derived by Parkinson (1980). For Pakistan, it is coming out to be 41.52%, and for Brazil, Russia, India and China it is coming out to be 60.14%, 59.89%, 63.20% and 61.58% respectively. Baskin’s (1989), in his study, calculated this value for the US companies, which comes out to be 36.9%.

The most contradict finding of the paper is negative correlation between debt and size. Study performed by Allen and Rachim (1996) reveals that there exists significant correlation between size and debt. This is due to fact that large companies are widely diversified and thus have more tangible assets. Companies having more tangible assets are subjected to more market scrutiny, and thus, they can support more debt financing. But in this case, size of not only Pakistani companies, but size of companies of BRIC nations also has negative correlation with debt. This shows, for the Pakistani and BRIC nations companies, with the diversification or expansion in their size, they find it difficult to raise debt finance. Further, Allen and Rachim (1996) also concluded that this positive correlation between debt and size is due to the fact, that there exists negative correlation between size and price volatility. But, in the present work, except for China, for all the other BRIC nations and Pakistan, size is positively related to price volatility. It means, apart from China, for other BRIC countries and Pakistan, if size of the companies will expand, their stock prices will become more volatile. Chinese companies follow the findings of Allen and Rachim (1996), as for Chinese companies, size is negative correlated with the price volatility. This is due to the fact that big firms have relative low earnings volatility before interest and taxes and because of this they are capable of carrying more debt.


In case of KSE 100 index, dividend yield which was coming out to be not significant in the correlation table, becomes significantly important after regressing it and dividend payout with the price volatility. This can be attributed from the lower value (0.036) of p. This again is contradicting to the previous findings of this study, as, there exist significant correlation between dividend yield and dividend payout. In case of Brazil, Russia and China also, it is found that dividend yield which was earlier not significantly correlated with the price volatility, when regressed with it in addition to dividend payout, is coming out to be significantly correlated with the price volatility. Only in case of India, the dividend yield is not significantly related to price volatility which is attributed from higher p value.

In case of Pakistan, when price volatility is only regressed with dividend payout, the value of r2 is coming out to be 0.052 and p is coming out to be 0.034, but when dividend yield is also added to the regression equation, not much change was observed in the value of r2 and p. this shows that in comparison to dividend payout, dividend yield has much less significance on the share price volatility. In case of Brazil, same trend is seen in the value of r2 and the significance level decreases with the addition of dividend yield. Contrary to this, for Russia, with the addition of dividend yield with dividend payout, the impact of these factors increases significantly on price volatility. In addition, the value of p decreases with addition of dividend yield. This shows, for Russian index, dividend yield has significant impact on the price volatility. For Nifty-50, the scenario is different from RTS-50. Here, with the addition of dividend yield, the value of r2 increases from 0.098 to 0.115 showing that combine impact of dividend yield and dividend payout is more in comparison to only payout. Further, for Nifty-50, both the independent variables together have high significance with the price volatility. Finally, in case of Chinese index, dividend payout individually dose not has much impact on the price volatility, and the situation remains same even after adding the other variable, that is, dividend yield. Further, both these independent variables have low significance with the price volatility as the value of p is coming out to be very high. Allen and Rachim (1996), in their study found out that dividend yield was not significantly correlated with the price volatility, remained insignificant even after it; along with dividend payout, was regressed with the stock price volatility.

Now moving the discussion towards the BRIC nations, addition of other control variables also have some impact on the price volatility of Bovespa-71, RTS-50, Shenzhen-100 and Nifty-50. For Bovespa-71 there exists significant positive relationship between dividend payout and price volatility. Further, dividend yield is also positively associated with the stock price volatility. Negative coefficient of size is as per expectation, because as the size of the company increase, it becomes less risky and its share price become less volatile. Considering earning volatility and debt for Bovespa-71, earning volatility is positively related which is bit contradict to the theoretical findings and debt is negatively related. Finally, the growth of Bovespa-71 listed companies is negatively related to the price volatility.

For RTS-50 index listed companies as per the expectations, both dividend yield and dividend payout are negatively correlated to the stock price volatility. Further, the value of p suggests that dividend yield has more influence on the price volatility than dividend payout. Positive coefficient of size in this case is contradicted to the earlier finds, as size should be negatively related to the stock price volatility. Looking at the earning volatility and debt for RTS-50, it is found that earning volatility is negatively related to stock price volatility while debt is positively related to share price volatility.

Considering Nifty-50 index of India, it is found that payout is significantly positively related to the price volatility while dividend yield is significantly negatively related to the price volatility. Moving on to the relation between size and price volatility, they are found to be negatively related with each other. Further, earning volatility, as per the expectation is negatively related and to the price volatility and so is the debt. These findings align the finding of the previous studies.

Finally, for Shenzhen 100, both dividend payout and dividend yield are negatively associated with the stock price volatility, but are not very significant to the dependent variable, which can be attributed from the higher p value. Apart from this, as per most of the earlier studies, size is negatively related to the price volatility. On the contrary, association between price volatility and earnings volatility, and price volatility and debt are positively related, which is contradicting to the earlier findings.

Summary and Conclusion

From the above data analysis chapter it can be concluded that for Pakistan’s KSE-100, there is positive association between price volatility and payout. Even after adding other control variables, the nature of association between them remained same. This is contradicting to the dividend irrelevance theory which suggests the dividends do not have any impact on the share price movement. On the other hand, apart from Russia, the relationship between payout and price volatility for other BRIC countries is also positive. In case of China, before the addition of other control variable, the rapport between the dependent variable and dividend payout was negative, but after the addition of other control variable, the relationship become positive. The positive relationship between price volatility and dividend payout are contradicted to the earlier findings of Allen and Rchim and Baskin. Companies which offer higher dividend payout are considered to be making good profits every year and thus are assumed to the less risky. So for such companies, share prices are less volatile and with the increase in dividend payout, volatility in share price must go down. So, for Pakistan and other BRIC countries the rapport between price volatility and dividend payout is positive. This also supports bird in hand theory, that investors are more concern about dividends rather capital gain. It is so because dividends are certain but capital gains are not.  

Further, Allen and Rachim also found that the major determinants of price volatility are leverage and basic earnings. The findings of the current work are in line with their findings as in most of the cases earning volatility is the major determinant of price volatility. This also supports bird in hand theory. Apart from this, the other major determinant of earning volatility for Pakistan and BRIC countries is size. These findings are sensible and go with theoretical and empirical studies. Further, it is also found during this study that dividend yield and dividend payout are significantly correlated with each other for all the indexes under studies. Cross sectional regression is not an effective tool for assessing the repercussions of dividend policy. Baskin (1989) in his work concluded negative relationship between dividend yield and price volatility. The same findings are drawn in this work also. That is, for BRIC nations, there exists negative correlation between dividend yield and price volatility. But, in case of Pakistan, positive association is found between dividend yield and price volatility. This shows that investors are much concern about the dividends paid by the company as company paying higher dividends experience less volatility in its share price.


  • Abor, J. and Bokpin, A. G. 2010. Investment opportunities, corporate finance, and dividend payout policy: Evidence from emerging markets. Studies in Economics and Finance. 27(3). pp.180-194.
  • Adefila, J. J. Oladipo, J. A. and Adeoti, J. O. 2004. The Effect of Dividend Policy on the Market Price of Shares in Nigeria: Case Study of Fifteen Quoted Companies. International Journal of Accounting. 2(1).
  • Ahmed, H. and Javid, A. 2009. Dynamics and Determinants of Dividend Policy in Pakistan (Evidence from Karachi Stock Exchange Non Financial Firms). International Journal of Finance and Economics. pp.148-171.
  • Ali, M. B. and Chowdhury, T. A. 2010. Effect of Dividend on Stock Price in Emerging Stock Market: A Study on the Listed Private Commercial Banks in DSE. International Journal of Economics and Finance. 2(4). pp.52-64.
  • Allen, D. E. and Rachim, V. S. 1996. Dividend policy & stock price volatility: Australian evidence. Applied Financial Economics. 6. pp.175-188.
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