Dividend Policy and Stock Price Behaviour in Indian Corporate Sector: a Panel Data Approach
Dividend Policy and Stock Price Behaviour in Indian Corporate Sector: A panel data approach
Upananda Pani∗
Abstract: This paper attempts to explore the possible links between dividend policy and stock price behaviour in Indian corporate sector. A sample of 500 listed companies from BSE are examined for the years 1996-2006.Dividend policy has always been a source of controversy despite years of theoretical and empirical research both in developed countries and emerging economies. The present paper features a panel data approach to analyze the relationship between dividend-retention ratio and stock-price behaviour while controlling the variables like size and long-term debt-equity ratio of the firm. The sample is taken across six different industries namely electricity, food and beverage, mining, non-metallic, textile and service sector. The results are based on the fixed-effect model, as these perform statistically better than random effects and pooled OLS model. Results of the fixed-effect models indicate that dividend-retention ratio along with size and debtequity ratio plays a significant role in explaining variations in stock returns. The fixed effect models show the presence of firm level effect in explaining the possible links between dividend policy and stock price behaviour of the firm. In another words it exhibits the possibility of “clientele effect” effect in case of some industries. Therefore the model helps to understand the intricacies of dividend policy and stock-return behaviour in Indian corporate sector for the same period. Although the results are not robust enough as in the case of developed markets but shades some more interesting facets to the existing corporate finance literature on dividend policy in India.
Kew Words: Dividened Policy, Stock Price, Corporate Finance, Fixed Effect Model JEL Code: G30, G35
Research Scholar, Indian Institute of Technology, Khragpur-721302. The author can be contacted upani@iitkgp.ac.in
∗
1
1.
Upananda Pani∗
Abstract: This paper attempts to explore the possible links between dividend policy and stock price behaviour in Indian corporate sector. A sample of 500 listed companies from BSE are examined for the years 1996-2006.Dividend policy has always been a source of controversy despite years of theoretical and empirical research both in developed countries and emerging economies. The present paper features a panel data approach to analyze the relationship between dividend-retention ratio and stock-price behaviour while controlling the variables like size and long-term debt-equity ratio of the firm. The sample is taken across six different industries namely electricity, food and beverage, mining, non-metallic, textile and service sector. The results are based on the fixed-effect model, as these perform statistically better than random effects and pooled OLS model. Results of the fixed-effect models indicate that dividend-retention ratio along with size and debtequity ratio plays a significant role in explaining variations in stock returns. The fixed effect models show the presence of firm level effect in explaining the possible links between dividend policy and stock price behaviour of the firm. In another words it exhibits the possibility of “clientele effect” effect in case of some industries. Therefore the model helps to understand the intricacies of dividend policy and stock-return behaviour in Indian corporate sector for the same period. Although the results are not robust enough as in the case of developed markets but shades some more interesting facets to the existing corporate finance literature on dividend policy in India.
Kew Words: Dividened Policy, Stock Price, Corporate Finance, Fixed Effect Model JEL Code: G30, G35
Research Scholar, Indian Institute of Technology, Khragpur-721302. The author can be contacted upani@iitkgp.ac.in
∗
1
1.
References: End Notes:1 Miller, Merton, and Modigliani, Franco, (1961) Dividend Policy, Growth, and 3 The term ‘dividends’, is defined inclusively under the Income Tax Acts, 1922 and Sarma, JVM. (1990). “Taxation and corporate dividend behaviour in India”, Y V Reddy (2003).The trends of dividend Behaviour in Indian corporate sector 5 Sarma, J V M (1990) , Taxation and Corporate Dividend Behaviour in India, Harman