37750854 Dividend Policy and Its Impact on Share Price

DIVIDEND POLICY AND ITS IMPACT ON SHARE PRICE(ANALYSIS OF SELECTED “A” CLASS LISTED COMPANIES) Submitted By Bijendra Bahadur Malla Roll No.: 740090 Reg. No: 2007-2-22-0056 A Research Report Submitted To Prof. Dr. Prem Raj Pant Apex College Pokhara University In partial fulfillment of requirements for the course on Research Methodology For the degree of Master of Business Administration Kathmandu August, 2009 ACKNOWLEDGEMENTS This Study has been under taken to analysis the “Dividend Policy and its Impact on Share Price (Analysis of selected “A” Class Listed Companies)” under partial fulfillment of the requirement of MBA degree. The thesis mainly covers the dividend policy and its impact on share price of “A” class listed companies of Nepal. I would like to express my deep gratitude to Professor Dr. Prem Raj Pant, for his kind support, advice and continuous support for the thesis writing. I would like to express my deep greet to my respected supervisor, Mr. Pushpa Raj Joshi and Mr. Bharat Singh Thapa for his continuous guidance and supervision. The report in this form is the result of their inspiring and invaluable guidance and supervision. I express sincere thanks to all librarians of Apex College who helped me directly and indirectly in the course of review of literature. Finally, I would like to thank my family and friends for their help, blessings, love and support for me to prepare for the thesis writing. ........…….……........ Bijendra Bdr. Malla I CERTIFICATE OF AUTHORSHIP I, hereby declare that this submission is my own work and that to the best of my knowledge and belief, it contains no materials previously published or written by another person nor material which to a substantial extent has been accepted for the award of any other degree of university or other institutions, except where due acknowledgement is made in the acknowledgements. Date: …………… …………………… Bijendra Bdr. Malla II TABLE OF CONTENTS Acknowledgements Certificate of Authorship Table of Contents List of Tables List of figures Abbreviations Executive Summary I II III VI VII VIII XI Chapter 1 Introduction 1.1 1.2 1.3 1.4 1.6 1.7 Background of the Study The Problem Statement Purpose of the Study Significance of the Study Limitations of the Study Organization of the Study 1 5 6 7 7 8 Chapter 2 Review of Literature 2.1 Conceptual Framework 2.1.1 Meaning of Dividend 2.1.2 Theories Regarding Dividend 2.1.3 Types of Dividend 2.2 Dividend Policy 2.3 Factors Affecting Dividend policy 2.4 Payment Procedure Followed by Companies 2.5 Ex- dividend Day Tests 2.6 Quality Rating of Companies in Nepal 2.7 Legal Provision Regarding Dividend Practice in Nepal 2.8 Review of the International Studies 2.9 Review of the Thesis 2.10 Concluding Remarks 10 10 11 12 16 20 23 23 25 26 29 43 III Chapter 3 Methodology 3.1 3.2 3.3 3.4 3.5 3.5.1 3.5.2 3.5.3 3.5.4 3.5.5 3.5.6 The Research Design The Population and Sample Sources of Data Methods of Data Analysis Tools Used Arithmetic Mean (A.M.) Standard Deviation (S.D.) Coefficient of Variation (C.V.) Karl Pearson’s Correlation Coefficient (r) T-statistics F-statistics 44 44 46 46 46 46 47 47 47 48 48 Chapter 4 Presentation and Analysis of Data 4.1 4.2 4.2.1 4.2.2 4.2.3 4.2.4 4.2.5 4.2.6 4.2.7 4.2.8 4.3 4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 4.4 4.4.1 No. of Cash Dividend paying listed companies Cash Dividend Payment of sector-wise financial institutions Cash Dividend Payment of Commercial Banks Cash Dividend Payment of Development Banks Cash Dividend Payment of Insurance Company Cash Dividend Payment of Finance Company Cash Dividend Payment of Manufacturing and Processing Company Cash Dividend Payment of Other Company Cash Dividend Payment of Hotel Cash Dividend Payment of Trading Company Ex-dividend Test For the Fiscal Year 2003/04 For the Fiscal Year 2004/05 For the Fiscal Year 2005/06 For the Fiscal Year 2006/07 For the Fiscal Year 2007/08 Test of Hypothesis Test of Hypothesis on Cash Dividend Payment of Commercial Banks IV 49 50 50 52 53 53 55 56 57 58 58 58 59 60 61 62 62 63 4.4.2 Test of hypothesis on Cash Dividend Payment of Development Banks 4.4.3 Test of Hypothesis on Cash Dividend Payment of Manufacturing and Processing Companies 4.5 Major Findings 64 65 66 Chapter 5 Summary and Conclusions 5.1 5.2 5.3 Summary of Findings Conclusions Recommendations 69 70 71 References Appendix V LIST OF TABLES Table No.4.1 Table No.4.2 Table No.4.3 Table No.4.4 Table No.4.5 Table No.4.6 Table No.4.7 Table No.4.8 Table No.4.9 Table No.4.10 Table No.4.11 Table No.4.12 Table No.4.13 Table No.4.14 Table No.4.15 Number of Cash Dividend Paying listed company Cash Dividend Payment of Commercial Banks Cash Dividend Payment of Development Banks Cash Dividend Payment of Insurance Company Cash Dividend Payment of Finance Company Cash Dividend Payment of Manufacturing and Processing companies Cash Dividend Payment of Other Company Price effect after Cash Dividend Payment on Fiscal Year 2003/04 Price effect after Cash Dividend Payment on Fiscal Year 2004/05 Price effect after Cash Dividend Payment on fiscal year 2005/06 Price effect after Cash Dividend Payment on fiscal year 2006/07 Price effect after Cash Dividend Payment on fiscal year 2007/08 One-way AVOVA table for Cash Dividend Payment of Commercial Banks One-way AVOVA table for Cash Dividend Payment of Development Banks One-way AVOVA table for Cash Dividend Payment of Manufacturing and Processing Companies 49 50 50 53 53 55 56 58 59 60 61 62 63 64 65 VI LIST OF FIGURES Fig. No. 4.1 Fig. No. 4.2 Fig. No. 4.3 Fig. No. 4.4 Fig. No. 4.4 Fig. No. 4.5 Number of Cash Dividend Paying Listed Companies Cash Dividend Payment of Commercial Banks Cash Dividend Payment of Development Banks Cash Dividend Payment of Finance Companies Cash Dividend Payment of Manufacturing and Processing Companies Cash Dividend Payment of Other Companies 49 51 52 54 55 57 VII ABBREVIATIONS A.D. AFC AGM A.M. ANOVA BFL BNL BOD CBBL CDND C.F. CHPCL C.V. DCBL DPS EBL EFL EPS Anno Domini Annapurna Finance Company Limited Annual General Meeting Arithmetic Mean Analysis of Variance Bhajuratna Finance and Saving Company Ltd. Bottlers Nepal Limited Board of Directors Chimeki Bikas Bank Ltd. Cash Dividend Not Declared Correction Factor Chilime Hydropower Company Limited Coefficient of Variation Development Credit Bank Limited Dividend per Share Everest Bank Limited Everest Finance Company Limited Earning per Share VIII EIC et.al F/Y HBL HGI Ltd. MPS MSC MSE NABIL NEPSE NIBL NLIC No. NPR NRB NUBL Rs. SBB SBBL SBI Everest Insurance Company Limited and others Latin:et aili Fiscal Year Himalayan Bank Limited Himalayan General Insurance Company Limited Market Price per Share Mean sum of square between columns Mean sum of square due to error Nabil Bank Limited Nepal Stock Exchange Nepal Investment Bank Limited Nepal Life Insurance Company Limited Number Nepalese Rupees Nepal Rastra Bank Nirdhan Utthan Bank Limited Nepalese Rupees Sahayogi Bikas Bank Limited Sanima Bikas Bank Limited Nepal SBI Bank Limited IX SCBNL S.D. SEBON SSC SSW TSS UIC UNL % Standard Chartered Bank Nepal Limited Standard Deviation Securities Board of Nepal Sum of square between samples Sum of square within samples Total Sum of Square United Insurance Company (Nepal) Ltd. Unilever Nepal Limited Percent X EXECUTIVE SUMMARY Dividend policy decision is one of the three decisions of financial management because it affects the financial structure, the flow of funds, corporate liquidating and investors’ attitudes. The main aspect of dividend policy is to determine the amount of earning to be distributed the shareholder and the amount to be retained in the firm. Divined policy involves the decision to pay out earning versus retaining them for reinvestment in the firm. The relationship between dividend and the value of the share is not clear cut. The financial manager must understand the various conflicting factors which influence the dividend policy before deciding the allocation of its company’s earnings into dividends and retain earnings. This study focuses on the dividend practice and its influence in prospect of Nepal of “A” class listed companies in Nepal. The empirical testing has been proved that exday stock price tend to fall by significantly less than the dividend. They interpret the result as consistent with a clientele effect where investors in high tax brackets show a preference for capital gains over dividends and vice versa. The number of cash dividend paying companies listed at NEPSE is seen almost the same in context of total listed companies since last five fiscal year except 2004/05 in which it comprise of 20.80 percent of total listed companies. It is also seen that there is the low degree of positive correlation between the total number of listed companies and the number of cash dividend paying listed companies. Most of the finance company is not being capable of declaring cash dividend to their shareholders. This study also wrap up that there is no significant difference between the average MPS before and after the cash dividend payment of commercial banks, development banks and finance company. XI Chapter 1 Introduction 1.1 Background of the Study After the restoration of democracy in 1990 A.D., Nepal has implemented liberal economic policy. As a result, many more companies are established in different sectors such as industrial, tourism, transportation, trade and mostly in financial sector who contribute to build up economy of the country. Nepal is a country trying to develop its economy through global trend and cooperation with developed countries. The development of an economy requires expansion of productive activities, which in turn is the result of the capital formation, which is the capital stock of the country. The change in the capital stock of the country is known as investment. Investment is key factor for capital formation. Investment promotes economic growth and contributes to a nation’s wealth. Investor desire to earn some return from the investment, without any return there is no any investment. Investment will block, if there is no return. The total expected return include two components one is capital gain and other is dividend. In the capital market, all firms operate in order to generate earnings. Shareholders make investment in equity capital with the expectation of making earning in the form of dividend or capital gains. Thus, shareholders wealth can increase through either dividend or capital gain. Once the company earns a profit, it should decide on what to do with the profit. It could be continued to retain the profit within the company, or it could pay out the profit to the owners of the company in the form of dividend. Dividends are payment made to stockholders from a firm’s earning in return to their investment. Dividend policy is to determine the amount of earnings to be distributed to shareholders and the amount to be retained or reinvestment in the 1 firm. The objective of a dividend policy should be to maximize shareholder’s wealth position. Retained earnings are used for making investment in favorable investment opportunities, which in turn help to increase the growth rate of the firm. What and how much it is desirable to pay dividend is always a controversial topic because shareholders expect higher dividend from corporation, but corporation ensure towards setting aside funds for maximizing the overall shareholders’ wealth. Management is therefore concerned with the activities of corporation that affect the well being of shareholders. That well being can be partially measured by the dividend received, but a more accurate measure is the market value of stock. But stockholders think dividend yield is less risky than capital gain. Dividends are payments made by a corporation to its shareholders. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business i.e. retained earnings, or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend. The most widely accepted objective of a firm is to maximize the value of the firm and to maximize shareholder wealth. In general, there are three types of financial decisions which might influence the value of a firm: investment decisions, financial decisions and dividend decisions. These three decisions are interdependent in a number of ways. The investments made by a firm determine the future earnings and future potential dividends; and dividend policy influences the amount of equity capital in a firm’s capital structure and further influences the cost of capital. In making these interrelated decisions, the goal is to maximize shareholder wealth. Dividends are decided upon and declared by board of directors. A firm’s profits after-tax can either be used for dividends payment or retained in the firm to increase shareholders' fund. This may involve comparing the cost of paying dividend with 2 the cost of retaining earnings. Generally, whichever component has a lower cost that is where the profit after-tax will flow. However, there is a need to strike for a balance because it is a zero sum decision.1 Although firms do not have obligations to declare dividends on common stock, they are normally reluctant to change their dividend rate policy every year as the firms strive to meet stockholders’ expectation, build a good image among investors and to signal that the firm has stable earnings to the public. The theory of dividend and its effect on the value of the firm is perhaps one of the most important yet puzzling theories in the field of finance. Academics have developed many theoretical models describing the factors that managers should consider when making dividend policy decisions. By dividend policy, we mean the payout policy that managers follow in deciding the size and pattern of cash distributions to shareholders over time. Miller and Modigliani (1961) argue that given perfect capital markets, the dividend decision does not affect firm’s value and is, therefore, irrelevant. However, most financial practitioners and many academicians believe otherwise. They offered many theories about how dividends affect firm’s value and how managers should make dividend policy decisions. Over time, the number of factors identified in the literature as being important to consider in making dividend decisions increased substantially. There are plenty of potential determinants for the dividend decisions. The more prominent determinants include protection against liquidity, after-tax earnings of the firm, liquidity and cash flow consideration, stockholders' expectation/preference, future earnings, past dividend practices, return on investment, industry norms, legal constraints, growth prospects, inflation and interest rate. (Foong, Zakaria and Tan, 2007, p.98) The development of an economy requires expansion of productive activities, which in turn is the result of the capital formation, which is the capital stock of the country. The change in the capital stock of the country is known as investment. Investment is key factor for capital formation. Investment promotes economic growth and contributes to a nation’s wealth. Investor desire to earn some return from the 3 investment, without any return there is no any investment. Investment will block, if there is no return. The total expected return include two components one is capital gain and other is dividend. In the capital market, all firms operate in order to generate earnings. Shareholders make investment in equity capital with the expectation of making earning in the form of dividend or capital gains. Thus, shareholders wealth can increase through either dividend or capital gain. Once the company earns a profit, it should decide on what to do with the profit. It could be continued to retain the profit within the company, or it could pay out the profit to the owners of the company in the form of dividend. Dividends are payment made to stockholders from a firm’s earning in return to their investment. Dividend policy is to determine the amount of earnings to be distributed to shareholders and the amount to be retained or reinvestment in the firm. The objective of a dividend policy should be to maximize shareholder’s wealth position. Retained earnings are used for making investment in favorable investment opportunities, which in turn help to increase the growth rate of the firm. What and how much it is desirable to pay dividend is always a controversial topic because shareholders expect higher dividend from corporation, but corporation ensure towards setting aside funds for maximizing the overall shareholders’ wealth. Management is therefore concerned with the activities of corporation that affect the well being of shareholders. That well being can be partially measured by the dividend received, but a more accurate measure is the market value of stock. But stockholders think dividend yield is less risky than capital gain. In Nepal only few companies are paying dividend and the other companies are not stable in the payment of dividend. There are some companies who have never paid dividend to their investors throughout their historical background. It has been noticed that company who has risen dividend generally experience on increase its stock price and that a company don’t pay dividend or lowers it’s has a falling stock price trend. It seems to suggest that dividend so matter, is affecting the stock price 4 of the company but several researchers argue the fact that dividend affect stock price, rather it is the information declaration of dividend that affect the stock price. It is fact that dividend work as a simple sufficient signal of management’s interpretation of the firm’s recent performance and its future prospects. 1.2 The Problem Statement Dividend policy is an integral part of financial management decision of a business firm. Dividend refers to that portion of a firm’s net earning which are paid out to the shareholders. Whether dividends have an influential on the value of the firm is the most critical question in dividend policy. If dividends are irrelevant, the firm should retain earnings for investment opportunities. If there are not sufficient investment opportunities providing expected returns in excess of the required return, the unused funds should be paid out as dividends. Dividend is the most inspiring factor for the investment on shares of the company is thus desirable from the stockholder's point of view. In one hand the payment of dividend makes the investors happy. But in the other hand the payment of dividend decreases the internal financing required for making investment in golden opportunities. This will hamper the growth of the firm, which in turn affects the value of the stock. Earnings are also treated as financing sources of the firms. The firm retains the earning; its impact can be seen in many factors such as decreased leverage ratio, expansion of activities and increase in profit in succeeding years. Whereas if firm pays dividend, it may need to raise capital through capital that will affect on risk characteristics of the firm. Therefore there are many dimensions to be considered on dividend theories, policies and practices. Shareholders make investment in equity capital with the expectation of making earnings. Dividend is kind of earning that the shareholders expect form their 5 investment. But, the dividend decision is still a fundamental as well as controversial area of managerial finance. The effect of dividend on market price of stock is the subject matter of the study. There are many empirical studies on dividend and stock price behavior. For example, few of them are Linter (1956), Miller and Modigliani (1961), Durand and May (1960), Friend and Puckett (1964), Fama and Babiak (1968), Elton and Gruber (1970), Frank and Jagannathan (1998), Uddin (2003), Foong, Zakaria and Tan (2007). However, conclusive relationship exists between the amount paid out in dividend and the market price of the share. There is still a considerable controversy concerning the relation between dividend and stock price. Theoretically, the share price should fall down after the book closure by an amount to the amount of cash dividend, in case the company is going to distribute cash dividend. For example, if the share price of ABC Company on one day before the book closure was Rs. 1000 and the company had declared Rs.70 per share as cash dividend, which was to be formalized in the coming AGM. The price per share in the first transaction after the book closure should be around Rs. 930. 1.3 Purpose of the Study The major objective of the study is to determine the trend and practices of dividend payment by the Nepalese “A” class listed companies of Nepal from fiscal year 2003/04 to 2008/09 however the specific objective is are as follows. • To examine the impact of dividend policy on market price of stock of “A” class listed companies of Nepal. • To explore the prevailing practices and effort made in dividend policy among the companies. • To identify the regularity and uniformity of dividend paying financial institutions. 6 1.4 Significance of the Study In the capital market the investor can earn return in two ways, one is dividend and another is capital gain. The term dividend is defined as a return from investment in equity shares. So dividend is important factor for investor while investing in equity shares. This study helpful to investor to take rational decision like where to invest, how to invest, what portfolio should be made to obtain maximum profit from their investment? When a new company floats shares through capital market, large numbers of people gathers to apply for owner's certificate. It indicates people's expectation on higher return of investment in shares. In Nepalese context, most of investors are investing in the stock without adequate knowledge of the company and performance and dividend policies. This study helps to aware the Nepalese investors. This study is useful for the firm’s perspective too. They know the investor objective’s from this study. There are basically two types of objective one is receiving dividend and another is receiving capital gain. Knowing the objective of investor they can develop their plans and policies accordingly. Basically this study is conducted to help the investor while investing in share capital. So that they can make correct decision at right time about the influence of dividend in market price of share and make investment. 1.5 Limitations of the Study 1. The study is mainly concentrated on the dividend practice and its influence in prospect of Nepal of “A” class listed companies in Nepal. 2. The data being taken from secondary source, therefore authenticity of the data is dependent on the accuracy of the information used. 7 3. The result and the interpretation are completely rigid and from the view point of the researcher. 4. Among the different aspect of dividend policy only cash dividend is taken for the analysis. 1.6 Organization of the Study The whole study has been divided into five chapters. Chapter 1 Introduction In this chapter we deal with the introductory part of the study which includes background of the study, statement of the problem, objective of the study, significance and limitation of the study Chapter 2 Review of Literature This chapter deals with review of the different literature in regard to the theoretical analysis and review of book, articles and thesis related to this study. Chapter 3 Methodology This chapter deals with research methodology used to carry out the research. It is includes research design, population and sample, source and technique of data collection, data analysis tools. Chapter 4 Presentation and Analysis of Data This chapter is the main part of the study, which includes analysis and interpretation of the data using financial and statistical tools. Similarly this chapter also includes the major finding of the study. 8 Chapter 5 Summary and Conclusions Here we will give the summary and conclusions of the study and recommendations for further studies. 9 Chapter 2 Review of Literature 2.1 Conceptual Framework 2.1.1 Meaning of Dividend The term dividend is defined as a return from investment in equity shares. The profit made by the firm which is distributed to the shareholders termed as dividend. Every firm after making profit either retain the money for further investment or distribute it among the shareholders. The firm should decide whether to keep the money as retained earning or pay the dividend. It may be in cash, share and combination of both. The dividend policy is the policy followed by the firm regarding the dividend versus retention decision. Dividend policy of different organization may same or different, but the policy followed by the firm should be suitable for both the shareholders as well as the firm itself. Dividend policy decision is one of the three decisions of financial management because it affects the financial structure, the flow of funds, corporate liquidating and investors’ attitudes. Dividend decision of the firm is a very crucial controversial area of financial management. The main aspect of dividend policy is to determine the amount of earning to be distributed the shareholder and the amount to be retained in the firm. When a company pays dividend, the shareholder benefitted directly. If the company retains the funds for investment opportunities, the shareholders can be benefitted indirectly through future increase in the price of their stock. Thus, shareholders wealth can be increase through either dividend or capital gain. Divined policy involves the decision to pay out earning versus retaining them for reinvestment in the firm. Any change in dividend policy has both favorable and unfavorable effects on the firm’s stock price. Higher the dividend means higher the immediate cash flows to investors, which is good, but lower future growth, which is 10 bad. The dividend policy should be optimal which balances the opposing forces and maximizes stock prices. Since the motive of shareholder is to receive returns on their investment. There is an adverse relation between retained earning and cash dividend. When the amount of retain earning is high, the company declares less dividend and when the high dividend is paid than retain earning is reduced, which reduce the opportunity to reinvest and expansion of the organization. So dividend decision is one of the major decisions of managerial finance. This decision consist the decisive decision of choosing between distributions of profit to shareholders or investing them back into the business. Dividend decision has great influence on financial structure, flows of funds, corporate liquidity and so on. The relationship between dividend and the value of the share is not clear cut. The financial manager must understand the various conflicting factors which influence the dividend policy before deciding the allocation of its company’s earnings into dividends and retain earnings. In fact, dividend is the portion of the net earnings, which is distributed to the shareholders by a company. After successfully completing the business activities of a company, if the financial statement shows the net profit, the Board of Directors (BOD) decides to declare dividend to the shareholders. Therefore, the payment of corporate dividend is at the discretion of the BOD. 2.1.2 Theories Regarding Dividend i. Residual theory Residual theory is that, in which the first priority is given to the profitable investment opportunities. If there are profitable opportunities, the firm invest is those and residual income (if any) is distribute to shareholders. Residual theory of dividends means,’ A theory that suggests that the dividend paid by the firm should be the amount left over after all acceptable investment opportunities have been 11 under taken.’ Using this approach the Firm would treat the dividend decision in three steps as follows: Step 1 Determine the optimum level of capital expenditure which would be the level generated by the point of intersection of the investment opportunities schedule (IOS) and weight managerial cost of capital (WMCC) function. Step 2 Using the optimal capital structure proportion, it would estimate the total amount of equity financing needed to support the expenditures generated in step 1. Step 3 Because of the cost of retained earnings is less than the cost of new common stocks; retained earnings would be used to meet the equity requirement determined in step 2. If retained earnings are inadequate to meet this need, new common stock would be sold. If the available retain earning are in excess to this needs, the surplus amount would be distributed as dividends. (Gitmen, 2001, p.544) ii. Wealth maximization theory Under wealth maximization theory, large dividends is announced and distributed to shareholders in order to (or in hope with) maximize the wealth of the shareholders. Basically, it is applicable for those companies, which are just established and to those companies it will be beneficial whose financial profits are is decreasing trends. The main purpose of the wealth maximization theory of dividend is to make assurance to the stockholders that they are interesting in the firm, which has not better market value. 2.1.3 Types of Dividend Keeping these theories into considerations, dividend can be paid in different forms. Among them some are discuss below: 12 a. Stock Dividend/Bonus Share A stock dividend occurs when the board of directors authorizes a distribution of common stock to existing shareholders. Stock dividend increases the number of outstanding shares of the firm’s stock. Although stock dividend does not have a real value, firms pay stock dividend as a replacement for a supplement to cash dividend. Under stock dividend, shareholders receive additional shares of the company in lieu of cash dividends. Stock dividend requires an accounting entry transfer from the retained earnings account to the common stock and paid in capital accounts. Rupees transferred from retained earnings = Number of shares outstanding * Percentage of stock dividend * Market price of the stock. This has the effect of increasing the number of outstanding shares of the company as a result the decrease in EPS which effect the reduction in the market price of the share. Since the shares are distributed proportionately, share holders retain his proportionate ownership of the company. b. Scrip Dividend A scrip dividend is a distribution of surplus to the stockholders in the form of notes or promises to pay the amount of dividend at a certain time. The notes are called dividend certificates or scrip. Sometime companies need cash generated by business earning to meet business requirements or with-hold the payment of cash dividend because of temporary shortage of cash. In such circumstance the company may issue scrip dividend payable at future dates. c. Bond Dividend With the theory and concept of scrip dividend, if dividends are paid in the form of bond (to shareholders), promising that it will mature in future date is known as bond dividend. Therefore the intention and purpose of bond dividend is also the postponement of dividend payment for some time. The only difference between 13 bond and scrip dividend is that bond carries relatively longer maturity date than scrip dividend. Bonds used to pay carry interest and it means that the company assumes the fixed obligation of interest payment annually and principal amount of bond at maturity date. Bond dividend posses the following characteristic: • Bond dividends are the means to dividend postponement for a while but more it is obligation. • • It couldn’t bring back the psychological value as the cash dividend. Bond and scrip dividend are same, only the difference between these are maturity time i.e. scrip has relatively less maturity time than bond dividend. d. Stock Split and Reserve Split A method that is commonly used to lower the market price of a firm’s stock by increasing the number of shares belonging to each shareholder. The effect of a stock split is an increase in the number of shares outstanding and a reduction in the par, or stated, value of shares. The total net worth of the firm remains unchanged. The stock split does not involve any cash payment, only additional certificates representing new shares. A method that is used to raises the market price of a firm’s stock by exchanging certain number outstanding shares for one new share of stock. The effect of a reverse split is a decrease in the number of shares outstanding and a increase in the par, or stated, value of shares. The total net worth of the firm remains unchanged. The reverse split does not involve any cash payment, only additional certificates representing new shares. When the market price of share of a company is falling gradually, the company may adopt reserve split which may increase the market price of share and help to maintain efficient situation of the company. 14 e. Stock Repurchase It is the process of repurchasing back outstanding share of any company. A corporation’s repurchase of its stock can serve as a tax advantages substitute for dividend payout. Repurchase have the effect of raising share prices so that shareholders can be taxes at the capital gain rate instead of ordinary dividend rate on cash dividend. Company can repurchase its shares in two ways: • • Open market repurchase Tender (Offer) repurchase Open market repurchase usually (but not always) involve gradual programs to buy back shares over a period of time. In tender offer, the company usually specifies the number of shares it is offering to repurchase, a tender price and a period of time during which the offer is in effect. If the number of shares actually tendered by the shareholders exceeds the maximum number specified by the company, then the purchases are usually made on a pro-rata basis. Alternatively, if the tender offer is under subscribed the firm may decide to cancel the offer of extend to expiration date. Share tendered during the extension may be purchased on either pro-rata or first-come, first-served basis. (Weston and Copeland, 1991, 682) The repurchase of stock holds major three reasons i.e. for stock option, for acquisition and for retiring the stock. However, Nepalese Company Act 1997, section 47 has prohibited company for repurchasing its own shares, it states that no company shall purchase its own shares or supply loans against the security of its own shares. Stock is repurchased specially when the firm has abnormally high profits and is not in a position to effectively utilize surpluses. The repurchase effects are as follows: • • The stock repurchases reduce the number of outstanding stocks. It increases EPS and also DPS if the payout ration is not changed, 15 • • It increases the proportional ownership of existing stockholders. It increases the stock price as net worth per share increases. f. Cash Dividend The most common way to pay dividend is in the form of cash. A company should have enough cash in its bank account when cash dividends are declared. If the company doesn’t have enough cash at the time of paying cash dividend, arrangement should be made to borrow funds. Payment of cash dividend shouldn’t lead to liquidity problem for the company. The cash account and the reserve account of a company will be reduced when the cash dividend is paid. Both the total assets and the net worth of the company are reduced by the distribution of cash dividend. Beside the market price of the share affected in most cases by the amount of cash dividend distributed. Cash dividend has the direct impact on the shareholders. The volume of the cash dividend depends upon earnings of the firm and on the management attitude or policy. Cash dividend has psychological value for stockholders. Each and everyone like to collect their return in cash rather than non-cash means. So cash dividend is not only a way to earnings distribution but also a way of perception improvement in the capital market. The objectives of the cash dividend are: • To distribute the earnings to shareholders, as they hold the proportion of the share. • To build an image in the capital market so as to create favorable condition to raise the fund at the needs. • To make distribution easy and to account easily. 2.2 Dividend Policy Dividend policy determines the decision of earnings between payment to stockholders and reinvestment in the firm. Retained earnings are one of the most 16 significant sources of funds for financing corporate growth, but dividends constitute the cash flow that accrues to stockholders. (Weston and Copeland, 1991, p.657) The third major decision of the firm is its dividend policy, the percentage of earnings it pays in cash to its stockholders. Dividend payout, of course, reduces the amount of earnings retained in the firm and affects the total amount of internal financing. The dividend payout ratio obviously depends on the way earnings are measured for case of exposition, we use account net earnings but assume that these earning can form true economic earnings. In practice, net earning may not conform and may not be an appropriate major of the ability of firm to pay dividends. (Van Horne, 2000, p.350) Dividend policy refers to the issue of how much of the total profit a firm should pay to its stockholders and how much to retain for investment so that the combined present and future benefits maximize the wealth of stockholders. The dividend policy, however, not only specifies the amount of dividend, but also form of dividend, payment procedure etc. Dividend policy according to the application could be categorized as follows: a. Stable dividend policy When the firm constantly pays a fix amount of dividend and maintains it for all times to come regardless of fluctuations in the level of its earnings, it is called a stable dividend policy. This policy is considered as a desirable policy by the management of companies. Most of the shareholders also prefer stable dividends because all other things remaining same, stable dividends have a positive impact on the market price of the share. By stability, we mean maintaining their positions in relation to a trend live preferably one that is upward sloping. Three of the common used dividend policies are: 17 i) Constant dividend per share Constant dividend policy is based on the payment of a fixed rupee dividend in each period. A number of companies follow the policy of paying fixed amount per share as dividend every period, without considering the fluctuation in the earnings of the company. The policy does not imply that the dividend per share or dividend rate will never be increased. When the company reaches new level of earnings and expects to maintain it the annual dividend per share may be increased. Investors who have dividends as the only source of their income prefer the constant dividend policy. ii) Constant payout ratio The ratio of dividend to earning is known as payout ratio. When fixed percentage of earnings is paid as dividend in every period, the policy is called constant payout ratio. Since earnings fluctuate, following this policy necessarily means that the rupee amount of dividends will fluctuate. It ensures that dividends are paid when profits are earned, and avoided when it incurs losses. iii) Low regular plus extra policy The policy of paying a low regular dividend plus extras in a compromise between a stable dividend (or stable growth rate) and a constant payout rate. Such a policy gives the firm flexibility, yet investors can count on receiving at least a minimum dividend. It is often followed by firms with relatively volatile earnings from year to year. The low regular dividend can usually be maintained even when earnings decline and extra dividends can be paid when excess funds are available. b. No immediate dividend policy If the company does not declare dividend unless the company earn large income is called no immediate dividend policy. In other words, if there is not any hurry about dividend payment and if it could be paid only when the company earns more profit 18 is known as no immediate dividend policy. This policy is usually pursued the following circumstances: • When the firm is new and rapidly growing concern, which needs large amount of funds to finance its expansion program, • • • When the firms’ excess to capital market is difficult, When availability of funds is costlier, When stockholders have agreed to accept higher return in future. In fact, this policy should follow by issue of bonus shares. c. Regular stock dividend policy If the company regularly pays dividends to its shareholders in stock instead of cash, then it is called regular stock dividend policy. Regular stock dividend policy is ale designated as bonus shares. Such policy should follow under the following circumstances: • When the firm needs cash generated by earning to cover its modernization and expansion of projects. • When the firm is lacking in cash despite high earning, this is particularly true when the firm’s sales is affected through credit and entire sales proceeds are tied in receivables. d. Irregular dividend policy It is the policy in which, the firm does not pay any fixed amount of dividend every year or dividend varied in correspondence with change in level of earning, i.e. higher earnings means higher dividend and vice-versa. The firm with unstable earnings also adopts this policy, when there are investable opportunities the company retains more and when there is not any investable opportunities, the company distributes the earning as dividend or there is not regularity of dividend payment therefore it is the most used type of dividend policy in the Nepalese context at present. 19 e. Irregular dividend policy This policy is based on the premise that investors prefer to have a firm retain and reinvest earnings rather than pay out them in dividends if the rate of return the firm can earn on reinvested earnings exceeds the rate of return investors can obtain for themselves on other investments of comparable risk. Further, it is less expensive for the firm to use retained earnings than is to issue new common stock. 2.3 Factors affecting Dividend Policy 2.3.1 Legal Requirements The legal rules provide that the dividends must be paid from earnings either form the current year’s earnings or from past years’ earnings as reflected in the balance sheet account ‘retained earnings’. State laws emphasize three rules: a) Capital impairment Rules The firm cannot pay dividend out of its paid up capital. If it does so there would be reduction in the capital that would affect the creditors of a corporation. b) Insolvency Rule This rules state that cash dividend should be prohibited, if the company is insolvent. Insolvency in the legal services defined as the situation when the recorded value of liabilities exceeds the recorded value of assets. Similarly in the technical sense, it is the firm’s inability to pay its current debtors. c) Net profit rule This rule provides that dividend can be paid form past and present earnings. 20 2.3.2 Liquidity position The cash or liquidity position of the firm influences its ability to pay dividends. A firm may have sufficient retained earnings, but if they are invested in fixed assets, cash may not be available to make dividend payment. Thus, the company must have adequate cash available as well as retained earning to pay dividends. 2.3.3 Access to the capital markets A large, well-established firm with a record of profitability and stability of earnings has easy access to capital markets and other forms of external financing. A small, new or venturesome firm, however, is riskier for potential investors. Its ability to raise equity or debt funds from capital markets is restricted, and it must retain more earnings to finance its operations. A well-established firm is thus likely to have a higher dividend payout ratio than a new or small firm. 2.3.4 Need to repay debt Firms may have the policy to retire its past debts by means of retained earning. If such alternative are being adopted then such firm will retain more and pays less dividend. 2.3.5 Restrictions in debt contracts Debt contracts, particularly when long-term debt is involved, frequently restrict a firm’s ability to pay cash dividends. Such restrictions, which are designed to protect the position of the lender, usually state that (I) future dividends can be paid only out of earnings generated after the signing of the loan agreement (i.e. they can not paid out of past retained earnings) and (ii) that dividends cannot be paid when net working capital is below a specified amount. Similarly, preferred stock agreements generally state that no cash dividends can be paid on the common stock until all accrued preferred dividends have been paid. 21 2.3.6 Growth rate of firm A rapidly growing concern will have constant needs of long-term funds to seize favorable opportunities for which it has to retain more and pays less dividend. 2.3.7 Control Another important variable is the effect of alternative sources of financing on the control situation of the firm. As a matter of policy, some corporations expand only to the extent of their internal earnings. This policy is defended on the ground that raising funds by selling additional common stock dilutes the control of the dominant group in that company. At the same time, selling debt increases the risks of fluctuating earnings to the present owners of the company. Reliance on internal financing in order to maintain control reduces the dividend payout. 2.3.8 Stability of earnings A firm that has relatively stable earnings is often able to predict approximately what its earnings will be. Such a firm is therefore more likely to pay out a higher percentage of its earnings than a firm with fluctuating earnings. The unstable firm is not certain that in subsequent years earning will be realized, so it is likely to retain a high proportion of current earnings. A lower dividend will be easier to maintain if earning fall off in the future. 2.3.9 Tax position of shareholders The tax position of a corporation’s owners greatly influences the desire for dividends. For e.g. a corporation owned by largely taxpayers in high income tax brackets tend toward lower dividend payout where as corporations owned by small investors tend toward higher dividend payout. 22 2.4 Payment Procedure followed by Companies The actual payment procedure is of some importance, and the following is an outline of the payment sequence. 1. Declaration date: This is the day on which board of directors declares the dividend. At this time they set the amount of the dividend to be paid, the holder-of-record date and payment date. 2. Holder-of-record date: This is the date the company opens the ownership books to determine who will receive the dividend; the stockholders of record on this date receive the dividend. In that date, the company closes its stock transfer books and make up a list of the shareholders as of that day. 3. Ex-dividend date: The date when the right to the dividend leaves the stock is called the ex-dividend date. In this case, the ex-dividend date is four days before holder of record date. Therefore if someone wants to receive the dividend, he/she must buy the stock four days before the holder of record day. 4. Payment date: This is the day when dividend checks are actually mailed to the holders of record. (Weston and Copeland, 1992, p. 658) 2.5 Ex- dividend Day Tests The ex-dividend test involved the ex-dividend behavior of common stock prices. Investors buying the stock before ex-dividend date are entitles to the dividend declared; purchases on or after the ex-dividend date are not entitled to the dividend. In one of the earliest published studies on the ex-dividend stock price anomaly is that of Campbell and Beranek (1955) who reversed the general view that stock prices drop by the full dividend amount on ex-days. Using data from the NYSE stocks, they observed that the ex-dividend price drop was 90% of the dividend 23 amount. Durand and May (1960) conducted another seminal work examining the ex-dividend day behavior of American Telephone and Telegraph stock (ATandT) for a time series of 43 consecutive dividends. They found that the average price change from the cum-dividend day to the ex-dividend day was $2.16, or about 4 percent less than the $2.25 dividend. Elton and Gruber (1970) were the first researchers that offered a reasonable explanation for the ex-dividend stock price anomaly. Using a one-year sample with 4,148 dividends, Elton and Gruber (1970) confirmed that ex-day stock prices tend to fall by significantly less than the dividend and developed a model explaining the effect known as “the long-term trading hypothesis” or “the tax-effect hypothesis”. Elton and Gruber showed that when dividends are taxed at a higher rate than capital gains, the stock price must drop by less than the dividend for investors to be indifferent between (i) selling the stock cum-dividend and (ii) holding the stock, receiving the dividend, and selling ex-dividend. Hence, in case that an investor decides to sell on the cum-dividend day he receives the cum-dividend price (Pc) and he pays tax at the capital gains rate (tg) on the excess of the cum-dividend price over to the price at which the share was bought (Po). On the other hand, if he decides to sell ex-dividend, he receives a dividend and the ex-dividend price (Pe) but he pays tax on the dividend at the dividend tax rate (td) and he pays tax on the excess of the ex-dividend price (Pe) over to the price at which the share was bought at the capital gains tax rate (tg). The above relationship is given by: Pc – (Pc-Po)tg = Pe – (Pe - Po) tg + D (1- td) (1) Rearranging Equation (1) we get: Pc − Pe 1 − td = 1 − tg D Elton and Gruber (1970) argued that the statistic1 (Pc -Pe )/ D (or ∆ P/D) must then reflect the marginal tax rates of the marginal stockholders and one should be able to infer these tax rates by observing the above ratio. 24 Elton and Gruber (1970) sorted their sample into deciles by the dividend yield and computed the mean ∆ P/D for each group. They found that NP/D generally increase with the dividend yield, suggesting that investors in lower tax brackets prefer stocks with higher dividend yields, while higher-bracket investors prefer lower-yield stocks. Thus, Elton and Gruber (1970) confirmed the existence of the “dividend clientele effect” as firstly proposed by Miller and Modigliani (1961). Frank and Jagannathan (1998) examined the ex-dividend day stock price behavior in the Hong Kong market, where neither dividends nor capital gains were taxed and unlike in the NYSE, in the Hong Kong Stock Market (HKSE) there were no market makers until 1993. They found that stock prices dropped on the ex-dividend day by half the dividend amount. Frank and Jagannathan argued that the unexpected price drop on the ex-dividend day was the result of transactions on the cum-dividend day occurring at the bid price, while transactions on the ex-dividend day took place at the asked price. That is, since for the average investor it is a burden to receive the dividend and then go through the process of collecting it, most investors prefer not to receive it. Market makers, instead, find themselves in a better position to collect the dividend, so they buy the stock on the cum-dividend day. As a consequence, on the cum-dividend day most trades occur at the bid price, while on the ex-dividend day most trades occurred at the asked price. (Dasilas, 2007, p.1-8) Similarly other many studies have been made in this matter. In a number of these studies, the evidence is consistent with the previous, namely, that stock prices decline on the ex-dividend day but less than the amount of the dividend. (Bhattarai, 2007, p.393) 2.6 Quality Rating of Companies in Nepal Nepalese capital market is still lacking an independent quality rating agency. But, NEPSE, the sole secondary market of Nepal, categorizes the listed companies into 25 two categories: Category “A” and Category “B”, on different criteria. According to the NEPSE criteria, only those companies are included in “A” categories that have: • Paid-up capital exceeding Rs. 20 million • Reported profit for the last three consecutive fiscal years • Have at least 1,000 shareholders • Shares of the company should be trading in the stock exchange for a price above the face value • The company should have submitted the annual report to NEPSE within six months of the end of the fiscal year. Organizations not falling under these criteria are kept in “B” category. If not fulfilled the criteria for long-term by the financial institutions they are de-listed by the NEPSE. (Bhattarai, 2006, p. 298) 2.7 Legal Provision Regarding Dividend Practice in Nepal Company Ordinance, 2005 makes some legal provision for dividend payment in Nepal. These provisions may be seemed as under: Dividends and subsections of this section are as follows Section 46: Shareholder and Debenture-holder Register Book Subsection (1) Every company should establish shareholder and debenture-holder register book as prescribed by law at company registrar office. Subsection (2) 1. Following description should be clearly mentioned in the shareholders’ register book: 26 a) Shareholder’s full name and address. b) No. of shares holding by shareholder. c) Total amount paid by shareholder and remaining balance if any. d) Registered date of shareholder’s certificate. e) Cancellation date of shareholder’s certificate. f) Ownership right on share after the death of the registered shareholder. Section 182: Dividend Subsection (1) Expect in the following circumstances, dividend shall be distributed among the shareholders within 45 days from the date of decision to distribute them, a) In case any law forbids the distribution of dividends. b) In case of right to dividend is disputed. c) In case dividends cannot be distributed within the time limit mentioned above owing to circumstance beyond anyone’s control and without any fault on the part of the company. Subsection (2) Government owned companies either fully or partly can’t issue dividend without permission of government and also necessary direction in the matter of dividend. Subsection (3) In case dividends are not distributed with the time limit mentioned in subsection (1), adding interest at prescribed rate. Subsection (4) Only the person whose name stands registered in the register of existing share holders at the time of declaring the dividend shall be entitled to it. 27 Subsection (5) The Company can’t issue any form/amount as dividend expected separate reserve amount for the distribution of dividend. Subsection (6) The Company should deduct the operating cost, deprecation amount, payable, adjustment for previous year’s losses by-law before distributing dividend from profit. Subsection (7) Under this section company can distribute interim dividend if it is provisioned in rules and if the dividend is verified by audit report and attested by the BOD. Subsection (8) Except the amount declared from AGM, the company cannot distribute dividend from fund affecting the company’s reserve. Subsection (9) If the shareholder does not come to take the dividend within the five F/Y from the declaration date, the amount would be safe guarded according to section 186 of company act. Subsection (10) If any shareholder comes to take the dividend amount according to section 183 within 1 month of before the expiry date, the notice should be published publicly in national daily. 28 Subsection (11) After the dividend declared form AGM, the company should establish separate book of account within 45 days and distribute to the shareholders and the amount should not be used for other purpose by the company. 2.8 Review of the International Studies Linter (1956) conducted a study, which is focused in the behavioral aspect of dividend policy. He investigated dividend pattern of 28 different companies of America and found that, firm generally predetermines the desired payout and tries to achieve it and rarely considers other factors. The model developed firm is his research is as follows: DIV*t= pEPSt …………………………………….. (i) and, DIVt- DIVt-1=a+b (DIV*t- DIVt-1) +e1…….…… (ii) Or, DIVt=a+b DIV*t+ (a+b) DIVt-1 +e1…………… (iii) Where, DIV*t = Firm’s desired payment EPS p a b = Earning per share = Targeted payout ratio = Constant relating to dividend growth = Adjustment factor relating to the previous period’s dividend and new desired level or dividend where b<1. Major finding of this study are as follows: • • Firms generally prefer desired proportion of earning to be paid as dividend. Investment opportunities are not considered for modifying the pattern of dividend behavior. 29 • Firm generally have target payout ratios in view while determining change in dividend per share. Walter (1957) has proposed a model for share valuation which supports the view that the dividend policy of the firm has impact on share valuation. His works shows clearly the importance of the relationship between the firm’s internal rate of return on investments (r) and its cost of capital (k) in determining the dividend policy that will maximize the wealth of shareholders. Walters’s model is based on the following assumptions (Chandra, 1999, p.302) • • • • Retained earnings represent the only source of financing for the firm. The return on the firm’s investment remains constant. The cost of the capital for the firm remains constant. The firm has an infinite life. Walter’s formula to determine the market price per share is as follows. P= Where P DPS EPS r k = = = = = DPS r(EPS − DPS)/k DPS + r(EPS − DPS)/k = = k k k Market price per share Dividend per share Earning per share Internal rate of return on investments Cost of capital In Walter’s model the optimum dividend policy depends on the relationship between the firm’s internal rate of return on investment (r) and its cost of capital (k). Walter’s view of the optimum dividend payout ratio can be summarize as follows: 30 Growth Firm r>k Firm having r>k may be referred as growth firm. The optimum payout ratio for a growth firm is 0. The market price per share increases as payout ratio decreases. Normal Firm r=k Firm having r=k may be referred as normal firm. There is no unique optimum payout ratio for a normal firm. One dividend policy is a good as the other. The market price per share is not affected by the payout ratio when r=k. The payout ratio for a normal firm is irrelevant. Declining Firm r<k Firm having r<k may be referred as declining firm. The optimum payout ratio for a declining firm is 100%. The market price per share increases as payout ratio increases. Thus, in Walter’s Model the dividend policy of the firm depends on the availability of investment opportunities and the relationship between the firm’s internal rate of return (r) and its cost of capital (k). The firm should use earning to finance investment if r>k, should distribute all earnings when r<k and would remain indifferent when r=k. Modigliani and Miller’s (1961) model (M-M) dividend policy of the firm is irrelevant. It doesn’t affect the wealth of the shareholder. They argue that the value of the firm depends on the firms earning, which result from its investment policy. The literature suggests that dividend payments should have no impact on shareholders value in the absence of taxes and market imperfections. Hence, companies should invest excess funds in the positive net present value projects instead of paying out them to the shareholders. 31 Modigliani and Miller’s model hypothesis of irrelevance is based ion the following assumptions. (Pandey, 2002, p.756) • The firm operates in perfect capital markets where investors behave rationally, information is freely available to all and transaction and floatation cost do not exist. Perfect capital markets also imply that no investor is large enough to affect the market price of share. • Taxes do not exist or there is no difference in the tax rate applicable to the capital gains and dividends. This means that investors value a rupee of dividend as much as a rupee of capital gains. • • The firm has a fixed investment policy. Risk of uncertainty does not exist i.e. investors are able to forecast future prices and dividend with certainty and one discount rate is appropriate for all securities and all time periods. Thus, r=k=kt for all t. Modigliani and Miller’s Model provide falling model to prove their theory. Market Value of Share The market value of share at the beginning of the period is equal to the present of dividend paid at the end of the period plus the market price of the share at the end of the periods. Symbolically, P0 = Where D1 + P1 1+ k (i) P0 D1 P1 k = = = = Market price of share at the beginning of the period Dividend of the share at the end of the period Market price per share at the end of the period Cost of the equity capital 32 No External Financing If no external financing exist the market value of firm can be computed by multiplying both sides by number of outstanding shares as follows: n (D1 + P1 ) 1+ k V= nP0= Where V n = = Total value of the firm (ii) Number of shares outstanding New Shares If retain earning is not sufficient to finance the investment opportunities, issuing new shares is the other alternatives. Assuming that m is the number of newly issued equity share at the price of P1 the value of firm at time 0 will be: nD1 + (n + m )P1 − mP1 1+ k nPo = Where nPo n nD1 m (n+m)P1 mP1 k (iii) = Total market value of outstanding shares at time 0 = Number of outstanding shares at time 0 = Total dividends in year 1 payable on equity shares outstanding at time 0 = Number of outstanding shares at time 1 at price P1 = Total market value of all outstanding shares at time 1 = Market value of shares issued at time 1 = Discount rate Total numbers of shares A firm can pay dividends and raise funds to undertake the optimum investment policy. The firm finances all investment opportunities either by issue of new shares or retained earnings or both. Thus the amount of new shares issues will be: mP1 = I1 – (E – nD1) 33 (iv) Where I1 E = = Total investment at time 1 Total net profit of the firm Retained earning E-nD1 = Substituting equation (iv) to equation (iii) we get nP0= (n + m )P1 − I1 + E 1+ k A firm, which pays dividends, will have to raise funds externally to finance its investment plans. Modigliani and Miller’s argument, that dividend policy does not affect the wealth of the shareholders, implies that when firm pays dividends, its advantage is offset by external financing. This means that the terminal value of the share decline when dividends are paid .Thus, the wealth of shareholders dividend plus terminal price remains unchanged. As a result, the present value per share after dividends and external financing is equal to the present value per share before the payment of dividends. Thus the shareholders are indifferent between payments of dividends and retention of earnings. Gordon (1962) develops own very popular model explicitly relating the market value of the firm to dividend policy. Gordon made a study on the dividend policy and market price of the stock and concluded that the dividend policy of a firm influences the market value of stock. He explained the investor’s preferred present dividend rather that future capital gains. He further explained that the dividend policy has direct relation with the value of stock even if the internal rate of return is equal to the required rate of return. Gordon’s model is based on the following assumptions: • The firm is an all equity firm. 34 • No external financing is available. Consequently retain earning would be used to financial expansion. • The internal rate of return (r) of the firm is constant. This ignores the diminishing marginal efficiency of the investment. • • • • The appropriate discount rate (k) for the firm remains constant. The firm and its stream of earning are perpetual. The tax does not exist. The relation ratio (b) ones decide upon, is constant. Thus the growth rate g=br, each constant forever. • k>br =g. if this condition is not fulfilled, we can’t get a meaningful value for the share. According to Gordon’s Dividend Capitalization Model the market value of a share is equal to the present value of an infinite stream of dividend to be received by the share. Thus: P0 = (1 + k ) D1 1 + (1 + k ) D2 2 .............. + (1 + k )n1 Dn Gordon has further developed the following equation for the computation of the market value of stock. EPS (1 – b) P = (Ke – br) Where P EPS b ke 1-b br = = = = = = market price per share earning per share retention ratio cost of capital payout ratio growth rate Gordon’s relevant theory is a popular theory of dividend as investor’s prefer current dividends earnings rather than expected higher future income so as to eliminate the 35 risk associated with future capital gain. Gordon stressed that the higher payout increases the dividend yield and hence increases the value of stock. But the assumption of this model is also far from the reality. (Pandey, 2002, p.751) Friend and Puckett (1964) conducted a study on the relationship between dividend policy and price of stock by running regression analysis on the data taken from 110 firms from five industries in the year 1956 to 1958. Industries taken as samples were chemicals, electric utilities, food, steels, and electronics. These industries were selected to permit a’ distinction made between the results for growth and nongrowth industries and to provide a basis for comparison with the results by other authors for earlier years. They also considered cyclical and non-cyclical industries in their study. The study period covered a boom year for the economy when stock prices leveled off after rise (1956) and a depressed for the economy when stock prices, however rose strongly (1958). They used dividends, retained earnings and price earning ratio as independent variable in their regression model of price function and dividends as supply function. Earnings, previous year’s dividend and price earning ratio are independent variable in the dividend function. Symbolically, their price function and dividend supply function are as follows: Their study based on the following assumption: • • • Dividends react with year-to-year fluctuation in earnings. Price doesn’t contain speculative components. Earnings fluctuation may not sum zero over the sample. The regression results based on the equation of: Pt= a + b Dt + CRt+dh(E/P)t-1 shows the customary strong dividend and relatively weak retained earning in three of the five industries, i.e. chemicals, foods and steels. They again tested other regression equation by addition of lagged earning price ratio to the above equation and result the following equation: Pt= a + bDt + CRt+d(E/P)t-1 36 Where, Pt= Per share price at time t Dt= Dividends at time t Rt= Retain earning at time t (E/P)t-1= Legged earning price ratio Dividend supply function Dt= e + fEt +gDt-1 +d(E/P)t-1 Where, Et= Earning per share at time t Dt-1= Last year dividend They found that more than 80% of the variation in the stock price could be explained by three independent variables. Dividends have predominant influence of stock price in the same three out of five industries but they found the difference between the dividend and retained earnings coefficient are not quite so marked as in the first set of regression. They also found that the dividend and retained earning coefficient are closer to each other for all industries in the both the years except for steels in 1956 and the correlations are higher again except for steels. They also calculate the dividend supply equation (Dt= e + fEt +gDt-1 +d(E/P)t-1) and derived price equation for four-industry group in 1958. The derived price equation showed that there were no significant changes’ from those obtained in the single equation approach as explained above. They argued that the stock price or more accurately the price-earning ratio does not seem to have a significant effect on dividend payout. On the other hand they noted that the retained earnings effect increased relatively in the three of the four cases tested. Further their result suggested, price effects on dividend supply are probably not a serious source of bias on the customary deviation of dividend and retained earnings effects of short-term income movement are sufficiently great. Further they used lagged price as a variable instead of lagged earning price ratio and showed that more than 90 percent of variation in stock prices can be explained by three independent variables and 37 retained earnings received greater relative weight than dividends in most of the cases. The only exception was steels and food in 1958. They considered chemicals, electronics, and utilities as growth industries in these groups and the retained earnings effect was larger than the dividends effect for both the years covered. For the other two industries, namely food and steels, there was no significant systematic difference between the retained earnings and dividends coefficient. Similarly, they tested the regression equation, Pt = a + bD, + cR, by using normalized earnings again, which they obtained by subtracting dividends from normalized earnings. This process of normalized earnings was based on the period 1950 to 1961. They again added prior year’s normalized earning price variable and compared the results and found that there was significant role of normalized earnings and retained earnings but the effect of normalized price earning ratio was constant. When they examined the later equation they found that the difference between dividend and retained earnings coefficient disappeared. Finally they conclude that management might be able to increase price somewhat by raising dividend in food and steel industries. They conducted more detailed examinations of chemical samples which disclosed that the result obtained largely reflected the undue regression weighting given the three firms with price deviating most from the average price in the sample of twenty firms and retained earnings as a price determinant. Finally, Friend and Puckett concluded that, management might be able, at least in some measure, to increase stock prices in non-growth by raising dividends payout and in growth industries by greater retention. Foong, Zakaria, and Tan (2007) investigated the relationship between individual stock returns with dividend yield, dividend stability and changes in dividend yield from 1992 to 2000 in the Malaysian Trading/Services and Plantation firms. The statistical result from annually cross-sectional regression show weak evidence to support the significant role of dividend yield and dividend stability in explaining 38 firm stock returns. Changes in dividend yield, on the other hand, have negative and significant coefficients in explaining stock returns in Trading/Services firms throughout 1993-1996 and the average crisis period. For Plantation firms, it is negatively significant only in 1994 and 1997. The main purpose in conducting this study was to identify the role of dividend in explaining Malaysian firm stock returns. They tested the relationship of firm stock returns with the so-called the dividend related variables, comprising dividend yield, dividend stability and changes in dividend yield. Although they do not obtained very strong results that the dividend related variables are the main factors explaining firm stock returns, they do find that changes in dividend play some role in explaining firm stock returns, especially of the Trading/Services firms, which are essentially representing growth firms. If this holds true across the whole Malaysia listed firms, this suggests that CEO and top management of growth firms should pay careful attention to the changes of dividend yield in their firms, which has an inverse relationship with the stock returns. The frequent changes in firm dividend policy may be particularly useful in attempting to differentiate high value firm from their low-value counterparts that have high dividend payout levels. The negative sign documented implies that the lower the changes in the dividend yield, the higher the stock returns. This suggests that the management should try to minimize changes in the dividend yield. Smoothing dividends payment over time can push the stock price to higher level. Another option is to maintain the level of dividend yield by adjusting the dividend payment relative to the stock price. Furthermore, announcing changes in the level of dividend payment provides important information to investors and must be carefully considered. This will eventually maximize the firm value; follow by the maximization of shareholder wealth. Uddin (2003) empirical results based on 137 samples of dividend paying companies listed on Dhaka Stock Exchange (DSE) showed that investors do not gain value 39 from dividend announcement. Indeed shareholders lost about 20 percent of value over a period of 30 days prior to the dividend announcement through to 30 days after the announcement. The lost value may be partially compensated because of the current dividend yield. Overall, the evidence tends to support the dividend irrelevancy hypothesis. Evidence also indicates that dividend payment does not signal any information to the investors. The study shows that the highest average dividend was paid in the Fuel and Power sector, followed by that in the banking sector. The highest dividend was announced in the food sector, and lowest in the Jute and Services sectors. In Jute sector, only one company announced dividend during the sample period. The average dividend was 19.5 percent with standard deviation of 12.9 percent. Overall, the study shows that the sample includes stocks from all sectors, except the paper sector. The number of samples are also fairly equally distributed with 10 to 20 stocks from each sector except Paper, Jute and Services sectors. This is also noted that out of 137 companies, 34 companies announced dividend in 2001 and 103 in 2003. Sample also displays that 108 companies belong to A category, 17 belong to B category and 12 belong to Z category.3 Fama and Babiak (1968) study has proven that there is significant positive relationship between the change of a firm’s dividend payment and change in its stock price. Fama and Babiak (1968) find a time series relation between annual dividends and earnings that is consistent with the view that dividend paying firms increase their dividend only when management is relatively confident that their higher payment can be maintained. Their view is supported by Capstaff, et al. (2004), who found that stock market reaction is more pronounced for large, positive dividend announcements that are followed by permanent cash flow increases. Anagho and Tah (2007) in their case study "The ex-dividend day stock price behavior," studied the movement of ex-dividend day stock price behavior for the FTSE100 stock index for the period 2001 to 2006. The study was carried out by 40 comparing the actual value of the raw price ratio, market adjusted price ratio, raw price drop and market adjusted price drop to their theoretical values. The difference was tested for significance using the one sample t-test. The results showed that there are significant differences in the observed figures from their theoretical or expected values. The observed raw price ratio is higher than the expected value of 1, implying that the stock price on the ex-dividend day drops by an amount that is higher than the dividend paid. Similarly, the market adjusted raw price ratio is also higher than the expected value of 1. The raw price drop and market adjusted price drop are lower than the dividend yield, indicating again that the stock price drops by an amount that is less than the dividend paid. The study is inconsistent with the findings by Nikolas et al (2006), who studied the ex-dividend day stock price behavior in the SHSE and SZSE indices of the Chinese Stock Exchange using a similar method but consistent with Alm et al (1999) who carry out a study using the Stockholm stock exchange where his findings showed that the stock price drop on average is less than the dividend been paid out. • Raw Price Ratio (RPR) is the drop in share price expressed as a fraction of the difference between the cum-dividend price and the ex-dividend price all over the actual dividend paid. Under normal circumstances, that is, where there are no arbitrage opportunities and where the market efficiency hypothesis is assumed to be true, the theoretical value of the raw price ratio should be equal to 1. • Market Adjusted Price Ratio (MAPR) is the difference between the cumdividend price and the market adjusted ex-dividend price expressed as a fraction of the actual dividend. Similarly under perfect capital markets, the theoretical or expected value of the market adjusted raw price ratio is equal to 1. • Raw Price Drop (RPD) is the difference between the cum-dividend price and the ex-dividend price expressed as a fraction of the cum-dividend price. In 41 perfect capital markets, the hypothesized value of the raw price drop is equivalent to the dividend yield. • Market Adjusted Price Drop (MAPD) is the difference between the cumdividend price and the market adjusted price expressed as a fraction of the cum-dividend price. Also, under perfect capital markets, the market adjusted price drop is equivalent to the dividend yield. 2.9 Review of the Thesis Adhikari (2063) in his study on “Comparative Study of Dividend Policy and Practices of Commercial Banks” found that there were irregularities in the dividend payment by the commercial banks of Nepal. There was also no stability in the dividend payout ratio of the commercial banks. Thus he has recommended the investors to consider the select company having high profit companies for purchasing shares. Bista (2062) in his study on the “Dividend Policy and Practices of Listed Joint Venture Commercial Banks and Manufacturing Companies” found that there was a positive correlation between DPS and MPS of commercial banks whereas no correlation was found in manufacturing companies. Bhattarai (2052) his study on “Dividend Decision and Its Impact on Stock Valuation” concluded that there is a positive relationship between cash flow and current profit and dividend percentage of share. There are no criteria to adopt dividend payout ratio and it is observed that there is a negative relationship between payout ratio and valuation of shares. Similarly he found that there was a negative relationship between MPS and stockholders’ required rate of return also. 42 2.10 Concluding Remarks The empirical testing has been proved that ex-day stock price tend to fall by significantly less than the dividend. They interpret the result as consistent with a clientele effect where investors in high tax brackets show a preference for capital gains over dividends and vice versa. Another study examining the ex-dividend day behavior of American Telephone and Telegraph stock for a time series of 43 consecutive dividends has found that the average price change from the cumdividend day to the ex-dividend day was $2.16, or about 4 percent less than the $2.25 dividend. Some argue that dividend policy of is irrelevant. It doesn’t affect the wealth of the shareholder. They said that the value of the firm depends on the firms earning, which result from its investment policy. Dividend payments should have no impact on shareholders value in the absence of taxes and market imperfections. Another study by Gordon on the dividend policy and market price of the stock and concluded that the dividend policy of a firm influences the market value of stock that explains the investor’s preferred present dividend rather that future capital gains. He further explained that the dividend policy has direct relation with the value of stock even if the internal rate of return is equal to the required rate of return. 43 Chapter 3 Methodology This chapter presents the short outline of the methods applied in the process of analyzing the capital structure is a systematic method of finding out solution to a problem whereas research methodology refers to the various sequential steps to adopt by a researcher in studying a problem with certain objective in view. 3.1 The Research Design For the analysis of the cash dividends payments of the “A” class financial institutions of Nepal as categorized by NEPSE, analytical as well as descriptive designs are applied to achieve the objective of the research. 3.2 The Population and Sample 3.2.1 Population Mainly the “A” class financial institutions as categorized by NEPSE are the population samples considered for the study. 3.2.2 Sample Our sample is selected from firms listed on the NEPSE. This study focuses on the “A” class financial institutions of Nepal. At present, there are 157 companies are listed at NEPSE out of which 78 are categorized as “A” class financial institutions. 44 Out of which 23 financial institutions are taken covering 26.92% ≅27% of the population as sample ( 21 ×100%). 78 Commercial Banks 1. Development Credit Bank Ltd. 2. Everest Bank Ltd. 3. Himalayan Bank Ltd. 4. NABIL Bank Ltd. 5. Nepal Investment Bank Ltd. 6. Nepal SBI Bank Ltd 7. Standard Chartered Bank Nepal Ltd. Development Banks 8. Chimeki Bikas Bank Ltd. 9. Nirdhan Utthan Bank Ltd. 10. Sanima Bikas Bank Ltd 11. Sahayogi Bikas Bank Ltd. Finance Companies 12. Annapurana Finance Company Ltd. 13. Bhajuratna Finance and Saving Company Ltd. 14. Everest Finance Company Ltd. Insurance Companies 15. Everest Insurance Company Ltd. 16. Himalayan General Insurance Company Ltd. 17. United Insurance Company (Nepal) Ltd. 18. Nepal Life Insurance Company Ltd. Manufacturing and Processing Companies 45 19. Unilever Nepal Ltd. 20. Bottlers Nepal Ltd. ( Not an “A” Class Financial Institution) Hydropower Companies 21. Chilime Hydropower Company Ltd. 3.3 Sources of Data This research is based on secondary data. Required data is collected from NEPSE, SEBON, previous thesis and various articles published by various people and organizations. The basic sources of data used are as follows: a. NEPSE and SEBON Annual Reports b. Financial statements of concerned financial institutions c. Related books and articles 3.4 Methods of Data Analysis Mainly financial methods are applied for the purpose of this study. Appropriate statistical tools are also used. Among them correlation analysis and hypothesis tests regarded as major one used for this research. 3.5 Tools Used 3.5.1 Arithmetic Mean (A.M) The mean is the figure we get when the total of all the values in a distribution is divided by the number of values in the distribution. The arithmetic mean is also known as the average. It should, however, be remembered that the mean can only be 46 calculated for numerical data. The mean is an appropriate term than saying average. The mean of data is biased toward extreme values. The mean is suitable when the scores are distributed symmetrically about the center of the distribution. This is calculated by using following formulae: 3.5.2 Standard Deviation (S.D.) The measurement of the scatterness of the mass of figure in a series about an average is known as the dispersion. The standard deviation measures the absolute dispersion. The greater amount of dispersion, greater the standard deviation. A small standard deviation means a high degree of uniformity of the observation as well as homogeneity of a series and vice-versa. This is calculated as follows: ∴ Standard deviation (S.D.) = ∑ (X − X) n 2 3.5.3 Coefficient of Variation (CV) The coefficient of variance is the relative measure of dispersion, comparable across distribution, which is defined as the ratio of the standard deviation to the mean expressed in percent. It is calculates as follows: ∴ Coefficient of Variation (CV) = S.D. × 100 Mean 3.5.4 Karl Pearson’s Correlation Coefficient (r) If two quantities vary in such a way that movements in the one are accompanied by movement in other, these quantities are correlated. The degree of relationship between the variables under consideration is measure through the correlation analysis. Correlation analysis only helps in determining the extent to which the two variables are correlated but it does not tell us about cause and effect relationship. ∴ Karl Pearson’s Correlation Coefficient (r) = ∑ xy ∑x ∑y 2 2 47 The value of “r” lies between -1 to +1. When r=0, then there is no correlation between two variables. 3.5.5 T-statistics To test the validity of our assumption, if the sample size is less than 30, t-test is used. For applying t-test in context of small sample the t-value is calculated first and compared with the t-value on table at certain level of significance for given degree of freedom. If calculated value of ‘t’ exceeds the tabulated value (say 0.05) we can say that the difference is significant at 5% level and vice-versa. The value is calculated by using following formula: X−µ S n ∴t = 3.5.6 F-statistics ANOVA is a statistical technique especially designed to test whether the means of more than two quantitative populations are equal. It is applied to find out whether the two samples may be regarded as drawn form the normal population having the same variance. The value of “F” is calculated as: ∴F = Variance between samples Variance within samples 48 Chapter 4 Presentation and Analysis of Data This is an analytical chapter, where an attempt has been made to analyze and evaluate the data collected. To analyze the data collected various presentation and interpretation is done in order to fulfill the objective of this study. 4.1 No. of Cash Dividend Paying Listed Companies Table No. 4.1 No. of Cash Dividend Paying Listed Companies Total Listed Companies Cash Dividend Paying Companies 114 32 125 26 135 37 135 39 142 41 Source: Annual Report of SEBON F/Y 2003/04 2004/05 2005/06 2006/07 2007/08 Ratio 28.07% 20.80% 27.41% 28.89% 28.87% Cash Dividend (In Rs.) 140 120 100 80 60 40 20 0 2003/04 2004/05 2005/06 2006/07 2007/08 Fiscal Year Total Listed Companies Cash Dividend Paying Listed Companies 49 Figure No. 4.1 No. of Cash Dividend Paying Listed Companies The number of Nepalese listed companies that paying cash dividend is seen fluctuating. About 28% of the total listed companies distributed cash dividend during the fiscal year 2003/04. But it decreases to 20.80% in the fiscal year 2004/05. Thereafter the increase has been seen to the fiscal year 2007/08. Among the cash dividend paying total financial institutions majority are from the banking sectors or finance companies. Very few numbers of financial institutions are from development banks, manufacturing and processing companies and hydropower company. From the correlation calculation we came to conclusion that there is very low degree of positive correlation between the total no. of listed companies and the no. of cash dividend paying listed companies. Though, the general public is highly attracted towards the shares of the commercial banks of the country as they are performing well in the secondary market. Similarly they are providing the stock dividend to the shareholders. But the financial performance of other institutions is not so good. Even majority of the commercial banks are also not providing good percentage of the cash dividend to their shareholders. Note: For detail calculation see Annex-I 4.2 Cash Dividend Payment of Sector-wise Financial Institutions 4.2.1 Cash Dividend Payment of Commercial Banks Table No.4.2 Cash Dividend Payment of Commercial Banks (In NPR) EBL NABIL NIBL SCBNL HBL SBI 20 50 20 110 1.32 8 20 65 15 110 CDND CDND 20 70 12.58 120 11.5 CDND 25 85 20 130 30 5 50 F/Y 2003/04 2004/05 2005/06 2006/07 DCBL 10 10 12 12 2007/08 A.M. S.D. C.V. 10 19 4.90 25.78% 100 5 80 15 74 14.52 110 11.56 17.15 5.56 16.73 10.86 23.17% 38.29% 15.21% 93.94% Source: Annual Report of SEBON 10 4.60 4.08 88.69% 12 11.20 0.98 8.75% 140 120 Cash Dividend (In Rs.) 100 80 60 40 20 0 2003/04 EBL NABIL 2004/05 NIBL 2005/06 Fiscal Year 2006/07 HBL SBI DCBL 2007/08 SCBNL Figure No. 4.2 Cash Dividend Payment of Commercial Banks Large amount of cash dividend paying “A” class commercial banks of the sample are seen SCBNL. The average payment of cash dividend by SCBNL is Rs.110 per share. In other word it paid average 110% cash dividend in average to its shareholders. The least average percent was of SBI with only 4.60% cash dividend. Being an “A” class financial institution SBI has not been able to declare cash dividend to its shareholders. The amount it has declared also is also not seen so satisfactory from the record than the other commercial banks. The situation of the NABIL bank is also seen well. It has also been distributing cash dividend regularly. The average cash dividend payment is seen 74% i.e. Rs. 74 per share. 51 HBL payment of cash dividend has been seen fluctuating. The amounts it has paid as a cash dividend is minor with average of Rs.11.56. The C.V of the DCBL is the least among the sample commercial banks with 8.75%, show the cash dividend payment of the bank is most consistent than other commercial banks. The most inconsistent in paying cash dividend is HBL with C.V. 93.94%. The situation of SBI is also not good, it’s C.V, is also seen high. 4.2.2 Cash Dividend Payment of Development Banks Table No.4.3 Cash Dividend Payment of Development Banks (In NPR) F/Y SBBL NUBL CBBL SBB 2003/04 CDND CDND CDND CDND 2004/05 CDND CDND CDND CDND 2005/06 CDND 4 10 CDND 2006/07 CDND 5 30 CDND 2007/08 CDND CDND CDND 3.50 1.8 8.00 A.M. 0.70 2.23 11.66 S.D. 1.40 C.V. 123.89 145.75 200% Source: Annual Report of SEBON 52 35 30 Cash Dividend (In Rs.) 25 20 15 10 5 0 2003/04 2004/05 2005/06 Fiscal Year 2006/07 2007/08 SBBL NUBL CBBL SBB Figure No. 4.3 Cash Dividend Payment of Development Banks Being categorized as an “A” class development banks, the situation of cash dividend payment of the bank is not seen good. Only NUBL and CBBL have been seen paying the cash dividend in fiscal year 2005/06 and 2006/07 with average of Rs. 1.80 and Rs. 8 per share respectively. Other development banks have not seen paying cash dividend since past five years. 4.2.3 Cash Dividend Payment of Insurance Company Table No.4.4 Cash Dividend Payment of Insurance Companies (In NPR) F/Y UIC NLIC HGI EIC 2003/04 CDND CDND CDND CDND 2004/05 CDND CDND CDND CDND 2005/06 CDND CDND CDND CDND 2006/07 CDND CDND CDND CDND 2007/08 CDND CDND CDND CDND A.M. S.D. C.V. Source: Annual Report of SEBON 53 The cash dividend situations of the Insurance Companies are not good in record. None of the Insurance Companies listed as “A” class financial institutions have declared cash dividend since past five fiscal year. 4.2.4 Cash Dividend Payment of Finance Company Table No.4.5 Cash Dividend Payment of Finance Companies (In NPR) F/Y AFC EFL BFL 2003/04 12 CDND CDND 2004/05 2.632 CDND CDND 2005/06 3.158 CDND CDND 2006/07 0.53 CDND CDND 2007/08 1.05 CDND 0.50 A.M. 3.87 0.10 S.D. 4.18 0.2 C.V. 108.01% 200% Source: Annual Report of SEBON 14 12 Cash Dividend (In Rs.) 10 8 6 4 2 0 2003/04 2004/05 AFC 2005/06 Fiscal Year 2006/07 2007/08 EFL BFL Figure No. 4.4 Cash Dividend Payment of Insurance Company 54 There is large no. of finance companies operating in Nepal. But most of them are not able to operate in an efficient ways. Their financial position is not so sound to be categorized as an “A” class financial institution. They are not been able to pay cash dividend to their shareholders. AFC has been paying cash dividend with average of Rs. 3.87 per share in last five fiscal year. BFL has been paid Rs. 0.50 per share cash dividend in the fiscal year 2007/08. 4.2.5 Cash Dividend Payment of Manufacturing and Processing Company Table No.4.6 Cash Dividend Payment of Manufacturing and Processing Companies (In NPR) F/Y ULN BNL BNL(Balaju) BNL(Terai) 2003/04 90 5 10 2004/05 100 CDND 5 2005/06 400 CDND CDND 2006/07 250 CDND CDND 2007/08 275 CDND CDND A.M. 223 1 3 S.D. 116.26 2 4 C.V. 52.13% 200% 133.33% Source: Annual Report of SEBON 55 450 400 Cash Dividend (In Rs.) 350 300 250 200 150 100 50 0 2003/04 2004/05 ULN 2005/06 Fiscal Year 2006/07 BNL (Terai) 2007/08 BNL (Balaju) Figure No. 4.5 Cash Dividend Payment of Manufacturing and Processing Companies Under manufacturing and processing companies, only one company has been included under the “A” class financial institution i.e. ULN. The company has been paying the cash dividend regularly in the past five fiscal year. Similarly, the amount of the cash dividend is seen increasing to fiscal year 2005/06 and it has been decreased to Rs. 250 per share and have been slight increase of Rs. 25 per share in fiscal year 2007/08. BNL is not included under the “A” class financial institution but we have taken as a sample from the manufacturing and processing companies for study. It has not been able to distribute cash dividend with good amount being one of the renowned multinational soft drink company. BNL (Terai) has paid cash dividend of Rs. 10 and Rs. 5 in the early fiscal years. The C.V. of BNL (Terai) is lesser than that of BNL (Balaju). 4.2.6 Cash Dividend Payment of Other Company 56 F/Y CHPCL Table No.4.7 Cash Dividend Payment of Other Company (In NPR) 2003/04 2004/05 2005/06 2006/07 CDND CDND CDND 35 A.M. S.D. C.V. Source: Annual Report of SEBON 2007/08 30 13 16 123.08% 35 Cash Dividend (In Rs.) 30 25 20 15 10 5 0 2003/04 2004/05 2005/06 Fiscal Year 2006/07 2007/08 CHPCL Figure No. 4.6 Cash Dividend Payment of Other Company 57 Under this sector only three companies are listed. They are National Hydropower Company Ltd., Butwal Hydropower Company Ltd. and Chilime Hydropower Company Ltd. CHPCL has declared Rs. 35 and Rs. 30 cash dividend in the fiscal year 2006/07 and 2007/08 respectively. But in earlier fiscal year it has not been able to declare cash dividend. 4.2.7 Cash Dividend Payment of Hotel None of the institutions under the hotel sector has distributed cash dividend to its shareholders since last five fiscal year except Soaltee Hotel Ltd. in fiscal year 2007/08 which pays Rs. 10 cash dividend per share. And even they did not come under the “A” class financial institutions as categorized by NEPSE. 4.2.8 Cash Dividend Payment of Trading Company Since none of the trading company come under “A” class even though they are paying healthy amount of cash dividend to their shareholders since last five fiscal year. 4.3. Ex-dividend Test (Empirical Testing) 4.3.1 For the Fiscal Year 2003/04 Table No.4.8 Price Effect after Cash Dividend Payment on Fiscal Year 2003/04 (In NPR) S No Company Name MPS Before MPS on Ex-dividend Date MPS After Price Change On ExAfter Exdividend dividend Date Date +9 +5 1. DCBL 152 58 2003/11/12 157 2. 3. 4. 5. 6. 7. SCBNL EBL AFC NABIL HBL SBI 1763 445 417 803 995 242 161 2003/12/05 1775 2003/12/21 444 2003/12/21 410 2004/01/04 800 2004/03/21 990 2004/03/28 241 1701 442 350 798 662 243 +12 -1 -7 -3 -5 -1 -3 -3 -67 -5 -333 +1 From the above table we see that MPS of the five companies who declared the cash dividend has declined on the ex-dividend date during the fiscal year 2003/04. The large amount loser company was HBL with the MPS decline of Rs. 333. The MPS of SCBNL was seen increased by Rs. 12 on the ex-dividend date. 4.3.2 For the Fiscal Year 2004/05 Table No.4.9 Price Effect after Cash Dividend Payment on Fiscal Year 2004/05 (In NPR) S No Company Name MPS Before MPS on Exdividend Date MPS After Price Change On ExAfter Exdividend dividend Date Date -2 -5 1. 2. 3. 4. 5. 6. EBL UNL SCBNL DCBL NABIL NIBL 687 1487 1860 201 1259 1152 2004/10/31 685 2004/12/17 1500 2004/12/02 1830 2004/12/18 208 2004/12/22 1265 2004/12/25 1155 682 1500 1839 211 1248 1160 +13 -30 +7 +6 +3 +13 -21 +10 -11 +8 59 Principally, the MPS of the shares should decline on the ex-dividend date and after this date after the declaration of the cash dividend by the companies. But from the above data we see that the MPS of UNL, DCBL, NABIL and NIBL increased by Rs.13, Rs.7, Rs.6 and Rs38 respectively. Only the MPS of EBL and SCBNL has declined by Rs. 2 and Rs. 30 respectively on ex-dividend date and Rs. 5 and Rs. 21 after ex-dividend date. 4.3.3 For the Fiscal Year 2005/06 Table No. 4.10 Price Effect after Cash Dividend Payment on Fiscal Year 2005/06 (In NPR) S. No. Company Name MPS Before MPS on Exdividend Date MPS After Price Change On ExAfter Exdividend dividend Date Date +20 -335 1. 2. 3. 4. 5. 6. 7. UNL SCBNL DCBL NABIL NIBL HBL AFC 2180 2392 257 1660 792 1135 577 2005/09/09 2200 2005/10/26 2430 2005/11/08 265 2005/11/30 1650 2005/12/14 785 2005/12/16 1140 2005/12/26 627 1845 2373 257 1645 783 1119 420 +38 +8 -10 -7 +5 +50 -19 -15 -9 -16 -157 Similar is the situation in the fiscal year 2005/06. The MPS of majority of the cash dividend declaring companies is seen increased. Except the MPS of NABIL and NIBL, majority of the company’s MPS has increased on ex-dividend date whereas MPS of all the company has decreased after ex-dividend date. UNL lose Rs.335 after ex-dividend date. Similarly, AFC also lose Rs. 157 after ex-dividend date. 60 4.3.5 For the Fiscal Year 2006/07 Table No. 4.11 Price Effect after Cash Dividend Payment on Fiscal Year 2006/07 (In NPR) S No Company Name MPS Before Ex-dividend Date MPS After Price Change On Ex-dividend After ExDate dividend Date -13 +10 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. UNL NABIL NIBL EBL SCBNL HBL DCBL CBBL CHPCL SBI 2823 2312 1447 1328 4285 1303 809 102 757 790 2006/09/05 2810 2006/10/22 2340 2006/10/26 1435 2006/10/31 1345 2006/11/08 4400 2006/12/15 1300 2006/12/25 805 2006/12/26 105 2007/01/08 817 2007/02/03 2833 2320 1712 1421 4357 1301 813 124 795 802 +28 -12 +17 +115 -3 -4 -3 +60 +10 +8 +265 +93 +72 -2 +4 +22 +38 +12 800 During the fiscal year 2006/07 five companies gain on ex-dividend date whereas almost all the companies gain after ex-dividend date expect HBL lost Rs. 2 after exdividend date. The largest gainer was SCBNL and NIBL with the increase of Rs. 115 and Rs. 265 before ex-dividend and after the ex-dividend date respectively. 61 4.3.5 For the Fiscal Year 2007/08 Table No. 4.12 Price Effect after Cash Dividend Payment on Fiscal Year 2007/08 (In NPR) S No Company Name MPS Before Ex-dividend Date MPS After Price Change On Ex-dividend After ExDate dividend Date -18 -244 1. 2. 3. 4. 5. 6. 7. 8. 9. EBL HBL NABIL NIBL SBI 2973 2165 4770 1993 1635 1052 SBBL AFC CHPCL NLIC 883 1063 1644 10/7/2007 2955 31-Dec-07 2054 7-Oct-07 4631 8-Nov-07 2120 22-Feb-08 1200 11-Jan-08 1125 13-Jan-08 640 10-Feb-08 1151 24-Jun-08 1560 2729 1973 4285 2311 1286 1199 720 1216 1698 -111 -139 127 -435 73 -243 88 -84 -192 -485 -191 318 147 -163 153 54 During the fiscal year 2007/08 four companies MPS decreased on and after exdividend date. NIBL, SBBL and CHPCL companies MPS increased on ex-dividend date and four companies MPS increased after ex-dividend date. The largest gainer was the shares of NIBL with the increase of Rs. 127 on ex-dividend date and SBI with the increase of Rs. 318 after ex-dividend date. SBI and NABIL lose more on and after ex-dividend of Rs. 435 and Rs. 485 respectively. 4.4 Test of Hypothesis Under this topic, an effort has been made to test the significance regarding the parameter of the population based on drawn from the population. Generally, the following steps are followed for the test of hypothesis. i. Formulation of Hypothesis 62 ii. iii. iv. v. vi. Computation of test statistic Fixing the level of significance Finding the criteria region Deciding the two tailed or one tailed test Making decision 4.4.1 Test of Hypothesis on Cash Dividend Payments of Commercial Banks Null Hypothesis (Ho): µ =µ2 =µ3 =µ4 =µ =µ6 −=µ7 i.e. there is no significant 1 5 difference among mean cash dividend payment of commercial banks i.e. cash dividend payment of commercial banks are homogenous. Alternative Hypothesis (H1): µ ≠µ2 ≠µ ≠µ4 ≠µ5 ≠µ6 ≠µ7 i.e. there is a 1 3 significant difference among mean cash dividend payment of commercial banks. Note: For detail calculation see Annex-III Table No. 4.13 One-way AVOVA Table for Cash Dividend Payment of Commercial Banks Source of Variation Between samples Sum of Square d.f. Mean Square F ratio= MSC MSE MSC F= MSE SSC= 49307.19 SSW= 3823.05 TSS=53130.24 k-1= 7-1=6 n-k= 35-7=28 n-1=34 MSC= 49307.19 6 =8217.86 Within samples 3823.05 MSE= 28 = 8217.86 136.54 =136.54 Total F=60.19 Critical Value: The tabulated value of F at 5% level of significance for 6 and 34 d.f. is 2.42. 63 Decision: Since calculated F is greater than tabulated value, the null hypothesis, Ho is rejected and hence the alternative hypothesis, H1 is accepted. Therefore, we conclude that there is a significant difference among mean cash dividend payment of commercial banks. 4.4.2 Test of Hypothesis on Cash Dividend Payments of Development Banks Null Hypothesis (Ho): µ =µ2 =µ =µ4 i.e. there is no significant difference among 1 3 mean cash dividend payment of development banks i.e. cash dividend payment of CBs are homogenous. Alternative Hypothesis (H1): µ ≠µ2 ≠µ3 ≠µ4 i.e. there is a significant difference 1 among mean cash dividend payment of development banks. Note: For detail calculation see Annex-IV Table No. 4.4 One-way AVOVA Table for Cash Dividend Payment of Development Banks Source of Variation Between samples Sum of Square d.f. Mean Square F ratio= MSC MSE MSC F= MSE SSC= 200.84 SSW= 714.60 TSS=915.44 k-1= 4-1=3 n-k= 20-4=16 n-1=19 MSC= 200.84 3 =66.95 Within samples 714.60 MSE= 16 = 66.95 44.66 =44.66 Total F=1.50 Critical Value: The tabulated value of F at 5% level of significance for 3 and 19 d.f. is 3.13. 64 Decision: Since calculated F is lesser than tabulated value, the null hypothesis, Ho is accepted and hence the alternative hypothesis, H1 is rejected. Therefore, we conclude that there is no significant difference among mean cash dividend payment of development banks i.e. cash dividend payment of development banks are homogenous. 4.4.3 Test of Hypothesis on Cash Dividend Payments of Manufacturing and Processing Companies Null Hypothesis (Ho): µ1=µ2 i.e. there is no significant difference among mean cash dividend payment of manufacturing and processing companies i.e. cash dividend payment of manufacturing and processing companies are homogenous. Alternative Hypothesis (H1): µ1≠µ2 i.e. there is significant difference among mean cash dividend payment of manufacturing and processing companies i.e. cash dividend payment of manufacturing and processing companies are not homogenous. Note: For detail calculation see Annex-V Table No. 4.15 One-way AVOVA Table for Cash Dividend Payment of Manufacturing and Processing Companies Source of Variation Between samples Sum of Square d.f. Mean Square F ratio= MSC MSE MSC F = MSE SSC=119902.50 k-1= 2-1=1 n-k= 10-2=8 n-1=9 MSC= 119902.5 1 =119902.50 Within samples SSW=67750 67750 MSE= 8 = 119902.50 8468.75 =8468.75 Total TSS=187652.50 F=14.16 Critical Value: The tabulated value of F at 5% level of significance for 1 and 8 d.f. is 5.32 65 Decision: Since calculated F is greater than tabulated value, the null hypothesis, Ho is rejected and hence the alternative hypothesis, H1 is accepted. Therefore, we conclude that there is significant difference among mean cash dividend payment of manufacturing and processing companies i.e. cash dividend payment of manufacturing and processing companies are not homogenous. 4.5 Major Findings 1. The no. of cash dividend paying companies listed at NEPSE is seen almost the same in context of total listed companies since last five fiscal year except 2004/05 in which it comprise of 20.80 percent of total listed companies. 2. There is the low degree of positive correlation between the total number of listed companies and the number of cash dividend paying listed companies. 3. Large amount of cash dividend paying “A” class commercial bank of the sample is seen SCBNL. The average payment of cash dividend by SCBNL was Rs.110 per share. Being an “A” class financial institution SBI has not been able to declare cash dividend to its shareholders. EBL, NIBL, HBL and DCBL have been seen declaring and paying the cash dividend regularly to its shareholders. 4. Development bank’s payment of cash dividend is almost insignificant. Only CBBL and NUBL has been seen paying cash dividend in two fiscal year 2005/06 and 2006/07 with an average of Rs. 1.80 and Rs. 8 per share. 5. The cash dividend payment condition of the insurance companies has not been seen in sample. None of the insurance companies listed as “A” class financial institutions also have not declared cash dividend since past five fiscal year except some of the insurance companies declared bonus share. 66 6. Most of the finance company is not being capable of declaring cash dividend to their shareholders. Only AFC has been paying cash dividend regularly, with an average of Rs. 3.87 in the past five fiscal year. 7. Under manufacturing and processing companies, only one company has been included under the “A” class financial institution i.e. ULN. The company has been paying the cash dividend regularly. Similarly, the amount of the cash dividend paid is also high than any other companies included in the sample. BNL is not included under the “A” class financial institution but we have taken as a sample from the manufacturing and processing companies for study. It has not been able to distribute cash dividend with good amount being one of the renowned multinational soft drink company. It has been paying cash dividend with an average of Rs. 4 in the past five fiscal year. 8. Under the other company only three companies are listed. They are National Hydropower Company Ltd., Butwal Hydropower Company Ltd. and Chilime Hydropower Company Ltd. CHPCL has been categorized as “A” class financial institution and it has declared Rs.35 as cash dividend and Rs. 30 as interim dividend in the fiscal year 2006/07 and 2007/08 respectively. But in earlier fiscal year it has not been able to declare cash dividend. 9. None of the institutions under the hotel and trading have distributed cash dividend to its shareholders since last five fiscal year except Soaltee Hotel Ltd. in fiscal year 2007/08 which pays Rs. 10 cash dividend per share. 10. Under ex-dividend test, the MPS of the nineteen companies who declared the cash dividend has increased on the ex-dividend date and fifteen companies after the ex-dividend date during the sample fiscal year. Similarly, the MPS of the twenty companies who declared the cash dividend has declined on the exdividend date and twenty three companies after the ex-dividend date. 11. Principally, the MPS of the shares should decline on the ex-dividend date and after this date after the declaration of the cash dividend by the companies. But 67 from the above data we see that the MPS of UNL, DCBL and NIBL increased by Rs.13, Rs.10 and Rs.8 respectively in fiscal year 2004/05. 12. Similar is the situation in the fiscal year 2005/06. The MPS of majority of the cash dividend declaring companies is seen increased on ex-dividend date and decreased after ex-dividend date. 13. During the fiscal year 2006/07, MPS of majority of the cash dividend declaring companies is seen increased after ex-dividend date. The largest gainer was the shares of NIBL with the increase of Rs. after the ex-dividend date. 14. Since calculated F is greater than tabulated value, the null hypothesis, Ho is rejected and hence the alternative hypothesis, H1 is accepted. Thus, we conclude that there is a significant difference among mean cash dividend payment of commercial banks and manufacturing and processing companies whereas there is no significant difference among mean cash dividend payment of development. 15. Since calculated value of t is of t is less than tabulated value of t, the null hypothesis is accepted i.e. There is no significant difference between the average MPS before and after the cash dividend payment of commercial banks, development banks and finance companies. 68 Chapter 5 Summary and Conclusions 5.1 Summary of Findings After the restoration of democracy in 1990 A.D., Nepal has implemented liberal economic policy. As a result, many more companies are established in different sectors such as industrial, tourism, transportation, trade and mostly in financial sector who contribute to build up economy of the country. Nepal is a country trying to develop its economy through global trend and cooperation with developed countries. Shareholders make investment in equity capital with the expectation of making earning in the form of dividend or capital gains. High payout satisfies the dividend need whereas increase in market price of stock increases capital gain. Therefore, firm should make a proper balance between dividends and retained earning. Dividend distribution is the very important factor to any organization for effective goal achievement to satisfy the shareholders. Dividends are decided upon and declared by board of directors. A firm’s profits after-tax can either be used for dividends payment or retained in the firm to increase shareholders' fund. This may involve comparing the cost of paying dividend with the cost of retaining earnings. Actually, paying dividend to shareholders is an effective way to attract new investors to invest in shares. Due to decision of earnings of a company between dividends payout and retention of earnings of a company between dividend pay out and retention of earnings, its effect on market value of shares is a crucial question. So, a wise policy should be maintained between shareholders’ interest and corporate. The funds sometimes could not be used in case of lack of investment opportunities. In such a situation distribution of dividend to shareholders is taken as 69 the best because shareholders may have investment opportunities to invest elsewhere. In Nepal there is more practice of cash dividend and stock dividend. The payment of cash dividend by the financial institutions especially by banks is seen well than other sectors. Thus, the study attempts to determine the impact of cash dividend on stock price. For this whole purpose different descriptive, financial and statistical analysis was done using various methodologies. 5.2 Conclusions Different types of dividend are paid by the companies operating all over the world. They may be in different forms and basis. The main reason of the dividend payment is to provide the benefit to the shareholders of the company and to make them they are the part of the company. In Nepal, there is a practice of providing either stock dividend or cash dividend by the companies to their shareholders. From the study we find out that mainly the commercial banks of the Nepal are regular paying dividend. Being an “A” class financial institution, the majority companies under the development banks, financial institutions and insurance companies have not been able to pay dividend to its shareholders. Similarly, from the CV calculation also we saw that the companies paying the cash dividend are not paying consistently. Under the empirical testing it has been proved that ex-day stock price tend to fall by significantly less than the dividend. They interpret this result as consistent with a clientele effect where investors in high tax brackets show a preference for capital gains over dividends and vice versa. Another study examining the ex-dividend day 70 behavior of American Telephone and Telegraph stock for a time series of 43 consecutive dividends has found that the average price change from the cumdividend day to the ex-dividend day was $2.16, or about 4 percent less than the $2.25 dividend. But in Nepalese perspective the MPS of certain financial institutions is seen increased heavily on and after ex-dividend date. From Karl Pearson’ correlation analysis we found, there is a very low degree of positive correlation between total listed companies and cash dividend paying companies. We have also found that the most of the companies are paying cash dividend and bonus share. From the hypothesis calculation, we found there is a significant difference among mean cash dividend payment of commercial bank and manufacturing and processing companies i.e. i.e. cash dividend payment commercial banks and of manufacturing and processing companies are not homogenous and there is no significant difference among mean cash dividend payment of development banks i.e. cash dividend payment of development banks are homogenous. This study also concludes that there is no significant difference between the average MPS before and after the cash dividend payment of commercial banks, development banks and finance company. 5.3 Recommendations On the basis of findings the following recommendation is made for the further applications of dividend policy regarding its impact on the stock prices: 1. Shareholders should be given an option to choose between stock dividend and cash dividend instead of declaring stock or cash dividend arbitrary. For 71 this, dividend declaration should be proposed to the AGM of shareholders for approval. 2. The legal rules and regulation must be in favor of investors to exercise the dividend practice and to protect the shareholders right. 3. The NEPSE and SEBON should properly handle, guide and inform the shareholders and the related companies about the market price increase or decrease from the impact of dividend declaration. 4. The investors should be careful in investing in the stock of development banks, insurance companies, hotel and other sector on the basis of cash dividend. 5. Each and every company should provide the information regarding the activities and performance, so that investors can analyze the situation and invest their money in the best company. 6. Having seen the history of dividend paying companies, it is seen that the net profit after tax is the main base for distributing the dividend. Thus, it is suggested that investor who want to purchase the equity share and immediate return should invest on the share of high profit earning companies. 7. The investor should also think of investing in the hydropower sector for the investment portfolio diversification. As Nepal has a huge potentiality in generation of the performance. hydropower, there is a good future for the better 8. As per the study it has been seen that there is no significant difference between the average market price before and after the cash dividend payment, therefore it suggested to investors not to invest in the AGM period only because of dividend. 72 REFERENCES Adhikari, K. K. (2063). “The Comparative Study of Dividend Policy and Practices Commercial Banks in Nepal”. Kathmandu: Shanker Dev Campus. Bhattari, B. H. (2052). “Dividend Decision & Its Impact on Stock Valuation”. Kathmandu: Shanker Dev Campus. Bista, S. (2062). “Dividend Policy and Practices in Nepal: A Comparative Study of Listed Joint Venture Commercial Banks and Manufacturing Companies”. Master Degree Thesis, Shanker Dev Campus, Kathmandu. Bhattarai, R., (2006). Investment- Theory and Practice. Kathmandu: Buddha Academic Publishers & Distributors Pvt. Ltd. Chandra, P. (1999). Financial Management. New Delhi: Tata McGraw-Hill Publishing Co. Ltd. Dasilasa, Apostolos (2007). “The ex-dividend day stock price anomaly: evidence from Greece.” Fama, E .F. & Babiak, H. (1968). “Dividend policy: an empirical analysis.” Journal of American Statistical Association, 63, pp. 1132-1161. Foong, S. S., Zakaria, N. B. & Tan, H. B. (2007). “Firm performance and dividend related factors: the case of Malaysia.” Labuan Bulletin of international business & finance. Vol. 5, pp. 97-111. Gitmen, L. J. (2000). Principles of Managerial Finance. New Delhi: Pearson Education, Inc. Joshi, P. R., (2001), Research Methodology. Kathmandu: Buddha Academic Publisher & Distributor Pvt. Ltd. Pandey, I.M. (2002). Financial Management. New Delhi: Vikas Publishing House Pvt. Ltd. Uddin, Md. H. (2003). “Effect of Dividend Announcement on Shareholders’ Value: Evidence from Dhaka Stock Exchange.” Van Horne, J. C. (2005). Financial Management and Policy. New Delhi: Person Education, Inc. Weston, F. J. & Copeland, T. E. (2001). Managerial Finance. New York: The Dryden Press. Wolff, H. K. & Pant, P. R. (2005). Social Science Research and Thesis Writing. Kathmandu: Buddha Academic Enterprises Pvt. Ltd. Appendix-I Karl Pearson’s correlation coefficient (r) Correlation Coefficient Between Total Listed Companies and Cash Dividend Paying Listed Companies F/Y Total listed Companies (X) 114 125 135 135 142 ∑ X =651 Total Cash Dividend paying listed companies(Y) 32 26 37 39 41 ∑ Y =175 x=X- X y=Y- Y x2 y2 xy 2003/04 2004/05 2005/06 2006/07 2007/08 N=5 -16.20 -5.20 4.80 4.80 11.80 ∑ x =0 ∑ y =0 -3 -9 2 4 6 1024 676 1369 1521 1681 ∑ x 2 =6271 9 81 4 16 36 ∑ y 2 =146 48.60 46.80 9.6 19.20 70.80 ∑ xy =195 5 175 = = 35 Y= 5 n ∑ xy ∴r = = x2 ∑ y2 ∑ X = n ∑y ∑ x = 651 = 130.20 195 6271 146 = 195 = 0.203 79.19 × 12.08 Finding: There is a very low degree of positive correlation between total listed companies and cash dividend paying companies. Appendix-II Dividend Announcement Name of Listed Company Fiscal Year Nabil Bank Ltd. Nepal Investment Bank Ltd. Standard Chartered Bank (Nepal) Ltd. Himalayan Bank Ltd. Nepal SBI Bank Ltd. Development Credit Bank Ltd. Everest Bank Ltd. 2003/04 Cash Dividend 50 Cash Dividend 20 Dividend in (%) 2004/05 2005/06 COMMERCIAL BANK Cash Dividend 65 Cash Dividend 15 Cash Dividend 70 Cash Dividend 12.58 Cash Dividend 120 Cash Dividend 11.5 Bonus Share 20 Cash Dividend 12 Cash Dividend 20 2006/07 Cash Dividend 85 Cash Dividend 20 Bonus Share 35.46 Cash Dividend 130 Bonus Share 10 Cash Dividend 30 Bonus Share 5 Cash Dividend 5 Cash Dividend 12 Cash Dividend 25 2007/08 Cash Dividend 100 Bonus Share 40 Cash Dividend 5 Bonus Share 25 Cash Dividend 80 Bonus Share 50 Cash Dividend 110 Cash Dividend 1.32 Cash Dividend 8 Cash Dividend 10 Cash Dividend 20 Cash Dividend 110 Cash Dividend 10 Cash Dividend 20 Cash Dividend 15 Bonus Share 25 Cash Dividend 10 Bonus Share 35 Bonus Share 12 Cash Dividend 10 Bonus Share 30 DEVELOPMENT BANK Chimeki Bikas Bank Ltd. Sanima Bikas Bank Ltd. Sahayogi Bikash Bank Ltd. Nirdhan Utthan Bank Ltd. Cash Dividend 10 Cash Dividend 4 Bonus Share 10 Cash Dividend 30 Cash Dividend 5 Bonus Share 20 Bonus Share 70 Bonus Share 20 Cash Dividend 3.50 Bonus Share 10 FINANCE COMPANY Annapurna Finance Co. Ltd. Bhajuratna Finance and Saving Co. Ltd. Everest Finance Co. Ltd. Cash Dividend 12 Cash Dividend 2.632 Bonus Share 50 Cash Dividend 3.158 Bonus Share 60 Cash Dividend 0.53 Bonus Share 10 Cash Dividend 1.05 Bonus Share 20 Cash Dividend 0.5 Bonus Share 10 - - INSURANCE COMPANY Himalayan General Insurance Co. Ltd. Everest Insurance Co. Ltd. Nepal Life Insurance Co. Ltd. United Insurance Co. Ltd. Bonus Share 100 Bonus Share 50 Bonus Share 20 - Bonus Share 110 Bonus Share 12.50 Bonus Share 20 HOTEL Soaltee Hotels Ltd. Taragaon Regency Hotel Ltd. Oriental Hotel Ltd. Yak and Yeti Hotel Ltd. Cash Dividend 10 - MANUFACTURING AND PROCESSING COMPANY Bottlers Nepal Ltd. (Balaju) Bottlers Nepal Ltd. (Terai) Unilever Nepal Ltd. Salt Trading Corporation Ltd. Bishal Bazar Co. Ltd. Cash Dividend 5 Cash Dividend 10 Cash Dividend 90 Cash Dividend 5 Cash Dividend 100 Cash Dividend 400 Cash Dividend 250 - Cash Dividend 275 Cash Dividend 20 Cash Dividend 20 Bonus Share 80 Cash Dividend 6 Cash Dividend 25 Cash Dividend 30 Cash Dividend 20 Cash Dividend 75 TRADING COMPANY Cash Dividend 20 Cash Dividend 20 Cash Dividend 85 Cash Dividend 90 OTHERS Cash Dividend 20 Interim Dividend 100 - National Hydro Power Co. Butwal Power Co. Ltd. Chilime Hydro power Co. - - - Cash Dividend 30 Cash Dividend 35 Source: Annual Report of SEBON Appendix-III Test of Hypothesis on Cash Dividend Payments of Commercial Banks Null Hypothesis (Ho): µ =µ2 =µ3 =µ4 =µ5 =µ6 −=µ7 i.e. there is no significant difference among mean cash dividend 1 payment of commercial banks i.e. cash dividend payment of commercial banks are homogenous. Alternative Hypothesis (H1): µ1 ≠µ2 ≠µ3 ≠µ4 ≠µ5 ≠µ6 ≠µ7 X5 i.e. there is a significant difference among mean cash dividend payment of commercial banks X1 X2 X3 X4 X6 8 0 0 5 10 X7 X2 11 2 X2 2 X3 2 X4 2 X5 X 62 64 0 0 25 100 2 6 2 X7 ∑ 20 20 20 25 10 X1 = ∑ 50 65 70 85 100 X2 = ∑ 2 20 15 12.58 20 5 X3 = 72.58 ∑ 3 110 110 120 130 80 X4 = 550 ∑ 5 1.32 0 11.50 30 15 X5 = 57.82 ∑X 24 6 6 = ∑ 10 10 12 12 12 X7 = 56 95 370 ∑ 400 400 400 625 100 X2 = 11 1925 ∑ 2500 4225 4900 7225 10000 2 X2 = 28850 ∑ 400 225 158.26 400 25 2 X3 = 1208.26 ∑ 12100 12100 14400 16900 6400 2 X4 = 61900 ∑ 1.74 0 132.25 900 225 2 X5 = 1258.99 ∑X = ∑ 100 100 144 144 144 2 X7 = 632 189 T= ∑X + ∑X + ∑X + ∑X + ∑X + ∑X + ∑X 1 4 7 =95+370+72.58+550+57.58+24+56=1224.40 C.F.= T 2 2 2 2 2 2 T.S.S.= ∑ X11 + ∑ X 2 + ∑ X3 + ∑ X 2 + ∑ X5 + ∑ X 6 + ∑ X 7 − C.F. 2 4 N = (1224.4) 2 35 =42833.01 =1925+28850+1208.26+61900+1258.99+189+632-42833.01 =53130.24 S.S.C.= ( ∑X ) 1 2 n1 2 + ( ∑X ) 2 2 n2 + ( ∑X ) 3 2 n3 + ( ∑X ) 4 2 n4 + ( ∑X ) 5 2 n5 + ( ∑ X ) (∑ X ) 6 2 7 2 n6 n7 − C.F. = (95) 5 + (370) 2 (72.58) 2 (550) 2 (57.82) 2 ( 24) 2 (56) 2 + + + + + − 42833.01 5 5 5 5 5 5 =49307.19 S.S.W.= T.S.S.-S.S.C.= 53130.24 - 49307.19= 3823.05 Appendix-IV Test of Hypothesis on Cash Dividend Payments of Development Banks Null Hypothesis (Ho): µ =µ2 =µ3 =µ4 i.e. there is no significant difference among mean cash dividend payment of 1 development banks i.e. cash dividend payment of CBs are homogenous. Alternative Hypothesis (H1): development banks. X1 X2 µ1 ≠µ2 ≠µ3 ≠µ4 i.e. there is a significant difference among mean cash dividend payment of X3 X4 X2 11 2 X2 2 X3 2 X4 ∑ X1 = 0 0 0 0 0 0 ∑ X2 = 9 3 4 0 0 4 5 0 ∑ X3 = 40 0 0 10 30 0 ∑ X4 = 3.5 0 0 0 0 3.5 0 0 0 0 0 0 0 16 25 0 1 0 0 100 900 0 2 ∑ X3 = 0 0 0 0 12.25 2 ∑ X4 = ∑ X12 = 0 2 ∑ X2 = 41 1000 12.25 T= ∑X +∑X +∑X +∑X 1 2 =0+9+40+3.5=52.50 C.F.= T 2 2 2 2 T.S.S.= ∑ X 12 + ∑ X 2 + ∑ X 3 + ∑ X 4 − C.F . 1 N = (52.50) 2 20 =137.81 =0+41+0+1000+12.25-137.81 =915.44 S.S.C.= ( ∑X n1 2 1 )2 + ( ∑X n2 2) 2 + ( ∑X n3 3) 2 + ( ∑X n4 4) 2 − C.F . = (0) 5 + (9) 2 (40) 2 (3.5) 2 + + − 137.81 5 5 5 =200.84 S.S.W.=T.S.S.-S.S.C.= 915.44-200.84=714.60 Appendix-V Test of Hypothesis on Cash Dividend Payments of Manufacturing and Processing Companies Null Hypothesis (Ho): µ =µ2 i.e. there is no significant difference among mean cash dividend payment of Mfg. and PCs i.e. 1 cash dividend payment of CBs are homogenous. Alternative Hypothesis (H1): µ1≠µ2 i.e. there is a significant difference among mean cash dividend payment of Mfg. and PCs. X1 X2 X2 11 2 X2 ∑ X1 = 1115 900 100 400 250 275 ∑ X2 = 20 15 5 0 0 0 400 8100 10000 160000 62500 400 225 25 0 0 2 ∑ X2 = ∑ X12 = 1 316225 250 T= ∑X +∑X 1 2 =1115+20=1135 C.F.= T 2 N = (1135) 2 10 =128822.50 2 T.S.S.= ∑ X 121 + ∑ X 2 − C.F . =3166225+250-128822.50 =187652.50 S.S.C.= (∑ X1 ) 2 n1 2 (∑ X 2 ) 2 + − C.F. n2 = (1115) 5 + (20) 2 − 128822.50 5 =119902.50 S.S.W.=T.S.S.-S.S.C.= 187652.50-119902.50=67750 Appendix-VI Test of hypothesis on ex-dividend day test for the MPS of commercial banks Null Hypothesis (Ho): µ =µ i.e. there is no significant difference between the average MPS x y before and after the cash dividend payment of commercial banks. Alternative Hypothesis (H1): µx > µy (Right tailed test) i.e. the average MPS decrease after the payment cash dividend. MPS Before Cash Dividend (x) 152 1763 445 803 995 242 687 1860 201 1259 1152 2312 1447 1328 4285 1303 809 790 2973 2165 4770 1993 1665 n=23 MPS After Cash Dividend (y) 157 1701 442 798 662 243 682 1839 211 1248 1160 2320 1712 1421 4357 1301 813 802 2729 1973 4285 2311 1286 d-x-y d2 -5 62 3 5 333 -1 5 21 -10 11 -8 -8 -265 -93 -72 2 -4 -12 244 192 485 -318 379 ∑ d =946 25 3844 9 25 110889 2 25 441 100 121 64 64 70225 8649 5184 4 16 144 59536 36864 235225 101124 143641 2 ∑ d =776220 ∴d = ∑ d = 946 = 41.13 n 23 (∑ d ) 2 ⎤ 1 ⎡ 2 ∴ sd = ⎢∑ d − ⎥ n −1 ⎣ n ⎦ = (946) 2 ⎤ 1 ⎡ 776220 − ⎢∑ ⎥ 23 − 1 ⎢ 23 ⎥ ⎣ ⎦ 1 * 737310.60 22 = = 183.07 ∴ tcal = d = 41.13 183.07 23 s d n ∴ tcal = 1.08 ∴ Degree of freedom (d.f.) = n-1 = 23-1 = 22 ∴ Level of significance, α =0.05 Critical Value: The tabulated value of t at α =0.05 and 23 d.f. for right tailed test is 1.714. Decision: Since the calculated value of t is less than tabulated value of t, the null hypothesis is accepted i.e. There is no significant difference between the average MPS before and after the cash dividend payment of commercial banks. Appendix-VII Test of hypothesis on ex-dividend day test for the MPS of development banks and finance company Null Hypothesis (Ho): µ =µ i.e. there is no significant difference between the average MPS x y before and after the cash dividend payment of development banks and finance company. Alternative Hypothesis (H1): µx > µy (Right tailed test) i.e. the average MPS decrease after the payment cash dividend. MPS Before Cash Dividend (x) 102 1052 417 577 883 n=5 MPS After Cash Dividend (y) 124 1199 350 420 720 d-x-y d2 -22 147 67 157 163 ∑ d =218 484 21609 4489 24649 26569 2 ∑ d =77800 ∴d = ∑ d = 218 = 43.60 n 5 (∑ d ) 2 ⎤ 1 ⎡ 2 ∴ sd = ⎢∑ d − ⎥ n −1 ⎣ n ⎦ = (43.60) 2 ⎤ 1 ⎡ 77800 − ⎢∑ ⎥ 5 −1 ⎢ 5 ⎥ ⎣ ⎦ 1 * 77419.81 4 = = 139.12 ∴ tcal = d s = d 43.60 139.12 5 n ∴ tcal = 0.70 ∴ degree of freedom (d.f.) = n-1 = 5-1 =4 ∴level of significance, α =0.05 Critical Value: The tabulated value of t at α =0.05 and 4 d.f. for right tailed test is 2.132. Decision: Since the calculated value of t is less than tabulated value of t, the null hypothesis is accepted and concluded that there is no significant difference between the average MPS before and after the cash dividend payment of development banks and finance company. Appendix-VIII 1 When a stock pays higher dividend, the lesser the profit after-tax is being retained for firm’s growth, thus affecting the expansion activities of the firms’ operations. On the other hand, if all of the profit after-tax is retained, this will cause dissatisfaction among investors and in a way encouraging them to invest in other stocks. This statistic is known as the ex-dividend price drop ratio, drop-off ratio, premium, price change to dividend drop ratio ∆ P/D etc. DSE classifies the listed companies into A, B and Z categories. A category companies are good stocks as their operating performance are assessed to be good and pay regular dividends, B-category companies are moderate companies whose operating performance are satisfactory and pay some dividends from time to time, and Z-category companies are those whose operating performance are not good and normally pay no dividend 2 3 APPENDIX IX Average MPS calculation for ex-dividend test for fiscal year 2003/04 S. No. Company Name 1 EBL 2 3 4 5 6 7 DCBL SCBNL AFC NABIL HBL SBI Ex‐dividend  date 21‐Dec‐03 17‐Dec‐03 444 445 12‐Nov‐03 5‐Nov‐03 161 151 5‐Dec‐03 1‐Dec‐03 1775 1760 21‐Dec‐03 12‐Dec‐03 410 420 4‐Jan‐04 30‐Dec‐03 800 810 21‐Mar‐04 24‐Feb‐04 990 994 28‐Mar‐04 15‐Mar‐04 241 245 Average MPS  Before  Dividend 18‐Dec‐03 445 6‐Nov‐03 150 3‐Dec‐03 1756 15‐Dec‐03 420 31‐Dec‐03 800 26‐Feb‐04 997 19‐Mar‐04 240 19‐Dec‐03 22‐Dec‐03 23‐Dec‐03 24‐Dec‐03 444 441 442 442 7‐Nov‐03 13‐Nov‐03 14‐Nov‐03 15‐Nov‐03 155 158 157 156 4‐Dec‐03 8‐Dec‐03 9‐Dec‐03 12‐Dec‐03 1774 1771 1782 1550 19‐Dec‐03 9‐Jan‐04 23‐Jan‐04 25‐Jan‐04 410 350 350 350 2‐Feb‐04 5‐Feb‐04 7‐Feb‐04 7‐Feb‐04 800 800 800 795 27‐Feb‐04 26‐Mar‐04 5‐Apr‐04 6‐Apr‐04 994 630 661 694 26‐Mar‐04 1‐Apr‐04 2‐Apr‐04 5‐Apr‐04 241 240 245 245 445 152 1763 417 803 995 242 Average MPS  After Dividend 442 157 1701 350 798 662 243 Average MPS calculation for ex-dividend test for fiscal year 2004/05 S. No. Company Name 1 EBL 2 3 4 5 6 UNL SCBNL DCBL NABIL NIBL Ex‐dividend  date 31‐Oct‐04 685 17‐Dec‐04 1500 2‐Dec‐04 1830 18‐Dec‐04 208 22‐Dec‐04 1230 25‐Dec‐04 Average MPS  Before  Dividend 26‐Oct‐04 690 18‐Nov‐04 1510 29‐Nov‐04 1889 10‐Dec‐04 198 17‐Dec‐04 1230 22‐Dec‐04 27‐Oct‐04 685 26‐Nov‐04 1450 30‐Nov‐04 1860 14‐Dec‐04 198 20‐Dec‐04 1266 23‐Dec‐04 28‐Oct‐04 685 16‐Dec‐04 1500 1‐Dec‐04 1830 17‐Dec‐04 208 21‐Dec‐04 1280 24‐Dec‐04 1‐Nov‐04 685 23‐Dec‐04 1500 3‐Dec‐04 1840 20‐Dec‐04 212 23‐Dec‐04 1260 27‐Dec‐04 2‐Nov‐04 3‐Nov‐04 680 680 27‐Dec‐04 15‐Jan‐05 1500 1500 4‐Dec‐04 5‐Dec‐04 1840 1838 21‐Dec‐04 22‐Dec‐04 210 212 24‐Dec‐04 29‐Dec‐04 1270 1215 28‐Dec‐04 29‐Dec‐04 687 1487 1860 201 1259 Average MPS  After Dividend 682 1500 1839 211 1248 1155 1147 1155 1155 1163 1162 1154 1152 1160 Average MPS calculation for ex-dividend test for fiscal year 2005/06 S. No. Company Name 1 UNL 2 3 4 5 6 7 SCBNL DCBL NABIL NIBL HBL AFC Ex‐dividend  date 9‐Sep‐05 2200 26‐Oct‐05 2430 7‐Oct‐07 265 30‐Nov‐05 1650 14‐Dec‐05 785 16‐Dec‐05 1140 26‐Dec‐05 627 Average MPS  Before  Dividend 6‐Sep‐05 2140 9‐Oct‐05 2370 2‐Oct‐07 255 24‐Nov‐05 1660 11‐Dec‐05 800 13‐Dec‐05 1126 20‐Dec‐05 563 7‐Sep‐05 2200 23‐Oct‐05 2400 3‐Oct‐07 255 27‐Nov‐05 1660 12‐Dec‐05 790 14‐Dec‐05 1140 21‐Dec‐05 570 8‐Sep‐05 2200 25‐Oct‐05 2405 4‐Oct‐07 260 29‐Nov‐05 1660 13‐Dec‐05 785 15‐Dec‐05 1140 20‐Dec‐05 598 23‐Nov‐05 1800 27‐Oct‐05 2446 8‐Oct‐07 261 1‐Dec‐05 1700 18‐Dec‐05 788 18‐Dec‐05 1135 20‐Feb‐06 400 24‐Nov‐05 1885 30‐Oct‐05 2472 9‐Oct‐07 261 6‐Dec‐05 1631 19‐Dec‐05 790 19‐Dec‐05 1123 26‐Mar‐06 420 29‐Nov‐05 1850 7‐Nov‐05 2200 10‐Oct‐07 248 7‐Dec‐05 1605 20‐Dec‐05 770 20‐Dec‐05 1100 4‐Apr‐06 441 2180 2392 257 1660 792 1135 577 Average MPS  After Dividend 1845 2373 257 1645 783 1119 420 Average MPS calculation for ex-dividend test for fiscal year 2006/07 S. No. Company Name 1 NABIL 2 3 4 5 SBI HBL SCBNL EBL Ex‐dividend  date 22‐Oct‐06 2340 3‐Feb‐07 800 15‐Dec‐06 1300 8‐Nov‐06 4400 31‐Oct‐06 1345 Average MPS  Before  Dividend 17‐Oct‐06 18‐Oct‐06 18‐Oct‐06 26‐Oct‐06 31‐Oct‐06 1‐Nov‐06 2295 2300 2340 2340 2300 2320 29‐Jan‐07 31‐Jan‐07 1‐Feb‐07 4‐Feb‐07 5‐Feb‐07 6‐Feb‐07 785 785 800 800 805 800 12‐Dec‐06 13‐Dec‐06 14‐Dec‐06 17‐Dec‐06 18‐Dec‐06 19‐Dec‐06 1305 1305 1300 1300 1301 1303 5‐Nov‐06 6‐Nov‐06 7‐Nov‐06 9‐Nov‐06 12‐Nov‐06 13‐Nov‐06 4255 4300 4300 4440 4550 4081 26‐Oct‐06 29‐Oct‐06 30‐Oct‐06 1‐Nov‐06 2‐Nov‐06 6‐Nov‐06 1300 1340 1345 1365 1440 1458 2312 790 1303 4285 1328 Average MPS  After Dividend 2320 802 1301 4357 1421 6 7 8 9 10 NIBL DCBL UNL CBBL CHPCL 26‐Oct‐06 1435 25‐Dec‐06 805 5‐Sep‐06 2810 26‐Dec‐06 105 8‐Jan‐07 817 17‐Oct‐06 18‐Oct‐06 19‐Oct‐06 29‐Oct‐06 30‐Oct‐06 31‐Oct‐06 1456 1450 1435 1414 1423 2300 20‐Dec‐06 21‐Dec‐06 24‐Dec‐06 26‐Dec‐06 27‐Dec‐06 28‐Dec‐06 810 801 815 805 816 819 24‐Aug‐06 27‐Aug‐06 30‐Aug‐06 7‐Sep‐06 18‐Sep‐06 12‐Oct‐06 2810 2850 2810 2900 2750 2850 2‐Apr‐06 3‐Apr‐06 27‐Nov‐08 25‐Jun‐08 29‐Jun‐08 30‐Jun‐08 100 100 105 120 120 132 3‐Jan‐07 4‐Jan‐07 7‐Jan‐07 9‐Jan‐07 10‐Jan‐07 11‐Jan‐07 735 745 790 810 775 800 1447 809 2823 102 757 1712 813 2833 124 795 Average MPS calculation for ex-dividend test for fiscal year 2007/08 S. No. Company Name 1 EBL 2 3 4 5 6 7 8 9 HBL NABIL NIBL SBI SBBL AFC CHCPL NLIC Ex‐dividend  date 7‐Oct‐07 2955 31‐Dec‐07 2054 7‐Oct‐07 4631 8‐Nov‐07 2120 22‐Feb‐08 1200 11‐Jan‐08 1125 13‐Jan‐08 640 10‐Feb‐08 1151 24‐Jun‐08 1560 Average MPS  Before  Dividend 2‐Oct‐07 3‐Oct‐07 4‐Oct‐07 8‐Oct‐07 2970 2950 3000 2587 25‐Dec‐07 26‐Dec‐07 27‐Dec‐07 9‐Jan‐08 2220 2180 2095 2054 2‐Oct‐07 3‐Oct‐07 4‐Oct‐07 8‐Oct‐07 4800 4800 4710 4450 5‐Nov‐07 6‐Nov‐07 7‐Nov‐07 12‐Nov‐07 1940 2000 2040 2162 16‐Feb‐08 17‐Feb‐08 19‐Feb‐08 25‐Feb‐08 1850 1230 1825 1275 8‐Jan‐08 9‐Jan‐08 10‐Jan‐08 12‐Jan‐08 1020 1018 1119 1332 6‐Jan‐08 11‐Jan‐08 12‐Jan‐08 21‐Jan‐08 610 650 1390 684 3‐Feb‐08 4‐Feb‐08 5‐Feb‐08 12‐Feb‐08 1078 1036 1076 1145 4‐Jun‐08 5‐Jun‐08 9‐Jun‐08 25‐Jun‐08 1601 1633 1698 1825 9‐Oct‐07 2849 10‐Jan‐08 1985 9‐Oct‐07 4255 13‐Nov‐07 2280 27‐Feb‐08 1301 13‐Jan‐08 1175 22‐Jan‐08 710 14‐Feb‐08 1335 29‐Jun‐08 1620 10‐Oct‐07 2750 12‐Jan‐08 1880 10‐Oct‐07 4150 14‐Nov‐07 2490 28‐Feb‐08 1282 14‐Jan‐08 1090 31‐Jan‐08 767 16‐Feb‐08 1167 30‐Jun‐08 1650 2973 2165 4770 1993 1635 1052 883 1063 1644 Average MPS  After Dividend 2729 1973 4285 2311 1286 1199 720 1216 1698