1. The impact of dividend Policy on Shareholder’s wealth
(An M-Phil proposal)
Fouzia Iram
Fouzia_minhas@gmail.com
Foundation University, Islambad, Pakistan
The Original paper is adopted from R. Azhagaiah and Sabari Priya .
“International research journal for finance and economics” irjfe_20_15
Abstract:
The present paper is aimed at analyzing the impact of dividend policy of
shareholders’ wealth in Textile sector of Pakistan during 2004 to onwards. To
measure the impact of dividend policy on shareholders’ wealth multiple regression
method and stepwise regression models will be used by taking (Dividend per
Share), RE it (Retained Earnings per Share), Pet-1 (Lagged Price Earning Ratio)
and MPSit-1 (Lagged Market Price) (MVit-1) as independent variable, and MPSit
(Market Price per Share) as dependent variables. To determine the proportion of
explained variation in the dependent variable, the co-efficient of determination (R2)
will be tested with the help of F value. The previous study done in this field study
proved that the wealth of the shareholders is greatly influenced mainly by five
variables viz., Growth in sales, Improvement of Profit Margin, Capital Investment
Decisions (both working capital and fixed capital), Capital Structure Decisions,
Cost of Capital (Dividend on Equity, Interest on Debt) etc. The previous study was
done on organic and inorganic chemical industries of India. The author found a
significant impact of dividend policy on shareholders’ wealth in Organic Chemical
Companies while the shareholders’ wealth is not influenced by dividend payout as
far as Inorganic Chemical Companies are concerned. This study aims to apply the
previous research on textile sector of Pakistan.
Electronic copy available at: http://ssrn.com/abstract=1545749

2. Keywords: Dividend Paying Companies, DPS, Share Price, Retained Earrings.
Introduction:
Pakistan has a diverse economy that includes textiles, chemicals, leather
products, food processing, financial services, telecommunications, retail,
automobile manufacturing, light and heavy armaments, agriculture and other
industries.
Pakistan’s textile industry is a major contributor to the national economy in terms
of exports and employment. Pakistan holds the distinction of being the world’s 4th
largest producer of cotton as well as being the 3rd largest consumer of the same.
In the period July 2007 - June 2008, textile exports were US$ 10.62 Billion and
accounted for 55% of the total exports. The share of textile industry in the
economy along with its contribution to exports, employment, foreign exchange
earnings, investment and value added makes it the single largest manufacturing
sector for Pakistan. It contributes around 8.5 percent to GDP, employs 38 percent
of the total manufacturing labor force, and contributes between 60-70 percent to
total merchandise exports.
Finance scholars have engaged in extensive theorizing to explain the impact of
dividend policies on shareholders. Some researchers have developed and
empirically tested various models to explain it. Some researchers have surveyed
corporate managers and institutional investors to determine their views about its
impact. In Pakistan, the industry do not follows the same patterns as in other
countries because of terrorism and other political and economics issues make the
investor hesitate to invest. The textile sector being the major sector of Pakistan’s
economy the implication of this study is more significant as textile sector
represents the major part of Pakistan’s economy.
Objectives of the Study:
• To study the relationship between dividend payout and shareholders' wealth.
• To analyze the impact of variation in dividend policy on shareholders' wealth of
dividend paying and non-paying companies (Textile) in Pakistan.
Electronic copy available at: http://ssrn.com/abstract=1545749

3. • To analyze the impact of retained earnings and past performance in the
presence of dividend policy on shareholders’ wealth of (Textile) Companies in
Pakistan.
Literature Review:
The question of whether dividend policy affects the wealth of the shareholders has
puzzled researchers and corporate managers for many years. Dividend policy is
one of the most widely researched topics in finance. Yet, researchers have
different views about whether the percentage of earnings that a firm pays out in
dividends materially affects its long-term share price. Some empirical studies
appear to support Miller and Modigliani's (1961) classic dividend irrelevance
proposition [e.g., Black and Scholes (1974), Miller and Scholes (1978), Jose and
Stevens (1989)]; others do not [e.g., Long (1978), Sterk and Vandenberg (1990)].
In addition, survey research by Farrelly, Baker, and Edelman (1985) shows that
corporate managers typically believe that dividend policy affects a firm's value and
that an optimal level of dividend payout exists.
Baker and Powell (1999) conducted a survey on dividend policy. Most
respondents think dividend policy affects firm value and also it has effect on
shareholder’s wealth. Respondents had the highest level of agreement with
statements involving dividend signaling. This idea has merit since a share of
common stock is worth the "present" or "discounted" value of its stream of future
dividends (Malkiel, 1999, p. 327). Cash dividends announcements convey
valuable information about assessment of a firm's future profitability. The survey
results suggest that investors may use dividend announcements as information to
assess a firm's stock price. For example, steep drops in stock prices often
accompany dividend cuts signaled as bad news about the future prospects of the
firm.The bird in hand theory claims a high dividend yield will maximize a firm's
value. Dividends represent a sure thing relative to share price appreciation
because dividends are less risky than capital gains. The study respondents also
suggested that managers are highly concerned about the continuity of dividends.
Dividend continuity suggests stability and constant growth in the firm's earnings.
This increases investor confidence by insuring a constant of return on
investments.
Electronic copy available at: http://ssrn.com/abstract=1545749

4. Hypotheses:
• H1: “There is no significant difference in average market value relative to book
value of equity between dividend payers and non-payers of (Textile) companies.”
• H2:“There is no significant impact of dividend policy on shareholders’ wealth in
(Textile) Companies.”
Methodology:
The purpose of this paper is to investigate the impact of dividend policy on share
holder’s wealth. Previous study is used to examine the relationship between
dividend policy and share holder’s wealth. Data will be collected from both primary
and secondary sources. The primary source is field surveys, while the secondary
source is the “Monthly Survey of textile sector”.
Sampling:
Originally the sample for this study has been planned to choose from the list of
companies listed in Karachi Stock Exchange (KSE). A sample of 50 textile
companies will selected on the basis of availability of information like DPS, and
share prices and also the declaration of dividends.
References:
Gallagher and Andrew, Financial Management: Principles and Practice;
www.Netlibrary.com.
Joe K. Shim, Joel G. Siegel; Financial Management, www.Netlibrary.com
DeAngelo, H. and DeAngelo, L. (2006). The irrelevance of the MM dividend
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Jensen, M. (1986). Agency costs of free cash ow, corporate _nance, and
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Jensen, M. and Meckling, W. (1976). Theory of the _rm: managerial behavior,
agency the-ory, and ownership structure. Journal of Financial Economics, 3, 305-
360.
Miller, M. and Modigliani, F. (1961). Dividend policy, growth, and the valuation of
shares. Journal of Business, 34, 411-433.