Dividend policy’s influence on stock price

Abstract

Dividend policy is a major concern for firms in their decision making process and it is also a concerned issue for investors. The type of dividend policy a firm adopts says a lot about the firm’s operations, profitability and future prospects. Several theories have been proposed which attempted to explain the influence of dividend policy on the value of a firm. Modigliani and Miller (1961) were the first whom they proposed the Dividend Irrelevance Theory. Others opposed their argument and several opposing theories have been proposed. The purpose of this study is to provide a better understanding regarding the dividend puzzle. This study aims to determine whether changes in dividend policy will affect the stock price of the firm. The research question is answered through a multiple regression analysis using a sample of 56 publically traded financial institutions in the Eurozone for a period of 15 years from 2004 to 2018. The regression model is based on the framework recommended by Baskin (1989). Moreover, auxiliary models were produced following similar adjustments suggested by Hussainey et al. (2011). The results greatly contrasted with the findings of other studies where a significant negative relationship between stock price volatility and dividend policy was observed. The empirical results of this study showed that dividend yield and payout ratio are insignificant. Based on the findings, it was concluded that the size of the firm, leverage and the growth in assets are the main determinants of stock price volatility.