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CHAPTER I 1.1 INTRODUCTION Dividend policy of a firm decides the portion of earning utilized for payment and the portion of earning retained in the firm for re- investment. Dividend policy has a choice of financing. If a firms capital budgeting decision is intend on dividend decision, payment of dividend at a higher rate will create change of its capital budget and vice- versa. Dividend policy determines the decision of earnings between payment to stockholders and reinvestment in the firm. Retained earnings are one of the most significant sources of funds for financing corporate growth, but dividends constitute the cash flow that accrues to stockholders. 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. 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 policies, however, not only specifies the amount of dividend, but also form a dividend, payment procedures.

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1.2 HISTORY 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 nations 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 firms 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 rim. The objective of a dividend policy should be to maximize shareholders DIVIDEND POLICY
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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 reinvested 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 firms 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 firms profits after-tax can either be used for dividends payment or retained in the firm to increase shareholders' fund. This may involve DIVIDEND POLICY
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comparing the cost of paying dividend with 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 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 firms value and is, therefore, irrelevant. However, most financial practitioners and many

academicians believe otherwise. They offered many theories about how dividends affect firms value and how managers should make dividend policy decisions. Overtime, 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. The development of an economy requires expansion of productive activities, which in turn is the result of DIVIDEND POLICY
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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 nations 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 firms 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 shareholders 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 DIVIDEND POLICY
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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 dont pay dividend or lowers its has a falling stock price trend. It seems to suggest that dividend so matter, is affecting the stock price 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 managements interpretation of the firms recent performance and its future prospects.

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1.3 OBJECTIVE 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.

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CHAPTER II REVIEW OF LITERATURE 2.1 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 firms stock price. Higher the DIVIDEND POLICY
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dividend means higher the immediate cash flows to investors, which is good, but lower future growth, which 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 companys 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.

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2.2 DIVIDEND THEORIES

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 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.

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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.

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2.3 TYPES OF DIVIDEND Keeping these theories into considerations, dividend can be paid in different forms. Among them some are discuss below:

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 firms 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. 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 DIVIDEND POLICY
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because of temporary shortage of cash. In such circumstance the company may issue scrip dividend payable at future dates. 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 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 couldnt 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. Stock Split and Reserve Split A method that is commonly used to lower the market price of a firms 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 firms 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 DIVIDEND POLICY
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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. Stock Repurchase It is the process of repurchasing back outstanding share of any company. A corporations 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 repurchases

Tender (Offer) repurchase Open market repurchase usually (but not always) involve gradual programs to buyback 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 prorata 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 DIVIDEND POLICY
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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, It increases the proportional ownership of existing stockholders. It increases the stock price as net worth per share increases.

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 doesnt have enough cash at the time of paying cash dividend, arrangement should be made to borrow funds. Payment of cash dividend shouldnt 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 every one 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. DIVIDEND POLICY
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To make distribution easy and to account easily.

2.4 TYPES OF DIVIDEND POLICIES Dividend policy determines the decision of earnings between payment to stockholders and reinvestment in the firm. Retained earnings are one of the most significant sources of funds for financing corporate growth, but dividends constitute the cash flow that accrues to stockholders. 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. 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:

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 DIVIDEND POLICY
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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: 1. 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.

2. 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.

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3. Low regular plus extra policy The policy of paying a low regular dividend plus extras in a compromise between as table 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.

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 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.

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

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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 firms sales is affected through credit and entire sales proceeds are tied in receivables.

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. 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.

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CHAPTER III 3.1 FACTORS AFFECTING DIVIDEND POLICY

Legal Requirements The legal rules provide that the dividends must be paid from earnings either form the current years earnings or from past years earnings as reflected in the balance sheet account retained earnings. State laws emphasize three rules:

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.

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 firms inability to pay its current debtors.

Net profit rule This rule provides that dividend can be paid form past and present earnings.

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, DIVIDEND POLICY
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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.

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.

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.

Restrictions in debt contracts Debt contracts, particularly when long-term debt is involved, frequently restrict a firms 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 networking 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.

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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

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.

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.

Tax position of shareholders The tax position of a corporations owners greatly influences the desire for dividends. For e.g. a corporation owned by largely taxpayers in high income tax brackets tend

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toward lower dividend payout where as corporations owned by small investors tend toward higher dividend payout.

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 day 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.

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3.2 DIVIDENDS AND DIVIDEND POLICY: HISTORY, TRENDS, AND DETERMINANTS

The Historical Evolution of Dividends The rst corporations were short-term ventures that ended in full liquidation. As corporations became longer lived, managers faced the issue of how to make distributions to shareholders, and numerous rm-specic policies as well as laws developed to address how much corporations could pay shareholders. From the seventeenth to the nineteenth century, managers used dividends to inuence share prices and to attract new capital. In the twentieth century, researchers developed various hypotheses to explain dividend policies. An overview of recent sur veys and observed rm reactions to changes in tax laws provide additional insights into current dividend policies.

Trends in Dividends: Payers and Payouts Trends in dividends reviews recent trends in dividends and dividend payers and focuses on the phenomenon of disappearing dividends, which appeared in the United States during the end of the twentieth century, as rst observed by Fama and French (2001). Researchers have advanced several possible explanations for the decrease in the propensity to pay dividends. To date, there is no universally accepted explanation. While one strand of the literature questions the existence of this phenomenon, another strand argues that the phenomenon has been only temporary, as the propensity to pay dividends has been on the increase since the new millennium. Finally, although studies on countries other than the United States h a v e o b s e r v e d a s i m i l a r d e c l i n e i n t h e p r o p e n s i t DIVIDEND POLICY
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y t o p a y d i v i d e n d s , t h e m m a g n i t u d e o f the phenomenon is much less pronounced and much more recent.

Factors Inuencing Dividends I t s yn t h e s i z e s t h e a c a d e m i c e v i d e n c e o n t h e c r o s s s e c t i o n a l a n d t i e-series determinants of dividends. T h i s e v i d e n c e s h o w s t h a t d i v i d e n d s a r e a s s o c i a t e d w i t h several rm characteristics, such as size, protability, growth opportunities, maturity, leverage, equity ownership, and incentive compensation. The chapter also examines the relationship between dividends and characteristics of the market in which the rm operates, such as tax law, investor protection, product market com-p e t i t i o n , investors sentiment, and public or private status, as well as t h e a v a i l a b i l i t y of substitute forms of corporate payout primarily repurc hase. These ndings have several implications for existing theories of dividend policy and suggest avenues for future research.

Cross-Country Determinants of Payout Policy: European Firms Most research in dividend policy focuses on the North American nancial markets and their associated regulatory environment. Chapter 5 focuses on dividend policies of European rms and other legal and regulatory regimes. It begins by examining the evolution of dividend policy to determine whether the key trends identied in the United States, such as the declining fraction of dividend payers and the concentration of dividend payers among large rms, also occur in Europe. The chapter then examines the major determinants of European payout policy, drawing largely from Bancel, Bhattacharyya, and Mittoo (2006). The DIVIDEND POLICY
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chapter provides some reassuring evidence that the major factors inuencing dividend policy are similar across countries. However, some country-specic differences exist, indicating that dividend policy is a complex interaction of a countrys legal and institutional structure with rm characteristics such as ownership structure.

DECLARATION OF DIVIDENDS:

The main advantage of bonus issue to the shareholders is that they get more cash dividend in future years if company maintains the pre-bonus rate dividend on equity shares. But the question is whether the company will be in position to maintain the rate of dividend after issuing bonus shares or mere capitalizing the accumulated profits it depends solely on the earnings capacity of the company. The future rate of dividend will naturally be lower as because the number of equity shares will be increased without any increase in its earning capacity of thus the total profits would be divisible among the larger number of shares thus lowering down the dividend per share. Dividend at the lower rate would adversely affect the share price in the market. But if the total cash-dividend to be received by a shareholder after bonus issue, is protected or it marginally increases, share price would not be affected much. On the other hand, if the issue of bonus shares is used as a speculative tool by the administrator or persons having vested interest in the company in order to earn higher profits for themselves, the share price in the market would invariably limits and should be detrimental to the interest of shareholders. On the country, if the company maintains the rte of dividend, the shares including bonus shares would be quoted at a much higher price which in turn would affect favorably the psychology of the investors and goodwill of the company in the eyes of investing public. DIVIDEND POLICY
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The power regarding appropriation of profits is given to the Board of directors,. However, they are governed by the provisions of Act. The directors are to follow table. A or the provisions of Articles provisions of the Companies Act 1950 in the regard. The following are the rules regarding declaration and payment of dividend:-

1. Dividend on Paid up Capital. A company may, if so authorized by its Articles, pay dividend on the paid up value of shares under section 93 of the companies Act.

2. Provisions of Articles of Association. Rules 85 to 94 of Table A provide that A company may declare dividend its general meeting provided it does not exceed the a mount recommenced by the board of directors. The board of directors may from the time pay to t members such interim dividends, as appears to it to be justified by the profits of the company. Notice of any dividend should be given to those who are entitled to receive it. The directors my transfer an amount they think p[roper to the reserve fund which may be utilised for any contingencies. When a dividend has been declared, it becomes a liability of the company to the shareholders from the date of its declaration but no interest can be claimed on it.

3. Dividends only of Profits. Dividends can only be declared or paid out of (i) the current profits of the company, (ii) the past accumulated profits and (iii) moneys provided by the government for the payment of dividends in pursuance of a guarantee given by that government. No dividend can be paid out of capital. (Sec. 205 (i)). DIVIDEND POLICY
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Director who is responsible for payment of dividend out of capital shall be personally liable to take good such amount to the company.

Companies are not entitled to pay any dividend unless present or arrears of depreciation have been provided for out of the profits and an amount of 10 % or reports has been transferred to reserve. However, central government may allow any company to declare or pay dividends out of profits before providing for any depreciation.

Capital Profits may also be utilized for the declarations of dividend provided (i) there is nothing in the Article prohibiting the distribution of dividend out of capital profits; (ii) they have been relied in cash: and (iii) they have been realized in cash and (iii) they remain as profits after revaluation of all assets and liabilities.

Dividend cannot be paid out of accumulated profits unless current losses are made good.

4. Payment of dividend only in Cash [Sec. 205 (iii)]. Dividends are to be paid in cash only except in the following circumstances By capitalizing the profits by issue of fully paid bonus shares, if Articles so permit, provided all legal formalities have been satisfied in respect of issue of bonus shares. By paying up any unpaid amount on partly paid up shares.

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5. Payment of Dividend to Specified Persons (Sec. 206). Dividend shall be paid only to those whose names appear on the Register of member son the date of declaration of dividend or to the holders of dividend warrant, if issued by the company.

6. Payment of Dividend within 42 days (Sec. 207) Dividend must be paid within 42 days of its declarations except in the following circumstance: by operation of law of insolvency; in compliance of the directions of the shareholders; Where right to receive dividend is pending decision; Where it is not due to the default of the company. If company lawfully adjusts the amount against any debt due form the shareholder.

7. Payment of Interim dividend. The directors of a company can pay interim dividend subject to the provisions of Articles. Interim dividend can be paid at any time between the two annual general meetings taking into full year depreciation on fixed assets.

8. Transfer of Unpaid dividend to a Special Bank Account (Sec. 205 A) According to section 205 A, newly inserted by the Companies (Amendment) Act 1974, where a company has declared a dividend but has not posted the dividend warrant in respect there for within 42 days to the shareholders entitled to it, such unpaid dividends shall be transferred to a special account to be opened by the company in that behalf in any DIVIDEND POLICY
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Scheduled Bank to be called Unpaid Dividend Account of ......Co. Ltd/Co. (Pvt) Ltd.' If the unpaid dividend are not so transferred, the company shall pay an interest at 12 % p.a. Any unpaid amount of dividend declared before the commencement of this Amendment Act shall also be transferred to such special account within 6 months from the date of commencement of the Act.

9. Transfer Unclaimed Dividend to Central Government. Any amount transferred to the unpaid dividend account remains unpaid or unclaimed for 3 years from the date of such transfer shall be transfered to the 'General Revenue Account' by the company along with a statement giving full particulars in respect of the sums so transferred and the last known addresses of the persons entitled to receive it and such other particulars as may be prescribed. The company is entitled so a receipt for such transfer from the Reserve Bank of India.

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CHAPTER IV 4.1 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 firms 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 dividends 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 the best because shareholders may have investment opportunities to invest else where. The payment of cash dividend by the

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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.

4.2 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: Shareholders should be given an option to choose between stock dividend and cash dividend instead of declaring stock or cash dividend arbitrary. For72 this, dividend declaration should be proposed to the AGM of shareholders for approval. The legal rules and regulation must be in favor of investors to exercise the dividend practice and to protect the shareholders right. 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. 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. 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. 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. DIVIDEND POLICY
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The investor should also think of investing in the hydropower sector for the investment portfolio diversification. As Nepal has a huge potentiality ingeneration of the hydropower, there is a good future for the better performance. 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

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CHAPTER V CONCLUSION 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 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 behavior of American Telephone and Telegraph stock for a time series of 43consecutive 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 DIVIDEND POLICY
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payment of commercial bank and manufacturing and processing companies 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.

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CHAPTER VI BIBLIOGRAPHY

BOOKS: Advanced Accounting, By S.P. Jain & K.L. Narang. Advanced financial Management- III, M.Com Part II, By Michael Vaz.

WEBSITE: http://en.wikipedia.org/wiki/dividend_policy. http://www.paisacontrol.com/bullionnews.dividendpolicy&types http://www.investopedia.com/doc/81551656/factorsaffectingdividendpolicy. http://www.slideshare.net/1954bvr/dividend_policy_bvraghunandan.

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