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Cash dividends, retained earnings and stock prices: Evidence from Jordan

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com

APRIL 2013

VOL 4, NO 12

Evidence from Jordan

WasfiAlTroudi

Department of Banking and Financial Sciences,Hashemite University,Zarqa, Jordan

Maysa'aMilhem

Department of Banking and Financial Sciences, Hashemite University,Zarqa, Jordan

Abstract

The purpose of this study is to examine the empirical relationship between cash

dividends, retained earnings and the stock prices, after controlling for earnings per

share and financial leverage in the context of the Jordanian stock market. All

industrial firms listed on the Amman Stock Exchange are selected for analysis over

the period from 2005 to 2010. The unbalanced panel data (cross-sectional and time

series) is used to examine the relationship between cash dividends, retained earnings

and the stock prices. The results of this study show a positive and significant

relationship between cash dividends, retained earnings, earnings per share, and stock

pricewhile stock price is positively but non-significant associated with financial

leverage. The contribution of this study is to reduce the dearth of previous research

on dividend policy in emerging markets regarding the empirical relationship between

dividend policy and stock prices.

Keywords: Cash Dividend, Retained Earnings, Stock Price, Amman Stock Exchange.

1. Introduction

Dividend policy is a central strategic concern around which other corporate financial

policies rotate. Ross et al (2005) define corporate dividend policy, simply, as determining

the amount to be paid to the shareholders and that to be retained in the company to

reinvest in profitable projects or for retention in case of future needs.

Dividend policy has attracted the interest of numerous researchers in the field of

corporate finance over a long period (e.g. Lintner, 1956; and Gordon, 1963); however,

the subject of corporate dividend policy remains a focus in many recent articles (e.g.

Bhargava, 2010; Kooli and Her, 2010; Blouinet al., 2011; Grullonet al., 2011; John et al.,

2011; and Renneboog and Trojanowski, 2011).

Corporate dividend policy is one of the most important financial policies in corporations

regardless of the type of industry activity. Therefore, a vast literature has examined

corporate dividend policy (e.g. Miller and Modigliani, 1961; Lintner, 1962; Al-Malkawi,

2007; and Al-Najjar and Hussainey, 2009).

Corporate dividend policy and its role in determining the market value of the company is

a very important topic which has attracted the interest of many researchers. A group of

researchers has argued that corporate dividend policy leads to increase the wealth of

stockholders through its influence on the firms stock price and hence increases firm

value (e.g. Gordon, 1963; and Salih, 2010). Another group has argued that dividend

payments lead to decrease the wealth of shareholders by reducing stock price, and hence

decreasing firm value (e.g. Pettit, 1972). The last group has adopted the notion of

irrelevance of dividend policy, i.e., for stock prices, and hence firm value is not affected

by corporate dividend policy (e.g. Miller and Modigliani, 1961; Baker et al., 1985; and

Farrellyet al, 1986).

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2. Previous Research

Dividend policy has been received much interest among corporate finance researchers

over a long time period, especially the relationship between corporate dividend policy

and stock prices. This is mainly due to the potential influence of dividend policy on a

firms share prices.

The theoretical literature on corporate dividend policy may be classified into three points

of view among researchers; (i) it increases firm value, (ii) it decreases firm value, and

(iii) it has no effect on firm value. The first group of researchers has argued that corporate

dividend policy, through dividend payments, lead to increase the wealth of stockholders

through their influence on the firms common stock prices and hence increase the value

of the firm, while the second group has stated that dividend payments, which is one of the

means of corporate dividend policy, lead to decrease the wealth of shareholders by

reducing the common stock prices of the firm, and hence decrease the value of the firm.

The last group has adopted the notion of irrelevance dividend policy, i.e., the prices of

stock, and hence the value of the firm, are not affected by the corporate dividend policy

(Manos, 2001).

Harkavy (1953) investigates the relationship between retained earnings and stock prices.

He finds, as of a given of time, there is a propensity for stock prices to differ in a straight

line with the ratio of distributed earnings. The results also show that the price of firms

stock that retained large ratio of its earnings is higher than the price of stock of firm that

retained small proportion of its earnings.

Walter (1956) examines the relationship between dividend policy and common stock

prices. He uses the following equation to evaluate the current stock price:

(1)

Where, Vc: The present value of common stock, E: The firms profits, Rc: The rate of

market capitalization, Ra: The rate of return on additional investment, D: Cash dividends.

As it can be seen from the above equation, there is an inverse relationship between

dividend payout ratio and the value of the growth stock. In other words, if the dividend

payout ratio increases under such circumstances, the value of the growth stock will

decrease. Furthermore, stockholders get benefits as long as the rate of return on

additional investment exceeds the rate of market capitalization. In addition, there is a

negative relationship between stock prices and dividend payout ratio, i.e., the higher the

dividend payout ratio, the lower the stock prices.

Gordon (1959) examines the effect of dividend policy and earnings on the prices of

firms stock by using cross-sectional data for four industries in two years. He concludes

that the current stock prices is or is not use as a signal to purchase the stock of company.

In fact, the retained earnings are the most important cause for growth in the firms

dividends which is in line with Harkavy (1953), whereas there is no relationship between

dividends and the prices of stock.

Friend and Puckett (1964) distinguish between the effect of dividends and retained

earnings on stock prices. The results show that the effect of dividends on stock prices is

greater than the effect of retained earnings in several times for three industries,which is in

contrast with Harkavy (1953). In particular, earnings retention is more important than

dividends for growth industries. Therefore, firms managers should increase dividend

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payments in order to increase firms stock prices and encouragement current investors to

keep their investments or attracting more investors.

Litzenberger and Ramaswamy (1979) examine the relationship between taxes, dividends

yield and stock prices. The results show a quite highly significant and positive

relationship between dividend yield and stock prices, which is consistent with Brown et

al. (1977) results, while in contrast with Ben-Zion and Shalit (1975).

Litzenberger and Ramaswamy (1982) study the impact of dividends yield on stock prices.

The results show that stock prices are positively affected by dividend yields inside every

set subsample. In general, the relationship between dividend yields and stock returns is

positive but non-significant, which is in line with Brown et al. (1977); Litzenberger and

Ramaswamy (1979) and Blume (1980) results and contradicts with Ben-Zion and Shalit

(1975).

Naamon (1989) investigates the effect of cash dividends and retained earnings on

common stock prices in Jordan. The results show a high significant and positive

relationship between both cash dividends policy and earnings retention, and stock prices,

which is in line with Power and MacDonald (1995). Particularly, the effect of cash

dividend on stock prices is higher than the effect of retained earnings, which is consistent

with Gordon (1959), Friend and Puckett (1964) while in contrast with Harkavy (1953). In

addition, according to the views of both firms managers and investors, the amount of

realized earnings, liquidity and the preferences of investors concerning cash dividends or

retained earnings are the most important determinants of dividend policy.

Nishat (1992) makes a comparison between the effect of cash dividends and the retained

earnings on stock price. The results show that common stock price affected by cash

dividends and retained earnings, which is similar to Naamon (1989) and Power and

MacDonald (1995); however, the impact of cash dividends on share price is higher than

the effect of earnings retention, which is in line with Gordon (1959), Friend and Puckett

(1964) and Naamon (1989) while contradicts with Harkavy (1953).

Dhillon and Johnson (1994) investigate the effect of dividend changes on the markets of

stocks and bonds. The results show that the reaction of stock prices to large increase in

dividend is positive. Therefore, the variance of stock price is largely based on the future

changes in dividends, which is consistent with Kothari and Shanken (1992).

Power and MacDonald (1995) investigate the effect of dividends and retained earnings on

the prices of shares. They find there is a relationship amongst the prices of shares;

dividend and retained earnings, which is similar to Harkavy (1953); Gordon (1959); and

Friend and Puckett (1964).

Marsh and Power (1999) investigate the relationship between dividends and stock prices

in the long-run. A sample of 56 large firms listed on the London Stock Exchange over

the period from 1968 to 1996 is selected for analysis. The results show that there is a

significant effect of dividend on stock prices, which is consistent with Brown et al.

(1977); Litzenberger and Ramaswamy (1979); Blume (1980) and Litzenberger and

Ramaswamy (1982) while inconsistent with Gordon (1959); Ben-Zion and Shalit (1975)

and Keim (1985).

Pradhan (2003) examines the effect of dividends and retained earnings on stock prices in

Nepal. He reaches to results similar to Gordon (1959), Friend and Puckett (1964);

Naamon (1989) andNishat (1992) while contradicts with Harkavy (1953).

Pan (2007) investigates the effect of earnings and dividends on stock prices. The results

show that no bigger than 5% of the variability of stock prices caused by raw earnings and

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dividends, while the vast majority of the variability (95%) is explained by both

permanent earnings and permanent dividends. Therefore, he finds that the big proportion

of the stock price variability can be explained by the fundamental factors (permanent

dividends and permanent earnings) as well as non-fundamentals factors (share prices

own innovations).

Azhagaiah and Sabari (2008) examine the effect of dividend policy on stock prices. They

find that the market price of stock is determined by dividend and retained earnings. The

results are similar to Friend and Puckett (1964); Naamon (1989); Nishat (1992) and

Pradhan (2003) while contradicts Harkavy (1953). The results of regression show that the

price of share influences by the dividend policy.

Huang et al. (2009) examine the impact of the changes of cash dividend announcements

on stock prices. The results show that the effect of the changes of cash dividend

announcements on stock prices is positive, which is in line with Pettit (1972), Brown et al

(1977).

Khan (2009) examines the effect of cash dividends and retained earnings on stock price

for 96 firms listed on the Dhaka Stock Exchange over the period from 2000 to 2006. The

results show that the stock price is affected by both cash dividends and retained earnings,

however, the effect of cash dividends is greater than that of retained earnings which is in

line with Gordon (1959), Friend and Puckett (1964) and Naamon (1989) while

contradicts with Harkavy (1953).

Salih (2010) examines the empirical relationship between dividend policy and firms

value. The results show that the firms market value is affected by its dividend policy

which is in line with Gordon (1963) while inconsistent with Miller and Modigliani

(1961); Baker et al. (1985); and Farrellyet al. (1986); Ahmad and Chaudhary (2006).

There is a relationship between earnings, investment policy, and firms value. Most

firms mangers prefer cash dividends on stock dividends and stock repurchases.

Stockholders structure is the most important factor influencing firms managers when

they set its dividend policy while agency theory is the less important factor.

3. Hypotheses

Previous research suggests that there is a relationship between cash dividends, retained

earnings and stock prices as well as a relationship with other control variables (e.g.

Harkavy, 1953; Friend and Puckett, 1964; Nishat, 1992; Power and MacDonald, 1995;

Pradhan, 2003;andKhan, 2009). Therefore, those relations are constructed in the form of

hypotheses (fourhypotheses); each hypothesis represents an expected relationship

between one independent variable and the dependent variable (stock prices). Therefore,

the following are the hypotheses:

H1: there is a positive relationship between cash dividends per share and stock price in

Jordan.

H2: there is a positive relationship between retained earnings per share and stock price in

Jordan.

H3: there is a positive relationship between earnings per share and stock price in Jordan.

H4: there is a positive relationship between financial leverage and stock price in Jordan.

4. Research Method

4.1 The sample of the study

As a sample, all industrial firms listed on the Amman Stock Exchange during the period

from 2005 to 2010 are taken to examine the empirical relationship between cash

dividends, retained earnings and stock prices.

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This study includes both firms which are dividend-paying and those not paying cash

dividends. The exclusion of non-dividend-paying firms would result in a well-known

selection bias problem (AL-Malkawi, 2007).

Concerning the number of firms that used to examine the empirical relationship between

cash dividends, retained earnings and stock prices, firms enter and leave the sample each

year, so, the number of firms is different from year to year (unbalanced data), and thus

there is no survival bias in the data (e.g. Morgan and Thomas, 1998; McManus et al.,

2004). Some firms are excluded from the sample because they have financial leverage

equal to one, which means there is no equity issuance (all-debt listed firm) for this firm in

that year. The final number of observations which included to examine the empirical

relationship between cash dividends, retained earnings and stock prices is 390.

4.2 Statistical approach

First of all, summary statistics such as minimum, maximum, mean, and standard

deviation are utilized to provide a broad description of the characteristics of all variables

that are used in the analysis.

The unbalanced panel data (cross-sectional and time series) is used to examine the

empirical relationship between cash dividends, retained earnings and stock prices after

controlling for earnings per share and financial leverage. In addition, the correlation

coefficients are used to test the strength and the direction of the relationship between each

pair of independent variables as well as between each explanatory variable and dependent

variable. Therefore, t test and F test are used for checking the significance of the multiple

regression. On one hand, t test is used to test if the relationship between each independent

variable individually is significant or not, on the other hand, F test is used to check if the

relationship between the dependent variable and the set of all independent variables is

significant or not.Therefore, the quantitative methods are used to examine the previous

relationships.

SPSS statistical software package (version 19) is used for running the multiple

regressions in order to obtain the results.

4.3 Variables definition

The variables of the relationship between cash dividends, retained earnings and stock

prices are derived from the studies of a number of the previous researchers (e.g. Harkavy,

1953; Friend and Puckett, 1964; Nishat, 1992; Power and MacDonald, 1995; Pradhan,

2003;andKhan, 2009).

4.3.1 Dependent variable

Stock price ( Pt )

This variable is defined as the closing price of stock (at the end of the year). It is derived

directly from the financial statements of firms.

4.3.2 Independent variables

Cash dividends per share (DPS )

To calculate this variable, cash dividends paid to common stockholders are divided by the

number of shares outstanding. This is represented algebraically as follows.

DPS =

D

(2)

# Shares

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Where D isdenote the cash dividends and # Shares is denote the number of shares

outstanding.

Retained earnings per share RPS

To calculate this variable, retained earnings are divided by the number of shares

outstanding. This is represented algebraically as follows.

RPS

RE

(3)

# Shares

Where RE isdenote the retained earnings and # Shares is denote the number of shares

outstanding.

Earnings per share EPS

This variable is calculated by dividing the net income available to common stockholders

on the number of shares outstanding. This is represented algebraically as follows.

EPS

NI

(4)

# Shares

Where NI is denote the net income available to common stockholders and # Shares is

denote the number of shares outstanding.

Financial leverage (LEV)

To calculate this variable, total debt (total liabilities) is divided by total assets for each

year. This is represented algebraically as follows.

LEV

DEBT (5)

ASSET

Where DEBT is denote the total debt and ASSET is denote the total assets.

All variables (dependent and independent) are measured based on data derived from the

financial statements of the industrial firms listed on the Amman Stock Exchange over the

period from 2005 till 2010.

4.4The regression model

The following regression model is used in this study in an attempt to examine the

empirical relationship between cash dividends, retained earnings and the firms stock

price in the Jordanian context after controlling for earnings per share and financial

leverage that are likely affect the relationship between cash dividends, retained earnings

and stock price.

This model is based on Harkavy (1953),Friend and Puckett (1964),Naamon (1989),Nishat

(1992),Power and MacDonald (1995),Pradhan (2003)andKhan (2009). I extend these

models by including the four independent variables together (cash dividends per share,

retained earnings per share, earnings per share, and financial leverage).

Pt 0 1DPSt 2 RPSt 3EPSt 4 LEVt et (6)

Where, Pt denotes the stock price, DPSt denotes cash dividends per share, RPSt denotes

retained earnings per share, EPS t denotes the earnings per share, LEV denotes the

financial leverage, e is a random variable referred to as the error term.

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5.1 Summary statistics

Table 1 presents the minimum, maximum, mean, and standard deviation of all variables

utilized in the analysis of the relationship between cash dividends, retained earnings and

stock price.

Table 1: Descriptive Statistics of dependent and independent variables

Variable

PRICE

390

.1200

43.5000

3.006154

4.4775416

DPS

390

.0000

1.5000

.072590

.1573649

REPS

390

-.6600

3.0400

.020872

.2835829

EPS

390

-.6600

3.7400

.093462

.3723069

FLEV

390

.0031

.9447

.319616

.1974934

Valid N

390

Minimum

Maximum

Mean

Std. Deviation

(listwise)

REPSdenotes the retained earnings per share,EPSdenotes the earnings per share, and

FLEVdenotes the financial leverage.

In Table 1, cash dividends per share is the first independent variable. Its values range

from a minimum of 0.0000to a maximum of 1.5000;i.e. some firms did not pay cash

dividends at all, while some firms pay a huge amount of cash dividends. It has mean

value equal to .0726, and standard deviation equal to .1574, implying that high variations

in terms of cash dividends per share on the market across the period of the study.

Retained earnings per share is the second explanatory variable. It varies from -.6600 to

3.0400; i.e. some firms suffer from losses and did not retain earnings at all, while some

firms retain a large amount of earnings, whereas its mean is .0209, indicating that each

share has, (on average) a small amount of retained earnings, and standard deviation is

.2836, suggesting high variations among firms listed on the Amman Stock Exchange over

the period of study (2005-2010).

Earnings per share is the thirdindependent variable. It ranges from -.6600, telling that

some firms have losses, to 3.7400, which means that some firms have a huge amount of

profits, with mean of .0394, indicating that firms listed on the Amman Stock Exchange,

on average, have little profits, and standard deviation of .3723, which means high

variations amongst firms in terms of earnings per share.

The last independent variable is financial leverage. Its values range from a minimum of

.0031to a maximum of .9447. That means, the ratio of total liabilities to total assets is

very small for some firms, indicating that some firms depend heavily on issuing equity to

finance their assets, while total liabilities is close to total assets for some firms, implying

that some firms rely largely on debt to finance their assets. Its mean value equal to .3196,

which shows that the firms listed on the Amman Stock Exchange, in general, do not

depend highly on debts to finance their assets, and standard deviation equal to .1975,

implying that high variations among firms regarding the financial leverage variable.

Closing price of stock is the dependent variable. Its values range from the minimum of

.12, which means that some firms have stock price less than its par value, to the

maximum of 43.50, with mean value equal to 3.006, telling that the industrial firms listed

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on the Amman Stock Exchange have stock price greater than their face values and

standard deviation measuring 4.4775, indicating high very variations amongst the firms

listed on the Amman Stock Exchange in terms of closing prices of their stocks.

5.2 Hypothesis testing

Before proceeding to discuss the testing of hypotheses, the correlation coefficients

between the independent variables will be presented to show the strength and the

direction of the relationship between any pair of independent variables, as well as the

dependent variable.

Table 2: Correlation Coefficients of dependent and independent variables

PRICE

PRICE

Pearson Correlation

DPS

1

.711

Sig. (2-tailed)

N

DPS

REPS

EPS

FLEV

Pearson Correlation

390

.711

**

Sig. (2-tailed)

.000

390

Pearson Correlation

.648

**

REPS

**

**

.794

**

-.102

.000

.000

.044

390

390

390

390

**

**

.375

.708

-.117

.000

.000

.021

390

390

390

390

**

.375

.000

.000

390

390

**

**

.794

.648

FLEV

.000

Sig. (2-tailed)

Pearson Correlation

EPS

.708

.920

**

-.176

**

.000

.000

390

390

390

**

.920

-.183

**

Sig. (2-tailed)

.000

.000

.000

390

390

390

390

390

**

**

Pearson Correlation

-.102

-.117

-.176

.000

-.183

Sig. (2-tailed)

.044

.021

.000

.000

390

390

390

390

390

*. Correlation is significant at the 0.05 level (2-tailed).

Table 2 shows the correlation coefficients among the variables used in this study. It can

be seen that the correlation coefficient between the closing price of the firms stock and

cash dividendsis.711**, which is strongly positive and highly significant. That is, the

higher the cash dividend per share, the higher the closing price of the firms stock and the

lower the cash dividend per share, the lower the closing price of the firms stock.

The highest correlation is .92** between retained earnings per share and earnings per

share, which is strongly positive and highly significant, that leads to the existence of

Multicollinearity (one of the violation in the model assumptions). Therefore, these two

variables should not be included together in the same regression model.

Expected relationships between dividend yield and some of control variables and stock

returns that formed the hypotheses are tested below one by one.

The previous literature suggests that the cash dividend has an effect on the closing priceof

firms stock (e.g. Harkavy, 1953; Friend and Puckett, 1964; Naamon, 1989; Nishat, 1992;

Power and MacDonald, 1995; Pradhan, 2003; and Khan, 2009). Generally, the lower the

cash dividends per share, the lower the closing price of the firms stock and the higher the

cash dividends per share, the higher the closing price of the firms stock. Therefore,

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based on the above discussion regarding the relationship between the cash dividends per

share andthe closing priceof firms stock, the following hypothesis can be formulated.

H1: there is a positive relationship between cash dividends per share and stock price in

Jordan.

In order to test this and the remaining hypotheses, the following multiple regression

model is used.

Pt 0 1DPSt 2 EPSt 3LEVt et (7)

Where, Pt denotes the stock price, DPSt denotes cash dividends per share, EPS t denotes the

earnings per share, LEV denotes the financial leverage , e is a random variable referred

to as the error term.

As can be seen from Eq. 7, retained earnings per share variable is not included. This is

because the correlation coefficient between two independent variables (earnings per share

and retained earnings per share) is very high as shown from Table 2;which leads to the

existence of Multicollinearity. Retained earnings per share variable, not earnings per

share, is excluded because the correlation coefficient of retained earnings per share

variableis materially less than that of earnings per share. However, retained earnings per

share variablewill be added to Eq. (7) later to examine its relationship with the closing

price of firms stock after the discussion of all hypotheses.

The results of the relationship between the set of independent variables (except retained

earnings per share variable) and the dependent variable, as represented in Model 7 are

presented in Table 3.

Standardized

Unstandardized Coefficients

Model

Std. Error

1(Constant)

1.427

.261

DPS

8.463

1.166

EPS

7.111

FLEV

.939

Coefficients

Beta

Sig.

5.465

.000

.297

7.261

.000

.498

.591

14.288

.000

.667

.041

1.408

.160

Table 3 shows that the Sig. value associated with the t test for the cash dividends per

share of .000, therefore, the relationship between the cash dividends per shareand the

closing price of the firms stock is positive and highly significant, implying that the cash

dividends per sharemight lead to increase the closing price of the firms stock. The slope

coefficient ofthis variable is 8.463, suggesting that a 1 unit increase in the cash dividends

per sharewould have an increase of 8.463units in the closing price of the firms stock,

other things being constant. For industrial firms listed on the Amman Stock Exchange,

the lower the cash dividends per share, the closing price of the firms stock and the higher

the cash dividends per share, the higher the closing price of the firms stock.

Furthermore, this result is consistent with Harkavy (1953),Friend and Puckett

(1964),Naamon (1989),Nishat (1992),Power and MacDonald (1995), Pradhan

(2003)andKhan (2009), who find a positive and significant relationship between the cash

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dividends per shareand the closing price of the firms stock. Therefore, the result of the

coefficient of the cash dividends per share as identified in Table 3 supports H1

hypothesis.

The previous literature suggests that earnings per share have an effect on closing price of

the firms stock (e.g. Gordon, 1959; Pan, 2007; and Salih, 2010). Generally, firms with

lower earnings per share might display lower closing price of the firms stock and firms

with higher earnings per share might display higher closing price of the firms stock.

Therefore, based on the previous discussion regarding the relationship between earnings

per shareand the closing price of the firms stock, the following hypothesis can be

formulated.

H3: there is a positive relationship between earnings per share and stock price in Jordan.

Table 3 shows that the Sig. value associated with the t test for earnings per shareof .000 is

less than .05, .01 (significance levels), therefore, the relationship between earnings per

shareand the closing price of the firms stock is positive and highly significant. For firms

listed on the Amman Stock Exchange, the lower the earnings per share, the lower the

closing price of the firms stock and the higher the earnings per share, the higher the

closing price of the firms stock. The coefficient of earnings per share is large and highly

significant. The t value of the earnings per share is 14.288, which is the highest value

among the other variables, i.e; the earnings per shareis the more dominant effect on the

closing price of the firms stock.

Moreover, this result is in line with Gordon (1959),Pan (2007), and Salih (2010), who

find a positive and significant relationship between earnings per shareand the closing

price of the firms stock. So, the result of the coefficient of earnings per sharefrom Table

(3) supports H3 hypothesis.

Concerning to the relationship between the financial leverage and the closing price of the

firms stock, the following hypothesis can be formulated.

H4: there is a positive relationship between financial leverage and stock price in Jordan.

Table 3 reports that the Sig. value associated with the t test for the financial leverage is

(.160), therefore, the relationship between the financial leverage and the closing price of

the firms stock is positive but non-significant, implying that firms with high financial

leverage might not display higher closing price of the firms stockthan firms with low

financial leverage. That is, the leveraged firms in the Jordanian stock market did not

display higher closing price of the firms stockthan non-leveraged firms. The t value of

financial leverage is 1.408; the smallest value among the other variables.So, the result of

the coefficient of financial leverage from Table 3does not supports H4 hypothesis.

The relationship between the closing price of the firms stock and the set of independent

variables is provided by the following estimated regression equation.

Pt 1.427 8.463DPSt 7.111EPSt .939LEVt

(8)

Std. Error of the

Model

1

R

.823

R Square

a

Adjusted R Square

.677

.674

Estimate

2.5545621

Table 4 shows that approximately 68% of the variability in the closing price of the firms

stockcan be explained by the linear relationship between (cash dividends per share,

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earnings per share, and the financial leverage) as independent variables and the closing

price of the firms stock, while 32% of the variability in the closing price of the firms

stockcaused by external factors.

The Sig. value associated with the F test can be used to check for the overall significance.

Generally, the F test (overall significance) is used to determine whether a significant

relationship exists between the dependent variable and the set of independent variables.

Therefore, the following table can be used to test that.

Table 5: ANOVA for Eq. (7)

Model

Sum of Squares

df

Mean Square

Regression

5279.865

1759.955

Residual

2518.954

386

6.526

Total

7798.819

389

Sig.

269.692

.000

b. Dependent Variable: PRICE

Table 5 shows that the Sig. value is less than .05 and .01(levels of significance), which

means that the relationship between both the set of independent variables and the

dependent variable is highly significant.

This section discusses the empirical relationship between retained earnings per

which is dropped from the previous analysis because of high correlation between

earnings per share as identified in Table 2, and closing price of the firms

Therefore, the following multiple regression model will be used to analyze the

relation.

Pt 0 1DPSt 2 RPSt 3LEVt et

share,

it and

stock.

above

(9)

The results of the relationship between (cash dividends per share, retained earnings per

share, and financial leverage) and closing price of the firms stock are presented in the

following table.

Table 6: Regression Coefficients of independent variables

Standardized

Unstandardized Coefficients

Model

(Constant)

Std. Error

1.427

.261

15.575

.889

REPS

7.111

FLEV

.939

DPS

Coefficients

Beta

Sig.

5.465

.000

.547

17.517

.000

.498

.450

14.288

.000

.667

.041

1.408

.160

Table 6 shows that the relationship between retained earnings per share and the closing

price of firms stock is positive and highly significant as identified from the Sig. value

associated with retained earnings per share, implying that the firms with higher retained

earnings per share are more likely to display highclosing price than firms with lower

retained earnings per share. That is, the higher the retained earnings per share, the higher

the closing price of the firms stock and the lower the retained earnings per share, the

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lower the closing price of the firms stock. Furthermore, the coefficients of all

independent variables remain significant. In addition, the impact of cash dividends per

share is on the firm's stock is greater than the effect of retained earnings on it as identified

from the value of Betas as shown in Table 6, where the Beta coefficient for cash

dividends is 15.575 while the Beta coefficient for retained earnings is 7.111. This result is

in the line of Friend and Puckett (1964); Naamon (1989); Nishat (1992);Pradhan (2003);

and Khan (2009) while contradicts Harkavy (1953).

The purpose of this study is to examine the empirical relationship between cash

dividends, retained earnings, and stock prices in the Jordanian context. The results show

that there is a positive and significant relationship between the cash dividends and the

stock prices,implying that the cash dividends per share might lead to increase the closing

price of the firms stock. For industrial firms listed on the Amman Stock Exchange, the

lower the cash dividends per share, the closing price of the firms stock and the higher the

cash dividends per share, the higher the closing price of the firms stock. Furthermore,

this result is consistent with Harkavy (1953),Friend and Puckett (1964),Naamon

(1989),Nishat (1992),Power and MacDonald (1995), Pradhan (2003)andKhan (2009),

who find a positive and significant relationship between the cash dividends per share and

the closing price of the firms stock.

The results also show that there is a strongly positive and significant relationship between

the earnings per share and the closing price of the firms stock. For firms listed on the

Amman Stock Exchange, the lower the earnings per share, the lower the closing price of

the firms stock and the higher the earnings per share, the higher the closing price of the

firms stock. The coefficient of earnings per share is large and highly significant. The t

value of the earnings per share is 14.288, which is the highest value among the other

variables, i.e; the earnings per shareis the more dominant effect on the closing price of

the firms stock.Moreover, this result is in line with Gordon (1959),Pan (2007), and Salih

(2010), who find a positive and significant relationship between earnings per share and

the closing price of the firms stock.

The relationship between the financial leverage and the closing price of the firms stock

is positive but non-significant, implying that firms with high financial leverage might not

display higher closing price of the firms stock than firms with low financial leverage.

That is, the leveraged firms in the Jordanian stock market did not display higher closing

price of the firms stockthan non-leveraged firms.

The relationship between retained earnings per share and the closing price of firms stock

is positive and highly significant as identified from the Sig. value associated with retained

earnings per share, implying that the firms with higher retained earnings per share are

more likely to display highclosing price than firms with lower retained earnings per

share. That is, the higher the retained earnings per share, the higher the closing price of

the firms stock and the lower the retained earnings per share, the lower the closing price

of the firms stock. In addition, the impact of cash dividends per share on the firm's stock

is greater than the effect of retained earnings on it as identified from the value of Betas as

shown in Table 6, where the Beta coefficient for cash dividends is 15.575 while the Beta

coefficient for retained earnings is 7.111. This result is in the line of Friend and Puckett

(1964); Naamon (1989); Nishat (1992);Pradhan (2003); and Khan (2009) while

contradicts Harkavy (1953). This result indicates that investors in industrial firms listed

in the Amman Stock Exchange during the period from 2005 to 2010 prefer cash

dividends to retained earnings.

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