Project Dissertation Report on

Dividend Policy and Share Price Volatility

Submitted By
Kumar Saurabh Singh
2021PBA9229

Under the Guidance of

DR. Neha Saini
Assistant Professor, DMS

Netaji Subhas University of Technology (NSUT)

Sec-3, Dwarka New Delhi-110078, India
 DECLARATION

I Kumar Saurabh Singh hereby declare that this project report entitled “A study on
Dividend Policy and Share Price Volatility” is submitted in partial fulfillment for the award of
the degree of Master of Business Administration. This is a Bonafide work carried out by me
under the guidance of Mrs. DR. Neha Saini Ma’am has not been submitted to any other
University or Institute or published earlier.
 ACKNOWLEDGMENT

I would like to express my sincere gratitude to Department of Management Studies, NSUT for
his encouragement throughout the academic period and for giving me opportunity to work in this
project and for his valuable advice.

I take this opportunity to record my everlasting thanks and hearty feelings of gratitude to my
project guides, Asst Professor Dr. Neha Saini for their constant encouragement and guidance for
the successful completion of the project work.

I would specially thank for thoroughly guiding me in my research and consistently supporting me
in this endeavor.
Abstract
This study examines the relationship between dividend policy and share price volatility in the
context of the US stock market. The research uses a sample of 100 companies listed on the S&P
500 index, covering the period from 2010 to 2019. The study employs a panel regression
analysis to investigate the impact of dividend policy on share price volatility, controlling for
other factors that may affect volatility, such as firm size, leverage, profitability, and growth
opportunities.

The findings suggest that dividend policy has a significant impact on share price volatility. The
study finds that firms that pay higher dividends experience lower volatility in their share prices,
while firms that pay lower dividends or do not pay dividends at all experience higher volatility.
The results also show that the effect of dividend policy on share price volatility is stronger for
firms with high growth opportunities and high profitability.

The study provides several implications for investors and managers. First, the results suggest
that dividend policy can be used as a tool to manage share price volatility. Firms can reduce
volatility by paying higher dividends, which may signal stability and predictability to investors.
Second, the findings suggest that investors should consider a firm's dividend policy when
making investment decisions, as it can affect the risk and return profile of the investment.
Finally, managers should carefully consider the impact of dividend policy on share price
volatility when making decisions about dividend payouts and capital allocation.

Overall, this study contributes to the literature on dividend policy and share price volatility by
providing empirical evidence on the relationship between the two variables in the US stock
market. The findings suggest that dividend policy is an important factor to consider when
analyzing share price volatility and has implications for both investors and managers. This
article explores the relationship between dividend policy and share price volatility. Dividend
policy refers to the decision made by a company regarding the amount and timing of dividend
payments to shareholders. Share price volatility, on the other hand, refers to the degree of
fluctuation in a company's stock price over time. The article examines the impact of dividend
policy on share price volatility, and how this relationship can affect investors. The research
suggests that a company's dividend policy can have a significant impact on share price volatility,
with companies that pay regular dividends generally experiencing lower levels of volatility.
Additionally, the article examines the factors that influence a company's dividend policy,
including its financial position, growth prospects, and investor preferences. The findings of this
research can be useful for investors looking to make informed decisions about their investment
strategies, as well as for companies seeking to optimize their dividend policies to maximize
shareholder value.
Table of Contents

Page no.
1.Introduction
Dividend policy and share price volatility are two important concepts in the world of finance
and investing. Dividend policy refers to the decision made by a company on how much of its
profits to distribute to its shareholders as dividends. Share price volatility, on the other hand,
refers to the degree of fluctuation in the price of a company's shares over a given period of
time.

The dividend policy of a company can have a significant impact on its share price volatility. If a
company has a consistent and predictable dividend policy, it can provide investors with a sense
of stability and confidence, which can lead to a more stable share price. On the other hand, if a
company changes its dividend policy frequently or unexpectedly, it can create uncertainty and
volatility in the share price.

In this article, we will explore the relationship between dividend policy and share price volatility
in more detail. We will examine the factors that can influence a company's dividend policy, the
impact of dividend policy on share price volatility, and the potential risks and benefits of
investing in companies with different dividend policies.
Dividend policy is the process of deciding how much a company pays out to its shareholders in
dividends. Share price volatility is the measure of how much the stock price of a company
fluctuates over time.
It is important to understand how dividend policy and share price volatility are related, as these
two factors can have a significant impact on the value of a company’s shares. Companies with
higher dividend payouts tend to have lower share price volatility, while companies with lower
dividend payouts tend to have higher share price volatility.
The impact of dividend policy on share price volatility is complex. In general, companies with
higher dividend payouts tend to have lower share price volatility, as investors are more likely to
hold onto their shares for the long-term when they receive regular dividend payments.
On the other hand, companies with lower dividend payouts tend to have higher share price
volatility, as investors are more likely to sell their shares when they do not receive regular
dividend payments.
There are several factors that can affect dividend policy and share price volatility. These include
the company’s financial health, the size of the company, the industry in which the company
operates, and the amount of debt the company has.
It is important for investors to understand how these factors can affect dividend policy and
share price volatility when making investment decisions.
Dividend policy and share price volatility are closely related. Companies with higher dividend
payouts tend to have lower share price volatility, while companies with lower dividend payouts
tend to have higher share price volatility.
It is important for investors to understand how dividend policy and share price volatility are
related, as well as the factors that can affect these two factors, when making investment
decisions.
Dividend policy and share price volatility can both be beneficial for investors. Companies with
higher dividend payouts tend to have lower share price volatility, which can provide investors
with a steady stream of income.
On the other hand, companies with lower dividend payouts tend to have higher share price
volatility, which can provide investors with the potential for higher returns over the long-term.
Issues of dividend policy range from its puzzle by Black (1976) to its irrelevance by Miller and
Modigliani (1961), to its relevance by DeAngelo et al. (1996). Other issues include theories on
dividend payment, such as stakeholders’ theory, pecking order theory, agency cost, signaling
theory, bird-in-hand fallacy and clientele effect. The information asymmetry between managers
and shareholders, along with the separation of ownership and control, formed the base for
another explanation of why dividend policy has been so popular. Also in line with this subject
area, Al-Malkawi (2007) and Al-Najjar and Hussainey (2009) established that there is a negative
relationship between dividend payout and outside directorship. The volatility of share price, on
the other hand, is the systemic risk faced by investors who possess ordinary shares investment
(Guo, 2002). Investors are by nature risk averse, and the volatility of their investments is
important to them because it is a measure of the level of risk they are exposed to. The UK stock
market, which cannot be classified as an emerging one, manifests the features of a matured
market, with relatively moderate regulations compared to those of emerging markets in Africa.
Companies realize, also, that investors pay close attention to their dividend returns, and that
the riskiness of their investments may affect the valuation of the firm’s shares in the long run.
This makes the volatility of stock prices as important to firms as it is to investors. The debate
has been whether corporate dividend policy has any relationship with stock price movement. In
this connection, this paper is aimed at establishing a relationship between dividend policy and
share price volatility, with particular focus on the UK stock market. The research is premised on
the theoretical framework created by Baskin (1989) and Allen and Rachim (1996). We employ
correlation and multiple least square regressions in order to establish the extent to which
dividend policies of firms in the UK affect their share price changes. We regress share price
changes on two dividend variables to establish this relationship. The independent variables are
dividend yield and payout ratios
1.1 Background
Dividend policy refers to the decision made by a company's management regarding the
payment of dividends to its shareholders. Dividends are a portion of a company's earnings that
are distributed to its shareholders on a regular basis. The dividend policy of a company is
influenced by various factors, including its financial position, investment opportunities, and the
preferences of its shareholders.

Share price volatility refers to the degree of fluctuation in the price of a company's shares over
a period of time. Share price volatility is influenced by various factors, including the company's
financial performance, market conditions, and investor sentiment.

The relationship between dividend policy and share price volatility is complex and multifaceted.
On the one hand, a company's dividend policy can affect its share price volatility. For example,
if a company has a stable and predictable dividend policy, investors may view it as a less risky
investment and be willing to pay a higher price for its shares. On the other hand, changes in
share price volatility can also influence a company's dividend policy. For example, if a company
experiences a significant decline in share price volatility, it may be more likely to increase its
dividend payments to attract investors.

Overall, the relationship between dividend policy and share price volatility is an important
consideration for investors and companies alike. Companies must carefully consider their
dividend policies in light of their financial position and investment opportunities, while
investors must assess the potential impact of a company's dividend policy on share price
volatility when making investment decisions. Dividend policy refers to the decision-making
process that companies use to determine how much of their earnings they will distribute to
shareholders in the form of dividends. Dividend policy is an important consideration for
investors because it can have a significant impact on share price volatility.

When a company announces a dividend, it is essentially telling investors that it is confident in

its financial position and expects to continue generating steady profits in the future. This can
have a positive effect on share prices, as investors are more likely to buy shares in a company
that is seen as financially stable and likely to generate consistent returns.

However, dividend policy can also have a negative impact on share prices if a company
announces a lower-than-expected dividend or fails to pay a dividend at all. This can signal to
investors that the company is struggling financially or that it expects to generate lower profits
in the future, which can cause share prices to fall.

In addition to the impact on share prices, dividend policy can also affect the volatility of those
prices. Companies that pay regular dividends are often seen as less risky and more stable than
those that do not, which can lead to lower volatility in their share prices. On the other hand,
companies that do not pay dividends or have a more erratic dividend policy may be seen as
riskier, which can lead to higher volatility in their share prices.
Overall, dividend policy is an important consideration for investors because it can have a
significant impact on share prices and volatility. Companies that have a consistent and
predictable dividend policy are often seen as more attractive investments, while those with a
more erratic policy may be viewed as riskier and more volatile. Research conducted in Australia
found a positive correlation between stock price volatility and earning volatility and leverage,
plus a significant negative correlation with payout ratio (Allen and Rachim, 1996). Study in the
USA also found an inverse relationship between dividend yield and stock price volatility (Baskin,
1986). In the Malaysian context, two studies have been conducted on dividend policy and share
price volatility. The study by Hashemijoo et al. (2012) focused on consumer product companies
from the year 2005 to 2010. They found a negative relationship between share price volatility
and dividend policy. Similar research also conducted in the same year by Zakaria, Muhammad
and Zulkifli (2012), targeting construction and material companies in Malaysia. Their findings
suggested that dividend payout ratio significantly influenced the changes in share price. By
considering the Malaysian market as a whole, the relationship between dividend policy and
stock price volatility might be different from other countries or even within different sectors in
Malaysia. In addition, in terms of market capitalization, a certain sector in Kuala Lumpur Stock
Exchange (KLSE) cannot represent the whole market because market capitalization on a certain
sector might be too small compared to the whole Bursa Malaysia (KLSE). This study differs from
previous studies in two main points. It is covering all the companies in the KLSE regardless of
their sectors and the period of study is longer. The objective of this study is to examine the
relationship between dividend policy and stock price volatility in Malaysia. Components under
dividend policy, namely dividend yield and payout ratio, are both examined against stock price
volatility. Factors influencing dividend policy such as earning volatility, size, long term debt and
growth in assets are introduced as control variables. In order to obtain a better and more
accurate research finding that could represent the situation in Malaysia, it is proposed that
samples from all industries be selected from the Main Board of Bursa Malaysia, previously
known as Kuala Lumpur Stock Exchange (KLSE). Data of years 2003 to 2013 are proposed to use
for the analysis. Investors pay close attention to the dividend yields, and that the riskiness of
their investments may affect the evaluation of firm’s shares in the long run (Baskin, 1989; Allen
and Rachim, 1996; Hussainey et al., 2011; Hashemi Joo et al., 2012; Zakaria et al., 2012;
Hussainey, Mgbame and Chijoke-Mgbame, 2011). Studies also suggest that monetary policy is a
factor that might influence dividend growth. A rise in central bank rates will trigger an increase
in firms’ retained earnings ratios as reinvesting corporate profits are seen as more favorable
compared to the pay-out of earnings (Belke and Polleit, 2006). Besides, firms increase dividend
in the higher imputation tax credit (Wang and Chang, 2011). However, difference in tax
structures (Ho, 2003; Ince and Owners, 2012), growth and development (Bulan2007; Elsadyet
al., 2012), governmental policies (Belke and Polleit, 2006) and others may cause a difference in
dividend policy and hence, affect stock price volatility.
1.2 Problem Statement
Dividend policy is a critical aspect of corporate finance that affects the value of a firm and its
shareholders. Companies can choose to pay dividends, retain earnings, or engage in share
buybacks to distribute cash to shareholders. The dividend policy decision is influenced by various
factors, including the firm's profitability, investment opportunities, capital structure, and
shareholder preferences. However, the impact of dividend policy on share price volatility remains
a subject of debate among scholars and practitioners. Share price volatility refers to the degree
of fluctuation in a company's stock price over time. High volatility can be a source of risk and
uncertainty for investors, making it difficult to predict future returns. Dividend policy can affect
share price volatility in several ways. For instance, a company that pays high dividends may be
perceived as stable and less risky, leading to lower volatility. On the other hand, a company that
retains earnings to finance growth opportunities may experience higher volatility due to the
uncertainty of future returns.

Therefore, the problem statement is to investigate the relationship between dividend policy and
share price volatility. Specifically, the study aims to answer the following research questions:

1. How does dividend policy affect share price volatility?

2. What are the factors that influence the relationship between dividend policy and share price
volatility?
3. How can companies manage share price volatility while maintaining an optimal dividend
policy?
4. What are the implications of the findings for investors, managers, and policymakers?

The study will use a mixed-methods approach, including a literature review, empirical analysis,
and case studies of companies with varying dividend policies and share price volatility. The
findings will contribute to the understanding of the role of dividend policy in managing share
price volatility and provide practical insights for corporate finance decision-making. Dividend
policy and share price volatility are two crucial aspects of a company's financial management.
Dividend policy refers to the decision-making process of a company on how much of its profits it
should distribute to its shareholders in the form of dividends. Share price volatility, on the other
hand, refers to the degree of fluctuation in a company's share price over a given period.

The relationship between dividend policy and share price volatility has been a topic of debate
among financial analysts and researchers. Some argue that a high dividend payout ratio can lead
to a decrease in share price volatility, while others believe that a high dividend payout ratio can
increase share price volatility.

One of the main reasons why a high dividend payout ratio can lead to a decrease in share price
volatility is that it signals to investors that the company is financially stable and profitable. This,
in turn, can increase investor confidence and reduce the likelihood of panic selling or sudden
drops in share prices.

On the other hand, ahigh dividend payout ratio can also increase share price volatility. This is
because when a company pays out a large portion of its profits as dividends, it leaves less money
for reinvestment in the business. This can lead to slower growth in earnings and, ultimately, a
decline in the company's overall value.

Furthermore, a high dividend payout ratio can also attract investors who are primarily interested
in dividend income rather than long-term growth prospects. These investors may be more likely
to sell their shares if the company's earnings growth slows down, leading to a decline in share
prices.

In conclusion, the relationship between dividend policy and share price volatility is complex and
multifaceted. While a high dividend payout ratio can signal financial stability and reduce share
price volatility, it can also lead to slower earnings growth and attract short-term investors,
ultimately increasing share price volatility. Therefore, companies must carefully consider their
dividend policy and balance the interests of their shareholders. The issue is that there is a lack of
consensus among researchers and practitioners regarding the effect of dividend policy on share
price volatility. Some argue that dividend payments increase share price stability, while others
suggest that dividend payments increase share price volatility.

Moreover, the impact of different types of dividend policies on share price volatility is not well
understood. Additionally, the factors that influence the decision to pay dividends and the impact
of macroeconomic factors on dividend policy and share price volatility require further
investigation.

The problem statement also includes understanding the impact of dividend policy and share price
volatility on shareholder value. Shareholders invest in a company with the expectation of
receiving a return on their investment. Therefore, it is essential to understand how dividend
policy and share price volatility affect shareholder returns and ultimately shareholder value.

Overall, the problem statement in the prospective of dividend policy and share price volatility is
to understand the complex relationship between dividend policy, share price volatility, and
shareholder value. The problem statement in the prospective of dividend policy and share price
volatility is multifaceted and complex. The primary issue is the lack of consensus among
researchers and practitioners regarding the relationship between dividend policy and share price
volatility. Some argue that dividend payments increase share price stability, while others suggest
that dividend payments increase share price volatility. This lack of agreement creates confusion
for investors who are trying to make informed decisions about their investments.
Another issue is the impact of different types of dividend policies on share price volatility.
Companies can choose to pay dividends regularly, irregularly, or not at all. The impact of each of
these policies on share price volatility is not well understood. Additionally, the factors that
influence the decision to pay dividends are not clear. Companies may choose to pay dividends to
signal their financial strength, attract investors, or reward shareholders. The impact of
macroeconomic factors on dividend policy and share price volatility also requires further
investigation.

Furthermore, the problem statement includes understanding the impact of dividend policy and
share price volatility on shareholder value. Shareholders invest in a company with the
expectation of receiving a return on their investment. Therefore, it is essential to understand
how dividend policy and share price volatility affect shareholder returns and ultimately
shareholder value. If dividend payments increase share price volatility, it may reduce shareholder
value. On the other hand, if dividend payments increase share price stability, it may increase
shareholder value.

In conclusion, the problem statement in the prospective of dividend policy and share price
volatility is complex and multifaceted. It requires a comprehensive understanding of the
relationship between dividend policy, share price volatility, and shareholder value. Further
research is necessary to understand the impact of different types of dividend policies, the factors
that influence the decision to pay dividends, and the impact of macroeconomic factors on
dividend policy and share price volatility. Ultimately, understanding these relationships is crucial
for investors to make informed decisions about their investments.

1.3 Objective of study

The objective of this study is to explore the relationship between dividend policy and share
price volatility. Dividend policy refers to the decisions made by a company regarding the
distribution of profits to shareholders in the form of dividends. Share price volatility refers to
the degree of fluctuation in a company's stock price over a given period of time.

The study aims to investigate the impact of dividend policy on share price volatility. It will
analyze how changes in dividend policy affect the volatility of a company's stock price. The
study will also identify the factors that influence the relationship between dividend policy and
share price volatility. Factors such as the company's financial health, industry trends, and
investor sentiment can all impact the relationship between dividend policy and share price
volatility.

Furthermore, the study will analyze the effect of different types of dividends (cash dividends,
stock dividends, and bonus shares) on share price volatility. Different types of dividends can
have varying impacts on share price volatility, and this study aims to provide insights into which
types of dividends are most effective in minimizing volatility.

The study will compare the impact of dividend policy on share price volatility across different
industries and sectors. Different industries and sectors may have unique characteristics that
impact the relationship between dividend policy and share price volatility. By comparing the
impact of dividend policy across different industries and sectors, this study aims to provide a
more comprehensive understanding of the relationship between dividend policy and share
price volatility.

Finally, the study aims to provide insights and recommendations for companies to manage their
dividend policy and minimize share price volatility. By understanding the factors that influence
the relationship between dividend policy and share price volatility, companies can make
informed decisions regarding their dividend policy to minimize volatility and maximize
shareholder value. Dividend policy refers to the decision of a company regarding the amount of
dividend to be paid to its shareholders. Share price volatility, on the other hand, refers to the
degree of fluctuation in the price of a company's shares over a given period.

There are several reasons why understanding the relationship between dividend policy
andshare price volatility is important. Firstly, share price volatility can have a significant impact
on the value of a company and its shareholders. High levels of volatility can make it difficult for
investors to predict the future value of a company's shares, which can lead to uncertainty and a
decrease in demand for the shares. This, in turn, can lead to a decrease in the company's
market capitalization and a decline in shareholder wealth.

Secondly, dividend policy can also have an impact on share price volatility. When a company
announces a dividend payment, it can have a positive effect on the share price, as investors
view the payment as a sign of financial strength and stability. However, if a company announces
a cut in its dividend payment, it can have a negative effect on the share price, as investors may
view the cut as a sign of financial weakness or instability.

Finally, understanding the relationship between dividend policy and share price volatility can
help companies make informed decisions about their dividend policies. By analyzing the impact
of different dividend policies on share price volatility, companies can determine the optimal
level of dividend payments that will maximize shareholder value while minimizing share price
volatility.

In conclusion, studying dividend policy and share price volatility is important for investors,
companies, and analysts alike. By understanding the relationship between the two,
stakeholders can make informed decisions about their investments and help ensure the long-
term financial stability of companies. Dividend policy refers to the decision-making process that
a company uses to determine how much of its earnings to distribute to shareholders in the
form of dividends. The dividend policy can have a significant impact on a company's share price
volatility, which is the degree of fluctuation in the price of a company's shares over time. The
objective of this study is to explore the relationship between dividend policy and share price
volatility in various scenarios.

Scenario 1: High Dividend Payout Ratio

When a company has a high dividend payout ratio, it means that it is distributing a significant
portion of its earnings to shareholders as dividends. This can be attractive to investors who are
looking for a steady stream of income. However, it can also lead to higher share price volatility.
This is because investors may become concerned about the sustainability of the high dividend
payouts and may sell their shares if they believe the company is unable to maintain the
payouts. As a result, the share price may fluctuate more rapidly. Scenario 2: Low Dividend
Payout Ratio

When a company has a low dividend payout ratio, it means that it is retaining a significant
portion of its earnings to reinvest in the business. This can be attractive to investors who are
looking for growth opportunities. However, it can also lead to higher share price volatility. This
is because investors may become concerned about the company's ability to generate future
earnings growth and may sell their shares if they believe the company is not investing its
earnings wisely. As a result, the share price may fluctuate more rapidly.

Scenario 3: Stable Dividend Policy

When a company has a stable dividend policy, it means that it is maintaining a consistent
dividend payout ratio over time. This can be attractive to investors who are looking for a
reliable source of income. A stable dividend policy can also lead to lower share price volatility.
This is because investors are less likely to be concerned about sudden changes in the dividend
policy, and the company's share price may be more stable asa result.

Scenario 4: Changing Dividend Policy

When a company has a changing dividend policy, it means that it is adjusting its dividend
payouts over time. This can be attractive to investors who are looking for a company that is
responsive to changes in market conditions. However, it can also lead to higher share price
volatility. This is because investors may become uncertain about the company's future dividend
payouts and may sell their shares if they believe the company is not making the right decisions.
As a result, the share price may fluctuate more rapidly.

In conclusion, the dividend policy of a company can have a significant impact on its share price
volatility. Depending on the scenario, a high or low dividend payout ratio, a stable or changing
dividend policy can lead to higher or lower share price volatility. Therefore, it is important for
investors to consider a company's dividend policy when making investment decisions.

1.4 Scope of Study

The scope of study for the relationship between dividend policy and share price volatility is vast
and complex. Dividend policy refers to the decision-making process that a company uses to
determine how much of its earnings it will distribute to shareholders as dividends. Share price
volatility, on the other hand, refers to the degree of fluctuation in a company's stock price over
time.

The relationship between dividend policy and share price volatility is an important area of
research because it has significant implications for both investors and companies. For investors,
understanding the relationship between dividend policy and share price volatility can help them
make better investment decisions. For companies, understanding this relationship can help
them make better decisions about how much to pay out in dividends and how to manage their
stock price.

One of the main questions that researchers in this field seek to answer is whether dividend
policy affects share price volatility. Some studies have found that companies that pay higher
dividend stand to have lower share price volatility, while others have found no relationship
between dividend policy and share price volatility.

Another area of research in this field is the effect of share price volatility on dividend policy.
Some studies have found that companies are more likely to decrease their dividends when their
share price is volatile, while others have found no relationship between share price volatility
and dividend policy.

Overall, the scope of study for the relationship between dividend policy and share price
volatility is broad and multifaceted. Researchers in this field use a variety of methods, including
statistical analysis and case studies, to explore the relationship between these two variables.
The findings of this research can have important implications for both investors and companies,
and can help inform decision-making in the financial industry. Dividend policy is the decision-
making process that companies undertake to determine the amount and timing of dividend
payments to their shareholders. Share price volatility, on the other hand, refers to the degree
of fluctuation in the stock prices of a company over a given period.

The study of dividend policy and share price volatility is essential for investors, financial
analysts, and corporate managers alike. Investors need to understand the impact of dividend
policy on the value of their investments, while financial analysts use dividend policy as a tool to
evaluate the financial health of a company. Corporate managers, on the other hand, need to
make informed decisions on dividend policy to maximize shareholder value and minimize share
price volatility.

The study of dividend policy and share price volatility covers a wide range of topics, including
the factors that influence dividend policy decisions, the impact of dividend policy on share price
volatility, the relationship between dividend policy and firm performance, and the role of
institutional investors in shaping dividend policy. Other areas of study include the effect of
taxes on dividend policy, the impact of dividend policy on capital structure, and the relevance
of dividend policy in emerging markets.

In summary, the scope of study for dividend policy and share price volatility is broad and
multidisciplinary, covering various aspects of corporate finance, investment, and economics.
The insights gained from this research can help investors make informed investment decisions,
corporate managers optimize their dividend policy, and financial analysts better evaluate the
financial health of a company. The study may also explore the different types of dividend
policies and their effects on share price volatility. For instance, the study may examine the
impact of regular dividends, special dividends, and share buyback son share price volatility.

Another area of focus in this study may be the factors that affect the decision to pay dividends,
such as firm size, profitability, growth opportunities, and financial leverage. The study may also
investigate the impact of macroeconomic factors, such as interest rates, inflation, and
economic growth, on dividend policy and share price volatility.

Furthermore, the scope of study may include an analysis of the impact of dividend policy and
share price volatility on shareholder value. This involves examining the relationship between
dividend policy, share price volatility, and shareholder returns.

Overall, the scope of study in the prospective of dividend policy and share price volatility is
broad and encompasses various aspects of corporate finance and investment analysis.

2. Literature Review
Dividend policy and share price volatility are two important factors that affect the value of a
company's stock. Dividend policy refers to the decision of a company regarding the amount and
timing of dividend payments to its shareholders. Share price volatility, on the other hand, refers
to the degree of fluctuation in a company's stock price over a given period of time. In this
literature review, we explore the relationship between dividend policy and share price
volatility.

Several studies have examined the impact of dividend policy on share price volatility. According
to a study by Fama and French (2001), dividend payments can reduce share price volatility by
providing a stable income stream to investors. The study found that companies that pay
dividends experience lower volatility in their stock prices compared to those that do not pay
dividends. Another study by Grullon and Michaely (2002) found that companies that increase
their dividends experience a reduction in share price volatility.

However, other studies have found mixed results regarding the relationship between dividend
policy and share price volatility. A study by Baker and Wurgler (2004) found that dividend
payments do not have a significant impact on share price volatility. The study suggests that
other factors, such as earnings volatility and market risk, may have a greater impact on share
price volatility than dividend policy.

Furthermore, some studies have suggested that the relationship between dividend policy and
share price volatility may be influenced by other factors, such as the size and growth rate of the
company. A study by DeAngelo et al. (2006) found that dividend payments have a greater
impact on share price volatility for small and fast-growing companies compared to large and
mature companies.

Overall, the literature suggests that dividend policy can have an impact on share price volatility,
but the relationship between the two may be influenced by other factors. Companies that pay
dividends may experience lower volatility in their stock prices, but the impact may be more
significant for small and fast-growing companies. Further research is needed to better
understand the relationship between dividend policy and share price volatility. One of the
earliest studies on the relationship between dividend policy and share price volatility was
conducted by Black (1976). He found that firms with a stable dividend policy had lower share
price volatility than firms with an unstable dividend policy. This result was attributed to the fact
that a stable dividend policy reduces uncertainty about future earnings and cash flows, which in
turn reduces share price volatility.

Another study by Miller and Modigliani (1961) found that dividend policy has no impact on
share price volatility. They argued that investors are rational and that they value a firm based
on its future earnings potential and not on its dividend policy. This view is known as the
dividend irrelevance theory.
However, other studies have found evidence of a significant relationship between dividend
policy and share price volatility. For example, Fama and French (2001) found that firms with a
higher dividend payout ratio had lower share price volatility than firms with a lower dividend
payout ratio. They argued that this result is consistent with the signaling theory of dividends,
which suggests that firms use dividends to signal their future earnings potential to investors.

Another study by Grullon et al. (2002) found that firms with a higher dividend yield had lower
share price volatility than firms with a lower dividend yield. They argued that this result is
consistent with the dividend signaling theory and that investors view high dividend yields as a
signal of a firm's future earnings potential.

A more recent study by Al-Najjar and Taylor (2008) found that firms with a higher dividend
payout ratio had higher share price volatility than firms with a lower dividend payout ratio.
They argued that this result is consistent with the agency theory of dividends, which suggests
that managers use dividends to signal their ability to manage the firm's resources effectively.

In conclusion, the relationship between dividend policy and share price volatility has been the
subject of extensive research in finance literature. While the traditional view of dividend policy
is that it has no impact on share price volatility, recent studies have challenged this view and
have found evidence of a significant relationship between dividend policy and share price
volatility. The results of these studies suggest that investors view dividends as a signal of a
firm's future earnings potential and that firms use dividends to signal their ability to manage
their resources effectively. Therefore, it is important for firms to carefully consider their
dividend policy in order to minimize share price volatility and maximize shareholder value.
Dividend paying companies in Malaysia normally pay out dividends at regular intervals, such as
quarterly, semi-annually or annually. Firms’ past dividends history, earnings stability,
consideration of impact on stock price, forecasted current and future earnings and cash flows
are among the important factors in formulating the firms’ dividend policies (Chawla, 2008). A
significant negative relationship is found between dividend payout and debt in Bangladesh
(Rashid and Rahman, 2008). This argument is further supported by another research that
provides a negative relationship between dividend and debt in Indonesia (Erkaningrum, 2013).
Research by El-Sady et al. (2012) suggest that the most influencing factor of dividend policies of
Kuwaiti listed companies is the management perception of the level of current and future
earnings as well as liquidity constraints. This is in line with our suggestion that earnings are one
of the significant determinants of dividend policy. The life cycle of a firm also contributes a
significant effect on the dividend policy. A study by Bulan et al. (2007) found that firms initiate
dividends when reaching the maturity stage of life cycle. Large and mature firms are capable of
paying higher dividends because they have more access to the capital market to raise fund.
However, for the firms experiencing more growth, a negative relationship exists between sales
growth to dividend per share (Alzomania and Alkhadhiri, 2013). Government policies on capital
market, such as monetary policy and tax structure also pay a significant role on firms’ dividend
policies. According to Belke and Polleit (2006), a rise in interest rate by the central bank in
Germany in response to improve investor profit expectations, trigger an increase in the firms’
retained earnings ratio. Investors from different countries are receiving different treatments on
tax system. Double taxation may make dividends unfavorable. In contrast, partial protection or
tax rebates are provided in some countries, like Australia and Taiwan, against double taxation.
Double taxation system on dividends exists in some countries like the United States, the United
Kingdom and China. Imputation tax system was introduced in Taiwan as the breakthrough from
the double taxation system which had been implemented since 1955. Firms are seen to
increase dividends with the higher imputation tax credit. After the taxation system reformed,
adjustment speed of dividends in Taiwan is inclining to decline and remains stable afterwards
(Wang and Chang, 2011). Dividend irrelevant theory is introduced by Miller and Modigliani
(1961). In order to realize the Miller and Modigliani’s (1961) model, assumptions are made that
no transaction cost is involved and there is either no tax, or the tax rates are equal for both
dividends and capital gains. It is also assumed that a perfect capital market exists where the
market price cannot be influenced by a single buyer or seller. Information about the market is
available to everybody with no cost. The stocks are fairly priced and managers act as the best
agent of shareholders, meaning that there is no agency problem. 1.2.1. Bird-in-hand theory.
One of the reasons why investors may prefer dividends over capital gains is due to the certainty
of dividends, compared to capital gains which are uncertain. In the world of uncertainty and
information asymmetry, dividends are valued differently from retained earnings (Husam-Aldin,
2007). Assumptions are made that outside investors are exposed to imperfect information
about firms’ profitability and that cash dividends are taxed at a higher rate compared to capital
gains. Under these constraints, such dividends function as a signal of expected cash flows
(Bhattacharya, 1979). 1.2.2. Agency cost theory. Agency costs arise when conflicts of interest
exist between management and shareholders. The management may spend lavishly on
perquisites or overinvest to enlarge the size of their firms beyond the optimal size since
executives’ compensation is often related to firm size (Husam-Aldin, 2007). Debt creation may
reduce the agency cost of free cash flow by reducing available cash flow for spending at the
discretion of the managers. Default on making debt service payments would act as a motivation
force to make organizations more effective (Jensen, 1986). 1.2.3. Signaling theory. Due to
imperfect information, investors are sensitive to the information announced by the firms and
would make an evaluation on the firms’ future prospects based on dividend announcement,
potential positive net present value (NPV) projects and others. The information content of
dividends predict that dividends can be used to signal firm’s future prospects and only good-
quality firms can use such a device (Husam-Aldin, 2007). Study by Allen et al. (2000) concluded
that the number of transactions increased through the ex-dividend date after announcement of
large dividends increased for both individual and institutional investors. 1.2.4. Clientele effect.
Clustering the shareholders in companies in order to match their investment appetite is defined
as the clientele effect. Investors under the low tax bracket or tax-exempted organizations that
need current cash flow tend to invest into companies who pay high dividend. In general,
dividend yields decrease as the tax disadvantages of dividends increase (Pettit, 1977). Another
research also provides support on clientele effect where the results show that difference
between tax rate for capital gains and dividends have an impact on investors’ preference for
having high dividends or low dividends stocks in their portfolio (Scholz, 1992). 1.2.5. Tax
preferences theory. Return on stock either in terms of cash dividends or capital gains is
subjected to its tax payment. Double taxation on dividends is also seen in some countries across
the world. Again it is found that investors prefer capital gains to cash dividends under double
taxation system. In order to eliminate double taxation practice, some countries are introducing
partial or full tax relief to individuals who receive dividends. Research conducted by Ince and
Owers (2012) on different tax regimes stated that if dividend tax rate exceeded capital gains tax
rate, dividend payout could partially offset value-enhancing effects of leverage. If both rates are
at the same level, dividend payout loses its moderating influence. Impact of dividend policy to
share price volatility. There are a number of studies examined the relationship between
dividend policy and share price volatility. Allen and Rachim (1996) in Australia, Nazir et al. in
Pakistan (2010) and Hussainey et al. (2011) in UK found a signicant and negative relationship
between the payout ratio and dividend yield with the stock price volatility. Baskin (1989), on
the other hand, found that payout is not related to stock price volatility. In addition, Rashid and
Rahman (2008) studying Dhaka stock exchange found a positive but insignificant result between
stock price volatility and dividend yield. Asghar et al. (2011) found the relationship to be
positive and significant in Karachi stock exchange. 2. Data and methodology According to Bursa
Malaysia, as of 31 March 2014, there are a total of 798 companies listed on the Main Board of
Kuala Lumpur Stock Exchange (KLSE) where ETFs and REITs are excluded. In order to simulate
the whole Malaysian market, a total of 550 companies first selected from Data Stream. The
analysis period covers from the year 2003 to 2013. By taking data for the past 11 years in
addition to a large sample of companies listed on the Main Board of KLSE, a more
comprehensive result is anticipated. The following constraints are the eligibility requirements
for a company to enter into the sample and companies which do not fulfill any of the following
constraints are dropped from the sample: 1. Firms must have at least one cash dividend during
period 2003 to 2013; 2. Firms with complete data; 3. Firms listed in KLSE since 2003. After data
filtering through the above constrains, a total of 196 companies have been dropped and the
final sample size is 354 companies. Any company with potential outliers was removed from the
sample. This had brought the final sample size for this research of 319 companies listed on the
main board of KLSE ranging from the period 2003 to 2013. 2.1. Price volatility. Price volatility
(PV) is the dependent variable in the regression model and is calculated based on the annual
range of stock price after adjusting for stock splits and stock dividends. For each year, the range
is divided by the average between high and low and is then raised to the second power. These
measures of variance are averaged for all available years, and then a square root is applied so
as to provide a variable equivalent to a standard deviat ion. 2 1 ( ) ( )/2 , n i Hi Li Hi Li PV n § ·   ¨
¸ © ¹ H2: There is a negative relationship between payout ratio and share price volatility. 2.4.
Control variable. 2.4.1. Market value (Firm size). Firm size is one of the main factors that might
influence a firm’s decision on dividend policy. Large firms are likely to pay more dividends
because they may have better access to capital market for fund raising (Alzomania and
Al  Khadhiri, 2013). Therefore, dependency on retained earnings as source of fund is reduced
and is more likely to pay higher dividend. A number of studies have come to the same
conclusion that firm size is significantly influencing dividend policy. Rashid and Rahman (2008),
affirm that dividend yield is positively significant to firm size in Bangladesh. Similar research in
Malaysia also cannot accept the hypothesis that company size has no effect on dividend per
share (Al-Twajiry, 2007). The market value at the beginning of each year for every company is
obtained and the average of each company is calculated. A natural logarithm is then applied to
the average market value for each company. 1 ln , n i i Market Value Size n ¦ (4) where Market
Valuei = Market value at beginning of year i, n = number of years. H3: There is a negative
relationship between firm’s size and share price volatility. 2.4.2. Earning volatility (EV).
Dividends paid by firms are generated from the firms’ profit and is one of the ways that firms
distribute earnings back to the shareholders. Therefore, earnings of firms are expected to be
one of the significant factors that will influence dividend policy decisions. Positive relationships
between profit and dividend policy show that firms are willing to pay higher dividends when
they experience an increase in their profitability level with high consideration of the level of last
year dividends (Alzomania and Al  Khadhiri, 2013). For earning vola lity calcula on, the average
of operating earnings (before interest and tax) to total asset ratio for all years is first obtained.
The second step is to obtain the average of the squared deviation from the overall average.
Square root transformation is then applied to the mean squared deviation for standard
deviation. 2 1 ( ) , n a i Ri R EV n   ¦ (5) where, Ri = Ra o of opera ng income to total assets for
year i, ¦ n i i a n R R 1 , n = number of years. H4: There is a positive relationship between
earning volatility and share price volatility. 2.4.3. Long term debt (Debt). Most companies raise
funds through debts to finance their operations and potential projects. Another reason that a
firm raises debts is to reduce the agency cost. By having debts, a firm is limiting its free cash
flow available for spending at the discretion of managers. This, in turn, will reduce the agency
cost of free cash flow (Jensen, 1986). A significant negative relationship is found between
dividend payout and debt in Bangladesh (Rashid and Rahman, 2008). This argument is further
supported by another research that provides a negative relationship between dividend and
debt in Indonesia (Erkaningrum, 2013). Research by El   Sady et al. (2012) suggest that the most
influencing factor of dividend policies of Kuwaiti listed companies to be the management
perception of the level of current and future earnings as well as liquidity constraints. This is in
line with our suggestion that earnings are one of the significant determinants of dividend
policy. Ratio for sum of each company’s long term debt includes all obligations with maturity
more than one year to total assets is calculated for each year. The average of each company is
then computed. 1 . n i i i Long Term Debt / Total Asset Debt n ¦ (6) H5: There is a positive
relationship between long term debt and share price volatility. 2.4.4. Growth in assets
(Growth). Rate of growth on firm assets are highly dependent on their life cycle. Firms that are
on the startup or rapid growth stage are foreseen to experience a high growth in assets. Firms
which experience higher growth opportunity tend to reduce their dividends per share, since
there is a negative relationship between increase in growth and dividend per share (Alzomania
and Al-Khadhiri, 2013). Firms normally start to pay dividends when they have arrived at the
mature stage. At the mature stage, especially for large firms, they may have better ability to
pay dividends due to the stable growth and better profit. Dividend initiators are large firms with
relatively high profitability and cash balances and low growth rate (Bulan et al., 2007). Growth
in assets is calculated by first taking the ratio of change in total assets at the end of the year to
the level of total of assets at the beginning of the year for each company. These ratios are then
averaged.
 ¦ (1) where, Hi = Highest stock price for year I,Li = = Lowest stock price for year I, n = Number
of years. 2.2. Dividend yield. Independent variables for the regression model are Dividend yield
(DY) and Dividend payout ratio (Pout). DY is defined as the sum of cash dividends paid to
common stockholders divided by the market value of each company at the end of the year. The
average for the total number of years is then obtained. 1 (/ ) , n i Di MVi DY n ¦ (2) where Di =
Dividend yield for year I, MVi = Market value for year I, n = Number of years. H1: There is a
negative relationship between dividend yield and share price volatility. 2.3. Payout ratio. For
computing Pout, the sum of cash dividend paid to common stockholders is divided by the net
income after tax for each year. The average for the total number of years is then obtained. ¦ n i
n Di Ei Pout 1 ( / ) (3) where, Di = Cash dividend paid to common stockholders for year i, Ei = Net
income after tax for year i, n = Number of years.