DIVIDEND POLICY AND ITS IMPACT ON SHARE PRICE

OF DEVELOPMENT BANKS IN NEPAL

(With Reference to MNBBL, SADBL, JBBL, MLBL, GBBL and LBBL)

A Dissertation submitted to the Office of the Dean, Faculty of Management in partial

fulfillment of the requirements for the Master’s Degree

by

Aashish Dangol
Roll No: 15835/19
Registration No: 7-2-1059-0001-2013
Campus: Pushpalal Memorial College

January, 2023

i
 Certification of Authorship

I hereby corroborate that I have researched and submitted the final draft of dissertation
entitled “DIVIDEND POLICY AND ITS IMPACT ON SHARE PRICE OF
DEVELOPMENT BANKS IN NEPAL (With Reference to MNBBL, SADBL, JBBL,
MLBL, GBBL and LBBL)”. The work of this dissertation has not been submitted
previously for the purpose of conferral of any degrees nor, it has been proposed and
presented as part of requirement for any academic purpose.

The assistance and cooperation that I have received during this research work has been
acknowledged. In addition, I declare that all information sources and literature used are in
cited the reference section of the dissertation.

Aashish Dangol

23rd January, 2023

ii
 Report of Research Committee

Mr. AASHISH DANGOL has defended research proposal entitled “DIVIDEND POLICY
AND ITS IMPACT ON SHARE PRICE OF DEVELOPMENT BANKS IN NEPAL (With
Reference to MNBBL, SADBL, JBBL, MLBL, GBBL and LBBL)” successfully. The
research committee has registered the dissertation for further progress. It has recommended
to carry out the work as per suggestions and guidance of supervisor Mr. Mani Ratna
Parajuli, and submit the dissertation for evaluation and viva voce examination.

Mr. Mani Ratna Parajuli Dissertation Proposal Defended Date:

Dissertation Supervisor 4th April 2022
Signature:-

Mr. Shyam Kaji Khatri Dissertation Submitted Date:

Internal Export
23rd January 2023
Signature:-

Mr. Bishnu Poudel Dissertation Viva Voce Date:

Head of Research Committee 23rd January 2023
Signature:-

iii
 Approval Sheet
We have examined the dissertation entitled “DIVIDEND POLICY AND ITS IMPACT ON
SHARE PRICE OF DEVELOPMENT BANKS IN NEPAL (With Reference to MNBBL,
SADBL, JBBL, MLBL, GBBL and LBBL)” presented by AASHISH DANGOL for the
Master’s Degree in Business Studies. We hereby certify that the dissertation is acceptable
for the award of degree.

Mr. Mani Ratna Parajuli

Dissertation Supervisor
…………………………..

Mr. Shyam Kaji Khatri

Internal Examiner
…………………………..

Dr. Hari Prasad Adhikari

External Examiner
…………………………..

Mr. Shambu Adhikari

Principal
…………………………...

Mr. Bishnu Poudel

Chairperson, Research Committee
……………………………

Date: 23rd January, 2023

iv
 Acknowledgements

This entitled dissertation, “DIVIDEND POLICY AND ITS IMPACT ON SHARE PRICE
OF DEVELOPMENT BANKS IN NEPAL (With Reference to MNBBL, SADBL, JBBL,
MLBL, GBBL and LBBL)” has been prepared in partial fulfilment of the requirement for
the Master’s degree in Business Studies under the Faculty of Management, Tribhuvan
University.

First and foremost, I want to thank my supervisor, Mr. Mani Ratna Prarajuli, and the head
of Research Department, Mr. Bishnu Poudel, for their invaluable supervision and guidance
in completing this study. I'm grateful to them for their unwavering support and suggestions,
which enabled this research project to start taking on its present condition.

Furthermore, I would like to express my gratitude to my internal examiner, Mr. Shyam Kaji
Khatri, college principal, Mr. Shambhu Adhikari, vice principal, Mr. Basudev Dhungel,
and director, Mr. Kedar Pudaisaini, for their unwavering support.

At last, I would also like to thank my parents, family, relatives, friends, and all those who
helped me during the research work. However, I accept sole responsibility for any mistakes
or inconsistencies in this report.

Aashish Dangol
23rd January, 2023

v
 List of Contents

Title of the Dissertation ........................................................................................................i

Certification of Authorship ..................................................................................................ii
Report of Research Committee .......................................................................................... iii
Approval Sheet .................................................................................................................... iv
Acknowledgements ............................................................................................................... v
List of Contents ................................................................................................................... vi
List of Tables ..................................................................................................................... viii
List of Figures ..................................................................................................................... ix
Abbreviations ....................................................................................................................... x
Abstracts ............................................................................................................................. xi

CHAPTER I INTRODUCTION ...................................................................................... 1

1.1 Background of the study......................................................................................................... 1
1.1.1 Introduction of sample development banks ..................................................................... 3
1.2 Problem statement .................................................................................................................. 6
1.3 Objectives of the study ........................................................................................................... 7
1.4 Research Hypothesis .............................................................................................................. 8
1.5 Rationale of the Study ............................................................................................................ 7
1.6 Limitations of the study .......................................................................................................... 8

CHAPTER II LITERATURE RIEVIEW ....................................................................... 9

2.1 Conceptual Framework .......................................................................................................... 9
2.1.1 Major Forms of Dividends ............................................................................................ 10
2.1.2 Dividend policy ............................................................................................................. 12
2.1.3 Factors Influencing Dividend Payment and share price ................................................ 15
2.1.4 Legal Provisions Regarding Dividend Practice ............................................................. 16
2.2 Review of Research Studies ................................................................................................. 18
2.2.1 Theoretical Review........................................................................................................ 18
2.2.2 Empirical Review .......................................................................................................... 27
2.3 Research Gap........................................................................................................................ 33

CHAPTER III RESEARCH METHODOLOGY ......................................................... 34

3.1 Research Design ................................................................................................................... 34
3.2 Population and Sample ......................................................................................................... 34
3.3 Sources of Data .................................................................................................................... 35

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 3.4 Methods of Data Analysis .................................................................................................... 35
3.4.1 Financial tools ............................................................................................................... 35
3.4.2 Statistical Tools ............................................................................................................. 37
3.5 Regression Model ................................................................................................................. 41
3.6 Research Framework ............................................................................................................ 41

CHAPTER IV RESULTS AND DISCUSSION ............................................................ 43

4.1 Presentation of Financial Indicators and Variables .............................................................. 43
4.1.1 Market per share (MPS) ................................................................................................ 43
4.1.2 Earning per share (EPS) ................................................................................................ 45
4.1.3 Dividend per Share (DPS) ............................................................................................. 47
4.1.4 Dividend Payout Ratio (DPR) ....................................................................................... 49
4.1.5 Price to Earnings Ratio (P/E Ratio) ............................................................................... 51
4.2 Presentation of Statistical Indicators .................................................................................... 53
4.2.1 Descriptive Statistics ..................................................................................................... 54
4.2.2 Correlation analysis ....................................................................................................... 55
4.2.3 Regression Analysis ...................................................................................................... 56
4.2.4 Hypothesis Testing ........................................................................................................ 59
4.3 Major Study Findings ........................................................................................................... 60
4.4 Discussion ............................................................................................................................ 62

CHAPTER V SUMMARY AND CONCLUSION ........................................................ 64

5.1 Summary .............................................................................................................................. 64
5.2 Conclusion ............................................................................................................................ 65
5.3 Implication............................................................................................................................ 65

REFERENCE .......................................................................................................................
APPENDIX ...........................................................................................................................

vii
 List of Tables

Table 1 A brief review of literature ............................................................................. 30

Table 4.1 Market price per share (MPS) ......................................................................... 44

Table 4.2 Earnings per share (EPS) ................................................................................ 46

Table 4.3 Yearly Cash Dividend per share (DPS) .......................................................... 48

Table 4.4 Yearly Dividend Pay Out Ratio (DPR) .......................................................... 50

Table 4.5 Price to earnings ratio (P/E ratio) .................................................................. 52

Table 4.6 The descriptive statistics of sample development banks ................................ 54

Table 4.7 The result of correlation analysis .................................................................... 55

Table 4.8 Model summary for regression analysis ........................................................ 57

Table 4.9 ANOVA analysis ........................................................................................... 57

Table 4.10 Regression Coefficient Analysis .................................................................... 58

Table 4.11 Hypothesis Summary ..................................................................................... 59

viii
 List of Figures

Figure 1 Component of theoretical framework ............................................................. 42

Figure 4.1 Market price per share of selected development banks .................................. 45

Figure 4.2 Earnings per share of selected development banks ........................................ 47

Figure 4.3 Dividend per share of selected development banks ....................................... 49

Figure 4.4 Dividend payout ratio of selected development banks ................................... 51

Figure 4.5 Price to earnings ratio of selected development banks ................................... 53

ix
 Abbreviations

ANOVA : Analysis of variance

CV : Coefficient of variation
DPR : Dividend Payout Ratio
DPS : Dividend per Share
EPS : Earnings per Share
FY : Fiscal Year
GBBL : Garima Bikas Bank Limited
i.e. : That is
JBBL : Jyoti Bikas Bank Limited
SADBL : Shangrila Development Bank Limited
LBBL : Lumbini Bikas Bank Limited
MLBL : Mahalaxmi Bikas Bank Limited
MNBBL : Muktinath Bikas Bank Limited
MPS : Market Price per Share
NEPSE : Nepal stock exchange
NRB : Nepal Rastra Bank
NRs./Rs./NPR. : Nepali rupees
P/E : Price to Earnings
R/r : Correlation Coefficient
R2 / r2 : Coefficient of determination
SD : Standard deviation
SEE : Standard error of estimate
T.U. : Tribhuwan University
B.S. : Bikram Sambat

Note. All the dates are used in Anno Domini (A.D.) except the one which is mentioned by
B.S.

x
 Abstracts

The study examines the impact of dividend policy on the share price of development banks
in Nepal. The market price per share is a dependent variable, whereas earnings per share,
dividend per share, dividend payout ratio, and price to earnings ratio are independent
variables. The study is based on six development banks of Nepal listed in NEPSE from
2017 to 2021, leading to a total of 30 observations. The data were collected from banking
and financial statistics and bank supervision reports published by Nepal Rastra Bank, as
well as the annual reports of selected development banks. The regression model's
parameters are estimated to test the significance and impact of dividend policy on Nepalese
development banks' share prices.

Using correlation, the link between market price per share and price-to-earnings ratio and
earnings per share is positive, while the correlation between market price per share and
dividend per share and dividend payout ratio is adverse. Whereas earnings per share and
the price-to-earnings ratio are highly significant, the dividend payout ratio and dividend per
share are insignificant. It suggests that the market price per share and the cash dividend
have a poor relationship with the sample development banks.

Similarly, the regression analysis result shows that earnings per share and the price-to-
earnings ratio have a positive impact on market price per share. It reveals that an increase
in earnings per share and the price-to-earnings ratio leads to an increase in market price per
share. Similarly, the dividend payout ratio also has a positive impact on market price per
share. It shows that an increase in the dividend payout ratio leads to an increase in the
market price per share. However, dividends per share have a negative impact on market
price per share, which reveals that the higher the dividend per share, the lower the market
price per share.

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 CHAPTER I
INTRODUCTION

A company's dividend policy is the policy used by a company to decide how much it pays
out to shareholders in dividends. Taking financial indicators from six development banks
for the period of 2017 to 2021, this study attempts to elucidate the dividend practices of
development banks in Nepal. Abounding in controversies and unpredictability, this study
concludes that the development banks of Nepal do not show a uniform trend in dividend
policy. The dividend policy practiced by development banks in Nepal is neither fully
explained by residual theory nor stable theory. With the development of financial
institutions in Nepal, they need to follow a robust method of dividend policy so that
investors can predict the stock market and make a rational investment decision.

1.1 Background of the study

The dividend decision is the most important decision that the managers may take. This
decision affects the primary aim of shareholders, which is to maximize their wealth through
taking the dividend. Usually, a firm announces a dividend on the corporate profits decided
by the board of directors of the firm during its annual general meeting (AGM). The
dividend can be distributed either in cash or by the capitalization of profits as a stock
dividend. Miller and Modigliani (1961) have asserted that given firms’ optimal investment
policies, the firm’s choice of dividend policy has no impact on shareholders' wealth.
However, Gordon (1963) argues that dividend policy does affect the value of a firm and
the market price of its shares. He asserts that shareholders prefer the early resolution of
uncertainty and are willing to pay a higher price for a share that has a greater DPR. Investors
always prefer current income in the form of dividends over capital gains.

The history of the securities market began with the share flotation of Biratnagar Jute Mill
Limited and Nepal Bank Limited in 1937. The introduction of the company act in 1951,
the first issue of government bonds in 1964 and the establishment of the Securities
Exchange Centre Limited. In 1976, there was another significant development in the field
of the capital market. Securities Exchange Centre Limited was established with the
objective of facilitating and promoting the growth of capital markets. Before its conversion
into a stock exchange, it was the only capital markets institution undertaking the job of

1
brokering, underwriting, managing public issues, market making for government bonds and
other financial services.

When Nepal Stock Exchange Limited (NEPSE) was established in 1993, the objective of
this institution was to import free marketability and liquidity to the government and
corporate securities by facilitating transactions on its only trading floor through market
intermediaries, i.e., brokers as well as market makers, The Nepal Stock Exchange, or
NEPSE, is a non-profit organization that has been operating as the securities exchange since
1993. NEPSE opened its trading floor on January 13, 1994. Members of NEPSE are
permitted to act as intermediaries in the buying and selling of government bonds and listed
cooperative securities. At present, there are 50 member brokers with 43 branches who
operate on the trading floor as per the Securities Exchange Act of 2007, rules and byelaws.
The broker house and its branches are expanded over 21 different cities of Nepal.

If a company has surplus cash, it can buy back an outstanding number of shares, which is
known as a repurchase of shares. In the developed capital market, corporations are allowed
to buy shares back for better utilization of their unused cash. However, the Nepalese
company act of 1997, section 47, has prohibited a company from purchasing its own shares.
It states that no company shall purchase its own shares and make loans secured by its own
shares.

One of the major reasons people invest their hard money in the shares of any company is
for the dividend. The amount that is distributed as a dividend should be adequate to meet
the normal expectations of the shareholders. To achieve these objectives, firms distribute
the earnings to their shareholders. Earnings are that amount which remains after deducting
or submitting all operational and non-operational expenses. Stockholders’ expectations
may vary with their investment priorities. Some participate in the capital market in order
to have some dividend returned, while others hope for capital appreciation of stock. In fact,
the primary intention of investing in stocks is to earn a dividend, but in the Nepalese
context, people are interested in investing with the view and expectation of more capital
appreciation. However, there is no consistency or regular practice in different firms for
making dividend announcements. In the secondary market, the declaration of the dividend
or the dividend policy of the firms changes the market price of the shares. Therefore, it is
expected that there can be some impact from the dividend policy on the market price of the
stock.

2
The main focus of the study is dividend policy practice in the Nepalese Development Bank.
However, different other studies are being conducted for the overall purpose, such as a
comparison of MPS, DPS, EPS, DPR, and P/E ratio, as well as other relevant studies as
needed. The dividend policy and stock price always have a correlation; if the company pays
a high dividend, the stock price increases, and vice versa. However, in some cases, their
interrelationships mean the price may remain constant or decrease. Therefore,
informational lack or flow is also vital in the analysis of MPS. Someone claims that
dividend payments have no effect on valuation, while another claims that they are an active
variable in stock price valuation.

1.1.1 Introduction of sample development banks

Development banks in Nepal are financial institutions of class 'B' that are regulated by the
Nepal Rastra Bank (NRB). Until Ashadh’s end in 2079 BS [mid-July, 2022], there are 17
development banks in Nepal, of which some banks are listed below:

A. Muktinath Bikas Bank Limited (MNBBL)

Muktinath Bikas Bank was founded on Poush 19, 2063 B.S. (i.e., January 3, 2007). The
bank's central office is located at Kamaladi, Kathmandu, Nepal. Banking operations were
initially conducted as a "B" class financial institution in three districts of the then Western
Development Region (currently Gandaki Province) with permission from the Nepal Rastra
Bank to become a national level financial institution. The bank made opening branches in
rural areas a focus due to the significant need for banking services there because there was
no other financial institution. Within one and a half years of operations, in April 2009, the
bank launched a microfinance program as part of a range of services by creating a special
division at the head office and in the branches to assist low-income but highly capable
individuals who are also highly productive. The bank was the first "B" class bank with a
three-pillar strategy for serving low-income individuals, with separate departments for
modern banking, rural banking, and micro banking.

As of Ashad End 2078 (July 2021), the bank's balance sheet showed a significant amount
of NPR 101.09 billion, which is equal to $ 852 million. As of that same month, 950,000
satisfied consumers from various age groups, communities, societies, and ethnic groups
were represented on the bank's customer list. The Bank currently has a wide geographic
reach with 178 branch locations and 22 ATMs (and counting) dispersed around the nation.

3
B. Shangrila Development Bank Limited (SADBL)
Shangrila Development Bank Limited (SADBL) was formed after the merger of two local-
level development banks, Bageshwari Development Bank Limited, based in Nepalgunj,
and Shangrila Development Bank Limited, based in Pokhara. It is currently one of the
largest national-level development banks, with 98 branches. Shangrila Development Bank
Limited acquired Cosmos Development Bank Limited, and started their joint operations on
Ashad 30, 2074.

As of the Ashad end of 2078, the bank had a noticeable balance sheet size of NPR 47.84
billion, with 95 branches and 31 ATMs across the country serving more than 360 thousand
happy customers from different age groups, communities, and societies. Likewise, mobile
banking customers stood at 76 thousand, and the number of debit card holders stood at 28
thousand.

C. Mahalaxmi Bikas Bank Limited (MLBL)

Mahalaxmi Bikash Bank Limited, a leading national-level development bank that has been
recognized among the top and fastest-growing development banks, was established in 2052
B.S. The bank's head office is located in Durbarmarg, Kathmandu, Nepal. To become the
largest development bank in Nepal, Mahalaxmi Bikas Bank merged Yeti Development
Bank into it on July 2, 2017. Mahalaxmi Bikas Bank had started its journey as a B-class
institution following the merger of Mahalaxmi Finance, Malika Vikas Bank, and Siddartha
Finance Limited in July 2016 and started integrated transactions in September 2016. Thus,
Mahalaxmi is the result of the merger of seven BFIs altogether since 2013. In 2013,
Manakamana Development Bank, Valley Finance, and Yeti Finance merged to form the
Yeti Development Bank. Similarly, there was a merger between Imperial Finance and
Siddartha Finance in 2014. The bank is the first development bank to raise Rs. 3.07 billion
in capital and has been licensed by the Central Bank of Nepal as a "B" class national-level
bank. The bank has been offering banking services to over 500 thousand customers through
a wide range of 103 branches and 34 ATMs.

Institute of charter accountants of Nepal (ICAN) presented the bank with the Best Presented
Award (BPA) for 2018 for presenting the best financial report among development banks.
Similarly, a bank in Bangladesh received South Asian federation of accountants (SAFA) -
2018 for presenting the best financial.

4
D. Jyoti Bikas Bank Limited (JBBL)
Jyoti Bikash Bank Limited (JBBL) is a national-level development bank licensed by the
Nepal Rastra Bank and has started its operation as of 9 Shrawan 2065 (July 24, 2008). In
the course of the previous 13 years, the bank has merged with Jhimruk Bikas Bank Limited
(FY 2073–74 B.S.) and acquired Raptiveri Bikas Bank Limited (FY 2074–75 B.S.) and
Hamro Bikas Bank Limited (FY 2075–76 B.S.), two additional regional-level development
banks. JBBL was founded with the primary goal of financing the development of
hydropower and infrastructure, as well as providing banking services to the general public
for a variety of purposes. Starting with an initial paid-up capital of Rs. 259 million, the
bank has reached a paid-up capital of Rs. 4.26 billion. The bank currently has 120 branches
across the county, including three extension counters. The bank has also been providing
services from its network of ATM machines (73) and is in the process of extending its reach
through both branch and ATM expansion, apart from reaching the growing number of
techno-friendly customers with a wide range of digital banking products.

E. Garima Bikas Bank Limited (GBBL)

Garima Bikas Bank Limited was incorporated under the Company Act on Shrawan 22,
2064, and acquired a license from Nepal Rastra Bank to perform its financial transactions
on Aswin 24, 2064. The bank started its formal operations on Kartik 18, 2064, from Waling
3 and Syangja. After the successful merger between Garima Bikas Bank Limited and the
then-Nilgiri Bikas Bank Limited, the bank was upgraded to national status on Ashadh 29,
2072. On Ashwin 4, 2073 B.S., the bank merged with Subhechha Bikas Bank Limited, and
on Chaitra 27, 2073, the bank relocated its headquarters from Mahandrapool, Pokhara, and
Kaski to Lazimpat and Kathmandu. Later in the fiscal year 2077–78, Garima acquired
Sahara Bikas Bank. According to the bank's capital structure, it has Rs 4.58 billion in issued
capital and Rs 4.58 billion in paid-up capital. The bank now has 121 branches and 51 ATMs
strategically located throughout the country for the convenience of customers.

F. Lumbini Bikas Bank Limited (LBBL)

Lumbini Bikas Bank Limited began operations in 1998. The Bank is a well-known name
in Nepal's banking and financial industry. It conducts banking and other financial activities
in accordance with the Bank and Financial Institution Act of 2073 B.S. as well as the NRB's
license to begin operating as a "B" class financial institution. The bank, which merged with
Navadurga Finance Company Limited in 2014, successfully completed another merger

5
process with the Bank of Kathmandu in 2016. It is an organization that was created via the
merger of five banks and financial organizations, namely Vibor Bikas Bank Limited,
Bhajuratna Finance Limited, Birgunj Finance Limited, Himichuli Bikas Bank Limited, and
Lumbini Finance and Leasing Company Limited. On the 25th of Ashad 2074 B.S., the
Vibor Society Development Bank and Lumbini Finance and Leasing underwent their most
recent merger. The Bank has been an emerging name in the field of banking and the
financial sector of Nepal. The bank's driving force is its 88 branches, 1 extension, 17 ATMs,
and more than 600 employees who provide a wide range of services to more than 15,000
loan customers.

1.2 Problem statement

In the context of Nepal, only a select number of companies give reliable dividends, while
the most of other companies do not. There are some companies that have never paid
dividends to their investors. The dividend on shares is an important indicator that shows
the performance of banks and thereby attracts investors. Investors examine the dividend
policy of the banks before they decide to invest in the stock market, but due to the
fluctuation in dividend policies of development banks in Nepal, investors are unable to
forecast the future cash flow from cash dividend. It has been perceived that companies
which have grown their dividend generally experience an increase in their stock price,
while companies which don’t pay or lower their dividend generally experience a fall in
their stock price trend. Hence, it shows the dividend affects the stock price of the company,
but several researchers argue that it is the information on the payment of the dividend that
affects the stock price.

There are more than two hundred companies and enterprises listed on the stock exchange
limited. These companies are not seen regarding dividend decisions. Even profit-generating
companies do not have any consistent and clear-cut policy on dividend distribution. The
stock market of Nepal is still in its infancy, having experienced expansionary growth in
recent years. Amidst the recent expansion, understanding dividend practices in relation to
development banks' financial health can provide an opportunity to understand financial
sector dividend practices. This discovery aims to shed light on the relationship between
market value per share and earnings per share, dividends, P/E ratio and dividend payout
ratio. In addition, trends, levels, and patterns of dividend practices are also analysed. The
strength of this study is a comprehensive study of dividend policy and their impact on

6
Nepalese development Banks’s values over a long period of time, using time series data.
Time series analysis can only explain the plausible relationship between dividend practices
and financial indicators. As the relationship between dividend policy and the market share
is debatable, this paper aims at answering the question:

i. What kind of dividend policy did the chosen banks adopt?

ii. What is the trend in the market share of the selected development bank?
iii. Is there a relationship between MPS and DPS, EPS, DPR, and the P/E ratio?
iv. How do dividends per share, earnings per share, dividend payout ratio, and price
to earnings ratio affect the market price per stock?

1.3 Objectives of the study

The main objective of this study is to analyze the impact of dividend policy on market price
per share, with a focus on development banks listed on the NEPSE. For this purpose, a
paper titled "Dividend Policy and Its Impact on Share Price of Development Banks in
Nepal" has been written. So, there are some variables (MPS, EPS, DPS, DPR, and P/E
ratio) that have an impact on the share price, directly and indirectly. The objectives of the
study are:

i. To examine the dividend policy practices of development banks.

ii. To analyze the market price trend of development banks.
iii. To examine the relationship between the dividend policy and market price of
development banks.
iv. To analyze the effects of DPS, EPS, DPR, and P/E ratio on the MPS of development
banks.

1.4 Research Hypothesis

The hypotheses were developed to answer the above research questions. As a result, the
following hypotheses were tested in this study:

H1: There is significant relationship between dividend per share and market price per share.
H2: There is significant relationship between earnings per share and market price per share.
H3: There is significant relationship between DPR and market price per share.
H4: There is significant relationship between P/E ratio and market price per share.

7
1.5 Rationale of the Study
The purpose of the study is to examine the dividend policies of MNBBL, SADBL, JBBL,
MLBL, GBBL, and LBBL using financial and statistical analysis. Furthermore, the study
focuses on the current dividend policy trend in the market and its impact on the share price
of development banks. Development banks are those that were specifically created to
supply the infrastructural facilities needed for the country's industrial growth. The majority
of investors buy stock without possessing a sufficient understanding of the company's
performance or dividend policies.

The study is useful in informing the investor while investing in share capital so that they
can make the correct decision at the right time about the influence of dividend policy on
the market price of shares and make a decision. In addition, this research aids in
determining investor objectives, such as receiving dividends after learning about the impact
of dividends on the stock market. In conclusion, it is advantageous to the business since it
informs Nepalese investors, who can then adapt their plans and policies in keeping with
that understanding by knowing the investors' goals.

1.6 Limitations of the study

Every study has limitations imposed by different institutions, time frames, and the
reliability of statistical data, procedures, and variances. The limitations listed below have
drawn attention to the connection between development banks' dividend policies:

i. Only five years of data, i.e., 2017 to 2021, were used during the analysis; alternative
fiscal year data could have produced a different outcome.
ii. Since the data collection is secondary, depending on how reliable the data are, the
majority of the data are revisions to study results.
iii. The market price of stocks is influenced by a number of factors. But only dividend
policy-related criteria have been taken into account.
iv. Since just six development banks participated in the study out of 17 development
banks may be affected by the findings.

8
 CHAPTER II
LITERATURE RIEVIEW

The main concern of the various companies is an argument in dividend decisions.

Specifically, the factors affecting dividend decisions are a major argument among the
companies. In an attempt to respond to this argument, academics and practitioners
developed a number of theories that have been empirically tested. The academic literature
has been very helpful in providing clear guidance on practical issues, and for that purpose,
a literature review section is being carried out, which consists of valid and authentic books
and journals concerning past studies on dividend policy.

2.1 Conceptual Framework

The "dividend policy" of a company refers to its policy of dividing profits between
distribution to shareholders as a dividend and retention for investment. All aspects and
questions related to the payment of dividends are contained in a dividend policy. There is
a reciprocal relationship between retained changes and cash dividends. If more retained
earnings are kept by the company, less is paid as a dividend, and vice versa. A dividend
decision is one of three major decisions in managerial finance. In the sense that the firm
has to choose between distributing profits to shareholders and ploughing them back into
the business, the decision depends upon the objectives of the management for wealth
maximization. The firm uses the net profit to pay dividends to the shareholders if the
payment leads to a maximization of the owners' wealth. If not, it is better to retain them to
finance investment programs. The relationship between dividends and firm value should
thus be a decision-making criterion.

Most shareholders expect two forms of return from the purchase of common stock. These
are capital gains and dividends. A capital gain may be defined as the profit resulting from
the sale of common stock. The shareholders expect, at the same point, a distribution of the
firm’s earnings in the form of a dividend. Most investors expect regular dividends to be
declared and paid on the common stock of mature and stable corporations. This expectation
takes priority over the desire to retain earnings to finance expansion and growth. Thus,
shareholders' expectations can be fulfilled through either capital gains or dividends. One
might think that since dividends are more attractive to stockholders, there can be a tendency

9
for corporations to increase dividends. However, one might expect a slight reduction in
gross dividends, with an increase in net after-tax dividends still available to stockholders
and an increase in retained earnings for the corporation (Throp, 1997). It is, therefore, a
wise policy to maintain a balance between shareholders’ interests and that of corporate
growth from internally generated funds. The funds that cannot be used due to a lack of
investment opportunities should be better paid as dividends since shareholders have
investment opportunities to employ elsewhere. Financial management is therefore
concerned with the activities of a corporation that affect the well-being of stockholders.
That well-being can be partially measured by the dividend received, but a more accurate
measure is the market by the dividend received, but a more accurate measure is the market
value of stock (Dean, 1973) Shareholders usually think that the dividend yield is less risky
than a capital gain. Dividends refer to that portion of a firm’s net earnings that is paid out
to the shareholders (Khan and Jain, 1992). Dividends are generally paid in cash. Therefore,
it reduces the cash balances of the company. The dividend policy affects the financial
structure, the flow of funds, corporate liquidity, and investors’ attitudes. Thus, it is one of
the central decision areas related to policies seeking to maximize the value of a firm’s
common stock.

2.1.1 Major Forms of Dividends

Although the most popular form of dividend is the cash dividend, corporations need to pay
different types of dividends in order to achieve their objectives and policies. Some major
forms of dividends are cash dividends, stock dividends and stock splits, and the repurchase
of corporate shares. In the context of Nepal, only cash dividends and stock dividends have
been declared and paid, and other forms of dividends have not been paid.

1. Cash Dividends
A cash dividend refers to the portion of earnings paid as cash to the investors in proportion
to their shares of the company. The total assets and net worth of the company are reduced
when the cash dividend is distributed. The market price of the share drops in most cases by
the amount of the cash dividend distributed. The firm has to maintain an adequate balance
of cash for the payment of cash dividends; otherwise funds have to be borrowed for this
company to pay a stable dividend. To what extent cash dividend is popular and adopted by
companies in Nepal may be an interesting study.

10
2. Stock Dividends
A stock dividend is a payment in the form of additional shares of stock instead of cash.
Unlike cash dividend it does not result into the cash flows. The purpose of stock dividend
is to conserve cash in the firm, so that it can use in new projects. It’s involved simply a
book keeping transfer from retained earnings to capital stock account.

The effect of the stock dividend is an increase in the number of shares of current
stockholders to represent the same interest as it was before using the stock dividend. The
effect of a stock dividend can be outlined in this: The issue of stock dividends increases the
number of outstanding shares. It is issued to transfer retained earnings to the share capital.
The net worth and the par value of the share do not change with the issue of stock, and
stockholders' proportional ownership remains.

A company can distribute dividends in some other form, such as bonds (bond dividend),
scrips, properties, etc. When earnings of the company justify a dividend but the company’s
cash position is temporarily weak and does not permit a cash dividend, it may declare a
scrips dividend. In this form of dividend, the shareholders are issued scrips which may or
may not be interest bearing.

Stock splits and Reverse stock splits

In an economic sense, a stock split is similar to a stock dividend. When a stock splits,
shareholders are given a larger number of shares to compensate for the old shares they
already own. In either case, each shareholder retains the same percentage of all outstanding
stock that shareholder had before the stock dividend or split. Under a two-for-one stock
split, each shareholder can be given one additional share of stock for every share already
owned, thus doubling the number of shares owned by each shareholder. The effect of stock
split is that there is no change in the firm’s assets or liabilities or in shareholders’ equity
(assets less liabilities), and there is a fall in per share earnings, book value, and market
price, with an offsetting rise in the number of shares held by each shareholder (Schall and
Haley, 1991).

When a company’s share price falls substantially, the company may want to reduce the
number of shares outstanding. Reserve share splits reduce the number of shares. The
reduction in the number of shares increased both the par value and market price per share.
In spite of the fact that splits do not change the underlying assets, liabilities, or equity of

11
the firm, there is some empirical evidence that the total market value of a company’s equity
increases when the split occurs (roughly a 2 to 6 percent increase) (Grinblatt, Masulits, and
Titman, 1984).

Repurchase of corporate shares

Corporate share repurchase is often viewed as an alternative to paying dividends. If a firm
has some surplus cash (or it can borrow), it may choose to buy back some of its own stock.
It is instructive to see why share repurchases may be viewed as an alternative to paying
dividends. By repurchasing stock, a company is reducing the number of shares outstanding.
If the P/E ratio does not change after the repurchase, the stock price must rise. If a firm has
excess cash and insufficient profitable investment opportunities to justify the use of these
funds, it is in the shareholders’ interests to distribute the funds. The distribution can be
accomplished either by the repurchase of stock or by paying the funds out in increased
dividends (Horne, 1997). Hence, corporate share repurchase is often viewed as an
alternative to paying dividends. A repurchase is a signal that managers, who possess an
insider’s knowledge of the firm, are convinced that their stock is worth more than its current
price. In addition, their conviction is strong enough to lead them to pay a premium for the
stock despite the risk of dilution if they are wrong. The Nepalese Company Act, 1997,
Section 47, prohibits a company from purchasing its own shares. It states that no company
shall purchase its own shares or make loans secured by its own shares.

2.1.2 Dividend policy

Developing Dividend Policies, the Dividend practice should reflect the different factors as
well as the firm's present operating and financial position. In this total framework, the firm
finds that it has a choice of several dividend policies to follow. These are as follows:

1. Steady Dividends at the Present Level

Perhaps the most common dividend practice is to declare the same rupee dividend as paid
in the last period. This meets the shareholders' expectations for current income and is not
likely to affect the market price. This policy may result in shortages of funds during years
when earnings have declined. For mature firms with unused borrowing capacity, this is not
a serious drawback.

12
2. Steady Dividends at a Level Lower than Present Level
The practice of reducing dividends can be considered if the firm has high-profit investment
opportunities and needs the funds to finance them. This might alienate shareholders seeking
current income and affect the market price of the stock. To minimize this impact, the firm
might announce that the new level can be maintained in the near future with a further
lowering of dividends. This reduces some of the uncertainty associated with the reduction
of dividends. The firm may also indicate that dividends may be raised if the new investment
opportunities are as profitable as expected.

3. Steady Dividends at a Level Higher than Present Level

This is a practice used to raise the regular dividend declared by the firm. It is warranted
when the firm’s earnings have risen, when the earnings are stable at the higher level, and
when the firm does not need the excess earnings to finance growth. Frequently, the dividend
announcement has favourably affected the price of the common stock. In many cases, the
higher earnings already have caused a rise in the stock price, and the dividend declaration
has no effect.

The informational Content of Dividends

It has often been pointed out that a company that raises its dividends often experiences an
increase in its stock price and that a company that lowers its dividends has a falling stock
price. This seems to suggest that dividends do matter, in that they affect stock prices. This
causal relationship has been refuted by several researchers on the grounds that dividends
per se do not affect stock prices; rather, it is the informational content of dividends that
affects stock prices.

Since management may have greater insight than the rest of the market as to the level of
present and future earning power, they may use dividend payments as the medium through
which their expectations are conveyed (Petit, 1976). Recent evidence demonstrates that
dividend announcements convey information over and above that contained in alternative
announcements.

A number of writers have suggested that a considerable amount of information is conveyed

by changes in dividends. In light of this, the management of a firm may use dividend
payments (or a lack of them) as a method of indicating their estimates of the firm’s earning
power and liquidity (Petit, 1972).

13
The residual Theory
A firm's dividend policy can be viewed as one of its investment decisions. A firm that
behaves in this manner is said to believe in the residual theory of dividends. According to
this theory, dividend policy is a residual from investment policy. Whether or not a company
pays dividends depends on its investment policy. It assumes that the internally generated
funds are comparatively cheaper than the funds obtained from external sources. The theory
is based on the premise that investors prefer to have the firm retain on reinvested earnings
an amount that exceeds the rate of return the investor could, himself, obtain on other
investments of comparable risk. The dividend under a residual dividend policy equals the
amount left over from earnings after equity investment. If equity investment equals
earnings, no dividends are paid. If equity investment is greater than earnings, no dividends
are paid. If equity investment is greater than earnings, then no dividends are paid and new
shares are sold to cover any equity investment not covered by earnings. If there is no
investment opportunity, then one cent of earnings is distributed to shareholders. Dividends
are therefore merely a residual remaining after all equity investors' needs are fulfilled
(Schall and Haley, 1991).

Although the residual theory of dividends appears to make further analysis of dividend
policy unnecessary, it is indeed not clear that dividends are solely a means of disbursing
excess funds (Rao, 1992). It can therefore be imprudent to conclude that there are no other
implications of dividend policy, and so this study takes a closer look at the relationship
between dividends and value.

Wealth Maximization Theory

A large dividend is declared and distributed to shareholders in order to (or in the hope of)
maximizing their wealth, according to wealth maximization theory. Basically, it is
applicable to those companies that have just established themselves and to those whose
financial profits are decreasing. The main purpose of the wealth maximization theory of
dividends is to give assurance to the stockholders that they are interested in the firm, which
has no better market value. The market value of the shares is directly related to the
performance of the company. The better the performance, the higher the market value of
shares, and vice versa. So, the finance manager must try to maximize shareholder value.

14
2.1.3 Factors Influencing Dividend Payment and share price
A number of things come into play while establishing a corporate dividend policy. In what
follows, various factors that financial executives in practice should consider when
approaching a dividend decision should be taken up.

Factors influencing dividend payment

Various researchers have established several factors that influence dividend payments by
firms. The following are four of the most common factors:

a. Amount of Earnings
For the company to be able to pay dividends there must be sufficient earnings after tax
available for distribution to the shareholders. Companies are largely required to pay
dividend out of the profits made in a particular year and not from retained earnings. Lintner
(1956) in his classical study found that a firm’s net earnings are the critical determinant of
dividend change.

b. Cash Flows
In deciding on dividend payment, the company has to consider its cash flow situation. This
is to ensure if liquid it’s enough is to cover the cash outflow in dividend payment and its
operations thereafter. Alli et al. (1993) argue that dividend payments depend more on cash
flows, which reflect the company's ability to pay dividends.

c. Previous dividend
The manager of firms are not to reduce the previous level of dividend payment because of
the signal such action express to the investors in line with the dividend signalling
hypothesis. In his classic study on dividend policy, Lintner (1956) interviewed a sample of
corporate managers and found that managers demonstrate a "reluctance (common to all
companies) to reduce regular rates once established and a consequent conservatism in
raising regular rates".

d. Leverage
Firms that finance their activities mostly with debt rather than equity put pressure on their
liquidity. Debt principal and interest payments reduce the ability of firms to have residual
income to guarantee dividend payment. Consequently, it is expected that, there is always
negative relationship between debt and amount of dividend paid for a period. Kowaleski et
al (2007) argue that more obligated firms favour to pay lower dividends.

15
Factors Influencing Share Price
Financial managers should analyse various factors when approaching a dividend decision.
The factors influencing share prices may be categorized as either micro or macro
environment factors:

a. Micro-economic environment factors

These are factors that are within the firm and the industry in which it operates. They may
include the firm’s dividend policy, performance in terms of profitability, management
quality and earnings ratios among others. High dividend policy may attract high priced
stocks while low dividend policy may attract low priced stocks.

b. Macro-economic environment factors

These are factors affecting the whole economy within which the firm operates. These
factors include interest rates, inflation rate, and fiscal measures taken by the government in
managing the economy and foreign exchange rates among others. In developing countries
like Nepal, political factor is one of the important determinants of share price of
development banks rather than wisely understanding of fundamental and technical analysis
by the investors.

2.1.4 Legal Provisions Regarding Dividend Practice

In Nepal, the Nepal Company Act, 2063 (2006), makes some legal provisions for dividend
payments. These provisions may be seen as the following:
Section 182. Dividend:

1) Except in the following circumstance, dividend shall be distributed to the shareholders

within forty five days of the decision made to provide dividend:
a. If any law prohibits the distribution of dividend;
b. If the right to receive dividend is subject to any dispute;
c. If, in a circumstance beyond control of the company or for any reason,
dividend cannot be distributed within the said time-limit.
2) A company fully or partly owned by the Government of Nepal may distribute dividend
only after obtain in prior approval of the Government of Nepal; and the Government of
Nepal may give necessary directive on the matter of dividend to be distributed by such
company.

16
3) In the event of failure to distribute a dividend within the tine limit as referred to in Sub-
section(1), the dividend shall be distributed together with the interest thereon at such
rate as may be prescribed.
4) The person whose name is maintained in the shareholder register at the time of
declaration of a dividend or his/her legal heir shall be entitled to such dividend.
5) A company shall not pay or distribute a dividend in any other manner except out of the
amount of profits set aside for the distribution of dividend.
6) Before paying or declaring a dividend out of the profits for any financial year, a
company shall have fully deducted the pre operation expenses, the amount required to
be depreciated in accordance with the accounting standards fixed by the competent
authority under the prevailing law, any amount required to be paid or set aside out of
the profits under the prevailing law or the amount or accumulated loss in previous
financial years. Provided, however, that if the prevailing law requires the establishment
of a reserve or consolidated fund of any amount prior to distributing dividend, any
company which is required to comply with such legal requirement shall not distribute
divided without establishing such reserve or consolidated fund.
7) Subject to the various provisions contained in this Section, the board of directors of any
company may, in the following circumstance, distribute interim dividend out of the
profits for the previous financial year:
a. Where the articles of association contain a provision on the distribution of
interim dividend;
b. Where the annual financial statement for the financial year out of the profits
of which year interim dividend is to be distributed has already been certified
by the auditor and approved by the board of directors.
8) No company shall pay or distribute any amount in cash or kind, chargeable on its funds,
to its shareholders, except a dividend approved by the general meeting.
9) The amount of dividend not claimed/received by any shareholder even after the empery
of a period of five years after the date of resolution adopted by the company in its
general meeting to distribute dividend shall be credited to the investor protection fund
to be established under Section 183.
10) In crediting the amount as referred to company shall, prior to the expiry of the period
mentioned in that Sub-section, publish a notice in a national daily newspaper inviting
the concerned to receive the dividend, within the tie limit of at least on month.

17
11) A company shall credit the amount of a dividend to be distributed to its shareholders
pursuant to this Act to a separate account within forty five days after the date of
approval by the general meeting and pay the amount of dividend out of that an account;
and the company shall not use such amount for any other purpose.

2.2 Review of Research Studies

The review of research studies can be categorised into two part. They are: I. Theoretical
Review and II. Empirical Review.

2.2.1 Theoretical Review

A critical and perplexing question has always arisen: whether dividend policy affects stock
market value. To shed light on this matter, different studies conducted by different
theoretical researchers should be reviewed. Therefore, some of the main research questions
are discussed below:

Linter (1956) conducted a study which focused on the behavioural aspect of dividend
policy. He investigated the dividend patterns of 28 different companies in America and
found that firms generally predetermine the desired payout and try to achieve it while rarely
considering other factors. The model developed by his research is as follows:
DIV × t = p × EPS × t ……………….. (i)
And, DIV – DIV t-1 = a + b (DIV × t – DIV t-1) +e1 …….…… (ii)
Or, DIV = a + b DIV × t + (a + b) DIV t-1 +e1 …………… (iii)
Where,
DIV× t= Firm’s desired payment
EPS = Earnings per share
p = Targeted payout ratio
a = Constant relating to dividend growth
b = Adjustment factor relating to the previous period’s dividend and new desired level or
dividend where b < 1.

Major finding of this study are as follows:

i. Firms generally prefer desired proportion of earning to be paid as dividend.
ii. Investment opportunities are not considered for modifying the pattern of dividend
behaviour.
iii. Firm generally have target payout ratios in view while determining change in DPS.

18
Walter (1957) has proposed a model for share valuation which supports the view that the
dividend policy of the firm has an impact on share valuation. His works clearly demonstrate
the significance of the relationship between the firm's internal rate of return on investments
(r) and its cost of capital (k) in determining the dividend policy that maximizes shareholder
wealth. Walters’s model is based on the following assumptions:
 Retained earnings represent the only source of financing for the firm.
 The return on the firm’s investment remains constant.
 The cost of capital for the firm remains constant.
 The firm has an infinite life.
Walter’s formula to determine the market price per share is as follows:
DPS (EPS − DPS) DPS + r (EPS − DPS)
P= + +
K K K
Where,
P = Market price per share
DPS = Dividend per share
EPS = Earnings per share
r = Internal rate of return on investments
k = Cost of capital
In Walter’s model the optimum dividend policy depends on the relationship between the
firm’s internal rate of return on investment (r) and its cost of capital (k).Walter’s view of
the optimum dividend payout ratio can be summarize as follows:
 Growth Firm r > k
Firm having r > k may be referred as growth firm. The optimum payout ratio for a growth
firm is 0. The market price per share increases as payout ratio decreases.
 Normal Firm r = k
Firm having r = k may be referred as normal firm. There is no unique optimum payout ratio
for a normal firm. One dividend policy is a good as the other. The market price per share
is not affected by the payout ratio when r = k. The payout ratio for a normal firm is
irrelevant.
 Declining Firm r < k
Firm having r < k may be referred as declining firm. The optimum payout ratio for a
declining firm is 100%. The market price per share increases as payout ratio increases.

19
Thus, in Walter’s Model the dividend policy of the firm depends on the availability of
investment opportunities and the relationship between the firm’s internal rate of return (r)
and its cost of capital (k). The firm should use earning to finance investment if r > k, should
distribute all earnings when r < k and remain indifferent when r = k.

Modigliani and Miller’s (1961) study has been argued that dividend policy has no effect
either on the price of a firm's stock or its cost of capital. That is, dividend policy is
irrelevant. This theory was first introduced by Franc Modigliani and Melton H. Miller in
1961 and is popularly known as the M-M Approach. Through an article titled "Dividend
Policy, Growth and Valuation of Shares", they advocated that dividend policy does not
affect the value of the firm, i.e., dividend policy has no effect on the share price of the firm.
The M-M Approach focuses on the irrelevant effect of dividend policy on firm valuation,
arguing that the value of the firm is determined only by its basic earnings power and its
business risk. Thus, the value of the firm depends on the income from its assets and not on
how this income is split between dividends and retained earnings. The M-M Approach is
based on the following assumptions:
 The firm operates in a perfect capital market in which all investors are rational.
Information is available to all free of cost, instantaneous transactions without costs,
securities are infinitely divisible, and no investor is large enough to influence the market
price of securities.
 There is no flotation cost on securities issued by the firms.
 A world of no taxes.
 The firm has a fixed investment policy, which is not subject to change.
 The risk of uncertainty doesn’t exist.

Step 1: The market price of a share in the beginning of the period is equal to the present
value of dividend paid at the end of the period plus the market price of the share at the end
of the period.
D1 + P1
P0 = … … … . (i)
1 − ke
Where,
Po = Market price at the beginning or the zero period.
D1 = Dividend per share to be received at the end of the period.
P1 = Market price of the share at the end of the period.
K e = Cost of equity capital (assumed constant)

20
Step 2: Assuming no external financing, the total capitalized value of the firm would be
simply the number of shares times’ price of each share, thus
We have,
n(D1 + P1 )
nP0 = … … … … … . . (ii)
1 − ke
Where,
n= number of equity share at zero period.

Step 3: If the firm's internal source of financing its investment opportunity fall short of the
funds required and ∆n is the number of new shares at the end of year 'i' at price Pi , then
equation (ii) can be written as:
nDi + (n + ∆n) − ∆nPi
nP0 = … … … … . (iii)
1+ke
Where,
n = Number of shares at the beginning
∆n = Number of equity shares issued at the end of the period.

Step 4: If the firm were to finance all investment proposals, the total amount of new share
issued would be given by the following equation.
nPi = I – (E - n Di)
Or, nPi = I - E + n Di …………………… (iv)
Where,
nPi =The amount obtained from the sales of new shares to the finance capital budget.
I = the total amount requirement of capital budget.
E = Earning of the firm during the period.
nDi = Total Dividend paid.
(E-nDi)= Retained Earnings.

Step 5: By substituting the value of nPi from equation (iv) to equation (iii)
We find,
nDi + (n + ∆n) – (I + E + nDi )
nP0 =
1 + ke
nDi + (n + ∆n) − I + E − nDi
nP0 =
1 + ke
(n + ∆n) − I + E
nP0 =
1 + ke

21
Step 6: Conclusion
There is no role for a dividend in the above equation. So, Modigliani and Miller concluded
that dividend policy has no effect on the share price, i.e., dividends are irrelevant. However,
the view that dividends are irrelevant is not justified once the assumption is modified to
consider the realities of the world. In practice, every firm follows one kind of dividend.
This selection of a certain dividend policy of a firm depends upon the mature ness and
nature of the firm.

Myron Gordon (1962) explained that the dividend policy of a firm influences the value of
a share even in a situation where the return on investment and the required rate of return on
investment are equal. This model explains that investors are not indifferent between the
current dividend and the retention of earnings. The main focus of the study was that
"Investors give more emphasis to the present dividend rather than to future capital gains."
That is to say, current dividends are considered certain and risk less. Therefore, this model
is preferred by rational investors as compared to deferred in the future, as the future is
uncertain and investors avoid uncertainty.

He emphasized his argument that an increase in the dividend payout ratio leads to an
increase in the share prices for the reason that investors consider the dividend yield (D1/P0)
less risky than expected capital gain.

This model is based on the following assumptions:

i. The firm is an all-equity firm.
ii. The internal rate of return (r) of the firm is constant.
iii. The cost of capital (K e) is constant.
iv. The firm and its stream of earnings are perpetual.
v. Corporate taxes do not exist.
vi. The retention ratio 'b', once decided, remain constant. Thus, the growth rate, g= b ×
r, is constant.
vii. The cost of capital for the firm is greater than the growth rate, i.e., K e > g.
viii. No external financing is available. So, retained earnings would be used to finance
any expansion.

Based on the above assumptions, Gordon has provided a formula to determine the market
value of a share as follows:

22
 E(1 − b) E(1 − b)
P= =
ke − br ke − bg
Where,
P = Market value of share
E = Earnings per share
b = Retention ratio
(1-b) = Dividend payout ratio
E (1-b) = Dividend per share
K e = Capitalization rate or cost of capital
b × r = Growth rate of the firm

According to this model, the following facts are revealed:

 In case of growth firms, share price tends to decline in correspondence with increase
in payout ratio or decrease in retention ratio i.e. high dividend corresponding to earning
leads to decrease in share price. Therefore dividend and stock prices are negatively
correlated in growth firm.
 In case of normal firm, share price remains constant regardless of change in dividend
policies. It means dividend and stock prices are free from each in normal firm i.e. r=K
 In case of declining firm, shares price tends to rise with increase in payout ratio.

Friend and Puckett (1964) conducted a study on the relationship between dividends and
stock prices by running regression analysis on the data of 110 firms from five industries in
the years 1956 and 1958. These five industries were selected to permit a distinction to be
made between the results for growth and non-growth industries and to provide a basis for
comparison with results by other authors for earlier years. They also considered cyclical
and non-cyclical industries that they covered. The study periods covered a boom-year for
the economy when stock prices levelled off after a rise (1956) and a somewhat depressed
year for the economy when stock prices, however, rose strongly (1958). They used
dividends, retained earnings, and price-earnings ratio as independent variables in their
regression model of the price function. They used the supply function, i.e., the dividend
function, as well. In their dividend function, earnings, last year's dividends, and price-
earnings ratio are independent variables. They said that the dividend and price-earnings
ratio are independent variables. They said that the dividend supply function (equation) was
developed by adding to the best types of relationship developed by Linter.

23
Symbolically, their price function and dividend supply function are:
Price Function: Pt = a + b D t + c R t + d (E/P) t-1
Where,
P t = Share price at time `t`
D t = Dividends at time `t`
R t = Retained earnings at time `t`
(E/P) t-1= Lagged earning price ratio
Dividend Supply Function: Di = e + Fe1 +gDt-1 + h (E/P) t-1
Where,
Et = Earnings per share at time `t`
Dt-1 = Last year dividend
Their study was based on the following assumptions:
 Dividends do react to year fluctuation in earnings.
 Price doesn't contain speculative components.
 Earnings fluctuations may not sum zero over the sample.

Their regression results based on the equation Pt = a + b D t + c R t showed the company's

strong dividend and relatively weak retained earnings effects in three of the industries, i.e.,
chemicals, foods, and steel. They tested other regression equations by adding the lagged
earnings price ratio to the above equation Pt = a + b D t + c R t + d (E/P) t-1; they discovered
that three independent variables could explain more than 80% of the variation in stock
price. Dividends have a significant impact on stock prices in three of the five industries
studied, but the difference between the dividend and retained earnings coefficient is not as
pronounced as in the first set of regressions. They also discovered that the dividends and
retained earnings coefficients are closer to each other in both years, with the exception of
steel in 1956, and the correlation is higher again, with the exception of steel.

They also calculated the dividend supply equation, D t = e + f E t + g D t-1 + h (E/P) t-1 and
the dividend price equation for four industry groups in 1958. From their derived price
equation, it seems that there were no significant changes from those obtained from the
single equation approach as explained above. They argued that the stock prices, or more
accurately, the price-earnings ratio, do not seem to have a significant effect on dividend
payout. On the other hand, they noted that the retained earnings effect has increased
relatively in three of the four cases tested. Further, they argued that their results suggested
price effects on dividends are probably not serious because of bias in the customer

24
derivation of dividends and retained earnings effects on stock prices. However, such a bias
might be justified if the disturbing effects of short-run income movements are sufficiently
great.

Further, they used lagged price as a variable instead of lagged earnings price ratio and
showed that more than 90% of the variation in stock prices can be explained by the three
independent variables, and retained earnings received greater relative weight than
dividends in most cases. The only exceptions were steel and food in 1958. They considered
chemicals, electronics, and utilities as growth industries in their groups, and the retained
earnings effect was larger than the dividend effect for both years covered. For the other two
industries, namely food and steel, there were no significant systematic differences between
the retained earnings and dividend coefficients.

Similarly, they tested the regression equation, Pt = a + b D t + c R t, by using normalized

earnings again. They obtained normalized retained earnings by subtracting dividends from
normalized earnings. That normalized procedure was based on the period from 1950 to
1961. Again, they added the prior year's normalized earning price variable, and they
compared the result. When comparing the results, they found that there was a significant
role for normalized earnings. When they examined the latter equation, they found that the
difference between dividend and retained earning coefficient disappeared. Finally, they
concluded that management might be able to increase prices somewhat by raising dividends
in the food and steel industries. They concluded with a more detailed examination of
chemical samples. That examination disclosed that the results obtained largely reflected the
undue regression weighting given to the three firms, with their prices deviating most from
the average price in the sample of 20 firms and retained earnings as a price determinant.
Finally, Friend and Puckett concluded that it is possible that management might be able, at
least in some measure, to increase stock prices in the non-growth industries by raising
dividends and in growth industries by greater retention, i.e., low dividends.

Chawala and Srinavasan (1987), they studied the impact of dividends and retention on share
price. The objectives of their study were to estimate a model to explain share price,
dividend, and retained earnings relationships; to test the dividend and retained earnings
hypotheses; and to examine the structural changes in the estimated relations over time. As
per the financial theories, they expected the coefficients of both dividend and retained
earnings to be positive in the price equation. Similarly, in the dividend supply function,

25
they expected a positive sign for current earnings and the previous dividend. They took 18
chemicals and 13 sugar companies and estimated the cross-sectional relationship for the
years 1969 and 1973. The required data was collected from the official directory of the
Bombay Stock Exchange. The basic objectives of the study were:

 To develop a model to explain the relationship between share price, dividend, and
retained earnings.
 To test the dividend retention hypothesis.
 To examine the structural changes in the estimated relationships overtime.
 To achieve these objectives, they used the simultaneous equation model as developed
by Friend and Puckett (1964). The model, in its unspecified form, was as follows:
1. Price Function: Pt = D t, R t, (P/E) t-1
2. Dividend supply function: D t = [E t, D t-1, (P/E) t-1]
3. Identity: E t = D t + R t
Where,
Pt = Market price per share at time’t’
D t = Dividend per share at time’t’
Dt-1 = Dividend per share at time’t-1'
R t = Retention per share at time’t’
(P/E) t-1 = Price to earnings ratio at time't-1'

None of the other models provides as satisfactory an explanation of dividend behaviour as

Brittain’s cash flow model. Based on this model, their study attempted to examine the
impact of a few more determinants of dividend behaviour, except those already examined
by earlier authors, with the help of their sample data. Those determinants are investment
demand (ID), Flow of Net Debt (FND), Interest (I), Liquidity (L), Share Price Behaviour
(SP), and Sales Changes (ΔS-2) they did it by including these determinants one by one in
the Brittain’s cash flow model, which provided the model of good fit in most of the sample
classifications.

After using various regression equations, they found that dividend decisions are primarily
governed by cash flow, a measure of the company’s capacity to pay and the dividend paid
in the previous year. Among other determinants, investment demand has been found to
have a significant impact on the dividend decisions of electrical goods and chemical
industries. The impact of the flow of net debt on dividend decisions was found significant

26
in the cases of new companies at the aggregate level and the paper industry at the industry
group level of their study. Similarly, they found that liquidity factor turns out to be a
significant determinant of dividend payout in cotton and general engineering industries of
their study. They discovered that determinants such as interest payments, changes in sales,
and the general behaviour of share prices have no significant impact on the dividend
decisions of the sample companies.

2.2.2 Empirical Review

Now that we've moved on from theoretical explanations of dividends to actual data, it is
largely obvious that several stylised facts have been proven. First, dividend policy appears
to matter to both investors and management, notwithstanding the Miller and Modigliani
position's perfect logic on the subject of the relevance of dividend distribution patterns. The
following are summaries of research papers on dividend policy that Nepalese researchers
have done.

Adhikari (2014) carried out research on "Corporate Dividend Practices in Nepal" using
primary as well as secondary data. The major findings of this study are that high dividend-
paying companies have a better financial position than low dividend-paying companies.
Dividends have an impact on stock prices in both the finance and non-finance sectors; there
is a positive relationship between dividend payout and stock price, and a negative
relationship between dividend payout and earnings before taxes and net worth. Stocks with
a larger ratio of DPS to book value per share have higher profitability. These profitability
ratios of stocks paying larger dividends are also more variable as compared to those of
stocks paying smaller dividends. Companies paying more are reluctant to employ a higher
degree of leverage in their capital structures, and the stocks with a larger ratio of dividend
per share to book value per share also have a higher turnover ratio and higher interest
coverage.

Budhathoki's (2015) “Study of the Dividend Policy of Commercial Banks in Nepal” found
some of the major findings, this study were that the average earnings per share (EPS) of
the banks under study show a positive result. But the coefficient of variation indicates that
there is no consistency in EPS, the average dividend per share (DPS) shows that there is no
regularity in dividend payment, the analysis of the DPR shows that the Dividend Payout
Ratio (DPR) of the banks is not stable, and the average market price shows that there is
quite a high level of fluctuation.

27
Shrestha's (2016) article, "Shareholders' Democracy and Annual General Meeting
Feedback," has dealt with the policies and financial performance of some financial
companies and has made the following conclusions: (i) Exorbitant cost-push inflation has
caused shareholders to expect a higher return on investment; (ii) multiple decreases in
Nepalese currency purchasing power to the extent that a higher dividend return is simply a
natural economic consequence of it; (iii) erosion of income purchasing power has made it
clear that dividend payments must be directed to improve shareholders' purchasing power
by increasing dividend payments;(iv) Indo-Nepal trade and transit deadlock has become a
sort of economic warfare, raising the cost of living index to a considerable extent. This is
one of the reasons that led shareholders to expect a higher demand for a satisfactory
dividend; (v) The waiting of five years with a peanut dividend in the previous year is
equally a strong enforceable reason for the bank’s shareholders to expect a handsome
dividend already assured and committed in various reports of the earlier annual general
meeting; and (vi) one way to encourage risk-taking ability and preference is to have proper
risk-return trade-offs by the bank’s management board in such a way that a higher return
must be the investment rule for higher risk-takers that comprise the bank’s shareholders.

Bhattarai (2016) conducted research on the "Dividend Decision and its Impact on Stock
Valuation." The study used simultaneous equation models developed by Friends and
Puckett (2015) to explain price behavior. The findings of the study were that the
relationship between dividend per share and stock prices is positive in the sample
companies, dividend per share affects share prices differently in different sectors, changing
the dividend policy or dividend per share might help to increase the market price of shares,
the relationship between prices and retained earnings per share is not prominent, and the
relationship between stock prices and lagging earnings per share is negative.

Pandey (2016) conducted research on "Pricing and yield behavior of equity shares in Nepal:
A case of commercial banks" in March 2016. The main findings of this research are that
the market prices of the equity shares are overvalued when compared to the earnings per
share, which is the primary indicator of the financial status of the concerned financial
institution. This was primarily due to ignorance and improper access to the company's
financial health, and the results of a regression analysis between the market price and the
yield indicator revealed that net worth per share explained the market price the best when
compared to other indicators. Dividend per share and earnings per share were equally

28
explanatory, whereas the dividend payout ratio was not a good indicator of stock pricing.
According to the findings, the market price corresponds to earnings per share more than
dividends per share, with earnings per share coming in second.

Pradhan (2017) the study "Stock Market Behaviors in a Small Market: A Case of Nepal"
used cross-sectional data from 17 businesses. Some findings of his study, among others,
were that stocks with a larger ratio of dividends per share to market price per share have
higher liquidity. The liquidity position of stocks paying lower dividends is also more
variable as compared to stocks paying higher dividends; stocks with a larger ratio of
dividends per share to market price per share have lower leverage ratios. So, the leverage
ratios of stocks paying smaller dividends are also more variable as compared to stocks
paying higher dividends; stocks with a larger ratio of dividend per share to market price per
share also have higher earnings. But the earnings ratios of stocks paying larger dividends
are also more variable as compared to those of stocks paying smaller dividends. A positive
relationship is observed between the ratio of dividends per share to market price per share
and turnover ratios. Stocks with a larger ratio of dividends per share to market price per
share also have higher turnover ratios. The turnover ratios of stocks that pay larger
dividends are also more volatile than those of stocks that pay smaller dividends; there is
also a positive relationship between the dividends per share and market price per share
ratios and interest coverage. Stocks with a higher ratio of dividends per share to market
price per share also have higher interest coverage. Stocks paying larger dividends are also
more volatile than stocks paying smaller dividends, indicating a positive relationship
between dividend per share and market price per share with liquidity, profitability, asset
turnover, and interest coverage and a negative relationship with leverage.

Baral and Pradhan's (2018) "Impact of Dividend Policy on Share Price of Commercial Bank
in Nepal" examined the relationship of financial indicators like EPS, P/E ratio, and dividend
payout ratio with the market price per share. The study was conducted among the 10
commercial banks classified as the "top 5 gainers" and "top 5 losers" in NEPSE. According
to the article, expect DPR, while other factors such as EPS and P/E ratio have a positive
relationship with stock price in the case of a top-gainer commercial bank. The P/E ratio is
the strongest factor influencing share price, whereas EPS, P/E ratio, and DPR all have a
positive influence on stock price, with the DPR being the strongest factor influencing share
price in the case of a top-loser commercial bank.

29
Aryal (2020) investigated "Dividend and its Effect on Stock Market Price in Nepalese Joint
Venture Commercial Banks." The major conclusions of the study were that earnings per
share, P/E ratio, and dividend payout ratio are some of the most important determinants of
the market price of stock in commercial banks in Nepal. In order to increase the market
price of stocks, EPS and the P/E ratio should increase. It is found that the standardized beta
coefficient of the PE ratio and earnings per share is higher than that of other explanatory
variables. As a result, the price-earnings ratio and earnings per share are important
explanatory variables of market price in Nepalese commercial banks. Hence, to increase
the MPS, both the P/E ratio and EPS should be increased.

Several empirical reviews with different researchers have been done. Table 1 gives a brief
summary of some of them.

Table 1
A brief review of literature
Year Author Objectives Findings
1999 Tsoukalas and To investigate the The D/P ratio Granger causes stock
Sil predictive power of returns. It implies predictability
variables such as DYs, which is only inconsistent with the
dividend growth rate, simplest model of market
etc. using the efficiency.
‘information hypothesis’
of dividends.

2007 Al-Twaijry To identify variables that The current dividends are affected
have an impact on by their pasts and their future
dividend policy and performance. PORs do not have a
POR in an emerging strong effect on the company’s
market. future earnings growth but have
some significant negative
correlation with the company’s
leverage.

30
2009 Adres, Betzer, To conducted a study in There is a significant positive
Bongard, Germany to investigate relationship between dividend
Haesner and dividend announcement, announcement and share price on a
Theissen market expectations and bullish market whereas bearish
corporate governance market listed as a negative
significant relationship.

2010 Vijayakumar To examine the extent to The selected variables have a

which some indicators of positive relationship with the
the financial market price and DPS and the P/E
performance influence ratio have a negative impact on the
the stock price. market price of its equity shares.

2011 Hussainey, To analyse the relation DY and stock price changes are
Mgbame, and between dividend policy positively related while the
Chijoke- and share price changes dividend POR
Mgbame in the UK stock market.

2012 Zakaria, To examine the impact The model is able to explain only
Muhammad, of the dividend policy as 43.43% of the variation in the share
and Zulkifli well as DPR of the share price wherein DY, investment
price. growth and earnings volatility
insignificantly influence the
changes in the company’s share
price.

2014 Faloye and To deliver some There is a significant positive

Oluwole information to investors relationship between dividend
in relation to their announcement and share price on a
corporations’ bullish market whereas bearish
market listed as a negative
significant relationship.

31
2014 Nirmala, To examine the long-run There exists bi-directional long-run
Sanju, and causal relations between causality between share price and
Ramachandran share price and dividends. Share price and dividend
dividends in the Indian thus influence each other.
market.

2017 Anwar, Singh To analyse the impact of The cash dividend announcements
and Jain the announcement of have positive AARs of the select
cash dividends on stock manufacturing companies. Overall,
price returns. the results lend support to the
signalling and informational
content hypotheses of dividends.

2017 Adesina et al. To study dividend policy There is a positive relationship

and share price valuation between EPS and MPS, but on the
in Nigerian banks. other hand, DY and RRs have a
negative influence on the MPS.

2018 Felimban, To examine the effect of They report some evidence for the
Floros, and dividend announcement stock price reaction that partially
Nguyen on share price and supports the signalling hypothesis.
trading volume. Also, the Gulf Cooperation Council
(GCC) market is informationally
inefficient.

2019 Narendra P. To evaluate the effect of The result of correlation indicates

Sing and dividend policy on that DY has a negative impact on
Aakarsh market prices of shares MPS while other variables such as
Tandon of Nifty 50 companies EPS, DPS, return on earnings and
listed on the National RR are positively correlated with
Stock Exchange for MPS
2008–201

32
2.3 Research Gap
To date, a considerable measure of national and international study has been done in the
area of dividend policy. These studies probed the relationship between dividend policy and
stock price of banks. But since Nepal's capital market is relatively early stage of developing,
it's possible that the conclusions reached by the worldwide study don't apply to Nepal.
There are some studies by previous researcher that can be regarded as ground-breaking in
the area of dividend policy in the Nepalese context, but the Nepalese capital market has
undergone many more changes in recent years, making it unlikely that the results of the
past studies still hold true in the current environment.

Additionally, research on the banking sectors are available to study but research on
development bank hasn't been conducted for investing purposes, so the research on
development might give the investing sector new ideas so that investors can invest their
money for better prospects. Some researchers have only used a small sample of the same
sector of companies, therefore the conclusions from those studies might not accurately
reflect the current practices and efforts done in the Nepalese capital markets. Therefore, a
current analysis of the dividend policy of Nepalese development banks is required.

This study attempts to be distinct from previous studies in terms of sample size, nature of
sample firms, and methodology used. Six development banks were examined in the study.
Five years of data were analysed, taking into account EPS, DPS, DPR, P/E ratio, and MPS.
The main models in the study are financial indicator analyses, standard deviation,
regression analysis, and so on, in order to obtain relevant and accurate results. As a result,
it is clear that this study can differ from previous ones.

33
 CHAPTER III
RESEARCH METHODOLOGY

A systematic approach to resolving research issues is the research methodology. The total
research process that a researcher uses to complete their study is referred to as research
methodology. Considering the research's findings, primary and secondary data All of the
study's data, both collected and observed, have been examined using the proper financial
methods. Each topic and subject needs to be checked, examined, and a thorough research
strategy designed. It is difficult to make any conclusion regarding the relevant topic without
collecting detailed information and using various analytical tools.

3.1 Research Design

The quantitative research design is used to focus on the impact of dividend policy on market
price and test hypotheses, as well as the relationship between dependent and independent
variables. Under a quantitative research design to achieve the research objective, a causal
comparative research design was used to learn more about the dividend policy of
development banks in Nepal and how it affects share prices, as well as to offer any
necessary recommendations based on evaluation. A causal-comparative design has a
tendency to establish a cause-and-effect relationship between the development banks'
independent variables (dividends per share, earnings per share, dividend payout ratio, and
profit to earnings ratio) and the dependent variables (market price per share).

3.2 Population and Sample

All 17 of the development banks, which are rated Class "B" in the NRB and are currently
operating in Nepal, make up the population for this research. The scaling out of all
development banks is limited to national-level development banks. Six development banks
with stock on the Nepal Stock Exchange that distribute cash dividends on a regular basis
have been chosen as representative development banks for this study. The sample
development banks are MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL. This
sampling method, judgmental sampling, which falls under the non-probability sampling
method, is to be used while selecting samples for this study. The list of populations for this
research is listed in Appendix 1.

34
3.3 Sources of Data
This study is based on information gathered from secondary sources. For the study, annual
reports were collected from the respective banks and published on their respective websites.
The study's includes annual report of the following banks: Muktinath Bikas Bank Limited,
Shangrila Development Bank Limited, Jyoti Bikas Bank Limited, Mahalaxmi Bikas Bank
Limited, Garima Bank Limited, and Lumbini Bikas Bank Limited. Additional data and
information are gathered from a variety of institutions and regulatory bodies, including the
Nepal Rastra Bank, the Central Library, and the Department Library. Various data and
information are gathered from economic, journal, and magazine sources, among others. For
the analysis of data, data for five years from 2017 to 2021 has been gathered.

3.4 Methods of Data Analysis

This data analysis research is concerned with quantitative research, with the aim of creating
financial data and statistical tools. With quantitative data, financial tools such as
independent and dependent variable trends are used. In this study, statistical tools are used
to analyze data. The descriptive statistical tools include frequency distribution, measures
of central tendency such as mean, standard deviation, minimum, maximum, and coefficient
of variation. Similarly, various other statistical tools were used in the study, mainly
bivariate Pearson's correlation analysis and linear regression analysis. SPSS version 25.0
and MS-Excel were used to analyze secondary data.

The analysis of data has been done in two ways: by financial and statistical tools. The
relationships between different variables related to the study are drawn out using financial
and statistical tools. In this study, the main indicators (MPS, DPS, EPS, DPR, and P/E ratio)
are calculated. Likewise, statistical tools such as the arithmetic mean, standard deviation,
coefficient of variation, correlation, regression analysis, and ANOVA are also calculated
in this research. The detailed methods have been listed as follows:

3.4.1 Financial tools

To ascertain whether the impact of dividend policy on the share prices of development
banks “reflects the extent to which the aim of business is realized,” the financial ratio is
looked at. A higher ratio is preferable in most of the data since it is crucial for management,
which has a responsibility to optimize the owner’s welfare as well as that of present and
future shareholders.

35
a. Market Price per Share (MPS)
The market price per share is the price at which a share of a company's stock can be
purchased in the marketplace, such as on a stock exchange. This price fluctuates throughout
the day depending on the level of demand for the stock. When more investors want to buy
it than sell it, the price rises; when the opposite is true, the price falls. In another way, the
MPS of a share should be determined by the firm's return. If the firm's return is increased,
so is the MPS, and vice versa. As a result, the MPS of firms demonstrates their position.
The market value per share is the value obtained from the ratio of market capitalization to
the total number of shares outstanding. It is calculated as follows:
Market Capitalization
Market price per share =
Total number of share outstanding

b. Dividend per Share (DPS)

Dividend per share measures the dividend distributed among the equity shareholders on a
per share basis. The objective of computing this ratio is to know what an equity shareholder,
by way of dividend, exactly receives. Generally, the higher DPS creates positive attitude
of the shareholders toward the bank is common stock, which consequently helps to increase
the market value of the shares. The increased DPS should not be taken at its face value as
the increased DPS may not be a reliable measure of the profitability as the equity base may
have increased due to increased retention without any change in the number of outstanding
shares. It is calculated as:
Dividend Paid to Shareholders
Dividend Per Share =
Number of Equity Shares

c. Earnings per Share (EPS)

Earnings per share are the ratio, which is calculated to assess the availability of total profits
per share. It is a very important ratio for equity shareholders to assess the return on equity.
The higher the EPS, the better the performance of the company. The increasing tendency
of EPS enhances the possibility of more dividend and bonus shares. It does not reveal how
much is paid to the owners as dividends or how much of the earnings are retained in the
business. It is calculated as:
Net Profit after Preference Dividend
Earnings Per Share =
Number of Equity Shares

36
d. Dividend Payout Ratio (DPR)
Dividend payout ratio is the proportion of earnings paid in the form of a dividend. This
ratio shows what percentage of profit is distributed as a dividend and what percentage is
retained as a reserve and surplus for the growth of the bank. Higher earnings enhance the
ability to pay more dividends and vice versa. It is computed by dividing DPS by EPS.
Dividend per share
Dividend payout ratio (DPR) =
Earnings per share
And, Retention Ratio = (1 − Dividend payout ratio)
= (1 − DPR)

e. Price to Earnings Ratio (P/E Ratio)

The price to earnings multiple is the relationship between earnings per share and the market
price of the stock. Earnings per share show the company’s performance in the sense of how
well it has managed its material as well as human resources to satisfy the interests of
stockholders. So, the P/E multiple reflects the price currently being paid by the market for
each rupee of currently reported EPS. It is calculated as:
Market Value per Share
Price to Earnings Ratio =
Earnings per Share
In general, a high P/E suggests that investors are expecting higher earnings growth in the
future compared to companies with a lower P/E. A low P/E can indicate either that a
company may be undervalued or that the company is doing exceptionally well relative to
its past trends.

3.4.2 Statistical Tools

Statistical tools are the measures or the instruments to be used to analyse the collected data
from different sources. There are numerous statistical tools available to analyse data of
various types in statistics. In this study, mainly statistical tools such as mean, SD, CV,
descriptive statistics, coefficient of correlation (r), regression analysis, t-test, and ANOVA
have been used, keeping into consideration the key tools required for the study.

a. Arithmetic mean
The arithmetic mean is the most common type of average. It is the number obtained by
dividing the sum of all the items by the number of items. In general x1 , x2 ,…, xn are given
̅, is given by
'n' observations, then their arithmetic mean, usually denoted by X

37
 x1 + x2 + ⋯ + xn
x̅ =
n

Where,
x̅ denotes arithmetic mean,
x1 , x2 ,….. xn are given set of observations.
n denotes number of items observed.

b. Standard Deviation (SD)

The measurement of the scatter of the mass of figures in a series about an average is known
as dispersion. Among all the measures of dispersion, standard deviation is the most widely
used. The standard deviation measures the absolute dispersion. The standard deviation is
the positive square root of the arithmetic mean of the square of deviations of given data
from their arithmetic mean. The greater the dispersion, the greater the standard deviation,
i.e., the greater the magnitude of the deviation of the values from their mean. A small
standard deviation means a high degree of uniformity of the observation as well as
homogeneity of the series.
Symbolically,

̅2
√(xi − x)
σ=
n

Where,
σ = Standard deviation
xi = each value from the sample
x̅ = the sample mean
n = the size of the sample

c. Coefficient of variation (CV)

The relative measure of dispersion based on standard deviation is known as the coefficient
of variation. This is the best measure in statistics for comparing the variability,
homogeneity, or uniformity of two or more series of distributions. The distribution is
considered more homogeneous, more consistent, and more uniform if the CV of the
distribution is lower. The CV can be obtained as:
σ
CV = × 100
x̅

38
d. Coefficient of Correlation (r)
Correlation analysis is a statistical tool that can be used to describe the degree to which one
variable is linearly related to another. The correlation value always comes between -1 and
1, i.e., it can be either positive or negative. If both variables are changing in the same
direction, which means the correlation is close to 1, then there is a positive correlation
between the two variables (they tend to increase and decrease together). Similarly, when
the correlation coefficient (r) is close to -1, there is a negative correlation between the two
variables (as one variable increases, the other variable decreases), and when the correlation
coefficient (r) is close to 0, there is no correlation between the two variables. There is no
linear relationship. In this study, the coefficient of correlation is used to determine the
relationship between dividend policy and share price. In this study, the coefficient of
correlation is calculated to see the relationship among MPS and DPS, EPS, DPR, and the
P/E ratio. It can be calculated as:

N å XY − åX åY
r =
√N åX 2 − (å X)2 × √N åY 2 − (å Y)2

Where,
r = Correlation between X and Y
N = Number of observation of series X and Y
ΣX2 = Sum of observation in series X
Σ Y= Sum of observation in series Y
Σ XY= Sum of product of observation of series X and Y
Σ Y= Sum of square observation of series X
ΣY2 = Sum of square observation of series Y

e. Coefficient of Determination (r2)

The coefficient of determination is a measure of the degree of correlation between two
variables; one is independent and the other is a dependent variable. In other words, r 2
measures the percentage of total variation in dependent variables explained by independent
variables. The coefficient of determination can have a value ranging from zero to one. If
the unexplained variation is zero, the value of r 2 can become one which simply means that
all the data points in the scatter diagram fall exactly on the regression line. And if the value
of r 2 is zero, there is no correlation between the two variables.

39
The coefficient of determination can be calculated in this study to determine the degree of
correlation between dividend per share and earnings per share as well as market price per
share and earnings per share. It is simply the square of the sample correlation coefficient.
Symbolically,
Coefficient of determination (r2) = r × r

f. Regression Equation
Regression analysis is concerned with the study of the relationship between a dependent
variable and an independent variable. There are two types of regression analysis. One is
called "simple linear regression analysis," which is concerned with the study of the
relationship between a dependent variable and an independent variable. Another is multiple
linear regression analysis, which is concerned with the study of the relationship between a
dependent variable and more than one independent variable. Regression analysis consists
of two concepts:
i. Regression constant (β0)
The value of constant, which is the intercept of the model, indicates the average level of
the dependent variable when the independent variable is zero. In other words, ' β0' indicates
the mean or average effect on the dependent variable if all the variables were omitted from
the model.
ii. Regression Coefficient (β1, β2, β3…)
The regression coefficient of each independent variable indicates the marginal relationship
between that variable and the value of the dependent variable, holding constant the effect
of all other independent variables in the regression model. In other words, the coefficient
describes how a change in an independent variable affects the value of the dependent
variable estimate.

g. Standard Error of Estimate (SEE)

The reliability of the estimating equation is measured by the standard error of the estimate,
which indicates the variability of the observed points around the regression line, or the
degree to which the observed values deviate from their predicted value on the regression
line. Perfect prediction is practically impossible with the aid of regression equations. The
closer the dots are to the regression line, the more accurate the estimations based on the
equation for this line can be. There is no variance in the line and a perfect correlation if
SEE is zero. Consequently, SEE can be used to determine how accurate and representative
the regression line is as a representation of the average relationship between two series.

40
h. T '-Statistic
A t-test is a statistic that is used to determine whether there is a statistically significant
difference between the means of two variables. In statistics, the t-test is used to test
hypotheses. The difference between the mean values from each data set, the standard
deviation of each group, and the number of data values required to calculate the t-test. A
large t-value indicates that the variable is distinct, whereas a small t-value indicates that the
variable is comparable.

3.5 Regression Model

A regression model was created to investigate the alternative hypothesis that MPS and
dividend policy variables are significantly correlated. The study examines the effects of
changing independent variables to dependent variable The variables of interest in this study
are MPS, which is the dependent variable, and EPS, DPS, DPR and P/E ratio which are the
independent variables. The model used in the study is as follows:

ŷ = β0 + β1x + β2x2 + β3x3 + β4 x4 + εit

Or, MPSit = β0 + β1 DPSit-1 + β2 EPSit + β3 DPRit + β4 P/E ratioit + εit
Where,
MPSit= Market Price per Share of firm i for time‘t’
DPSit-1 = Dividend per Share of firm i for time‘t-1’
EPSit= Earnings per Share of firm i for time‘t’
DPRit = dividend payout ratio of firm i for time‘t’
P/E ratioit = price to earnings ratio of firm i for time‘t’
Similarly, β0 is the constant of the model, β1, β2, β3 and β4 are the coefficient of the
independent variables and εit is the residual error term that captures the effect of the other
variables not included in this model. The following are the interpretation of model.
 β < 0 Reflects a negative impact of independent variable to dependent variables.
 β > 0 Reflects a positive impacts of independent variable to dependent variables.

3.6 Research Framework

In this study, the main objectives are to determine the relationship between dependent and
independent variables and to analyze whether independent variables (i.e. EPS, DPS, DPR,
and P/E ratio) have effects on the dependent (i.e., MPS) of the chosen development banks,
as well as the level of significance.

41
The framework is based on the research of Baral, R. K., and Pradhan, A. (2018) “Impact
of Dividend Policy on Share Price of Nepalese Commercial Bank” which was published in
the International Research Journal of Management Science, with keywords: "Share Price
Reaction," "Earnings per Share," "P/E Ratio," "Dividend Payout Ratio," "Market Price per
Share," and "Wilcoxon Matched Paired Test."

Figure 1
Component of Research framework
Independent Variable Dependent Variables

Dividend per share (DPS)

Market Price per share (MPS)
Earnings per share (EPS)

Dividend payout ratio (DPR)

Price to earnings (P/E) ratio

Note. From Baral, R. K., & Pradhan, A. (2018). Impact of Dividend Policy on Share
Price of Commercial Bank in Nepal. The International Research Journal of
Management Science, 3, 107–122. https://doi.org/10.3126/irjms.v3i0.28039

Dependent variables

i. MPS (Market price per share, defined as average price of share in market).

Independent variables

i. EPS (Earning per share, defined as net income divided by total number of share
outstanding, in rupees),
ii. DPS (Dividend per share, defined as total dividend paid to total number of share
outstanding, in rupees),
iii. DPR (Dividend payout ratio, defined as the ratio of dividend per share divided by
earning per share, in percentage)
iv. P/E ratio (Price to earnings ratio, defined as the ratio of market price per share
divided by earning price per share, in percentage).

42
 CHAPTER IV
RESULTS AND DISCUSSION

This chapter offers a plan for achieving the fundamental objectives previously mentioned
in the first chapter of the study. The study followed the steps described in the third chapter
to achieve its objectives. The information gathered for the analysis has been provided in
tabular and diagrammatic form using commonly used financial ratio analysis tools. Not all
financial ratios are addressed in this chapter, it should be mentioned. To avoid data conflict
and complication, only independent variables should be used. Only a few highly significant
ratios that have been carefully picked are calculated, analysed, and presented in order to
pasteurize the study. The data has also been analysed using statistical methods including
trend analysis, correlation coefficient, and regression analysis.

This study's main goal is to observe, analyse, and evaluate the dividend policy of Nepal's
development banks and how it impacts share prices. Financial statements from the years
2017 to 2021 were used to help with the presentation and analysis of the data in this study.

4.1 Presentation of Financial Indicators and Variables

The ratio is tested to see if the impact of dividends on the share prices of development
banks "reflects the extent to which the objective of business is accomplished." The ratio is
of great interest to present as well as prospective shareholders and of great significance to
management, which has the responsibility of maximizing the owner's welfare, so a higher
ratio is desirable. The following is the financial variable used in this study.

4.1.1 Market per share (MPS)

The market price per share (MPS) refers to the value paid for a share of the firm by the
investor in the stock market. In the stock market, MPS is determined on the basis of demand
and supply interactions for a specific share in the market. In this study, MPS represents the
closing market price of the NEPSE index of the sample development banks.

The data presented in Table 4.1 includes the mean, standard deviation, and CV, along with
the market price per share for six sample development banks over a five-year period.

43
Table 4.1
Market price per share (MPS)
MPS (in rupees per share)
Banks MNBBL SADBL JBBL MLBL GBBL LBBL
2017 971 390 207 219 296 77.99
2018 378 157 141 171 218 146
2019 370 159 163 195 224 197
2020 312 141 166 183 223 181
2021 657 424 478 445 544 585
Mean 537.6 254.2 231 242.6 301 237.34
S.D. 276.83 140.18 140.12 114.53 139.62 199.62
CV 51.49 55.15 60.66 47.21 46.39 84.09
Note. From the annual report of sample development banks from FY 2017 to 2021

Table 4.1 presents the MPS of six development banks for the period of five years (2017–
2021). It demonstrates the existence of the MNBBL, SADBL, JBBL, MLBL, and GBBL.
MPS decreased from 2017 to 2018, but LBBL MPS increased from 2017 to 2019. MNBBL
decreased the following year, 2020, then increased in 2021. The MPS of the SADBL
decreased in 2018 and increased in 2019, decreased in 2020, and increased in 2021. The
minimum price paid per share of MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL is
Rs. 312; Rs. 141; Rs. 141; Rs. 171; Rs. 218; and Rs. 77.99, respectively. These prices are
noted in 2018 for JBBL, MLBL, and GBBL; for MNBBL and SADBL in 2020; and for
LBBL in 2017. Except for MNBBL, which occurred in 2017, MPS was observed in 2021.
The average market price per share of MNBBL is Rs. 537.6, SADBL is Rs. 254.2, JBBL
is Rs. 231.00, MLBL is Rs. 242.60, GBBL is Rs. 301.00, and LBBL is Rs. It reveals that
the mean MPS of MNBBL is greater than that of five banks. Likewise, the coefficient of
variation (CV) of MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL is 51.49%, 55.15%,
60.66%, 47.21%, 46.39%, and 84.09%, respectively.

The data indicate that there is the lowest variability in GBBL among the six sample banks.
Hence, the analysis of the MPS trend shows that the average market price per share paid to
MNBBL is greater than that of the other five banks. A higher market price per share creates
a positive attitude among the investors towards the bank, which consequently attracts
investors to invest in such highly valued shares.

44
The market price per share of the sample development banks under study are presented in
graphical form in Figure 4.1.

Figure 4.1
Market price per share of selected development banks

600 537.6
500

400
301
MPS

300 254.2 242.6 237.34

231
200

100

0
MNBBL SADBL JBBL MLBL GBBL LBBL
Sample Development Banks

Figure 4.1 shows the average MPS for a sample of development banks from 2017 to 2021,
including MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL. According to the data,
MNBBL has the greatest average MPS among the sample banks at Rs 537.6 per share,
while JBBL has the lowest average MPS at Rs 231 per share. Other banks with a figure 4.1
average MPS are SADBL (Rs 254.2 per share), MLBL (Rs 242.6 per share), GBBL (Rs
301 per share), and LBBL (Rs 237.34 per share).

4.1.2 Earning per share (EPS)

The earnings of the business unit are measured in terms of earnings per share (EPS). The
term "EPS" is widely used when there is a discussion of a company's performance or stock
price. The EPS calculation is helpful to know whether the earning power per share has
changed over the period or not. EPS measures the profit available to the equity shareholders
on a per share basis.

The earnings per share of six sample development banks with a five-year time series are
tabulated in Table 4.2, along with the mean standard deviation and CV.

45
Table 4.2
Earnings per share (EPS)
EPS (in rupees per share)
Banks MNBBL SADBL JBBL MLBL GBBL LBBL
2017 32.09 19.58 10.73 27.84 15.83 08.71
2018 20.45 12.18 13.34 19.78 17.43 15.19
2019 27.94 13.11 17.14 23.13 21.32 28.38
2020 16.56 7.33 13.97 13.14 17.82 13.94
2021 24.03 14.98 17.27 19.75 22.75 14.93
Mean 24.214 13.436 14.49 20.728 19.03 16.23
S.D. 6.097 4.447 2.76 5.380 2.887 7.283
CV 25.18 33.1 19.05 25.96 15.17 44.88
Note. From the Annual report of sample development banks from FY 2017 to 2021

Table 4.2 shows the data analysis of six development banks' earnings per share (EPS) for
the last five years, 2017–2021. It proves that the MNBBL, SADBL, JBBL, MLBL, GBBL,
and LBBL exist. MNBBL, SADBL, and MLBL's EPS declined from 2017 to 2018, whereas
JBBL, GBBL, and LBBL's EPS increased, as other development banks increased their EPS
in the year after. Every sample development's EPS increased in 2020, with the exception
of SADBL, which has the lowest EPS on record, 7.33. However, all of the sample
development banks' EPS increased in 2021. For the MNBBL, SADBL, JBBL, MLBL,
GBBL, and LBBL, the minimum earnings per share are, respectively, Rs. 16.56, 07.33,
10.73, 13.14, 15.83, and 08.71. For the MNBBL, SADBL, MLBL, and GBBL in 2022 and
for the JBBL, GBBL, and LBBL in 2017, respectively, these prices are stated. Average
earnings per share for the MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL are each
Rs. 24.214, Rs. 13.436; Rs. 14.49; Rs. 20.728; and Rs. 16.23, respectively. It demonstrates
that MNBBL's mean EPS is higher than the average for five banks. The coefficients of
variation (CV) for the MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL are, in turn,
25.18%, 33.10%, 19.05%, 25.96%, 15.17%, and 44.88%.

As a result, the examination of the EPS trend reveals that MNBBL received an average
earnings per share that was higher than that of the other five banks. Higher earnings per
share encourage investors to have a positive view of the bank, which in turn motivates them
to buy shares at such high valuations.

46
The earnings per share of the sample development banks under study are presented in
graphical form in Figure 4.2.

Figure 4.2
Earnings per share of selected development banks

30
24.214
25
20.746
20 19.03
16.23
14.49
EPS

15 13.436

10

0
MNBBL SADBL JBBL MLBL GBBL LBBL
Sample Development Bank

Figure 4.2 shows the average EPS for a sample of development banks from 2017 to 2021,
including MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL. According to the data,
MNBBL has the greatest average EPS among the sample banks at Rs 24.214 per share,
while SADBL has the lowest average EPS at Rs 13.436 per share. JBBL at Rs 14.49 per
share, MLBL at Rs 20.746 per share, GBBL at Rs 19.03 per share, and LBBL at Rs 16.23
per share are the other banks with a figure 4.2 for average EPS.

4.1.3 Dividend per Share (DPS)

The total of a company's declared dividends issued for every outstanding share of its
ordinary shares is known as the dividend per share (DPS). The amount was calculated by
dividing the total dividends paid by a company over a period, including interim dividends,
by the quantity of outstanding ordinary shares which were issued.

The data presented in Table 4.3 includes the mean, standard deviation, and CV, along with
the dividend per share, for six sample development banks over a five-year period.

47
Table 4.3
Yearly Cash Dividend per share (DPS) only
DPS (in rupees per share)
Banks MNBBL SADBL JBBL MLBL GBBL LBBL
2017 1.05 16.02 0 9 0 0
2018 1.13 5.45 8.40 7 3.75 0
2019 0.93 8.96 0 9.89 0.84 15.00
2020 4.26 0.26 0 0.46 0.71 3.00
2021 0.925 0.5263 4.5 1.05 0 0.68
Mean 1.66 6.24 2.58 5.48 1.06 3.74
S.D. 1.46 6.56 3.79 4.44 1.55 6.42
CV 87.71 105.06 146.99 81.08 146.56 171.74
Note. From the annual report of sample development banks from FY 2017 to 2021

Table 4.3 shows that MNBBL, SADBL, and MLBL pay cash dividends every year.
MNBBL's dividend fluctuated from 2017 to 2021, i.e., from Rs. 1.05 to Rs. 0.925. The
lowest dividend was Rs. 0.925 and the highest was Rs. 4.26, with an average dividend per
share of Rs. 1.66. SADBL pays the highest average cash dividend among the other sample
banks, Rs. 6.24, but the dividend has fluctuated from 2017 to 2021, i.e., Rs. 16.02 to Rs.
0.526, with an average DPS of Rs. 6.24. JBBL has not paid cash dividends in the years
2017, 2019, and 2020, so the table shows the cash dividend for only two years. The highest
cash dividend paid was Rs 8.40 in 2018, and the average dividend per share is Rs 2.58.
MLBL's highest cash dividend of Rs 9.89 was paid in 2019, but it fluctuated between Rs.
9 and Rs. 1.05, with an average DPS of Rs. 5.48. GBBL has only paid dividends for three
years, 2018–20, and is ranked last in the table. It has the lowest average among the other
banks, i.e., Rs. 01.06. And LBBL also pays a cash dividend for three years. The initial
years, i.e., 2017 and 2018, did not provide any cash dividend; however, the dividend in
2019 was Rs. 15 and in 2021, it was Rs. 0.68, with an average DPS of Rs. 3.74.

The data indicate that there is the lowest variability in MLBL among the six sample
development banks. The cash dividend creates a negative attitude among investors toward
the bank as compared to investors who invest for other factors, such as bonus shares, that
benefit them.

48
The dividend per share of the sample development banks under this study are presented in
graphical form in Figure 4.3.

Figure 4.3
Dividend per share of selected development banks

7 6.24
6 5.48
5
4 3.4
DPS

3 2.58
2 1.66
1.06
1
0
MNBBL SADBL JBBL MLBL GBBL LBBL
Sample Development Banks

Figure 4.3 shows the average DPS for a sample of development banks from 2017 to 2021,
including MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL. According to the data,
SADBL has the greatest average DPS among the sample development banks at Rs 6.24 per
share, while GBBL has the lowest average DPS at Rs 1.06 per share. Other banks with a
figure 4.3 average DPS are JBBL (Rs 2.58 per share), MNBBL (Rs 1.66 per share), SADBL
(Rs 5.05 per share), and LBBL (Rs 3.4 per share).

4.1.4 Dividend Payout Ratio (DPR)

Dividend payout ratio is the proportion of earnings paid in the form of a dividend. This
ratio shows what percentage of profit is distributed as a dividend and what percentage is
retained as a reserve and surplus for the growth of the bank. Higher earnings enhance the
ability to pay more dividends and vice versa.

The data presented in Table 4.4 includes the mean, standard deviation, and CV along with
the dividend payout ratio for six sample development banks over a five-year period.

49
Table 4.4
Yearly Dividend Pay Out Ratio (DPR)
DPR (in percentage)
Banks MNBBL SADBL JBBL MLBL GBBL LBBL
2017 3.27 81.82 0 32.33 0 0
2018 5.53 44.75 62.97 35.39 21.51 0
2019 3.33 68.34 0 42.78 3.94 64.16
2020 25.72 3.55 0 3.50 3.98 22.49
2021 3.85 3.51 26.06 5.32 0 4.55
Mean 8.34 40.39 17.81 23.86 5.89 18.24
S.D. 9.76 36.17 27.66 18.17 8.96 27.29
CV 117.01 89.55 155.31 76.15 152.15 149.63
Note. From the annual report of sample development banks from FY 2017 to 2021

Table 4.4 shows the respective dividend payout ratios of six development banks for 5-year
period i.e. 2017 -2021. The table shows the percentage of cash dividends paid out of the
total earnings made by each bank for each year during the period of study, i.e., 2017–2021.
From the table, it can be observed that in the year 2018, the DPRs of MNBBL, JBBL,
MLBL, and GBBL have increased compared to the previous year, but SADBL recorded
the highest individual DPR of 81.82% in 2017 but declined in 2018. The DPR for LBBL
was not discovered in 2017 or 2018, as there was no cash dividend declared in those years.
Like LBBL, JBBL has no value in 2017, 2019, and 2020, and GBBL has no value in 2017
and 2020. MLBL and SADBL DPR have increased in 2019, while MNBBL, JBBL, and
GBBL DPR have decreased. Similarly, the DPR of MNBBL and GBBL has increased in
2020, while the DPR of SADBL, MLBL, and LBBL has decreased. Similarly, the DPR of
MLBL has increased in 2021, while the DPR of MNBBL and SADBL has decreased.

MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL have average DPRs of 8.34, 40.39,
17.81, 23.86, 5.89, and 18.24, respectively. Similarly, the standard deviation (S.D.) of
GBBL is lower than that of other banks, and the coefficient of variation of the DPR of
MLBL is the lowest of all. As it can be observed, MLBL is comparatively able to maintain
a constant DPR, whereas the DPR of JBBL has the highest variation, as evidenced by the
CV of 155.31%.

50
The dividend payout ratios of the sample development banks under this study are presented
in graphical form in Figure 4.4.

Figure 4.4
Dividend payout ratio of selected development banks

45 40.39
40
35
30
23.86
25
DPR

20 17.81 18.24
15
10 8.34
5.89
5
0
MNBBL SADBL JBBL MLBL GBBL LBBL

Sample Development Banks

Figure 4.4 shows the average DPR for a sample of development banks from 2017 to 2021,
including MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL. According to the data,
SADBL has the greatest average DPR among the sample banks (40.39%), while GBBL has
the lowest average DPR (5.89%). Other banks with a figure 4.4 average DPR are JBBL
(17.81%), MNBBL (8.34%), MLBL (23.86%), and LBBL (18.24%).

4.1.5 Price to Earnings Ratio (P/E Ratio)

The Price to Earnings Ratio (P/E Ratio) is concerned with the relationship of the market
value per share to earnings per share. The analysis of the P/E ratio helps to judge the
investors’ expectations about the bank's performance and also the market appraisal of the
bank's performance. A higher P/E ratio shows the better performance of the banks and vice-
versa. Hence, a higher P/E ratio is regarded as better for both the banks and shareholders.

The data presented in Table 4.5 includes the mean, standard deviation, and CV, along with
the price-to-earnings ratio for six sample development banks over a five-year period.

51
Table 4.5
Price to earnings ratio (P/E ratio)
P/E ratio (in times)
Banks MNBBL SADBL JBBL MLBL GBBL LBBL
2017 30.26 19.92 19.29 7.87 18.69 8.95
2018 18.48 12.89 10.57 8.65 12.51 9.61
2019 13.24 12.12 9.51 8.43 10.51 6.94
2020 18.84 19.23 11.88 13.93 12.51 12.99
2021 27.34 28.3 27.68 22.53 23.91 39.18
Mean 21.64 18.49 15.78 12.28 15.62 15.53
S.D. 6.96 6.53 7.67 6.23 5.56 13.39
CV 32.16 35.33 48.62 50.72 35.57 86.24
Note. From the annual report of sample development banks from FY 2017 to 2021

Table 4.5 shows the P/E ratio of all the six selected development banks for the 5-year
period, i.e., 2017–2021. Sample development banks such as MNBBL, SADBL, JBBL, and
GBBL show the same fluctuation, i.e., decreases in 2018 and 2019 and increases in 2020
and 2021, whereas MLBL and LBBL increased in 2018 and followed the same pattern as
the others. MNBBL shows an average P/E ratio of 21.64, which is the highest among the
banks; the standard deviation of P/E is 6.96; and the coefficient of variation of 32.16%
indicates the least fluctuating nature. SADBL's average P/E ratio is 18.49; it has maintained
this level from 2017 to 2021. The standard deviation is 6.53, and the coefficient of variation
is 35.33%. Similarly, the average P/E ratio of JBBL is 15.78, and it has maintained a
standard deviation of 7.67 and a coefficient of variation of 48.62%. Likewise, the average
P/E ratio of MLBL is 12.28, the standard deviation is 6.23, and its coefficient of variation
is 50.72%. The average P/E ratio of GBBL is 15.62, its standard deviation is 5.56, and its
coefficient of variation is 35.57%. LBBL has individually the highest and lowest P/E ratios,
i.e., 39.18 and 6.94 times; the average P/E ratio of LBBL is 15.53; the standard deviation
of PE is 13.39; and the coefficient of variation of 86.24% indicates that the MLBL price-
to-earnings ratio is the least volatile.

The data indicated that the MLBL has the lowest average P/E ratio, i.e., 12.28, and the
MNBBL has the highest average P/E ratio, 21.64. The MLBL has the lowest standard
deviation, whereas the LBBL has the greatest. The P/E ratio of all the banks under

52
consideration shows at least a significant amount of variation, according to the coefficient
of variance of these banks.

The P/E ratios of the sample development banks under study are presented in graphical
form in Figure 4.5.

Figure 4.5
Price to earnings ratio of selected development banks

25
21.64
20 18.49
15.78 15.62 15.53
P/E ratio

15
12.28

10

0
MNBBL SADBL JBBL MLBL GBBL LBBL
Sample Development Banks

Figure 4.5 shows the average P/E ratio for a sample of development banks from 2017 to
2021, including MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL. According to the
data, MNBBL has the greatest average P/E ratio among the sample banks at 21.64, while
MLBL has the lowest average P/E ratio at 12.28. Other banks with a figure 4.5 average P/E
ratios are JBBL (15.78), SADBL (18.49), GBBL (15.62), and LBBL (15.53).

4.2 Presentation of Statistical Indicators

Statistical tools are the measures or the instruments to be used to analyse the collected data
from different sources. There are numerous statistical tools available to analyse data of
various types in statistics. In this study, mainly statistical tools such as descriptive statistics,
coefficient of correlation (r), regression analysis, t-test, and ANOVA have been used,
keeping into consideration the key tools required for the study.

53
4.2.1 Descriptive Statistics
The dependent variable is MPS and independent variables are DPS, EPS, DPR and P/E
ratio. The descriptive statistics shows mean, S.D, CV, minimum and maximum value from
the sampled development banks with observation (N).

Table 4.6
The descriptive statistics of sample development banks
Variable Maximum Minimum Mean S.D. CV N
MPS 971 77.99 300.633 195.30 64.96 30
DPS 16.02 0 3.4597 4.548 131.45 30
EPS 32.09 7.33 18.021 5.98 33.17 30
DPR 81.82 0 18.6791 23.66 126.68 30
P/E ratio 39.18 6.94 16.5587 7.99 48.23 30
Note. From the annual report of sample development banks from FY 2017 to 2021

Table 4.6 shows the descriptive statistics of six sampled development banks listed on
NEPSE from 2017 to 2021. It displays the mean, standard deviation, minimum, maximum,
and coefficient of variation (CV) of independent and dependent variables. Over the past
five years, leading to a total of 30 observation. The dependent variable i.e., market price
per share (MPS) has averaged 300.633. During the study period, market per share (MPS)
ranged from minimum value of 79.99 to a maximum of 971. At the time, MPS had a
standard deviation (S.D) of 195.30 and a CV of 0.6496 or 64.96%.

The independent variables that were chosen, such as the DPS, EPS, DPR, and P/E ratio,
were elements that might have an impact of the dividend policy on the market share price.
The mean of dividend per share (DPS) is 3.4597, mean of earnings per share (EPS) is
18.021, mean of dividend payout ratio (DPR) is 18.677, and mean of price to earnings ratio
(P/E ratio) during the study period is 16.5587. Standard deviations (S.D.) for DPS is 4.548
with a CV of 131.45%, S.D for .EPS is 5.978 with a CV of 33.17%, SD for DPR is 23.66
with a CV of 126.68%, and SD for P/E ratio is 7.986 with a CV of 48.23% over the course
of the study period. The maximum and minimum of DPS during the study period is Rs.
16.20 and 0.00 respectively. In the same way the maximum and minimum of EPS is Rs.
32.09 and 7.33 respectively. The maximum and minimum of DPR is 81.82% and 0.00
respectively. Moreover, the maximum and minimum of P/E ratio is 39.18 and 6.94 times
respectively.

54
4.2.2 Correlation analysis
Correlation analysis refers to the technique used in measuring the closeness of the
relationship between the variables. Correlation can be either positive or negative. The
correlation is said to be positive when both variables change in the same direction and
negative when both variables change in the opposite direction. It also indicates whether the
relationship is significant or not. The Pearson correlation coefficient are shows for
dependent and independent variable. Dependent variable is MPS and independent variables
are DPS, EPS, DPR and P/E ratio

Table 4.7
The result of correlation analysis
MPS DPS EPS DPR P/E ratio
MPS Pearson Correlation 1
Sig. (2-tailed)
DPS Pearson Correlation -0.18 1
Sig. (2-tailed) 0.34
EPS Pearson Correlation 0.552** 0.279 1
Sig. (2-tailed) 0.002 0.135
DPR Pearson Correlation -0.227 0.935** 0.068 1
Sig. (2-tailed) 0.228 0 0.719
P/E Pearson Correlation 0.818** -0.321 0.048 -0.288 1
ratio Sig. (2-tailed) 0 0.084 0.801 0.122
N 30 30 30 30 30
**. Correlation is significant at the 0.01 level (2-tailed).

Table 4.7 shows the Pearson's correlation coefficient for the thirty observations from six
sample development banks from 2017 to 2021. The correlation between MPS and DPS is -
0.18, indicating a slight inverse relationship between the two variables. There is an
insignificant connection between MPS and DPS since the significant two-tailed test has a
significance level of 0.34, which is higher than the level of significance (α) = 0.05. Since
MPS and EPS have a correlation coefficient of 0.552**, this indicates a favourable link
between the two variables. There is a significantly significant link between MPS and EPS
since the significant two-tailed test has a significance level of 0.002, which is lower than
the level of significance (α) = 0.01. There is a negative association between MPS and DPR,

55
as indicated by the correlation coefficient between the two, which is -0.227. There is an
insignificant connection between MPS and DPR since the significant two-tailed test is
0.228 and is higher than the level of significance (α) =0.05. There is a positive association
between MPS and P/E ratio, as indicated by the correlation coefficient of 0.818** between
MPS and P/E ratio. There is a highly significant link between MPS and P/E ratio, as
indicated by the significant two-tailed test's significance level of 0.00, which is lower than
the level of significance (α) = 0.01.

Additionally, the correlation between DPS and EPS is 0.279, which is a moderately positive
correlation, and the significant two-tailed test is 0.135 greater than the level of significance
(α) = 0.05, indicating a substantial negative link between the two variables. The DPS and
DPR correlation coefficient is 0.935**, indicating a very strong positive association
between the two variables. There is a positive significant link between DPS and DPR since
the significant two tail test result is 0.00, which is less significant than the level of
significance (α) = 0.01. There is an insignificant correlation between DPS and P/E since
the two-tailed significant test is 0.084 greater than the level of significance (α) = 0.05 and
the correlation coefficient between DPS and P/E ratio is -0.321, which is negative.

Similarly, correlation coefficient between EPS and DPR is 0.068 which is moderate
positive correlation and the significant two tailed test is 0.719 higher than the level of
significance (α) = 0.05, Hence there is an insignificant relationship between EPS and DPR.
The correlation coefficient between EPS and P/E ratio is 0.048 which means there is a
positive correlation between EPS and P/E ratio. And insignificant two tail test is 0.801
which is higher than the level of significance (α) = 0.05, Hence there is an insignificant
relationship between EPS and P/E ratio. At lastly, The correlation coefficient between DPR
and P/E ratio is -0.288 which is negative correlation and the significant two tailed test is
0.122 higher than the level of significance (α) = 0.05, Hence there is an insignificant
relationship between DPR and P/E ratio respectively.

4.2.3 Regression Analysis

Regression analysis is used to estimate the relationship between independent and dependent
variables. The results are based on panel data of six development banks with 30
observations for the period of 2017 to 2021 by using linear regression model. The
regression model is MPS= β0 + β1EPS + β2 DPS + β3DPR+ β4P/E ratio + ε.

56
Table 4.8
Model summary for regression analysis
Model Summary
Model R R2 Adjusted R2 Std. Error of the Estimate
1 0.977 0.955 0.947 44.75549
a. Predictors: (Constant), P/E ratio, EPS, DPS, DPR

Table 4.8 shows the model summary for the regression study between MPS and DPS, EPS,
P/E ratio, and DPR of the sample development banks. The model's explanatory power, as
indicated by the r2 value of 0.955, suggested that the announcement of dividends accounted
for 95.5% of movements in share prices in development banks, with the remaining
proportion explained by other factors not included in the model. The elimination of the
constant variable from the regression model resulted in an adjusted r2 of 94.7%,
demonstrating the model's explanatory power. The correlation coefficient between the
market price and the DPS, EPS, P/E ratio, and DPR was also 0.977, as shown by the
coefficient for r. Since the correlation was 0.977, it is clear that there is a strong positive
relationship between the market share price and the DPS, EPS, DPR, and P/E ratios. In
turn, as these ratios rise, so do the market share price. The standard error of estimates in
each regression model in this chapter displays the average departure from the best linear
relationship among the investigated variables. Additionally, the standard error of the
estimate (SEE) is 44.755.

Analysis of Variance
Analysis of Variance (ANOVA) is a statistical analysis technique that separates systematic
components from random factors to account for the observed aggregate variability within
a data set.

Table 4.9
ANOVA analysis
Model Sum of df Mean F Sig.
Squares Square
1 Regression 1056077.082 4 264019.271 131.808 .000
Residual 50076.337 25 2003.053
Total 1106153.419 29
a. Dependent Variable: MPS
b. Predictors: (Constant), P/E ratio, EPS, DPS, DPR

57
Table 4.9 shows that the F statistics is used as a test for the model goodness of fit,
F=131.808, t-value <0.05 shows that there is a significant relationship between MPS and
the DPS, EPS, P/E, DPR in development banks. The regression sum of squares shows the
sum of the squared deviation from the line of best fit to the respective observed variables,
residual sum of squares shows the sum of squared deviations which cannot be explained
by the model while the total sum of squares shows the sum of squared deviations which
has been explained and unexplained by the regression model. The degrees of freedom (df)
for the regression model was 4 corresponding with the number of independent variables
(DPS,EPS, P/E, DPR) and 29 in overall corresponding with the response rate minus 4 while
the degrees of freedom for residual were 25 (29-4). The F statistics is the ratio between
regression mean sum of square and residual sum of squares.

Coefficient analysis
Coefficient analysis are predictions of the uncertain study population that show how
independent variables and dependent variable are related. Coefficients are the numbers that
multiply the independent variable’s values in a linear regression. The linear regression
coefficients provide an explanation of the mathematical relationship between dependent
variable i.e. MPS and the independent variable i.e. DPS, EPS, DPR and P/E ratio.

Table 4.10
Regression Coefficient Analysis
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -363.825 35.447 -10.264 0
DPS -23.081 6.736 -0.537 -3.426 0.002
EPS 20.758 1.799 0.635 11.537 0
DPR 3.69 1.221 0.447 3.021 0.006
P/E ratio 18.196 1.124 0.744 16.189 0
a. Dependent Variable: MPS

Table 4.10 shows the coefficient analysis between MPS and DPS, EPS, DPR, P/E ratio The
nature of the relationship between DPS, EPS, DPR, P/E ratio, and the share price of
development banks was demonstrated using the regression coefficients. EPS and P/E ratio

58
have a positive impact on market price per share. Similarly, DPR also has a positive impact
on market price per share. However, DPS have a negative impact on MPS. Which reveals
that the change in a share prices in development banks because the t-ratios of EPS, DPR,
P/E ratio and DPS were respectively 11.537, 3.021, 16.189 and -3.426, and the significant
t-value is less than 0.05.

This equation yields the regression model: MPS= -363.825 - 23.081 DPS + 20.758 EPS +
3.69 DPR + 18.196 P/E ratio. This implies that a unit change in the DPS, EPS, DPR, and
P/E ratio causes -23.081, 20.758, 3.69 and 18.196 changes in the unit share prices of
development banks, respectively.

4.2.4 Hypothesis Testing

The hypothesis testing has been tested with the help of unstandardized beta coefficients of
independent variables corresponding p-value (Sig.).

Table 4.11
Hypothesis Summary
Hypotheses P-Value Results
H1: There is significant relationship between dividend per 0.002 Accept H1
share and market price per share.
H2: There is significant relationship between earnings per 0.000 Accept H2
share and market price per share.
H3: There is significant relationship between dividend 0.006 Accept H3
payout ratio and market price per share.
H4: There is significant relationship between price to 0.000 Accept H4
earnings ratio and market price per share.
Note. From Table 4.10

H1: There is significant relationship between Dividend per share and market price per share.
The corresponding p-value is .002 which is less than 0.01; hence, there is statistically
significant relationship between DPS and MPS. Thus, the alternative hypothesis; there is
significant relationship DPS and between MPS is accepted at 99 percent confidence level.

H2: There is significant relationship between earnings per share and market price per share.
The corresponding p-value is .000 which is less than 0.01; hence, there is statistically

59
significant impact relationship between EPS and MPS. Thus, the alternative hypothesis;
there is significant relationship between EPS and MPS is accepted at 99 percent confidence
level.

H3: There is significant relationship between dividend payout ratio and market price per
share. The corresponding p-value is .006 which is less than 0.01; hence, there is statistically
significant relationship between DPR and MPS. Thus, the alternative hypothesis; there is
significant relationship between DPR and MPS is accepted at 99 percent confidence level.

H4: There is significant relationship between price to earnings ratio and market price per
share. The corresponding p-value is .000 which is less than 0.01; hence, there is statistically
significant relationship between P/E ratios and MPS. Thus, the null hypothesis; there is
significant relationship between P/E ratio and MPS is accepted at 99 percent confidence
level.

4.3 Major Study Findings

The following is a list of the major findings from the examination of data analysis:

 MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL have, respectively, average
market price shares of Rs. 537.6, 254.2, 231, 242.6, 301, and 237.34 per share. A
higher market price encourages investors to have a favourable attitude toward the
bank, which in turn encourages them to invest in shares with such high values.
LBBL's MPS fluctuates the most, with a CV of 84.09%, while GBBL's fluctuates
the least, at 46.39%.
 Throughout the study period, the EPS of all development banks, i.e., MNBBL,
SADBL, JBBL, MLBL, GBBL, and LBBL, is oscillating. The average earnings
per share (EPS) for MNBBL, SADBL, JBBL, MLBL, GBBL, and LBBL are Rs.
24.214, 13.436, 14.49, 20.726, 19.03 and 16.23, respectively. It demonstrates that
SADBL has the lowest average EPS and MNBBL has the highest among the
sample development banks.
 The highest DPS among the six listed development banks in 2017 is Rs 16.2 per
share at SADBL, as well as the highest average, which provides some well-
diversified returns. Similarly, LBBL has the highest coefficient of variation (which
denotes relative dispersion) at 171.74%, while MLBL's is the lowest at 81.08%.

60
 This demonstrates unequivocally that firms lack reliable and regular dividend
practices.
 SADBL has the highest individual DPR, i.e., 81.82%, and the greatest average
DPR (40.39%), followed by MLBL (23.86%), and GBBL has the lowest average
DPR (5.89%). The biggest variation, shown at 155.31%, is in the DPR of JBBL.
The LBBL has a DPR variation of 5.86%, which is the lowest among sample
development banks.
 LBBL has individually the highest and lowest P/E ratios, i.e., 39.18 and 6.94 times.
MLBL (12.28), followed by LBBL (15.53), has the least change in the average
price-to-earnings ratio, whereas MNBBL has the greatest P/E ratio, i.e., 21.64.
Similarly, LBBL has the greatest variation, i.e., 86.24%, among the other
development banks.
 In descriptive statistics, the maximum values for MPS, DPS, EPS, DPR, and P/E
ratio are 971, 16.2, 32.09, 81.82, and 39.18, respectively. MPS, DPS, EPS, DPR,
and P/E ratio must all be at least 77.99, 0, 7.33, 0, and 6.94, respectively. 300.633,
3.4597, 18.021, 18.67, and 16.5587 are the respective means for MPS, DPS, EPS,
DPR, and P/E ratio. For MPS, DPS EPS, DPR, P/E ratio, and DPR, the respective
standard deviations are 195.303, 4.548, 5.98, 23.66, and 7.986. MPS, DPS, EPS,
DPR, and P/E ratio have coefficients of variation of 64.96%, 131.45%, 33.17%,
126.68%, and 48.23%, respectively, with observation number N of 30.
 MPS has a 0.552 and 0.818 positive correlation with EPS and P/E ratio,
respectively. Also, there is a negative correlation between DPR and DPS of -0.180
and -0.227. Additionally, DPS has a positive connection of 0.279 and 0.935 with
EPS and DPR but a negative association of -0.321 with the P/E ratio. Similarly,
EPS has a positive correlation of 0.048 with the P/E ratio and a positive correlation
of 0.068 with the DPR. Lastly, there is a -0.288 negative correlation between DPR
and P/E ratio.
 Following a two-tail significant at the 0.05 level test in correlation, MPS is highly
significant with EPS and P/E ratio, i.e., 0.001 and 0.00, respectively. However,
MPS has insignificant with DPR and DPS.
 Regression between MPS and DPS, EPS, DPR, and P/E ratio yields a correlation
(r) value of 0.977, a coefficient of determination (r2) of 0.955, an r2 adjusted
coefficient of 0.947, and a standard estimated error of 44.755. Additionally, the

61
 ANOVA analysis of this regression produces an f value of 131.808. The dependent
variable, MPS, has a significant interaction with the independent variables, DPS,
EPS, DPR, and P/E ratio.
 According to the regression model, MPS = -363.825 - 23.081 DPS + 20.758 EPS
+ 3.69 DPR + 18.196 P/E ratio, which means a unit change in the DPS, EPS, DPR,
and P/E ratio results in -23.081, 20.758, 3.69, and 18.196 changes in one unit of
development bank share prices, respectively.

4.4 Discussion
Since the government allowed market reforms and an open market policy in 1984, Nepal
has seen the establishment of a number of cooperative development banks, financial
institutions, and insurance firms. Because the initial established financial institutions were
unable to meet the demand for credit and the expectations of the market that drive activities
toward a growth position, these institutions were given the opportunity and the suitable
environment to expand their operations. The desire and expectation of stockholders is for
the market price of a share to be greater than net worth and for them to receive a significant
portion of dividends from earnings.

The modifications in dividend distribution are less helpful in the following years, though.
Therefore, they need to concentrate on other factors besides dividend policy in order to
influence future investing in development banks in the desired direction. The study is
similar to the article published by Baral and Pradhan (2018), "Impact of Dividend Policy
on Share Price of Commercial Bank in Nepal," and the case study of Aryal (2020), who
investigated "Dividend and its Effect on Stock Market Price in Nepalese Joint Venture
Commercial Banks." In those studies, there is a positive impact of earnings per share and
the P/E ratio on the share price of a stock, whereas there is a negative impact of dividends
per share. Similarly, the study's findings are similar to those articles of Adesina, K.,
Uwuigbe, U., Uwuigbe, O. R., Asiriuwa, O., and Oriabe, S. (2017), "Dividend policy and
share price valuation in Nigerian banks." Faloye, B. A., and Oluwole, F. O. (2014),
"Dividend announcement on share prices in a bull and a bear market".

However, the research does not support Bhattarai's (2016) research on "Dividend Decision
and its Impact on Stock Valuation" or Vijayakumar, A. (2010) research on "Effect of
Financial Performance on Share Prices in the Indian Corporate Sector," in which the

62
dividend policy positively impact and helps to increase the market price of shares, but the
relationship between prices and retained earnings per share is not prominent and negative.

The purpose of this research is to look into the dividend policy practices of selected
NEPSE-listed development banks. The study is mainly focused on accessing the dividend
practices of different development banks. So, it covers some specific objectives to find out
the relationship between other financial indicators and also to find out the appropriate
dividend policies for different development banks. Shareholders have high hopes that the
market price of their shares rises significantly higher than their value.

The result shows that earnings per share and the price-to-earnings ratio have a positive
impact on market price per share. It reveals that an increase in earnings per share and the
price-to-earnings ratio leads to an increase in market price per share. Similarly, the dividend
payout ratio also has a positive impact on market price per share. It shows that an increase
in the dividend payout ratio leads to an increase in the market price per share. However,
dividends per share have a negative impact on market price per share, which reveals that
the higher the dividend per share, the lower the market price per share.

63
 CHAPTER V
SUMMARY AND CONCLUSION

5.1 Summary
The research focuses on dividend policy and its impact on stock prices. The main purpose
of the study was to assess the dividend effect on the share price of Nepalese development
banks. The study used a causal comparative research design to establish a cause-and-effect
relationship between the variables studied. This study focuses on the independent variables
(DPS, EPS, DPR, and P/E ratio) and their interactions with the dependent variable. Six
national-level development banks were chosen as the research sample size from a total of
17 development banks in Nepal. In this study, data was analyzed using financial and
statistical tools. Averages, standard deviations, and other descriptive statistical tools are
available. Similarly, other statistical tools such as correlation, regression, and so on are
used for relationship analysis in the study. For the analysis of the data, SPSS version 25.0
and MS-Excel have been used.

The sample size was six national-level development banks listed in NEPSE from 2017 to
2021, giving a total of 30 observations. The information was gathered from the annual
reports of selected development banks. The parameters of the regression model are
estimated to test the significance and impact of dividend policy on the share prices of
development banks. According to the correlation analysis, the relationship between the
market price per share and the P/E ratio and EPS is positive, whereas the relationship
between the market price per share and dividend per share and DPR is negative. EPS and
P/E ratio are highly significant, but DPR and DPS are insignificant, according to the test at
the 0.01 level of significance. It suggests that the market price per share and the cash
dividend have a poor relationship with the sample development banks.

Similarly, the regression analysis results show that EPS and P/E ratio have a positive impact
on market price per share. It shows that rising EPS and the P/E ratio lead to rising market
prices per share. Similarly, DPR influences the market price per share. It shows that
increasing DPR raises the market price per share. Dividends per share, on the other hand,
have a negative impact on market price per share, indicating that the higher the dividend
per share, the lower the market price per share.

64
5.2 Conclusion
The study examine the impact of dividend policy on the share price of Nepalese
development banks with independent variable (EPS, DPS, DPR and P/E ratio) and MPS as
dependent variable. The sample are six development banks listed in NEPSE from 2017 to
2021, generating a total of 30 observations.

To analyse the dividend policy practice and the market price trend of development banks,
the financial indicators and variables are used. The finding shows that MNBBL has the
highest MPS, i.e., 971, among the sample banks, while LBBL, i.e., 79.99, has the lowest.
Similarly, SADBL has the highest DPS, i.e., 16.2, and JBBL has not posted a DPS in 3
years. Furthermore, MNBBL has the highest EPS of 32.09, while SADBL has the lowest
EPS of 7.33. The DPR of SADBL is the highest, i.e., 81.82%. Finally, LBBL has the highest
P/E ratio, i.e., 39.1 times, and LBBL also has the lowest, i.e., 6.94 times.

To examine the relationship between dividend policy and the share price, correlation
analysis reveals a positive and highly significant relationship between MPS and EPS and
the P/E ratio. However, there is a negative relationship between MPS and DPR, and DPS,
as well as an insignificant relationship. It implies that the sample development bank's
market price and dividend have a poor relationship. Similarly, the regression coefficient (r)
is 0.977 and the coefficient of determination of variables (r2) is 0.955 which shows the
parameters have a 4.5% impact, while the MPS has a 95.5% impact on dividend policy.

To analyse the factors affecting the market price of development banks, the regression
model is used which shows, MPS = -363.825 -23.081DPS + 20.758EPS + 3.69DPR +
18.196P/E ratio. This implies a unit change in the DPS, EPS, DPR, and P/E ratio results in
-23.081, 20.758, 3.69, and 18.196 changes in one unit of development bank share prices,
respectively. And (p<0.01) denotes that the dividend policy have a significant impact on
the market share price of development at 0.01 level of significant. It discovered a strong
relationship between market price and dividend policy.

5.3 Implication
Practical Implications
The dividend policy has a direct and significant impact on the share price of the company.
When a company increases its dividend payout, it is perceived as showing financial strength
and stability, which can lead to increased investor confidence and higher share prices. In

65
contrast, reducing a company's dividend payout may be interpreted as a sign of financial
distress, resulting in a drop in investor confidence and lower share prices. Furthermore,
paying a regular dividend can help increase stock liquidity by encouraging investors to buy
and hold the stock rather than trading it on the open market. As a result, when deciding on
a share price, companies should carefully consider their dividend policy.

The market price is positively affected by both earnings per share and price to earnings,
and as a result, the market value of the shares also rises, so the market value of the
company's shares becomes higher than its book value if the company is expanding and its
earning potential exceeds. If firms' earning capacity is lower, then the market price of shares
also becomes lower. When deciding on a dividend policy, companies should consider the
current economic environment as well as their overall financial position. Companies should
strive to maintain an adequate dividend policy that provides shareholders with a reasonable
return while also allowing the company to retain resources for growth and investment.

Theoretical Implications
Dividend policy has a direct impact on share price. Dividend per share, earnings per share,
dividend payout ratio, and price to earnings ratio can all have an effect on the market price
per share. Since the dividend is cash dividend, higher earnings per share, higher dividend
payout ratios, and higher price to earnings ratios can all lead to higher market prices per
share. Dividend payouts indicate that the company is financially sound and has the ability
to pay dividends to shareholders. Higher earnings per share indicate that the company is
making profits and is a good investment for shareholders. Higher dividend payout ratios
suggest that the company has more money to distribute to shareholders in the form of
dividends. Price to earnings ratios mean that the company is compared to its peers and can
be a good value investment. All of these factors can lead to higher market prices per share,
which is beneficial for shareholders.

Furthermore, research should be conducted with a larger sample size in order to generalize
the study's findings. Future research can include other factors influencing market share
prices. As a result, it is hoped that this paper will provide important information about
dividend policy and its impact on the share market. As a result, they must understand the
factors that influence the dividend policy on share price of development bank.

66
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Walter, J.E. (1963). Dividend Policy: It's Influence on The Value of The Enterprise. Journal
of finance, 18(2), 280-290
Zakaria, Z., Muhammad, J., &Zulkifli, A.H. (2012). The impact of dividend policy on the
share price volatility: Malaysian construction and material companies. International
journal of economics and management sciences, 2(5), 1-8.
 APPENDIX

APPENDIX I
List of population of research

S.N. Development bank name Established

1. Mahalaxmi Bikas Bank 1995

2. Lumbini Bikas Bank 1998

3. Narayani Development Bank 2001

4. Karnali Development Bank 2004

5. Excel Development Bank 2005

6. Kamana Sewa Bikas Bank 2006

7. Miteri Development Bank 2006

8. Corporate Development Bank 2007

9. Garima Bikas Bank 2007

10. Muktinath Bikas Bank 2007

11. Jyoti Bikas Bank 2008
12. Sindhu Bikas Bank 2010

13. Salapa Bikash Bank 2012

14. Saptakoshi Development Bank 2012

15. Green Development Bank 2013

16. Shine Resunga Development Bank 2013

17. Shangri-la Development Bank 2014

Note. Sample development bank are: Muktinath Bikas Bank Limited, Shangrila
Development Bank, Jyoti Bikas Bank Limited, Mahalaxmi Bikas Bank Limited, Garima
Bikas Bank Limited and Lumbini Bikas Bank Limited.
APPENDIX II
Basic Data Table (using cash dividend only)

Bank Year MPS DPS EPS DPR P/E ratio

MNBBL 2017/18 971 1.05 32.09 3.272 30.26
2018/19 378 1.13 20.45 5.526 18.48
2019/20 370 0.93 27.94 3.329 13.24
2020/21 312 4.26 16.56 25.725 18.84
2021/22 657 0.925 24.03 3.849 27.34
SADBL 2017/18 390 16.02 19.58 81. 82 19.92
2018/19 157 5.45 12.18 44.745 12.89
2019/20 159 8.96 13.11 68.345 12.12
2020/21 141 0.26 7.33 3.547 19.23
2021/22 424 0.5263 14.98 3.513 28.3
JBBL 2017/18 207 0 10.73 0 19.29
2018/19 141 8.4 13.34 62.969 10.57
2019/20 163 0 17.14 0 9.51
2020/21 166 0 13.97 0 11.88
2021/22 478 4.5 17.27 26.057 27.68
MLBL 2017/18 219 9 27.84 32.328 7.87
2018/19 171 7 19.78 35.389 8.65
2019/20 195 9.89 23.12 42.777 8.43
2020/21 183 0.46 13.14 3.501 13.93
2021/22 445 1.05 19.75 5.316 22.53
GBBL 2017/18 296 0 15.83 0 18.69
2018/19 218 3.75 17.43 21.515 12.51
2019/20 224 0.84 21.32 3.94 10.51
2020/21 223 0.71 17.82 3.984 12.51
2021/22 544 0 22.75 0 23.91
LBBL 2017/18 77.99 0 8.71 0 8.95
2018/19 146 0 15.19 0 9.61
2019/20 197 15 28.38 52.854 6.94
2020/21 181 3 13.94 21.521 12.99
2021/22 585 0.68 14.93 4.555 39.18
APPENDIX III
Correlation analysis

Correlations

MPS DPS EPS DPR P/E ratio

MPS Pearson Correlation 1 -0.18 .552** -0.227 .818**

Sig. (2-tailed) 0.34 0.002 0.228 0

N 30 30 30 30 30

DPS Pearson Correlation -0.18 1 0.279 .935** -0.321

Sig. (2-tailed) 0.34 0.135 0 0.084

N 30 30 30 30 30

EPS Pearson Correlation .552** 0.279 1 0.068 0.048

Sig. (2-tailed) 0.002 0.135 0.719 0.801

N 30 30 30 30 30

DPR Pearson Correlation -0.227 .935** 0.068 1 -0.288

Sig. (2-tailed) 0.228 0 0.719 0.122

N 30 30 30 30 30

P/E Pearson Correlation .818** -0.321 0.048 -0.288 1

ratio Sig. (2-tailed) 0 0.084 0.801 0.122
N 30 30 30 30 30

**. Correlation is significant at the 0.01 level (2-tailed).

APPENDIX IV
Regression Model

Model Summary
Adjusted R Std. Error of the
Model R R Square Square Estimate
1 .977 0.955 0.947 44.75549
a. Predictors: (Constant), P/E ratio, DPS, EPS, DPR

ANOVA
Sum of
Model Squares df Mean Square F Sig.
1 Regression 1056077.082 4 264019.271 131.808 .000
Residual 50076.337 25 2003.053
Total 1106153.419 29
a. Dependent Variable: MPS
b. Predictors: (Constant), P/Eratio, DPS, EPS, DPR

Coefficients
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -363.825 35.447 -10.264 0
DPS -23.081 6.736 -0.537 -3.426 0.002
EPS 20.758 1.799 0.635 11.537 0
DPR 3.69 1.221 0.447 3.021 0.006
P/E ratio 18.196 1.124 0.744 16.189 0
a. Dependent Variable: MPS
Jyoti Bikas Bank Limited
DIVIDEND POLICY AND ITS IMPACT ON SHARE PRICE
OF DEVELOPMENT BANKS IN NEPAL
(With Reference to MNBBL, SADBL, JBBL, MLBL, GBBL and LBBL)

A Dissertation proposal submitted to the Head of Research Department, Pushpalal

Memorial College in partial fulfilment of the requirements for the Master’s Degree

by

Aashish Dangol
Roll No: 15835/19
Registration No: 7-2-1059-0001-2013
Campus: Pushpalal Memorial College

April, 2022
 INTRODUCTION
A company's dividend policy is the policy used by a company to decide how much it will
pay out to shareholders in dividends. Taking financial indicators of 6 development banks
for the period of 2017 to 2021, this study attempts to elucidate the dividend practices of
development banks in Nepal. Abounding by controversies and unpredictability, this study
concludes that the development banks of Nepal do not show a uniform trend of dividend
policy. The dividend policy practiced by development banks in Nepal is neither fully
explained by residual theory nor stable theory. With the development of financial
institutions in Nepal, they need to follow a robust method of dividend policy so that
investors can predict the stock market and make a rational investment decision.

1.1 BACKGROUND OF THE STUDY

The dividend decision is the most important decision that the managers may take. This
decision influences the primary aim of shareholders, which is to maximize their wealth
through taking the dividend. Usually, a firm announces a dividend on the corporate profits
decided by the board of directors of the firm during its annual general meeting. The
dividend can be distributed either in cash or by capitalization of profits as a stock dividend.
Miller and Modigliani have asserted that given firms’ optimal investment policy, the firm’s
choice of dividend policy has no impact on shareholders' wealth. However, Gordon argues
that dividend policy does affect the value of a firm and the market price of its shares, asserts
that shareholders prefer the early resolution of uncertainty and are willing to pay a higher
price for a share that has a greater dividend payout ratio (DPR). He agrees that investors
always prefer current income in the form of dividends over capital gains.

In the context of Nepal, only a few companies are paying dividends, but many other
companies are not paying stable dividends. There are some companies that have never paid
dividends to their investors. The dividend on shares is an important indicator that shows
the performance of banks and thereby attracts investors. Investors examine the dividend
policy of the banks before they decide to invest in the stock market, but due to the
fluctuation in dividend policies of development banks in Nepal, investors are unable to
forecast the future cash flow from cash dividend. It has been perceived that companies
which have grown their dividend generally experience an increase in their stock price,
while companies which don’t pay or lower their dividend generally experience a fall in

1
their stock price trend. Hence, it shows the dividend affects the stock price of the company,
but several researchers argue that it is the information on the payment of the dividend that
affects the stock price. In fact, that dividend works as a simple but sufficient signal of
management’s interpretation of the firm’s current performance and its future prospects. The
dividend policy and stock price always have a correlation; if the company pays a high
dividend, the stock price will increase and vice-versa. However, in some cases, their
interrelationships the price may remain constant or decrease. Therefore, information lack
or flow is also vital in the analysis of market price per share (MPS).

The main focus of the study is dividend policy practice in the Nepalese Development Bank.
However, different other studies will be conducted for the overall purpose, such as a
comparison of earnings per share (EPS), dividend per share (DPS), and MPS, as well as
other relevant studies as needed. Someone claims that dividend payments have no effect
on valuation, while another claims that they are an active variable in stock price valuation.

1.1.1 Introduction of sample development banks

Development banks in Nepal are class ‘B’ financial institutions operated under the
regulation of Nepal Rastra Bank. Until Ashwin’s end in 2079 BS [mid-oct, 2021], there are
17 development banks in Nepal, of which six sample banks are listed below:

A. Muktinath Bikas Bank Limited (MNBBL)

The bank was established on 19th Poush 2063 B.S. (i.e., 3rd January 2007 A.D.). The bank
is licensed by the Central Bank of Nepal to operate as a "B" Class National Level financial
institution with its Central Office at Kamaladi, Kathmandu, Nepal. Today, Muktinath Bikas
Bank is known as the leading development bank in Nepal with a history of its own. The
Bank has a noticeable balance sheet size of NPR 101.09 billion (equivalent to USD 852
million) as of Ashad End 2078 (July 2021) with 950,000 happy customers from different
ages, communities, societies and ethnic groups as of July 2021.

B. Shangrila Development Bank Limited (SADBL)

Shangrila Development Bank Limited (SADBL) was formed after the merger of two local-
level development banks, Bageshwari Development Bank Limited, based in Nepalgunj,
and Shangrila Development Bank Limited, based in Pokhara. It is currently one of the
largest national-level development banks, with 98 branches. Shangrila Development Bank
Limited acquired Cosmos Development Bank Limited, and started their joint operations on
Ashad 30, 2074.

2
C. Mahalaxmi Bikas Bank Limited (MLBL)
Mahalaxmi Bikas Bank was established by renowned professionals with accomplished
leadership in 2052B.S. with the main theme of "Strong Bank, Successful Co-Operation".
The bank is licensed by the Central Bank of Nepal as a "B" class National Level Bank and
it is the first development bank to raise the capital fund by 3.07 billion. The bank is moving
ahead with the motto of "Service with a Smile" to each and every group of customers and
their satisfaction. Bank has been awarded with the Best Presented Award (BPA) 2018 from
ICAN for presenting the best financial report among development banks. Similarly, the
bank has also been awarded with SAFA-2018 in Bangladesh for being successful in
presenting the best financial report.

D. Jyoti Bikas Bank Limited (JBBL)

Jyoti Bikash Bank Limited is a national level development bank engaged in commercial
banking activity with a category "Kha" license from Nepal Rastra Bank. Starting with an
initial paid up capital of Rs. 259 million, the bank has reached a paid up capital of Rs. 4.26
billion. In the journey of the past 13 years, the bank merged with Jhimruk Bikas Bank
Limited (FY 2073/74) and acquired 2 more regional-level development banks, Raptiveri
Bikas Bank Limited (FY 2074/75) and Hamro Bikas Bank Limited (FY 2075/76).

E. Garima Bikas Bank Limited (GBBL)

The bank was incorporated under the Company Act on Shrawan 22, 2064 and acquired a
license from Nepal Rastra Bank to perform its financial transactions on Ashwin 24, 2064.
The bank started its formal operations on Kartik 18, 2064, from Waling 3, Syangja. After
the successful merger between Garima Bikas Bank Limited and the then Nilgiri Bikas Bank
Limited, the bank was upgraded to national level on Ashadh 29, 2072.

F. Lumbini Bikas Bank Limited (LBBL)

Lumbini Bikas Bank has been an emerging name in the banking and financial sector of
Nepal. It carries out banking and other financial activities under the license to commence
banking operations as a "B" Class financial institution from the Nepal Rastra Bank under
the Bank and Financial Institution Act, 2073. It is an entity established with the merger
banks and financial institutions, namely Bhajuratna Finance Ltd., Birgunj Finance Ltd.,
Himichuli Bikas Bank Ltd., Lumbini Finance and Leasing Co. Ltd., and Vibor Bikas Bank
Ltd. The last merger of Vibor Society Development Bank and Lumbini Finance and
Leasing took place on the 25th of Ashad 2074.

3
1.2 PROBLEM STATEMNET
Dividend behaviour in terms of net current earnings, cash flow, and lagged dividend.
However, there is no common consensus on the relationship that exists between the amount
paid out in dividends and the market price of a share. There is still considerable controversy
concerning the relationship between dividends and the common stock price.

The stock market of Nepal is still in its infancy, having experienced expansionary growth
in recent years. Amidst the recent expansion, understanding dividend practices in relation
to development banks' financial health would provide an opportunity to understand
financial sector dividend practices. This discovery aims to shed light on the relationship
between dividends and earnings per share, market value per share, and book net worth per
share. In addition, trends, levels, and patterns of dividend practices are also analysed. The
strength of this study is a comprehensive study of dividends and their impact on Nepalese
development banks over a long period of time, using time series data. Time series analysis
can only explain the plausible relationship between dividend practices and financial
indicators. As the relationship between dividend policy and the movement of stock prices
is debatable, this paper aims at answering the question:

 What kind of dividend policy did the chosen banks adopt?

 What is the trend in the market share of the selected development bank?
 Is there relationship between MPS and DPS, EPS, DPR, and the P/E ratio?
 How do dividend per share, earnings per share, dividend payout ratio, and price-to-
earnings ratio affect the market price of stock?

1.3 OBJECTIVES OF THE STUDY

An objective guides the power of thought of any set of operations, either directly or
indirectly. There are two types of objectives:
a. General Objective
In this study, my objective is to determine the impact of the dividend policy on the market
price per share with special reference to development banks listed in NEPSE. For this
purpose, titled "Dividend Policy & Its Impact on Market Price in a Development Bank in
Nepal". So, there are many variables (MPS, EPS, DPS, DPR, and P/E ratio) that have an
impact on the share price directly and indirectly. My main focus is on dividend policy and
price fluctuation.

4
b. Specific Objective
The followings are the specific objectives of the study:
 To analyse the dividend policy of sample banks.
 To examine the market price trend of development banks.
 To analyse the factors affecting the market price of development banks.
 To examine the relationship between the dividend policy and market price of
development banks.

1.4 RATIONALE OF THE STUDY

In the Nepalese context, most investors are investing in the stock without adequate
knowledge of the company's performance and dividend policies. They know the investor
objectives from this study. One receives a dividend, while the other receives a capital gain.
 This study is useful for the firm’s perspective and too aware the Nepalese investors.
 To know the objective of investor they can develop their plans and policies
accordingly.
 To help the investor while investing in share capital. So that they can make correct
decision at right time about the influence of dividend in market price of share and
make investment.

1.5 THEORETICAL FRAMEWORK

This study is focused on finding out whether there is a relationship between dividends and
share prices of development banks from the period of 2017/18 to 2021/22. The study has
therefore been based on EPS, DPS, and P/E ratio of selected bank groups and finds out the
relationship between one dependent and two independent variables respectively. As a
result, the focus of this study is on determining whether there is a relationship between
dividend and share price of the selected banks, as well as the nature and extent of that
relationship.

Independent Variable
Dependent Variables
 Dividend per share (DPS)
 Earnings per share (EPS)  Market price per share
 Price to Earnings (P/E) ratio (MPS)
 Dividend payout ratio (DPR)

Note. From Baral, R. K., & Pradhan, A. (2018).

5
1.6 HYPOTHESIS OF THE STUDY
Based upon the empirical review and various theories of dividend following alternative
hypothesis has been formulated.

H1: There is significant relationship between dividend per share and market price per
share.
H2: There is significant relationship between earnings per share and market price per
share.
H3: There is significant relationship between dividend payout ratio and market price
per share.
H4: There is significant relationship between price to earnings ratio and market price
per share.

1.7 REVIEW OF LITERATURE

According to Hussainey, Mgbame, & Chijoke-Mgbame (2011), the study on "Dividend
Policy and Share Price Volatility" shows positive relations between dividend yield and
stock price changes and negative relations between dividend payout ratio and market price
per share. Their results further show that the firm’s earnings, growth rate, level of debt, and
size also cause the change in stock price in the UK.

Adres, Betzer, Bongard, Haesner, and Theissen (2009) conducted a study in Germany to
investigate the correlation between dividend announcements, market expectations, and
corporate governance. The results of the study showed that there is a significant relationship
between market expectations and dividend announcements, whereby if the dividend
followed the prior market expectation, the share prices increased after the dividend
announcement.

Faloye and Oluwole (2014), a dividend announcement is always expected to deliver some
information to investors in relation to their corporations’ performance since the stock is
always considered as being bullish or bearish. The security market is supposed to be bullish
if the stock prices are consistently on an upward trend and bearish if they are consistently
downward. There is a significant positive relationship between the dividend announcement
and share price in a bullish market, whereas in a bearish market, there is a significant
negative relationship.

6
In the context of Nepal, limited research work has been conducted on dividend payout.
Bhattarai (2016) conducted research on the "Dividend Decision and its Impact on Stock
Valuation." The relationship between dividend per share and stock prices is positive in the
sample companies, dividend per share affects share prices differently in different sectors,
changing the dividend policy or dividend per share might help to increase the market price
of shares, the relationship between prices and retained earnings per share is not prominent,
and the relationship between stock prices and lagging earnings per share is negative.

Baral and Pradhan's (2018) "Impact of Dividend Policy on Share Price of Commercial Bank
in Nepal" According to the article, expect DPR, while other factors such as EPS and P/E
ratio have a positive relationship with stock price in the case of a top-gainer commercial
bank. The P/E ratio is the strongest factor influencing share price, whereas EPS, P/E ratio,
and DPR all have a positive influence on stock price, with the DPR being the strongest
factor influencing share price in the case of a top-loser commercial bank.

Aryal (2020) investigated "Dividend and its Effect on Stock Market Price in Nepalese Joint
Venture Commercial Banks." It is found that the standardized beta coefficient of the PE
ratio and earnings per share is higher than that of other explanatory variables. As a result,
the price-earnings ratio and earnings per share are important explanatory variables of
market price in Nepalese commercial banks. Hence, to increase the MPS, both the P/E ratio
and EPS should be increased.

1.8 RESEARCH METHODOLOGY

The study is based on secondary data analysis. In order to achieve the objective of this
study, there are 17 development banks listed in NEPSE, which are considered the
population of the study, and 6 development banks are selected as a sample of the study. All
national level development banks has been used in the case of the availability of five-year
data from selected banks. The required data is collected from the annual report, the official
website of respective banks and NEPSE data. The research design employed in this study
is a descriptive and causal relationship as it deals with the impact of dividend policy on the
share price of a development bank in Nepal. Moreover, the study examines the effect of the
dividend policy on market price i.e., impact of dividend per share (DPS), earnings per share
(EPS), dividend payout ratio (DPR), and price-earnings (P/E) ratio on market price per
share(MPS). The data is gathered from the F/Y 2017/18 to 2021/22.

7
1.8.1 Research Design
In this study, we aim to find out the dividend policy and its impact on the share price of
development banks in Nepal and provide necessary suggestions on the basis of our
evaluation. To achieve the research objective, a quantitative research design using a causal-
comparative research design will be used. Dividends per share, earnings per share, dividend
playout ratio, and profit to earnings ratio are the independent variables for this study, and
market price per share of the sample development bank is the dependent variable. This
study will be based on time series data extracted from annual reports for the relevant five-
year period from 2017 to 2021.

1.8.2 Population and Sample

The population of this study is the development banks of Nepal. In the context of Nepal,
there are 18 development banks operating in Nepal. Among them, six development banks
(i.e., MNBBL, SADBL, MLBL, JBBL, GBBL, and LBBL) will be taken sample by
judgmentally sampling. In order to determine the nature and extent of the relationship,
collected data will be analysed by employing trend analysis, correlation technique,
regressions and descriptive statistics.

1.8.3 Data Collection Procedures

Data will be collected from secondary data. Likewise, data has been derived from listed
development banks’ financial reports, published and unpublished books, scholarly journals,
business and financial newspapers, and other magazines and corporate journals. The study
made use of financial performance data that were relevant to the current study. Financial
reports and other relevant information of the listed banks for the period 2017 to 2021 will
be retrieved from the internet by search engines.

1.8.4 Data Analysis and Discussion Statistics Analysis

The collected data will analyse with the help of different financial and statistical tools.
I. Financial tools
The ratio is tested to see impact of dividend on share price of development banks "reflects
the extent to which the objective of business is accomplished". The ratio is of great interest
to present as well as prospective shareholders and of great significance to management,
which has the responsibility of maximizing the owner's welfare, so higher ratio is desirable.

8
a. Earnings Per Share (EPS)
Earnings per share are the ratio, which is calculated to assess the availability of total profits
per share. It is a very important ratio for equity shareholders to assess the return on equity
share. More the EPS better is the performance of the company. The increasing tendency of
EPS enhances the possibility of more dividend and bonus shares. It does not reveal how
much is paid to the owners ass dividends nor how much of the earnings are retained in the
business. It is calculated as:
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑃𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒𝑠

b. Dividend Per Share (DPS)

Dividend per share measures the dividend distributed among the equity shareholders on a
per share basis. The objective of computing this ratio is to know what an equity shareholder
by way of dividend exactly receives. DPS should not be taken as its face value as the
increased DPS may not be reliable measure of the profitability as the equity base may have
increased due to increased retention without any change in the number of outstanding
shares. It is calculated as:
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑖𝑑 𝑡𝑜 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 𝑆ℎ𝑎𝑟𝑒𝑠

c. Market Price of Share (MPS)

Market price per share is that Value of stock, which can be obtained by a firm from the
market. Market value of share is one of the variables which are affected by the dividend
per share and earnings per share and earnings per share of the firm. If the earning per share
and dividend per share is high, the market value of share will also be high. Market value of
share may be lower and higher than the book value. If the firm is growing concern and its
earning power is greater than the cost of capital, the market value of share will be higher
than the book value .If firms earning capacity is lower than the cost of capital the market
price of share will also be lower. Market value per share is calculated as
𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 =
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

d. Price Earnings Ratio (P/E Ratio)

Price earning multiple is the relationship between earning per share and market price of the
stock. Earnings per share shows the company’s performance in the sense that how well the
company has managed its material as well as Human resource to satisfy the interest of

9
stockholders. So, P/E ratio multiple reflects that price currently being paid by the market
for each rupee of currently reported EPS.
𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝑃𝑟𝑖𝑐𝑒 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑅𝑎𝑡𝑖𝑜 =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

e. Dividend Payout Ratio (DPR)

It is the proportion of earning paid in the form of dividend. This ratio shows what
percentage of profit is distributed as dividend and what percentage is retained as reserve
and surplus for the growth of the bank. Higher earning enhances the ability to pay more
dividends and vice versa.
It is computed by dividing DPS by EPS.
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 (𝐷𝑃𝑅) =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

II. Statistical Tools

Statistical tools are the measures or the instruments to analyse the collected data from the
different sources. In statistics, there are numerous statistical tools to analyse the data of
various natures. In this study, mainly statistical tools such as Mean, standard deviation,
coefficient of variation, descriptive statistics, correlation analysis (r), Regression analysis,
t-test and ANOVA has been used keeping into consideration the key tools required for the
study.

1.9 LIMITATIONS OF THE STUDY

In context of Nepal, problem of reliable data is the major problem for research study. Every
study has limitations due to different factors of institutions, time-period taken, reliability
of statistical data, tools and variances. The following limitations have pointed for dividend
policy and its impact on development banks:

 Only five years of data, i.e., 2017 to 2021, were used during the analysis; alternative
fiscal year data could have produced a different outcome.
 Since the data collection is secondary, depending on how reliable the data are, the
majority of the data are revisions to study results.
 The market price of stocks is influenced by a number of factors. But only dividend
policy-related criteria have been taken into account.
 Since just six development banks participated in the study out of 17 development
banks may be affected by the findings.
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1.10 REPORT STRUCTURE
The study has been organized into five chapters each devoted to some aspect of reaction of
stock price to dividend announcement. The chapters one to five consist of introduction,
review of literature, research methodology, presenting and analysis of data and summary
and conclusions. The content of each chapters of this study are briefly mention here:

Chapter I: Introduction
This chapter deals with the introductory part of the study, which includes the following:
Background of the study; Problem statement; Objective of the study; Rationale of the study;
Theoretical framework; Research Hypothesis; Limitations of the study; and Report
structure.

Chapter II: Review of Literature

This chapter deals with the review of the different literature with regard to the theoretical
analysis and review of books, articles, and theses related to the study field. Therefore, it
includes conceptual frame work and other related studies with research gap.

Chapter III: Research Methodology

This chapter deals with the research methodology employed to carry out the research. It
describes the research methodology that has been used by the researcher. The research
methodology describes the research design; Population and sample; Sources of data; data
collection procedures; data analysis tools.

Chapter IV: Results and Discussion

This chapter is the main part of the study. Dividend per share (DPS), market price per share
(MPS), earnings per share (EPS), dividend payout ratio (DPR), and price to earnings ratio
(P/E Ratio) are the financial indicators presented. Statistical tools, such as descriptive
statistics, correlation analysis, regression analysis, and hypothesis testing; major findings;
and discussion.

Chapter V: Summary and Conclusions

This chapter presents the summary of the study; Conclusion; and Implication for the
research study.

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