CORPORATE DIVIDEND POLICY IN BANGLADESH: A STUDY OF FIRMS LISTED IN DHAKA STOCK EXCHANGE

Abstract

The main objective of the study is to identify the determinants of corporate dividend policy followed in Bangladesh and to investigate the impact of dividend policy on stock price. The study uses a firm-level panel data set of 61 companies from eight major sectors of DSE for ten years from 2008 to 2017. The relationship between dividend per share and ownership structure, reserve & surplus, net asset value per share, earnings per share, dividend payout ratio, dividend yield and stock price has been examined in addition to the type of dividend policy of each sample company. Statistical tools and techniques like analysis of variance (ANOVA), Pearson correlation coefficient, multiple regression as well as simple linear regression have been used to find out the results of the study. One-way ANOVA test shows that there is a significant difference in dividend per share between intra-sector as well as inter-sector companies. Pearson correlation coefficient shows mixed results for the relationship between dividend per share and ownership structure, reserve & surplus, net asset value per share, earnings per share, dividend payout ratio, dividend yield and stock price. Backward Elimination Method of Multiple Regression has been used to investigate the impact of six explanatory variables viz., ownership structure, reserve & surplus, net asset value per share, earnings per share, dividend payout ratio and dividend yield on dividend per share. Log transformed value of reserve & surplus is taken to make the regression model linear. The study is done separately for eight major sectors of DSE and it is found that same factors are not equally important in dividend decisions of firms under different sectors. The results show that log transformed value of reserve & surplus, net asset value per share and dividend yield have significant positive impact on dividend per share in Banking sector. On the other hand, earnings per share and dividend payout ratio have significant negative impact on dividend per share. In Financial Institutions sector, ownership structure, net asset value per share and dividend yield have significant positive impact while log transformed value of reserve & surplus has negative impact on dividend per share . Earnings per share and dividend yield have significant positive impact on dividend per share in Engineering sector. In Food & Allied Product sector, earnings per share has significant positive impact on dividend per share. In Fuel & Power sector, dividend payout ratio and dividend yield have significant positive impact on dividend per share. Net asset value per share of Textile sector has significant positive impact on dividend per share. Log transformed value of reserve & surplus and earnings per share of Pharmaceuticals & Chemicals sector have positive impact on dividend per share. Net asset value per share and dividend payout ratio have significant positive impact on dividend per share of Insurance sector. In addition, multiple regression results of all the sectors taken together show significant positive impact of ownership structure, earnings per share and dividend payout ratio on dividend per share. Overall, ownership structure, log transformed value of reserve & surplus, net asset value per share, earnings per share, dividend payout ratio and dividend yield have significant positive or negative impact on dividend per share of one or more of the selected sectors under study. These findings support the studies of Likitwongkajon (2019), Tanjung (2017), Gupta (2017), Chesini and Staniszewska (2017), Martin Reyna (2017), Oloidi and Adeyeye (2014), Michaely and Roberts (2011), Huda and Farah (2011), Denis and Osovob (2008), Al- Twaijry (2007), Imam and Malik (2007), Adaoglu (2000) and many others. Moreover, management views on dividend policy of firms listed in DSE have also been analyzed to identify the factors that influence dividend decisions. The survey results reveal that same factors are not equally important in dividend decisions of firms under different sectors, which is consistent with the findings of secondary data analysis. Thus, this study identified earnings per share, net asset value per share, dividend payout ratio, dividend yield, reserve & surplus and ownership structure as six major determinants of corporate dividend policy followed in Bangladesh. The findings of the impact of dividend per share on stock price of companies of eight selected sectors produced very interesting results. The results of simple linear regression show that Banking, Food & Allied Product, Pharmaceuticals & Chemicals and Insurance sectors have significant positive impact of DPS on stock price, which supports the Relevance Theory of dividend, i.e., Walter’s model and Gordon’s model. Studies conducted by Golder, Akter and Sheikh (2019), Islam (2019), Bajaja and Jain (2019), Zainudin, Mahdzan and Yet (2018), Prabhakaran and Karthika (2018), Banerjee (2018), Ahmed (2018), Joshi and Mayur (2017), Memon, Channa and Khoso (2017), Velankar, Chandani and Ahuja (2017), Warrad (2017), Misir and Khandoker (2017), Ngo and Cuong (2016), Priya and Mohanasundari (2016), Sharif, Ali and Jan (2015), Balagobei and Selvaratman (2015), Rahman (2015), Islam, Humyra and Sultana (2015), Masum (2014), Al-Hasan, Asaduzzaman and al Karim (2013), Dharmarathne (2013), Gupta, Dogra, Vashisht and Ghai (2012), Suwanna (2012), Hussainery, Zakaria, Muhammad and Zulkifli (2012), Hasan, Akhter and Huda (2012), Mgbame and Chijoke- Mgbame (2011), Zaman (2011), Misir (2010), Uddin (2009), Yilmaz and Gulay (2006), Baker, Veit and Powell (2001), Travlos, Trigeorgis and Vafeas (2001), Ahmed (2000), Richardson, Sefcik and Thompson (1986) and Ariff and Finn (1989) are among those who empirically proved that dividend has an impact on the stock price of the firm. On the other hand, it is found that there is no significant impact of DPS on stock price of Financial Institutions, Engineering, Fuel & Power and Textile sectors, which supports Irrelevance Theory of dividend, i.e., MM Hypothesis. Seyedimany (2019), Vavilina, Levanova and Tkahenko (2019), Alaeto (2018), Dedunu (2018), Tharshiga and Velnamby (2017), Balakrishnam (2016), Geetha and Swaaminathan (2015), Uddin and Uddin (2014), Dhungel (2013), Ali and Chowdhury (2010), Rahman and Rahman (2008), Uddin and Chowdhury (2005), Allen and Rahim (1996), Miiler and Sholes (1982), Miller and Sholes (1978), Srivastava (1968) are among those who empirically showed that there is no relevance of dividend to stock price in line with Miller and Modigliani (1961). The survey regarding the impact of dividend on stock price produced mixed results in line with the findings of secondary data analysis. However, the findings of simple linear regression of all sample companies from all the sectors under the study taken together show that there is a significant positive impact of dividend policy on the stock price. The findings of the study will be helpful to the equity investors, corporate managers and other stakeholders of the capital market in Bangladesh.