The Impact Of Dividend Policy On Shareholders’ Wealth Evidence From Industry And Technology Sector In India

Abstract

Dividend Policy (DP) is considered to be one of the major decisions of financial management. The decision of the firm regarding how much earnings could be paid as dividend, and how much could be retained by the firm is the concern of DP. The DPdetermines the extent to which the earnings paid to shareholders by way of dividends, and theextent to which the earnings ploughed back in the firm itself for reinvestment purposes. The development of such a DP will be greatly influenced by investment opportunities available to the firm, and the value of dividends as against capital gain to the shareholders. Each firm should develop such a DP, which divides the net earnings into dividends, and retained earnings is an optimum way to achieve the objective of maximizing the shareholders’ wealth (SW). Hence, the objective of the paper is to analyze the impact of DP on SW of Industry and Technology Sector in India. Out of 13 firms in Industrial and 17 firms in Technology sector listed onBombay Stock Exchange (BSE), 6 firms each that have been paying dividend consecutively for thepast ten years are considered for analysis. Besides descriptive statistics, Augmented Dickey Fuller Test
(ADF), Levin, Lin & Chu (LLC) t test, Philip Perron (PP) Fisher test, Im-Pesaran- Shin W (IPS-W) and Breitung test are used to test whether the data are stationary and to satisfy one pre-condition for co-integration Johansen Co-integration test is used. Regression and Chow test are also applied to differentiate the impact between pre and post financial melt down periods. The results of the co-integration test reveals that the presence of a longrun relationship between DP and SW in Industry sector and there is no co-integration between DP and SW inTechnology Sector in India. Regression result proves that DP has significant impact on SW and the Chow test result proves that the impact of DP (significantly affected by the variables DPS and DY) onSW has been affected by the
financial melt down for Industry Sector in India and the impact of DP onSW is unaffected by the financial meltdown for Technology sector in India.