Investors expect the value of their investment to increase either through an increase in the value of the stock or through the receipt of dividends. If a company decides to declare a dividend, it chooses between issuing stock dividends or paying cash dividends. Stock Dividend Definition A stock dividend takes the form of additional shares of stock provided to stockholders at no additional cost.
While the dividend history of a given stock plays a general role in its popularity, the declaration and payment of dividends also has a specific and predictable effect on market prices. It stands to reason that the possibility of creating recurring investment income encourages investors to purchase and retain shares of stock.
While this motivation may seem to be purely economical, the underlying beliefs Effect of dividend policy on share the company's profitability are what impact stock prices the most. To understand how dividends positively affect investor thinking, it helps to first understand the mechanics of the stock market and the basic of how dividends work.
Market Psychology The stock market is the collective result of the decisions of millions of investors. Though stock prices are based on the value of the issuing company, fluctuations in the stock market are largely dictated by human psychology.
If an investor thinks the future is bright for a given company, she wants to invest as soon as possible to reap the maximum profit. If enough investors feel the same way, the increase in investment drives the stock price up, thereby fulfilling the investor's prediction.
Conversely, shareholders who think a stock is about to take a dive sell quickly to avoid losses. If enough shareholders buy or sell around the same time, other investors begin to think that they've missed out on some crucial piece of information.
Especially among individual retail investorsthe baseline assumption is generally that others know more than you do, so it behooves you to follow the herd. This mentality often results in previously neutral investors suddenly entering the fray to avoid missing out on profits or incurring losses, further exacerbating the effect.
Essentially, when the collective opinion of investors is positive, stock prices go up. When the general consensus is less than optimistic, prices drop. Despite the seemingly complex nature of the market, most activity truly boils down to the cumulative effect of investors trying to predict what their peers are thinking.
Basically, it's all one big guessing game with financial consequences that are anything but trivial. How Dividends Work For investors, dividends serve as a popular source of investment income.
For the issuing company, they are a way to redistribute profits to shareholders as a way to thank them for their support and to encourage additional investment. Dividends also serve as an announcement of the company's success. Because dividends are issued from a company's retained earningsonly companies that are substantially profitable issue dividends with any consistency.
Though some companies may issue dividends to create the illusion of profitability, this is the exception rather than the rule. Dividends are often paid in cash, but they can also be issued in the form of additional shares of stock. In either case, the amount each investor receives is dependent on their current ownership stakes.
When a dividend is paid, the total value is deducted from a company's retained earnings. Essentially, it is the amount of money a business has on account that it can use to pay dividends or fund growth projects.
The Effect of Dividend Psychology Stocks that pay consistent dividends are popular among investors. Though dividends are not guaranteed on common stockmany companies pride themselves on generously rewarding shareholders with consistent — and sometimes increasing — dividends each year.
Companies that do this are perceived as financially stable, and financially stable companies make for good investments — especially among buy-and-hold investors who are most likely to benefit from dividend payments. When companies display consistent dividend histories, they become more attractive to investors.
As more investors buy in to take advantage of this benefit of stock ownership, the stock price naturally increases, thereby reinforcing the belief that the stock is strong. If a company announces a higher-than-normal dividend, public sentiment tends to soar.
Conversely, when a company that traditionally pays dividends issues a lower-than-normal dividend, or no dividend at all, it may be interpreted as a sign that the company has fallen on hard times.
The truth could be that the company's profits are being used for other purposes — such as funding expansion — but the market's perception of the situation is always more powerful than the truth.
Many companies work hard to pay consistent dividends to avoid spooking investors, who may see a skipped dividend as darkly foreboding. The Effect of Dividend Declaration and Distribution Before a dividend is distributed, the issuing company must first declare the dividend amount and the date when it will be paid.
It also announces the last date when shares can be purchased to receive the dividend, called the ex-dividend date.Dividend policy has significant effect on share price So the hypothesis is-Ho: There is no significant effect of dividend policy on share price H A: There is a significant effect of dividend policy on share price III.
Methodology of the Study: Data Collection Technique: This study is based on the secondary data. Jul 26, · Effects of dividends policy on the market price of share. (a case study of first bank of nigeria plc) ABSTRACT.
The efficient and effective financial administration in corporate organization is sine quad non’ to the achievement of the . dividend policy more than share dividend as a strategy aimed at increasing the value of the firms due to its positive effect on the share price.
If this is done consistently, the . Özet This investigates the effect of dividend policy on stock prices.
Objective of the study is to see if there exists any relationship between dividend policy and stock prices. Academics are divided on the effects of dividend policy.
Some say that dividends are important in attracting investors and supporting stock prices, while others claim that earnings are just as important as dividends. Empirical evidence, while not uniform, does suggest that higher dividends raise stock prices, while dividend cuts hurt prices.
Allen and Rachim () suggest that the relationship between dividend policy and share price volatility after the inclusion of growth as a control variable would be suggestive of either the arbitrage or information effect.