The impact of dividend policy on stock prices in kse

Introduction
Dividend is Latin word which means things to be divided. Dividends are payment made by organization to its share holder or we can say that dividends are a tool used by firms to return cash to shareholders. Dividend is basically a portion of organization profit paid out to share holders. when an organization earn profit it can be used in two ways the profit can be reinvested in business (which is known as retained earning) or it can be paid as dividend to share holders. Mostly organization retained some portion of profit as a retained earning remaining part of profit distribute among share holder as a dividend. Stock holder receives dividend according to their proportion of investment. The most common type of dividend is a regular cash dividend in which a firm announces that all shareholders of record on a certain date will receive a certain cash payment for each share they hold. Some time companies offered dividend reinvestment plan (DRIP) in which investor does not receive cash dividend but they can purchase additional shares. The dividend policy may vary from time to time. In dividend policy Board of directors declares the dividend announcement date ex-dividend date and dividend per share amount it becomes a liability of the firm. Stock price is the price of single stock of number of sale able shares of an organization. When an investor purchases a share of company then he will be the owner of that company up to the extent of his investment .In this paper we shall relate the dividend policy and share price. This study reveals that the impact of dividend policy on share prices. Different researcher present their different views about dividend policy mostly researcher said that dividend policy has strong

relationship with stock prices. But few of them said that there is no relationship between dividend policy and stock prices Dividend policy still source of controversy despite of empirical and theoretical research. MertonH,Miller and Frannco Modigliani(M&M) they suggest that the firm value is determined solely by earning power and risk of assets(investment).and the manner in which it splits its earning stream between dividends and internally retained funds does not effect this value. M&M theory suggest that in a perfect world (certainty, no taxes, no transaction cost, and other market imperfection) the firm value is unaffected by distribution of dividends. Some researches shows that change in dividend do affect stock price. Increase in dividend increase the stock price and decrease in dividend lead to decrease in stock prices in response M&M theory argue that these effects are attributable not to dividend itself but rather to informational content of dividends with respect to future earning M&M says that it is not preference of the share holder for current dividend (rather than future capital gain)that is responsible for such behavior investor view the change in dividends up or down as increased in dividend is viewed as positive signal the investor bid up share price; a decrease in dividend is a negative sign that may lead to decrease the stock prices as investor sell their shares. On the other hand J.Gordon and John lintner who suggest that there is in fact, a direct relationship between dividend policy and its market value. fundamentals to this proposition is their bird in-the-hand argument, which suggest that investor see current dividend as less risky then future dividend or capital gain.gordon and Lintner argue that current dividend payment reduce investor uncertainty causing investor to discount the firm earning at a lower rate and, else being equal, to place higher value on firm stock. conversely if dividend are reduced or are not to paid, investor uncertainty will increase, raising the required return and lowering the stock value.Altough many other arguments related to dividend relevance have been

put forward, empirical studies fail to provide conclusive evidence in support of the intuitively appealing dividend relevance argument. But according to me there is strong impact of dividend policy on stock prices. Lets see up to what extent I can prove it. I think M&M theory is acceptable if there will be the concept of efficient market. But here in Pakistan due to imperfect market we cant apply this theory.