Research Project: Prasanna Hegde

Impact of Dividend Policies on the Value of the Firm.
RESEARCH PROJECT
ON
IMPACT OF DIVIDEND POLICIES ON THE VALUE OF THE FIRM

Submitted in partial fulfillment of the requirements of the MBA Degree Course of Bangalore University
By
PRASANNA HEGDE
06XQCM6061
Under the Guidance and Supervision Of
Prof. SATHYANARAYANA
M.P.BIRLA INSTITUTE OF MANAGEMENT

Associate Bharatiya Vidya Bhavan # 43, Race Course Road Bangalore-560001
2006 08
M P Birla Institute of Management
DECLARATION
I here by declare that the report entitled. IMPACT OF DIVIDEND POLICIES ON THE VALUE OF THE FIRM. is prepared under the guidance of Prof.Sathyanarayana (Faculty, M.P.Birla Institute of Management).I also declare that this project report has not been submitted to any other University/ Institute for the award of any other degree, diploma, fellowship or other similar title or prizes.
Date: Place: Bangalore
PRASANNA HEGDE (O6XQCM6061)
ACKNOWLEDGEMENT
I am thankful to Dr. Nagesh Malavalli, Principal M.P. Birla Institute of Management, Bangalore, who has given his valuable support during the study.
I am extremely thankful to Sathyanarayana, Professor M.P. Birla Institute of Management, Bangalore who has guided me to do this project by giving valuable suggestions and advice.
My gratitude will not be complete without thanking God and I am most grateful to my beloved parents who have been a constant source of aspiration and blessings in my pursuit for studies. Finally, I express my sincere gratitude to all my friends and well wishers who helped me to do this project.
Place: Bangalore
Date:
(PRASANNA HEGDE)
TABLE OF CONTENTS
CHAPTERS CHAPTER - I CHAPTER - II PARTICULARS Research Extract Introduction Background & Need for the Study Statement of the Problem Objectives of the study Hypothesis Theoretical Background Operational Definitions Scope Of The Study Limitations CHAPTER - III CHAPTER- IV REVIEW OF LITERATURE METHODOLOGY Research Design Study Setting Population Sampling Data Collection Statistical Analysis and Model Used PAGE NO. 7 10 11 12 13 13 13 18 19 19 21 29 29 29 29 29 31 32
CHAPTER - V SECTION-I SECTION-II CHAPTER-VI
ANLYSIS AND INTERPRETATIONS Cross Sectional Regression Analysis Time Series Regression Analysis DISCUSSION Findings of the study Summary and Conclusion Limitations Recommendations BIBLIOGRAPHY
35 35 42 64 65 66 67 67 68
LIST OF TABLES
TABLE NO PARTICULARS PAGE NO
V-1
Cross Sectional Values for the year 2002/03
35
V-2
36
V-3
37
V-4
38
V-5
39
V-6
Cross Sectional Regression Results
40
V-7-34
Time Series Table of the Companies
42 - 55
V-35
Time Series Regression Results
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CHAPTER I
RESEARCH EXTRACT
To pay or not to pay dividend is a critical decision any management takes. Maximizing the value of the firm or maximizing the shareholders wealth is the ultimate objective of any firm. So any decision of the management has to be valued on the basis of its effect on the value of the firm.
Aim of the study was to understand the Impact of dividend policies on the value of the firm. Along with dividend other variables such as retained earnings, debt-equity and the return on equity share prices of the Indian public limited companies are studied to understand the relationship between the dividend and the share prices. The objectives of the study were to describe the samples in terms of its pattern of dividend distribution and debt and to find out the relationship between the dividend and debt & the return on the equity shares. The findings of the study can be used to understand the influence of dividend decisions and capital structure decisions on the value of the firm.
A descriptive research, which is quantitative in nature, was conducted. Convenient sample of 28 companies, shares of which are traded in Bombay Stock Exchange and National Stock Exchange was studied. The historical data were collected from the Bangalore stock Exchange and the web site of the Bombay Stock Exchange and National Stock Exchange. The relationship between the Value of the firm & Dividend Policies of the firm and the capital structure of the firm is studied using Multiple Regression model.
Results of the study show that there is no evidence of significant association between dividend policies on the value of the firm (Significant at 5% level using t test). The findings include both cross-sectional interpretation for 7
the entire sample companies for five years (2002/2003 to 2006/2007) and time series interpretation for each of the sample companies separately for ten years (1997/1998 to 2006/2007). The findings also include the dividend distribution and debt patterns of the samples under study.
CHAPTER II
INTRODUCTION
The Dividend decision of the firm is a crucial area of financial management. The important aspect of dividend policy is to determine the amount of earnings to be retained and the amount to be distributed to share holders. Retained earnings are the most significant internal source of financing. On the other hand, dividends may be considered desirable from shareholders point of view as they tend to increase their current return. During the first part of the twentieth century, dividends were the primary reason investors purchased stock. It was literally said, The purpose of a company is to pay dividends. Today, the investors view is a bit more refined; it could be stated, instead, as, the purpose of a company is to increase my wealth. Indeed, todays investor looks to dividends and capital gains as a source of increase.
The objective of any dividend policy should be to increase the shareholders return so that the value of his investment is maximized. Shareholders return has two components; dividends and capital gains. There are many reasons for paying dividends and there are many reasons for not paying any dividends. As a result, `dividend policy' is controversial. A higher payout of dividend means lower retained earnings, which may affect the growth of the firm and perhaps a lower market price per share. The decision becomes more critical when there exists an investment opportunity to the firm. If the profits earned are distributed to investors then the retained earnings to that extent will be reduced which will result in increasing debt to finance the investment opportunity. On the other hand the investors requirement also must be satisfied by providing the optimum dividend. All these factors, which go through the minds of the shareholders, will be reflected in the market price of the shares. Thus the dividend decision is very vital to any organization.
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BACKGROUND AND NEED FOR THE STUDY

How share prices differ from each other? To what extent financial decisions of the management have a bearing on the shareholders wealth? These are some of the several questions arose in the minds of the investors and other stakeholders of the firm. No matter what type of industry, growth perspective, capital structure etc of a firm the ultimate objective is maximizing shareholders wealth. Shareholders wealth or the total value of the firm being the final goal, all the decisions of the management is directed towards it. The next question arises is how to value these decisions. It is always believed that the market value of shares reflects the emotions and reactions of the investors to each and every decision the management takes.
The major decision of financial management is the dividend decision; in the sense that the firm has to choose between distributing the profits to the shareholders and plaguing back the profits in to the business. The choice would obviously hinge on the effect of the decision on the maximization of shareholders wealth. Given this objective firms should be guided by the consideration as to which alternative use is consistent with the goal of wealth maximization. A firm will be well advised to distribute the net profits as dividend if such a distribution results in maximizing the share holders wealth; if not it would be better to plough back the profits into the business for future investment and growth. There are however conflicting view regarding impact of dividend on the valuation of the firm. On the relationship between the dividend policy and value of the firm different theories have been advanced. One school of thought treats it as relevant and the other as irrelevant. There are two extreme views, that is; a) dividend are good as it increases the shareholder value; b) dividends are bad as it decreases the shareholders value. The crux of the arguments is whether to distribute the earnings or retain the earnings.
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Another important financial decision is capital structure decision. Under normal conditions the earnings per share increases when the leverage is more. More debt or leverage also increases the risk of the firm. Thus it cannot be clearly said whether the value of the firm increases with leverage. As the objective of the firm is to increase the value of the firm, the capital structure, or leverage, decision should be examined from the point of view of its impact on the value of the firm. If the capital structure affects the value of the firm, then every firm will try to achieve the optimal capital structure that maximizes the value of the firm. There exist conflicting theories on the relationship between the capital structure and the value of the firm.
Thus there exists a research gap and the purpose of the current study is therefore to describe whether the dividend decisions really influence the value of the firm or not. In this study an attempt has also been made to understand the relationship between the capital structure and the value of the firm.
STATEMENT OF THE PROBLEM

There exist conflicting views with regard to the impact of dividend decisions on the value of the firm. Some are of the opinion that dividends do affect the market price of the shares while others argue it does not. Thus there exists a knowledge gap. The research problem under consideration is as follows. To what extent does the dividend decision affect the value of the widely held public limited companies in India?
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OBJECTIVES OF THE STUDY
1 To describe the samples selected in terms of the financial ratios.
2 To explain the dividend distribution / retention and the debt equity patterns of the samples.
3 To understand the relationship between the dividend policies of the company and the value of the firm.
4 To study the effect of capital structure decision on the value of the firm.
HYPOTHESIS
H0: Dividend Policies affect the value of the firm. H1: Dividend Policies do not affect the value of the firm.
THEORETICAL BACKGROUND
Dividend
Companies that earn a profit can do one of the three things; pay that profit out to shareholders, reinvest it in the business through expansion, or both. When a portion of the profit is paid out to shareholders, the payment is known as a dividend. The dividend is a variable income, the amount of which depends on the amount of annual profit made by the company. The dividend corresponds to the share of income that the Annual General Meeting opts to distribute to
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shareholders. The remainder is placed in reserve and used to increase equity in order to finance the companys development.
By definition dividend is the payment made by a firm to its owners, either in cash or in stock. It is also referred to as the income component of the return on an investment in stock. Dividend is a taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies are not required to pay dividends. The companies that offer dividends are most often companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders. The term "dividend" usually refers to a cash distribution of earnings. If it comes from other sources, it is called "liquidating dividend". It mainly has the following types:
Regular: Regular dividends are those the company expects to maintain, paid quarterly (sometimes monthly, semiannually or annually).
Extra: Those that may not be repeated.
Special: Those that is unlikely to be repeated.
Stock Dividend: Paid in shares of stocks. Similar to stock splits, both increase the number of shares outstanding and reduce the stock price.
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The various terms with regard to Dividends are as follows: Cum Dividend: Phrase used to indicate that a stock is selling with a recently declared right or dividend.
Ex Dividend: A security that no longer carries the right to the most recently declared dividend; or the period of time between the announcement of the dividend and the payment.
Indicative Dividend: The total amount of dividends that would be paid on a share of stock over the next 12 months if each dividend were the same amount as the most recent dividend.
Interim Dividend: A dividend, which is declared and distributed before the company's annual earnings have been calculated; often-distributed quarterly.
Omitted Dividend: A dividend which was expected, but which was not declared, usually due to financial difficulties. Also called passed dividend.
Optional Dividend: Dividend which the shareholder can choose to take as either cash or stock.
Participative Dividend: Dividend paid on participating preferred stock. This is an unusual dividend structure, since it allows holders of preferred stock to receive payouts in addition to the stated dividend rate under certain circumstances.
Patronage Dividend: A taxable distribution made by a cooperative to its members or patrons.
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Trading Dividend: The practice by some corporations of buying and selling other corporations' stock to maximize collected dividends, for tax benefits (since corporations pay very little tax on dividend income). It is also called dividend capture.
Special Dividend: A nonrecurring dividend that is exceptional in terms of either size or date issued.
Capital Structure (Debt-Equity)

Another important variable, which affect the value of the firm, is the capital structure of the firm. Finance theory tells us that, in the absence of bankruptcy costs, corporate income taxation, or other market imperfections, the value of a firm is independent of its financial structure. The theory is intuitive, because real assets determine a firms value; it cannot be changed by purely financial transactions. In other words, financial assets on the right side of the balance sheet have value only because of the real assets, including intangibles and growth opportunities, on the left side. Therefore, if markets are doing their job, it should not be possible to create value by shuffling the paper claims on the firm's real assets. However, if there are imperfections such as taxes, underdeveloped financial markets, and inefficient legal systems financial structure becomes relevant. Firms must decide whether to issue debt or equity securities to minimize the costs entailed by these imperfections.
How Shareholders' Wealth Grows
Shareholders benefit financially from their investment in successful companies in three main ways:
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Dividends, which are a distribution of part of a company's net profit to shareholders, as part owners of the company. Most large industrial companies pay dividends twice yearly, and often these dividends have tax advantages as well.
Capital growth, which is the increase in the market value of a company's shares over the total cost of those shares. It usually reflects the growth in the company's profits and assets, but it can also be affected by a change in the sentiment of the whole share market as it goes through its cycles. Prices of shares are determined by many factors, which are interrelated to each other.
New Issues of shares, which may be made by a company when it requires further funds. Such new shares are usually offered at a discount to existing shareholders, based on a predetermined ratio, without having to pay brokerage. The entitlements to the new shares offered are known as Rights, as shareholders have the right to acquire the shares or to sell the rights to these new shares on the stock market. A company may also make a Bonus Issue to shareholders at no cost.
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OPERATIONAL DEFINITIONS
1. DIVIDEND PAYOUT A ratio showing the percentage of net profits paid out in dividends on common stock, after reducing net profits by the amount of dividends paid on preferred stock. It calculated as the percentage of dividend paid on profit after tax. In this study dividend payout ratio is expressed as the ratio of dividend paid to the net profit after tax.
D/P Ratio = Dividend Paid / Net profit after tax
2. RETENTION RATIOS Retention ratio shows the rate of earnings retained by the company for financing the investments needs. Retained earnings are the main internal source of finance for the company. This explains to what extent the earnings of the firm are ploughed back to the business. Technically it is one minus the dividend paid out ratio.
Retention Ratio = 1 D/P Ratio.
3. DEBT EQUITY RATIOS Debt Equity ratio shows capital structure of the firm. This represents the capital structure of the company. It is defined as the ratio of debt to equity of the firm.
D/E Ratio = Debt / Equity
4. RETURNS ON SHARES Return on shares is calculated by dividing the previous years price from the current year price and the log natural of the resultant figure is calculated as it gives a continuously compounded rate of return
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Ln (P1 / P0)
5. VALUE OF THE FIRM The effect on the value of the firm is analyzed by studying the return on equity shares. Return on Equity share = P1 / P0, where P1 is the market price of equity share for current year and P0 is the market price of the equity share for the previous year.
SCOPE OF THE STUDY

Here an attempt is made to understand increase or decrease in the share price due to the different dividend payout ratios. Here the ratios such as dividend payout, retention ratio, debt equity ratios and return on the shares are studied. The findings of the study can be used to understand the influence of dividend decisions and capital structure on the value of the firm.
LIMITATIONS
It is needless to say that the factors, which affect the share prices, are an endless list. Factors other than dividend payout, retention and debt equity ratios are not studied.
The study has taken only ten years data of 31 companies to explain the phenomenon.
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CHAPTER Iii
20
REVIEW OF LITERATURE
RELEVANCY OF DIVIDEND
This approach purports that the value of the firm is affected by the dividend policy and the optimal dividend policy is the one, which maximizes the firms value. These variables consider dividend decisions to be an active variable in determining the value of a firm. Two famous models in support of this are explained below.
Walter Model (James & Walter, 1963)

(Extracts from James Walter, Dividend Policy: Its Influence on the Value of the Firm, Journal of Finance (May 1963), 280-291) Walter model supports that the dividend policy of the firm is relevant. The investment policy of the management cannot be separated from its dividend policy and both are interrelated. Thus the choice of dividend policy does affect the value of the firm. Walter model is built around certain assumptions such as constant return, constant cost of capital, constant earnings and dividend. He also made an assumption that financing of new investment is done through retained earnings and debt and no new equity shares are being issued.
Walter in his argument explains three situations
If the return on investment exceeds the cost of capital then the firm has to retain the earnings and should not be distributed as dividends. If the cost of capital exceeds the return on investment then the firm has to pay the entire earnings as dividend If the return on investment and the cost of capital is same then rate of dividend payout can be 0 to 100.
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According to this model if the firm retains the earnings it gives a signal that the investment opportunities are more and it increases the share prices. Similarly when the firm distributes the entire earnings as dividend, share prices will automatically increase, as the income on the shares are more. The Walter model is criticized on the unrealistic assumptions on which it is made such as no debt financing, constant return, cost of capital and earnings etc are not practically possible.
Gordon Model (Gordon Myron J, 1962)

(Extract from M.J.Gordon, The Investment, Financing and Valuation of the Corporation, Homewood, III, Richard Irwin, 1962) Myron Gordon (1962) came up with a dividend relevance model, which is popularly known as the bird in the hand argument. The crux of the argument is that the Investors are risk averse and They put a premium on the certain returns and discount or penalize the
uncertain returns Gordon says that the current dividends are certain and the reinvestment of current dividend for future returns is uncertain. Thus the investors would be inclined to pay higher prices for shares on which current dividends are paid and discounts the value of the shares on which dividends are postponed.
This model is based on the belief that a bird in the hand worth two in the bush. Thus incorporating the uncertainty into the model, Gordon concludes that the dividend policy affects the value of the firm. His model justifies the behavior of investors who value a rupee of dividend income more than a rupee of capital gains income, because dividends are less uncertain when compared to capital gains. However this model is also not free of criticism because of the assumptions on which it is based.
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IRRELEVANCE OF DIVIDEND
Dividend irrelevance approach implies that the value of the firm is unaffected by the distribution of dividends and is determined by the earning power and risk of its assets. It is based on the assumption that the investors are indifferent between dividends and capital gains. So long as the firm is able to earn more than the equity capitalization rate, the investors would be content with the firm retaining the earnings.
MM Hypothesis (Modigliani and Miller, 1961)

(Extracts from M.H.Miller and F.Modigliani, Dividend Policy, Growth and the Valuation of Shares, Journal of Business, vol 34 (October 1961), 411-433.)
Modigliani and Miller argued that the dividend decisions have no effect on the share prices of the firm and therefore no consequence. According to them it is the investments policy through which a firm can increase its earnings and there by the value. Under the conditions of perfect capital market, rational investors, absence of tax discrimination between the dividend income and capital appreciation, given the firms investment policy, its dividend policy may have no influence on the market price of the shares.
The crux of the argument is the arbitrage process. When the earnings are paid out as dividend, the funds required for additional investment has to be raised from either sale of new shares or additional loans, thus the two acts offset or balance each other. Rational investors prefer more wealth to less wealth and they know that the present value of prospective dividends is the terminal value of the shares. MM argue that when dividends are paid out, the market prices of the shares will decrease. What is gained by the investors as a result of dividends will be neutralized completely by the decrease in the terminal value of the shares. 23
The market price before and after the payment of dividend is same and the investors are indifferent between dividend and the retained earnings. As the investors are indifferent; the wealth would not be affected by the current and future dividend policies. It would entirely depend up on the expected future earnings. Thus MM says that the difference in current and the future dividend policies can not affect the market price of the shares as the present value of the prospective dividends is nothing but the terminal value of the shares.
The assumption under which the MM hypothesis lies is highly unrealistic and untenable in practice. As a result the conclusion that the dividend payment and the other methods of finance will exactly offset and hence the dividend is irrelevant is not a practical proposition. The validity of MM hypothesis is criticized on imperfections of market also.
OTHERS
Gragg & Malkeil in their paper on Expectations and Structure of Share Prices present the results of an empirical study of year-end common stock prices from 1961 to 1965. The ratios of market prices earnings are related to such factors as earnings growth, dividend pay out, and various proxy variables designed to measure the quality of the return. They demonstrate in the study that it is possible to explain, for several successive years the percentage of variability in market price earnings ratios with the variables included in the study.
David & Julio (2004) University of Illinois and Urbana Champaign in their paper on Reappearing Dividends studied the reappearing phenomenon on United States of America. They observed that the cash dividend paid by the US companies during 1984 to 1999 has fallen down from 32% to 16.%. But after reaching a low percentage of 15% in 2001 now the dividend payout ratios have increased to 20% in first quarter of 2004. In their study they found out that the downward trend in dividends experienced a sharp reversal with the new
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millennium. They have also identified certain reasons such as tax cut in dividends, investment opportunities, corporate governance etc responsible for the reappearing of dividend.
RETAINED EARNINGS
S M Gupta (1989) studied the behavior of retained earnings in private sector and public limited companies in India, for a period from 1975-76 to 198485. The results showed that the retention ratio (retained earnings / Net profit after tax) moved from 62.22 to 31.87 percentage with an average of 53.27. The overall study concluded that the corporations tries to stabilize the dividends over a period and any increase in profits go to the retained earning for reinvestment in the business. It is also observed that the constant profit earning industries maintained a retention ratio; but low profit earning industries or loss incurring industries neither maintained any retention ratio nor maintained dividend payout ratios.
CAPITAL STRUCTURE vs. FIRMS VALUE

The two principal sources of finance for a company are equity and debt. What should be the proportion of equity and debt in the capital structure of the firm? One of the key issues in the capital structure decision is the relationship between the capital structure and the value of the firm. There are several views on how this decision affects the value of the firm. Optimal Capital Structure Theory: Optimal capital structure theory of Modigliani-Miller (1958) suggest there exist an optimal leverage at which the firm obtains a maximum value by minimizing its weighted average costs of capital, given the market imperfections and tax deductibility of interest costs from pre-tax income of firms. The proposition asserts that the value of a firm with taxdeductible interest is equal to the value of an all-equity firm as enhanced by the
25
tax savings. According to this approach, the capital structure decision of a firm is irrelevant. This approach supports the NOI approach and provides a behavioral justification for it. This approach indicates that the capital structure is irrelevant because of the arbitrage process which will correct any imbalance i.e. expectations will change and a stage will be reached where further arbitrage is not possible. Durand D (1959) identified two views; Net income approach and Net operating approach. Under the Net income approach the cost of debt and the cost equity are assumed to be independent to the to the capital structure. This approach says that the weighted average cost of capital of the firm declines and the total value of the firm rise with increased use of leverage. Under the Net operating income approach, the cost of the equity is assumed to increase linearly with leverage. As a result, the weighted average cost of capital remains constant and the total value of the firm also remains constant as the leverage is changed. Davidson N W, et.al., (1994) in their report on The effect of firm and industry debt ratios on market value analyzed 183 firms and studied the effect of debt ratios to the market value of the firm. Overall conclusion of the study is that the relationship of the firms debt level and that of its industry does not appear to be of concern to the market.
Arsiraphoongphisit O & Ariff M (2003) in their report on Optimal capital structure and firm value- an Australian evidence, 1991-2003 (Corporate Finance) analyzed 654 observations for a period of 1991 to 2003 in Australian market on the effect of capital structure change and firms value. The findings indicate that the market reacts positively to announcements of financing that lead to capital structure moving closer to their relative industrial Debt-Equity ratio. Thus market perceives and reacts positively to the optimal debt-equity ratio. Thus debt-equity ratio has an impact on market value of the firm.
From an overall review of the literature it is clear that there exist certainly a M P Birla Institute of Management 26
contradicting view on the impact of the dividend policy of a firm on the value of the firm. The studies on the effect of debt equity combination on share prices show that the relationship is almost zero. But theoretically as the debt increases because of the tax shield available the earnings must also increase and increase in earnings always increases the market price of the shares. Thus we can see that there exists a knowledge gap in the subject.
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CHAPTER Iv
28
METHODOLOGY
The methodology is the major phase of research in which the investigator makes a number of decisions about the methods and materials to be used to study the research problem, basically through collection of data. The methodological decision generally has control implications for the validity of the study findings
RESEARCH DESIGN
Type of research is Descriptive research, which is Quantitative in nature.
STUDY SETTING
Indian Public Limited Companies The Equity Shares of companies are traded in Indian Stock Exchanges. (BSE & NSE)
POPULATION
A population is a group whose members possess specific characteristics that a researcher is interested in studying. In this study the population includes all widely held public companies whose shares are publicly traded through a stock exchange.
SAMPLING FRAMEWORK
This study includes analysis of public limited companies, which are listed in Bombay stock exchange and National Stock Exchange of India.
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SAMPLING TECHNIQUE
A sample is a portion of the population that has been selected to represent the population of interest. Here in this study 28 companies are selected which are listed in Bombay stock exchange and National stock Exchange, India. Sampling technique used here is convenient sampling.
SAMPLE
The sample size is 28. The companies studied are the followings. Associated Cement Company Ltd. Bharat Heavy Electricals Ltd. Cipla Ltd. Dr.Reddys Laborotaries Ltd. Grasim Industries Ltd. Ambuja Cements Ltd. Hero Honda Ltd. Hindalco Ltd. Hindustan Lever Ltd. Infosys Technologies Ltd. Indian Tobacco Company Ltd. Larsen & Turbo Ltd. Ranbaxy Laboratories Ltd. Reliance Energy Ltd. Reliance Industries Ltd. Satyam Computers Ltd. Tata Motors Ltd Tata Power Ltd. Tata Iron and steel Company Ltd. Wipro Ltd. 30
Zee Telefilms Ltd. ABB Ltd. Bharat Petroleum Corporation Ltd. Britannia Industries Ltd. Colgate Palmolive Ltd. Mahindra & Mahindra Ltd. Steel Authority of India Ltd. Mahanagar Telecom Nigam Ltd.
The shares of the above companies are commonly traded in the stock exchange for the period under study i.e., 1997/98-2006/07.
DATA COLLECTION Secondary Data

Income statements of companies under study Balance sheets Historical stock prices
Data obtained
Figures and facts Unclassified raw data
Method of Data collection and steps

The data required for the study has been collected from the Data Base maintained in the Bangalore Stock Exchange, Bangalore and from the Data Base of the Bombay Stock Exchange and National Stock exchange through their web sites. The raw data collected were converted in to the ratios and classified according to the requirement of the study.
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STATISTICAL ANALYSIS
Descriptive Statistics is used to describe the pattern of dividend payout, Debt equity and the return on shares.
Five Year Moving Average is used to estimate the expected Dividend Payout, Retention Ratio and Debt-Equity Ratio of the successive years. This approach is used to estimate the values incorporating its behavior for the past five years.
Expected Value for the Year 6 = (Y5+Y4+Y3+Y2+Y1) / 5
Statistical model used: The model used here is multiple - regression model. The regression equation for the study is as under.
Y = a + b1 X1 + b2 X2 Y = Actual Return on Equity (For the year) X1 = Expected Debt-Equity Ratio (Moving average for five years) X2 = Expected Dividend Payout (Moving average for five years)
For Cross sectional Regression analysis the above variables X1 and X2 for ten years are converted in to five year moving averages.
For time series analysis the actual data for the years are taken.
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As there exist high correlation between the dividend payout and retention ratio there will be Multi Co-linearity effect on the regression analysis. To avoid this retention ratio is not included in the regression model.
t test significance at 5% level is used to accept or reject the hypothesis
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CHAPTER v
34
SECTION-I CROSS SECTIONAL REGRESSION ANALYSIS
Table no .V- 1 Cross sectional values for the year 2002/03 Moving Average for 1997/98 to 2001/02 Return 2002/03 -0.11 0.23 -0.3 -0.16 0.14 -0.22 -0.47 -0.29 -0.34 0.13 0.11 0.0016 0.11 -0.02 -0.07 0.31 0.23 -0.0079 0.36 -0.27 -0.62 0.08 -0.34 -0.09 -0.16 -0.11 0.77 -0.36 DebtEquity 1.39 0.16 0.05 0.31 0.83 0.92 0.27 0.21 0.08 0 0.42 0.95 0.27 0.45 0.94 0.74 0.87 0.68 1.1 0.45 0.15 0.06 0.74 0.69 0.03 0.78 2.92 0.75 Dividend Payout 0.66 0.17 0.15 0.16 0.29 0.4 0.32 0.12 0.68 0.13 0.26 0.46 0.46 0.22 0.21 0.13 0.48 0.25 0.52 0.05 0.22 0.46 0.3 0.25 1.04 0.38 0.07 0.19 Retention Ratio 0.14 0.83 0.85 0.84 0.71 0.6 0.68 0.88 0.32 0.87 0.74 0.54 0.54 0.78 0.79 0.87 0.52 0.75 0.48 0.95 0.78 0.54 0.7 0.75 -0.04 0.62 0.93 0.81
Company
ACC Ltd Bharat Heavy Electricals Ltd. Cipla Ltd. Dr.Reddys Laborotaries Ltd. Grasim Industries Ltd. Ambuja Cements Ltd. Hero Honda Ltd. Hindalco Ltd. Hindustan Unilever Ltd. Infosys Technologies Ltd. Indian Tobacco Company Ltd. Larsen & Toubro Ltd. Ranbaxy Laboratories Ltd. Reliance Energy Ltd. Reliance Industries Ltd. Satyam Computers Ltd. Tata Motors Ltd Tata Power Ltd. Tata Iron and steel Company Ltd. Wipro Ltd. Zee Entertainment Ltd. ABB Ltd. Bharat Petrolium Corporation Ltd. Britannia Industries Ltd. Colgate Palmolive Ltd. Mahindra & Mahindra Ltd. Steel Authority of India Ltd. Mahanagar Telecom Nigam Ltd.
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Table no. V -2 Cross sectional values for the year 2003/04
Moving Average for 1998/99 to 2002/03
Company
Return 2003/04 0.81 1.58 0.62 0.06 2.18 0.8 1.56 1.21 -0.0023 0.19 0.66 2.09 0.48 2.53 0.9 0.63 2.02 2.26 1.79 0.06 0.87 1.69 1.12 0.26 0.08 3.59 2.41 0.29
Debt-Equity
Dividend Payout 0.41 0.2 0.18 0.13 0.3 0.43 0.43 0.15 0.75 0.12 0.28 0.49 0.49 0.26 0.21 0.14 0.47 0.25 0.49 0.04 0.22 0.39 0.34 0.24 1.07 0.43 0 0.23
Retention
ACC Ltd. Bharat Heavy Electricals Ltd. Cipla Ltd. Dr.Reddys Laborotaries Ltd. Grasim Industries Ltd. Ambuja Cements Ltd. Hero Honda Ltd. Hindalco Ltd. Hindustan Unilever Ltd. Infosys Technologies Ltd. Indian Tobacco Company Ltd. Larsen & Toubro Ltd. Ranbaxy Laboratories Ltd. Reliance Energy Ltd. Reliance Industries Ltd. Satyam Computers Ltd. Tata Motors Ltd Tata Power Ltd. Tata Iron and steel Company Ltd. Wipro Ltd. Zee Entertainment Ltd. ABB Ltd. Bharat Petroleum Corporation Ltd. Britannia Industries Ltd. Colgate Palmolive Ltd. Mahindra & Mahindra Ltd. Steel Authority of India Ltd. Mahanagar Telecom Nigam Ltd.
1.44 0.13 0.05 0.27 0.78 0.94 0.19 0.22 0.11 0 0.3 0.99 0.19 0.36 0.9 0.58 0.86 0.67 1.16 0.24 0.12 0.05 0.78 0.64 0.03 0.75 3.48 0.46
0.39 0.8 0.82 0.87 0.7 0.57 0.57 0.85 0.25 0.88 0.72 0.51 0.51 0.74 0.79 0.86 0.53 0.75 0.51 0.96 0.78 0.61 0.66 0.76 -0.07 0.57 1 0.77
36
Table no. V- 3 Cross sectional values for the year 2004/05
Company
Return 2004/05 0.37 0.2 0.09 -0.24 0.11 0.32 0.09 0.0073 -0.14 0.76 0.23 0.7 0.02 -0.3 0.02 0.33 -0.16 -0.06 0.53 0.47 -0.0068 0.48 -0.28 0.38 0.35 0.04 0.84 -0.17
Debt-Equity
Dividend Payout
Retention
1.39 0.13 0.06 0.22 0.73 0.94 0.15 0.24 0.23 0 0.17 0.96 0.08 0.33 0.84 0.3 0.77 0.61 1.12 0.08 0.08 0.03 0.78 0.53 0.03 0.66 3.53 0.27
0.49 0.21 0.2 0.12 0.24 0.41 0.49 0.16 0.85 0.26 0.28 0.48 0.49 0.23 0.17 0.16 0.39 0.24 0.4 0.18 0.25 0.28 0.33 0.21 1.09 0.42 0 0.23
0.51 0.79 0.8 0.88 0.76 0.59 0.51 0.84 0.15 0.74 0.72 0.52 0.51 0.77 0.83 0.84 0.61 0.76 0.6 0.82 0.75 0.72 0.67 0.79 -0.09 0.58 1 0.77
37
Table no. V- 4 Cross sectional values for the year 2005/06
Company
Return 2005/06 1.14 1.79 1.55 0.91 0.67 0.87 0.63 0.43 1.05 0.33 1.16 1.38 -0.14 0.13 0.73 1.01 1.15 0.6 0.31 0.66 0.73 1.43 0.15 1.07 1.37 1.47 0.28 0.52
Debt-Equity
Dividend Payout
Retention
1.32 0.14 0.08 0.17 0.65 0.9 0.14 0.3 0.29 0 0.1 0.87 0.09 0.37 0.74 0.1 0.69 0.56 1 0.02 0.11 0.02 0.76 0.4 0.03 0.62 3.13 0.17
0.46 0.22 0.23 0.22 0.21 0.46 0.56 0.17 0.89 0.28 0.3 0.46 0.74 0.23 0.17 0.18 0.24 0.25 0.37 0.23 0.26 0.23 0.35 0.21 1.1 0.43 0.04 0.26
0.54 0.78 0.77 0.78 0.79 0.54 0.44 0.83 0.11 0.72 0.7 0.54 0.26 0.77 0.83 0.82 0.76 0.75 0.63 0.77 0.74 0.77 0.65 0.79 -0.1 0.57 0.96 0.74
38
Table no.V-5 Cross sectional values for the year 2006/07
Company
Return 2006/07 -0.06 0.0087 -0.1 0.02 0.01 0.03 -0.22 -0.28 -0.24 0.35 -0.22 0.33 -0.18 -0.19 0.73 0.1 -0.21 -0.12 -0.16 0.0005 0.05 0.21 -0.28 0.3 -0.23 0.24 0.37 -0.2
Debt-Equity
Dividend Payout
Retention
1.12 0.12 0.11 0.12 0.6 0.79 0.14 0.36 0.29 0 0.05 0.74 0.24 0.44 0.65 0.02 0.63 0.53 0.86 0.02 0.15 0.01 0.74 0.27 0.02 0.6 2.62 0.09
0.36 0.22 0.25 0.24 0.22 0.44 0.59 0.17 0.91 0.37 0.35 0.41 0.83 0.22 0.16 0.21 0.31 0.26 0.33 0.3 0.36 0.19 0.36 0.22 0.83 0.39 0.08 0.31
0.64 0.78 0.75 0.76 0.78 0.56 0.41 0.83 0.09 0.63 0.65 0.59 0.17 0.78 0.84 0.79 0.69 0.74 0.67 0.7 0.64 0.81 0.64 0.78 0.17 0.61 0.92 0.69
39
Table No V- 6
Cross Sectional Regression Results
Model Y = a + b1 X1 + b2 X2
Year
Multiple R
R2
b1
b2
t Stat (b1)
t Stat (b2)
P-value (b1)
P-value (b2)
2002/03
0.568105702
0.322744
-0.21639
0.27919117
-0.0235
3.414586
-0.106873
0.002185902
0.91574294
2003/04
0.416793091
0.173716
0.776505
0.57346257
0.155849
2.274929
0.1981405
0.031747941
0.84453753
2004/05
0.391987013
0.153654
0.051613
0.18019055
0.084841
2.124125
0.3172954
0.043729321
0.75365428
2005/06
0.21476446
0.046124
0.865467
-0.1496694
0.123884
-0.96335
0.2948673
0.344595005
0.7705301
2006/07
0.43999166
0.193593
0.122114
0.08086299
-0.44055
0.925565
-1.949585
0.363521334
0.06252737
40
The above table shows the year wise regression results of all the samples studied. Here Y denotes the return on the equity shares, X1 denotes debt equity ratio and X2 denotes dividend payout.
From the P- Values ascertained, we can conclude that:-
In the year 2002/03 there is no relationship between debtequity ratio and return on equity whereas there is relationship between dividend payout ratio and return on equity.
In the year 2005/06 there is relationship between debtequity ratio and return on equity and also between dividend payout ratio and return on equity.
In the year 2005/06 there is relationship between debtequity ratio and return on equity and also between dividend payout ratio and return on equity.
41
SECTION-II TIME SERIES REGRESSION ANALYSIS
V-7 ACC Ltd 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares -0.36 0.07 0.1 0.08 -0.04 -0.11 0.81 0.37 1.14 -0.06
Debt-Equity Ratio 1.22 1.45 1.35 1.4 1.52 1.39 1.44 1.39 1.32 1.12
Dividend Payout Ratio 1.7 0.4 0 0.79 0.39 0.66 0.41 0.49 0.46 0.36
Retention Ratio -0.7 0.6 0 0.21 0.61 0.14 0.39 0.51 0.54 0.64
V-8 BHEL Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.46 -0.11 -0.52 -0.28 0.08 0.23 1.58 0.2 1.79 0.0087
Dividend Payout Ratio 0.1 0.13 0.14 0.26 0.21 0.17 0.2 0.21 0.22 0.22
Retention Ratio 0.9 0.87 0.86 0.74 0.79 0.83 0.8 0.79 0.78 0.78
42
V-9 Cipla Ltd 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.25 0.5 0.77 0.31 -0.1 -0.3 0.62 0.09 1.55 -0.1
Retention Ratio 0.88 0.85 0.85 0.83 0.82 0.85 0.82 0.8 0.77 0.75
V-10 DR.Reddy's Lab Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.29 0.77 0.65 0.13 0.16 -0.16 0.06 -0.24 0.91 0.02
Debt-Equity Ratio
Dividend Payout Ratio
Retention Ratio
0.19 0.24 0.35 0.56 0.19 0.31 0.27 0.22 0.17 0.12
0.26 0.17 0.15 0.1 0.13 0.16 0.13 0.12 0.22 0.24
0.74 0.83 0.85 0.9 0.87 0.84 0.87 0.88 0.78 0.76
43
V-11 Grasim Industries Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares -0.33 -0.32 -0.05 0.22 -0.08 0.14 2.18 0.11 0.67 0.01
Debt-Equity Ratio
Retention Ratio
0.95 0.92 0.87 0.71 0.69 0.83 0.78 0.73 0.65 0.6
0.24 0.38 0.35 0.21 0.27 0.29 0.3 0.24 0.21 0.22
0.76 0.62 0.65 0.79 0.73 0.71 0.7 0.76 0.79 0.78
V-12 Ambuja Cement Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 Return on Shares -0.12 0.07 0.18 -0.02 -0.06 -0.22 0.8 0.32 0.87 0.03 0.98 0.83 0.74 0.94 1.1 0.92 0.94 0.94 0.9 0.79 Debt-Equity Ratio Dividend Payout Payout Ratio 0.43 0.45 0.18 0.45 0.5 0.4 0.43 0.41 0.46 0.44 Retention Ratio 0.57 0.55 0.82 0.55 0.5 0.6 0.57 0.59 0.54 0.56
44
IV-13 Hero Honda Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.69 0.8 0.31 -0.05 0.36 -0.47 1.56 0.09 0.63 -0.22
Debt-Equity Ratio
Retention Ratio
0.55 0.35 0.19 0.11 0.14 0.27 0.19 0.15 0.14 0.14
0.11 0.23 0.23 0.26 0.75 0.32 0.43 0.49 0.56 0.59
0.89 0.77 0.77 0.74 0.25 0.68 0.57 0.51 0.44 0.41
V-14 Hindalco Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares -0.06 -0.33 0.06 0.21 -0.29 -0.15 1.21 0.0073 0.43 -0.28
Debt-Equity Ratio
Retention Ratio
0.26 0.24 0.18 0.16 0.21 0.31 0.22 0.24 0.3 0.36
0.09 0.09 0.11 0.15 0.12 0.24 0.15 0.16 0.17 0.17
0.91 0.91 0.89 0.85 0.88 0.76 0.85 0.84 0.83 0.83
45
V-15 HUL Ltd 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.43 0.42 0.19 0.03 -0.08 -0.34 -0.0023 -0.14 1.05 -0.24
Retention Ratio 0.34 0.34 0.28 0.3 0.32 0.32 0.25 0.15 0.11 0.09
V- 16 Infosys Technologies Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 1.06 1.64 1.73 0.17 -0.45 0.13 0.19 0.76 0.33 0.35
Debt-Equity Ratio 0 0 0 0 0 0 0 0 0 0
Retention Ratio 0.87 0.91 0.89 0.88 0.83 0.87 0.88 0.74 0.72 0.63
46
V- 17 ITC Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.59 0.47 -0.02 -0.05 -0.06 0.11 0.66 0.23 1.16 -0.22
Retention Ratio 0.77 0.76 0.72 0.73 0.72 0.74 0.72 0.72 0.7 0.65
V- 18 L&T Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0 0.08 0.08 0.01 -0.27 0.0016 2.09 0.7 1.38 0.33
Retention Ratio 0.665 0.62 0.47 0.43 0.50 0.54 0.51 0.52 0.54 0.59
47
V-19 Ranbaxy Laboratories Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.03 0.41 0.27 -0.04 0.11 0.11 0.48 0.02 -0.14 -0.18
Retention Ratio 0.69 0.47 0.51 0.47 0.54 0.54 0.51 0.51 0.26 0.17
V-20 Reliance Energy Ltd 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.13 -0.14 0.07 0.05 0 -0.02 2.53 -0.3 0.13 -0.19
Retention Ratio 0.79 0.77 0.78 0.79 0.79 0.78 0.74 0.77 0.77 0.78
48
V-21 Reliance Industries Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.27 0 0.35 0.47 -0.04 -0.07 0.9 0.02 0.73 0.73
Dividend Payout Ratio 0.24 0.24 0.19 0.19S 0.20 0.21 0.21 0.17 0.17 0.16
Retention Ratio 0.76 0.76 0.81 0.81 0.80 0.79 0.79 0.83 0.83 0.84
V-22 Satyam Computers Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 1.06 1.86 1.91 0.03 -0.72 0.31 0.63 0.33 1.01 0.1
Retention Ratio 0.70 0.88 0.89 0.95 0.91 0.87 0.86 0.84 0.82 0.79
49
V-23 TATA MOTORS Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares -0.19 -0.34 -0.42 -0.4 -0.08 0.23 2.02 -0.16 1.15 -0.21
Dividend Payout Ratio 0.53 0.87 1 0 0 0.48 0.47 0.39 0.24 0.31
Retention Ratio 0.47 0.13 0 1 1 0.52 0.53 0.61 0.76 0.69
V-24 Tata Power Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares -0.1 -0.23 -0.35 0.2 0.25 -0.0079 2.26 -0.06 0.6 -0.12
Retention Ratio 0.71 0.71 0.77 0.73 0.81 0.75 0.75 0.76 0.75 0.74
50
V-25 Tisco Ltd 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares -0.15 -0.2 -0.17 0.11 -0.12 0.36 1.79 0.53 0.31 -0.16
Debt-Equity Ratio 1.08 1.16 1.13 1.01 1.13 1.1 1.16 1.12 1 0.86
Retention Ratio 0.49 0.42 0.59 0.61 0.27 0.48 0.51 0.6 0.63 0.67
V-26 Wipro Ltd 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 1.01 1.68 1.87 0.02 -0.77 -0.27 0.06 0.47 0.66 0.0005
Retention Ratio 0.92 0.93 0.96 0.98 0.97 0.95 0.96 0.82 0.77 0.7
51
V-27 Zee Entertainment ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.51 1.25 2.1 -0.06 -1.28 -0.62 0.87 -0.0068 0.73 0.05
Retention Ratio 0.72 0.82 0.76 0.84 0.76 0.78 0.78 0.75 0.74 0.64
V-28 ABB Ltd 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares -0.01 -0.12 -0.45 -0.39 0.12 0.08 1.69 0.48 1.43 0.21
Retention Ratio 0.4 0.38 0.53 0.65 0.73 0.54 0.61 0.72 0.77 0.81
52
V-29 BPCL Ltd 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.11 -0.26 -0.24 0.05 0.07 -0.34 1.12 -0.28 0.15 -0.28
Retention Ratio 0.84 0.7 0.67 0.7 0.61 0.7 0.66 0.67 0.65 0.64
V-30 Britannia Industries Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.47 1.03 0.07 -0.49 -0.06 -0.09 0.26 0.38 1.07 0.3
Retention Ratio 0.65 0.71 0.73 0.76 0.9 0.75 0.76 0.79 0.79 0.78
53
V-31 Colgate Palmolive Ltd 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.02 -0.16 -0.37 -0.03 -0.06 -0.16 0.08 0.35 1.37 -0.23
Dividend Payout Ratio 0.55 1 0.87 1.9 0.88 1.04 1.07 1.09 1.1 0.83
Retention Ratio 0.45 0 0.13 -0.9 0.12 -0.04 -0.07 -0.09 -0.1 0.17
V-32 M & M Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.05 -0.13 0.04 -0.28 -0.57 -0.11 3.59 0.04 1.47 0.24
Debt-Equity Ratio 0.98 1 0.69 0.52 0.71 0.78 0.75 0.66 0.62 0.6
Retention Ratio 0.75 0.72 0.74 0.45 0.45 0.62 0.57 0.58 0.57 0.61
54
V-33 SAIL Ltd 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares -0.51 -0.56 -0.16 0.02 -0.3 0.77 2.41 0.84 0.28 0.37
Dividend Payout Ratio 0.34 0 0 0 0 0.07 0 0 0.04 0.08
Retention Ratio 0.66 1 1 1 1 0.93 1 1 0.96 0.92
V-34 MTNL Ltd. 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Return on Shares 0.18 -0.14 -0.08 -0.08 -0.29 -0.36 0.29 -0.17 0.52 -0.2
Retention Ratio 0.82 0.83 0.8 0.8 0.78 0.81 0.77 0.77 0.74 0.69
55
Table No V-35
Time Series Regression Results for 28 Companies Studied (1998-2007)
Model Yi t = a + b1t X1t + b2 t X2 t
Companies
Multiple R
b1
b2
t Stat (b1)
0.226499
t Stat (b2)
-1.01632
P-value (b1)
0.827285
P-value (b2)
0.343311
ACC Ltd.
0.40288827
0.162319
-0.0246
0.32125863
-0.37511
BHEL Ltd.
0.2436021
0.059342
-0.54422
2.28502478
2.944206
0.486555
0.517941
0.641437
0.620462
Cipla Ltd.
0.1678232
0.028165
-0.04685
-0.2160775
2.352908
-0.01954
0.37337
0.984953
0.719923
Dr Reddy Lab
0.35474375
0.125843
-0.46095
0.65455647
3.264638
0.449173
0.975223
0.666884
0.361939
Grasim Ind. Ltd.
0.27356157
0.074836
1.3709
-2.2413817
2.275601
-0.73794
0.377251
0.484548
0.717164
Ambuja Cements Ltd. Hero Honda Ltd.
0.14922557
0.022268
0.570709
-0.7156693
0.63643
-0.39533
0.300263
0.704371
0.772697
0.27135725
0.073635
-0.12946
1.49072382
0.420736
0.705298
0.29337
0.503412
0.777746
Hindalco Ltd.
0.36991977
0.136841
0.352976
-3.0252098
3.296591
-0.99295
0.797534
0.353812
0.451342
56
HUL Ltd.
0.45733485
0.209155
1.688412
3.64549665
-2.75115
1.319079
-0.97115
0.228653
0.363825
ITC Ltd.
0.27932319
0.078021
1.746411
-0.2599336
-4.96708
-0.19452
-0.55695
0.851291
0.594914
L&T
0.20352151
0.041421
0.613064
-2.3858241
4.40579
-0.48769
0.5495
0.64067
0.599746
M&M
0.05270704
0.002778
0.565903
-0.2987944
0.219584
-0.07327
0.037139
0.943639
0.971411
Ranbaxy Lab Ltd Reliance Energy Reliance Industry Satyam Com Ltd Tata Motors Ltd Tata Power Ltd. TISCO Ltd.
0.48819009
0.23833
0.410134
0.20725845
-0.65498
0.287061
-1.22619
0.782377
0.25977
0.79496339
0.631967
-9.67432
-0.0688275
44.23942
-0.04507
3.418412
0.965308
0.011159
0.42198657
0.178073
1.504832
-0.5021859
-3.65775
-0.41056
-0.68077
0.693669
0.517893
0.81616009
0.666117
-0.53525
1.45097903
2.680491
3.632467
1.026393
0.00837
0.338861
0.14733989
0.021709
0.812577
-0.6536685
-0.27784
-0.20595
-0.29904
0.842689
0.773595
0.10533996
0.011097
0.995187
-0.0393482
-2.87795
-0.00863
-0.2801
0.993353
0.787499
0.45757401
0.209374
-2.72145
3.73087675
-2.24392
1.340533
-1.02148
0.221943
0.341024
Wipro Ltd.
0.54852847
0.300883
-0.07844
1.28895358
1.465521
1.735694
0.508889
0.126198
0.626474
Zee Telefilms ABB Ltd
0.17748475
0.031501
0.348287
2.01824475
-1.13219
0.459031
-0.16669
0.660125
0.872327
0.38281811
0.14655
1.001274
-0.9003199
-1.70145
-0.03429
-0.40177
0.973605
0.699837
BPCL Ltd.
0.25774483
0.066432
-0.47933
1.05771114
-0.96189
0.698066
-0.31029
0.507654
0.765378
57
Britannia Ind Ltd. Colgate Palmolive SAIL
0.37974608
0.144207
0.172297
0.99189613 5.81655243
3.011934
-0.82797
1.009351
0.435002
0.346416
0.16596328
0.027544
-0.19744
0.106256
0.278919
0.178019
0.788367
0.86375
0.44672251
0.199561
-2.25903
0.84645154
0.225942
0.996269
0.057933
0.352304
0.955421
MTNL
0.31459737
0.098972
-0.81307
0.23544767
2.969568
0.741758
0.859731
0.482374
0.418405
58
From the above Table, considering the P- Values we may conclude that:ACC Ltd - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
BHEL Ltd - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
CIPLA LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
DR REDDY LAB - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
GRASIM IND LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
AMBUJA CEMENTS LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
HERO HONDA LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
HINDALCO LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
59
HUL LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
ITC LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
L & T - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
M & M - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
RANBAXY LABS LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
RELIANCE ENERGY - There exists relationship between return on equity and debtequity ratio whereas there is no relationship between return on equity and dividend payout ratio.
RELIANCE INDUSTRIES LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
SATYAM COMPUTERS - There is no relationship between return on equity and debtequity ratio whereas there exists relationship between return on equity and dividend payout ratio.
60
TATA MOTORS LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
TATA POWER LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
TISCO LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
WIPRO LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
ZEE ENTERTAINMENT - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
ABB LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
BPCL LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
BRITANNIA INDUSTRIES LTD - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
COLGATE PALMOLIVE - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio. 61
SAIL - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
MTNL - There exists relationship between return on equity and debtequity ratio and also between return on equity and dividend payout ratio.
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CHAPTER VI
63
DISCUSSION
The study started with reviewing the previous research papers explaining the impact of the dividend decisions on the value of the firm. The most popular research result is that of Modigliani and Miller. They prove that dividend is irrelevant. As against this theory Walter and Gordon through their model explained that dividend is very relevant. Here the study focused on finding out whether dividend affects the value of the firm or not.
Through convenient sampling 28 Indian Public Limited companys actual data were analyzed. Here under the study the effect on the return on equity is considered as an indicator to the effect on the value of the firm. Using a multiple regression model an attempt is made to establish the relationship between the return on equity & debt and dividend of the companies selected for the study. Here the expected values of the dividend pay out and debt to equity is regressed with actual return to find out the association, if any.
The results of the study show that the impact of the dividend on the value of the firm is significant. Out of the 28 sample companies studied all the companies showed a significant association between the debt and the return on equity except one that is SATYAM COMPUTERS. Similarly, all the companies showed evidence of significant relation between dividend and return on shares except one that is RELIANCE ENERGY. Thus it can be observed that in the cross sectional analysis of the companies the Return on Equity shares does show significant relationship with Debt Equity and dividend Payout. And in case of Company wise time series analysis all the companies, except two as shown in TABLE 35 above, shows relationship between the variables. Thus we infer that investors do give importance to capital structure and the dividend policy of the companies as a whole.
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FINDINGS OF THE STUDY Cross Sectional Regression Analysis

The results of the Cross sectional Regression for the Five Years from 1997/98 to 2006/07 (Table No.6) Shows that for the selected samples there is evidence of significant relationship between Return on Equity & the Debt Equity ratio and dividend payout.
Time Series regression Analysis

The results of the Time Series Regression for the Ten-year data (1997/98 to 2006/07) as per the Table No.35 show that there exists significant relationship between the Return on equity & Debt Equity and Dividend payout other than for the following samples.
Reliance Energy: This sample also shows that there does not exist a significant relationship between the Return on the Equity and the Dividend Payout Ratio. The t calculated value is 3.41.
Satyam Computers Ltd: The Capital structure does not seem to have a relationship with the Return on equity shares in this sample. For the variable, Debt Equity Ratio the t calculated value is 3.63.
Hypothesis Testing
H0: Dividend Policies affect the value of the firm.
H1: Dividend Policies does not affect the value of the firm.
The hypothesis is tested by using t test significant at 5%.
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The Cross sectional Regressions results as per table no. 6 shows the t value calculated for the period of analysis i.e.; 2002/3 to 2006/07. It can be seen that the t values calculated show significant relationship between the return on equity & dividend payout. The Time series Regression results as per table no. 35 shows the t value calculated for each sample for ten years value (1997/98 to 2004/07). Here also there is evidence of relationship between return on equity share prices and dividend payout.
Thus at 5% level of significance using t test H0 IS ACCEPTED, which implies there is effect.
SUMMARY AND CONCLUSION The main objectives of the study were To find out whether dividend decisions affect the share prices. To find the extent to which the Debt Equity ratio affects the share prices. To describe the companies under study in terms of their dividend payout ratio, Retention ratio and Debt Equity ratios. The study was conducted in three stages 1. Collection of the required data namely the Income statement, Balance Sheet and the share prices for ten years (1998-2007) of the samples under study. 2. Calculation and tabulation of the variables under study namely Dividend payout Ratio, Retention Ratio, Debt-Equity Ratio and Return on Equity share prices.
3. Analysis and interpretation: The study was focused on finding the relationship existing between the dependent variable; return on equity
66
share prices and the independent variables, dividend payout and debt equity ratio. The data were collected through verification of financial statements of the company and the historical price data available in the NSE and BSE websites. The data were interpreted using descriptive statistics and Multiple Regression Analysis.
The salient findings of the study are: There is significant effect of dividend / retention and debt equity ratio
on share prices. Out of the variables under study it can be noticed that dividend and share
prices have a notable relationship between each other.
LIMITATIONS
The sampling technique used is a convenient sampling technique, which limits the generalization of the findings. The data collected are historical data and no adjustment is made to capture the abnormal events which affect the variables under study
RECOMMENDATIONS
The same study can be conducted including more samples and for a longer period. The relationship existing between the Debt-Equity Ratio and Dividend Payout can be studied in depth.
67
Bibliography
BOOKS
Financial Management, Sixth Edition, M Y Khan and P K Jain, Tata McGraw Hill Publications. Financial Management Theory and Practice, Sixth Edition 2004, Prasanna Chandra, Tata McGraw Hill Publications. Financial Management, Eight Edition 2004, I M Pandey, Vikas Publications Pvt Ltd. Business Research Methods, Nineth Edition 2006, Donald R Cooper & Pamela S Schindler, Tata McGraw Hill Publications. Statistical Methods, 6th Edition (2006), S.P Gupta, Sultan Chand & Sons.
JOURNALS
Prasanna Chandra, (1995). Shareholder Wealth Maximization, The ICFAI Kenneth M Eades, (1982). Empirical evidence on dividends as a signaling of firms value, journal of Finance and Quantitative Analysis, November.
WEBSITES www.capitaline.com www.beginersinvest.about.com www.investopedia.com www.investorwords.com www.peacedividend.com www.studyfinance.com www.indiainfoline.com
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Research Project: Prasanna Hegde

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Impact of Dividend Policies on the Value of the Firm.

IMPACT OF DIVIDEND POLICIES ON THE VALUE OF THE FIRM

M.P.BIRLA INSTITUTE OF MANAGEMENT

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

Date: Place: Bangalore

PRASANNA HEGDE (O6XQCM6061)

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

CHAPTER - V SECTION-I SECTION-II CHAPTER-VI

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

Cross Sectional Values for the year 2002/03

Cross Sectional Values for the year 2003/04

Cross Sectional Values for the year 2004/05

Cross Sectional Values for the year 2005/06

Cross Sectional Values for the year 2006/07

Cross Sectional Regression Results

Time Series Table of the Companies

Time Series Regression Results

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

BACKGROUND AND NEED FOR THE STUDY

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

STATEMENT OF THE PROBLEM

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

OBJECTIVES OF THE STUDY

1 To describe the samples selected in terms of the financial ratios.

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

Extra: Those that may not be repeated.

Special: Those that is unlikely to be repeated.

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

Patronage Dividend: A taxable distribution made by a cooperative to its members or patrons.

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

Capital Structure (Debt-Equity)

How Shareholders' Wealth Grows

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.

D/P Ratio = Dividend Paid / Net profit after tax

Retention Ratio = 1 D/P Ratio.

D/E Ratio = Debt / Equity

M P Birla Institute of Management

Impact of Dividend Policies on the Value of the Firm.