Dividend policy and share price volatility: UK evidence

Abstract

Forthcoming Journal of Risk Finance 20102 ABSTRACT Purpose: The purpose of this paper is to examine the relationship between dividend policy and share price changes in the UK stock market. Following Baskin (1989) and Allen and Rachim (1996), we use a multiple regression analyses to explore the association between share price changes and both dividend yield and dividend payout ratio. Methodology: Findings:We find a positive relationship between dividend yield and stock price changes and a negative relationship between dividend payout ratio and stock price changes. In addition, our results show that firm's growth rate, debt level, size and earnings explain stock price changes. Practical implications:The study supports the fact that dividend policy is relevant in determining share price changes for a sample of firms listed in the London Stock Exchange. The challenge for managements/accountants is to generally improve the quality of the financial statements (i.e. income statement) to avoid producing wrong information which could lead to wrong decisions by investors. Originality:To the best of our knowledge, this research is the first to show that corporate dividend policy is a key driver of stock prices changes in the UK.

The influence of dividend policy on the volatility of shares in the Romanian equity capital market

“…It shows the statistical means and standard deviation. Following [19], if it is assumed that share prices follow a normal distribution and the effect of company's going exdividend is not took into consideration, the standard deviation of stock market returns correspond to the determined volatility of this study [14]. It can be computed using [20] formula.…”

“…Size (SZ) is one of the control variable measured by using the natural logarithm of total assets [18]. Growth in assets (GROWTH) is determined as the ratio of the change in total assets at the end of the year to the level of total assets at the beginning of the year [14]. Debt ratio (DR) is the ratio of total debt to total assets.…”

“…Following [4,10,14,16], several control variables were included to account for certain factors that affect both stock price volatility and dividend policy, namely, firm size, growth in assets, debt ratio and earnings volatility.…”

“…The price volatility is associated negatively with both proxies of the dividend policy. In the UK stock market [14] found a significant and negative relationship between the payout ratio and dividend yield with the stock price volatility. In the US equity capital market dividend policy and stock price volatility is analyzed by ordinary least square regression [10] and, the stock with high dividend is less risky.…”

“…The common stock's volatility is a measure used to establish risk, indicating the rate of change in the stock's price over a determined period [14]. The smaller the volatility, the smaller possibility of gain or loss in short-term is.…”