The Effects of Dividend Policy On the Price of Shares of Microfinance Companies In Developing Countries

Abstract

The strategy of dividend policy implementation in the context of business value growth is the subject of debates in theoretical and empirical research. Dividends and retained earnings are two alternatives that investors have when deciding how to distribute their income. According to the bird-in-the-hand theory, a company’s value is maximized by paying large dividends, because investors consider the payouts less risky than capital gains, regular high dividend payments serve as an information signal to market participations about the current and future financial stability, which attracts new investors and allows attracting more external resources. Instead, according to Miller and Modigliani’s dividend irrelevancy theory, corporate value is influenced not by the division of income into dividends and retained earnings, but by investment policy and income from assets. There is a lack of research in the literature that examines the relationship between dividend payouts and stock prices in developing countries (especially in Nepal) and there is no empirical evidence that profitability can moderate this relationship. The article examines the influence of dividend yield, retention ratio and dividend payout ratio on share price both in general and directly, and indirectly-through return on assets and return on equity. The information base is data for the 2017-2021 financial years on 61 Nepalese microfinance institutions (10 of which were the direct object of the study) registered on the Nepal Stock Exchange (NEPSE), obtained from the official websites of the relevant institutions, ShareSansar and NEPSE statistics. SPSS software (PROCESS v4.3) was used for data analysis. Descriptive statistics, the correlation and regression analysis were used for the analysis. The article analyzes three types of effects: total, direct and indirect. The overall effect of dividend yield on share price is negative, the retention ratio is positive and significant, and the dividend payout ratio is negative and significant. The direct effect of the dividend yield on the stock price is negative, the retention ratio and the dividend payout ratio are positive and insignificant. The indirect effect of dividend yield and retention ratio on share price through return on assets is negative and insignificant, and through return on equity it is positive and significant. The indirect effect of the dividend payout ratio through the return on assets is positive and significant. However, the return on shareholders’ capital has a negative and insignificant effect on the share price.