Dividend policy and its effect on shareholders’ wealth: A study on indian banking sector in liberalized ERA

The dividend policy may be constructed as distribution (i.e., timing and pattern) of dividend payment. There are three schools of thoughts on dividend policy. The first school of thought is of the opinion that dividends neither enhance nor diminish value and accordingly, stock holders are indifferent between receiving dividends and enjoying price appreciation. The proponents of the second view are of the opinion that dividends destroy value for stockholders because they are taxed at much higher rates than capital gains. The third school of thought argues that dividend can be value increasing, at least for some firms. In this paper we would like to analyse the effect of dividend policy on shareholders’ wealth in the Indian banking sector in post liberalization era during 2000–2001 to 2010–2011. The present study is based on all banking companies which are listed on NSE over the decade from 2000–2001 to 2010–2011. In relation to the objective of our study, we have collected data for the said banking companies on required variables from “CAPITALLINE”. In order to measure the effect of dividend policy on shareholders’ wealth regression method has been used by taking DPS (dividend per share), RE (retained earnings per share), PE(t-1) (Lagged price earning ratio) and MPS(t-1) (Lagged market price per share) as independent variables and MPSt (market value per share in the current period) as dependent variable. To ascertain the proportion of explained variation in the dependent variable, coefficient of determination has been reported and tested accordingly.