Dividend Policy and Its Impact on Share Price

DIVIDEND POLICY AND ITS IMPACT ON SHARE PRICE (ANALYSIS OF SELECTED “A” CLASS LISTED COMPANIES)

Submitted By Bijendra Bahadur Malla Roll No.: 740090 Reg. No: 2007-2-22-0056

A Research Report Submitted To Prof. Dr. Prem Raj Pant Apex College Pokhara University

ACKNOWLEDGEMENTS

This Study has been under taken to analysis the “Dividend Policy and its Impact on Share Price (Analysis of selected “A” Class Listed Companies)” under partial fulfillment of the requirement of MBA degree. The thesis mainly covers the dividend policy and its impact on share price of “A” class listed companies of  Nepal. I would like to express my deep gratitude to Professor Dr. Prem Raj Pant, for his kind support, advice and continuous support for the thesis writing. I would like to express my deep greet to my respected supervisor, Mr. Pushpa Raj Joshi and Mr. Bharat Singh Thapa for his continuous guidance and supervision. The report in this form is the result of their inspiring and invaluable guidance and supervision. I express sincere thanks to all librarians of Apex College who helped me directly

CERTIFICATE OF AUTHORSHIP

I, hereby declare that this submission is my own work and that to the best of my knowledge and belief, it contains no materials previously published or written by another person nor material which to a substantial extent has been accepted for the award of any other degree of university or other institutions, except where due acknowledgement is made in the acknowledgements.

Date: ……………

…………………… Bijendra Bdr. Malla

TABLE OF CONTENTS

Acknowledgements Certificate of Authorship Table of Contents List of Tables List of figures Abbreviations Executive Summary

I II III VI VII VIII XI

Chapter 1 Introduction 1.1 1.2 1.3 1.4 1.6 1.7

Background of the Study The Problem Statement Purpose of the Study Significance of the Study Limitations of the Study Organization of the Study

Chapter 2 Review of Literature

1 5 6 7 7 8

Chapter 3 Methodology

3.1 3.2 3.3 3.4 3.5

The Research Design The Population and Sample Sources of Data Methods of Data Analysis Tools Used 3.5.1 Arithmetic Arithmetic Mean (A.M.) 3.5.2 Standard Deviation (S.D.) 3.5.3 Coefficient of Variation (C.V.) 3.5.4 Karl Pearson’s Correlation Coefficient (r) 3.5.5 T-statistics T-statistics 3.5.6 F-statistics

44 44 46 46 46 46 47 47 47 48 48

Chapter 4 Presentation and Analysis of Data

4.1 4.2 4.2.1 4.2.2

No. of Cash Dividend paying listed companies Cash Dividend Payment of sector-wise financial institutions Cash Dividend Payment of Commercial Banks Cash Dividend Payment of Development Banks

49 50 50 52

4.4.2 4.4.3 4.5

Test of hypothesis on Cash Dividend Payment of  Development Banks Test of Hypothesis on Cash Dividend Payment of  Manufacturing and Processing Companies Major Findings

64 65 66

Chapter 5 Summary and Conclusions

5.1 5.2 5.3

References Appendix

Summary of Findings Conclusions Recommendations

69 70 71

LIST OF TABLES

Table No.4.1 Table No.4.2 Table No.4.3 Table No.4.4 Table No.4.5 Table No.4.6 Table No.4.7 Table No.4.8 Table No.4.9 Table No.4.10 Table No.4.11 Table No.4.12 Table No.4.13

Number of Cash Dividend Paying listed company Cash Dividend Payment of Commercial Banks Cash Dividend Payment of Development Banks Cash Dividend Payment of Insurance Company Cash Dividend Payment of Finance Company Cash Dividend Payment of Manufacturing and Processing companies Cash Dividend Payment of Other Company Price effect after Cash Dividend Payment on Fiscal Year 2003/04 Price effect after Cash Dividend Payment on Fiscal Year 2004/05 Price effect after Cash Dividend Payment on fiscal year 2005/06 Price effect after Cash Dividend Payment on fiscal year 2006/07 Price effect after Cash Dividend Payment on fiscal year 2007/08 One-way AVOVA table for Cash Dividend Payment

49 50 50 53 53 55 56 58 59 60 61 62 63

LIST OF FIGURES

Fig. No. 4.1 Fig. No. 4.2 Fig. No. 4.3 Fig. No. 4.4 Fig. No. 4.4 Fig. No. 4.5

Number of Cash Dividend Paying Listed Companies Cash Dividend Payment of Commercial Banks Cash Dividend Payment of Development Banks Cash Dividend Payment of Finance Companies Cash Dividend Payment of Manufacturing and Processing Companies Cash Dividend Payment of Other Companies

49 51 52 54 55 57

ABBREVIATIONS

A.D.

Anno Domini

AFC

Annapurna Finance Company Limited

AGM

Annual General Meeting

A.M.

Arithmetic Mean

ANOVA

Analysis of Variance

BFL

Bhajuratna Finance and Saving Company Ltd.

BNL

Bottlers Nepal Limited

BOD

Board of Directors

CBBL

Chimeki Bikas Bank Ltd.

CDND

Cash Dividend Not Declared

EIC et.al

Everest Insurance Company Limited and others Latin:et aili

F/Y

Fiscal Year

HBL

Himalayan Bank Limited

HGI

Himalayan General Insurance Company

Ltd.

Limited

MPS

Market Price per Share

MSC

Mean sum of square between columns

MSE

Mean sum of square due to error

NABIL

Nabil Bank Limited

NEPSE

Nepal Stock Exchange

NIBL

Nepal Investment Bank Limited

NLIC

Nepal Life Insurance Company Limited

SCBNL

Standard Chartered Bank Nepal Limited

S.D.

Standard Deviation

SEBON

Securities Board of Nepal

SSC

Sum of square between samples

SSW

Sum of square within samples

TSS

Total Sum of Square

UIC

United Insurance Company (Nepal) Ltd.

UNL

Unilever Nepal Limited

%

Percent

EXECUTIVE SUMMARY

Dividend policy decision is one of the three decisions of financial management because it affects the financial structure, the flow of funds, corporate liquidating and investors’ attitudes. The main aspect of dividend policy is to determine the amount of earning to be distributed the shareholder and the amount to be retained in the firm. Divined policy involves the decision to pay out earning versus retaining them for reinvestment in the firm. The relationship between dividend and the value of the share is not clear cut. The financial manager must understand the various conflicting factors which influence the dividend policy before deciding the allocation of its company’s earnings into dividends and retain earnings. This study focuses on the dividend practice and its influence in prospect of Nepal of  “A” class listed companies in Nepal. The empirical testing has been proved that exday stock price tend to fall by significantly less than the dividend. They interpret the result as consistent with a clientele effect where investors in high tax brackets show a preference for capital gains over dividends and vice versa.

Chapter 1 Introduction

1.1 Background of the Study

After the restoration of democracy in 1990 A.D., Nepal has implemented liberal economic policy. As a result, many more companies are established in different sectors such as industrial, tourism, transportation, trade and mostly in financial sector who contribute to build up economy of the country. Nepal is a country trying to develop its economy through global trend and cooperation with developed countries. The development of an economy requires expansion of productive activities, which in turn is the result of the capital cap ital formation, which is the capital stock of the country. The change in the capital stock of the country is known as investment. Investment is key factor for capital formation. Investment promotes economic growth and contributes to a nation’s wealth. Investor desire to earn some return from the investment, without any return there is no any investment. Investment will block, if 

firm. The objective of a dividend policy should be to maximize shareholder’s wealth position. Retained earnings are used for making investment in favorable investment opportunities, which in turn help to increase the growth rate of the firm. What and how much it is desirable to pay dividend is always a controversial topic because shareholders expect higher dividend from corporation, but corporation ensure towards setting aside funds for maximizing the overall shareholders’ wealth. Management is therefore concerned with the activities of corporation that affect the well being of shareholders. That well being can be partially measured by the dividend received, but a more accurate measure is the market value of stock. But stockholders think dividend yield is less risky than capital gain. Dividends are payments made by a corporation to its shareholders. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business i.e. retained earnings, or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend.

the cost of retaining earnings. Generally, whichever component has a lower cost that is where the profit after-tax will flow. However, there is a need to strike for a balance because it is a zero sum decision.1 Although firms do not have obligations to declare dividends on common stock, they are normally reluctant to change their dividend rate policy every year as the firms strive to meet stockholders’ expectation, build a good image among investors and to signal that the firm has stable earnings to the public. The theory of dividend and its effect on the value of the firm is perhaps one of the most important yet puzzling theories in the field of finance. Academics have developed many theoretical models describing the factors that managers should consider when making dividend policy decisions. By dividend policy, we mean the payout policy that managers follow in deciding the size and pattern of cash distributions to shareholders over time. Miller and Modigliani (1961) argue that given perfect capital markets, the dividend decision does not affect firm’s value and is, therefore, irrelevant. However, most financial practitioners and many academicians believe otherwise. They offered many theories about how dividends affect firm’s value and how managers should make dividend policy decisions. Over time, the number of factors identified in the literature as being important to consider

investment, without any return there is no any investment. Investment will block, if  there is no return. The total expected return include two components one is capital gain and other is dividend. In the capital market, all firms operate in order to generate earnings. Shareholders make investment in equity capital with the expectation of making earning in the form of dividend or capital gains. Thus, shareholders wealth can increase through either dividend or capital gain. Once the company earns a profit, it should decide on what to do with the profit. It could be continued to retain the profit within the company, or it could pay out the profit to the owners of the company in the form of  dividend. Dividends are payment made to stockholders from a firm’s earning in return to their investment. Dividend policy is to determine the amount of earnings to be distributed to shareholders and the amount to be retained or reinvestment in the firm. The objective of a dividend policy should be to maximize shareholder’s wealth position. Retained earnings are used for making investment in favorable investment opportunities, which in turn help to increase the growth rate of the firm. What and how much it is desirable to pay dividend is always a controversial topic because

of the company but several researchers argue the fact that dividend affect stock  price, rather it is the information declaration of dividend that affect the stock price. It is fact that dividend work as a simple sufficient signal of management’s interpretation of the firm’s recent performance and its future prospects.

1.2 The Problem Statement

Dividend policy is an integral part of financial management decision of a business firm. Dividend refers to that portion of a firm’s net earning which are paid out to the shareholders. Whether dividends have an influential on the value of the firm is the most critical question in dividend policy. If dividends are irrelevant, the firm should retain earnings for investment opportunities. If there are not sufficient investment opportunities providing expected returns in excess of the required return, the unused funds should be paid out as dividends. Dividend is the most inspiring factor for the investment on shares of the company is thus desirable from the stockholder's point of view. In one hand the payment of  dividend makes the investors happy. But in the other hand the payment of dividend

investment. But, the dividend decision is still a fundamental as well as controversial area of managerial finance. The effect of dividend on market price of stock is the subject matter of the study. There are many empirical studies on dividend and stock price behavior. For example, few of them are Linter (1956), Miller and Modigliani (1961), Durand and May (1960), Friend and Puckett (1964), Fama and Babiak (1968), Elton and Gruber (1970), Frank and Jagannathan (1998), Uddin (2003), Foong, Zakaria and Tan (2007). However, conclusive relationship exists between the amount paid out in dividend and the market price of the share. There is still a considerable controversy concerning the relation between dividend and stock price.

Theoretically, the share price should fall down after the book closure by an amount to the amount of cash dividend, in case the company is going to distribute cash dividend. For example, if the share price of ABC Company on one day before the book closure was Rs. 1000 and the company had declared Rs.70 per share as cash dividend, which was to be formalized in the coming AGM. The price per share in the first transaction after the book closure should be around Rs. 930.

1.4 Significance of the Study

In the capital market the investor can earn return in two ways, one is dividend and another is capital gain. The term dividend is defined as a return from investment in equity shares. So dividend is important factor for investor while investing in equity shares. This study helpful to investor to take rational decision like where to invest, how to invest, what portfolio should be made to obtain maximum profit from their investment? When a new company floats shares through capital market, large numbers of people gathers to apply for owner's certificate. It indicates people's expectation on higher return of investment in shares. In Nepalese context, most of  investors are investing in the stock without adequate knowledge of the company and performance and dividend policies. This study helps to aware the Nepalese investors. This study is useful for the firm’s perspective too. They know the investor objective’s from this study. There are basically two types of objective one is receiving dividend and another is receiving capital gain. Knowing the objective of  investor they can develop their plans and policies accordingly.

3. The result and the interpretation are completely rigid and from the view point of the researcher.

4. Among the different aspect of dividend policy only cash dividend is taken for the analysis.

1.6 Organization of the Study

The whole study has been divided into five chapters.

Chapter 1

Introduction

In this chapter we deal with the introductory part of the study which includes background of the study, statement of the problem, objective of the study, significance and limitation of the study

Chapter 2

Review of Literature

This chapter deals with review of the different literature in regard to the theoretical

Chapter 5

Summary and Conclusions

Here we will give the summary and conclusions of the study and recommendations for further studies.

Chapter 2 Review of Literature

2.1 Conceptual Framework 2.1.1 Meaning of Dividend

The term dividend is defined as a return from investment in equity shares. The profit made by the firm which is distributed to the shareholders termed as dividend. Every firm after making profit either retain the money for further investment or distribute it among the shareholders. The firm should decide whether to keep the money as retained earning or pay the dividend. It may be in cash, share and combination of  both. The dividend policy is the policy followed by the firm regarding the dividend versus retention decision. Dividend policy of different organization may same or different, but the policy followed by the firm should be suitable for both the shareholders as well as the firm itself. Dividend policy decision is one of the three decisions of financial management

bad. The dividend policy should be optimal which balances the opposing forces and maximizes stock prices. Since the motive of shareholder is to receive returns on their investment. There is an adverse relation between retained earning and cash dividend. When the amount of  retain earning is high, the company declares less dividend and when the high dividend is paid than retain earning is reduced, which reduce the opportunity to reinvest and expansion of the organization. So dividend decision is one of the major decisions of managerial finance. This decision consist the decisive decision of  choosing between distributions of profit to shareholders or investing them back into the business. Dividend decision has great influence on financial structure, flows of  funds, corporate liquidity and so on. The relationship between dividend and the value of the share is not clear cut. The financial manager must understand the various conflicting factors which influence the dividend policy before deciding the allocation of its company’s earnings into dividends and retain earnings. In fact, dividend is the portion of the net earnings, which is distributed to the shareholders by a company. After successfully completing the business activities of 

under taken.’ Using this approach the Firm would treat the dividend decision in three steps as follows: Step 1

Determine the optimum level of capital expenditure which would be the level generated by the point of intersection of the investment opportunities schedule (IOS) and weight managerial cost of capital (WMCC) function.

Step 2

Using the optimal capital structure proportion, it would estimate the total amount of equity financing needed to support the expenditures generated in step 1.

Step 3 Because of the cost of retained earnings is less than the cost of new common

stocks; retained earnings would be used to meet the equity requirement determined in step 2. If retained earnings are inadequate to meet this need, new common stock would be sold. If the available retain earning are in excess to this needs, the surplus amount would be distributed as dividends. (Gitmen, 2001, p.544)

ii.

Wealth maximization theory

a. Stock Dividend/Bonus Share A stock dividend occurs when the board of directors authorizes a distribution of  common stock to existing shareholders. Stock dividend increases the number of  outstanding shares of the firm’s stock. Although stock dividend does not have a real value, firms pay stock dividend as a replacement for a supplement to cash dividend. Under stock dividend, shareholders receive additional shares of the company in lieu of cash dividends. Stock dividend requires an accounting entry transfer from the retained earnings account to the common stock and paid in capital accounts. Rupees transferred from retained earnings = Number of shares outstanding * Percentage of stock dividend * Market price of the stock. This has the effect of increasing the number of outstanding shares of the company as a result the decrease in EPS which effect the reduction in the market price of the share. Since the shares are distributed proportionately, share holders retain his proportionate ownership of the company.

b. Scrip Dividend

bond and scrip dividend is that bond carries relatively longer maturity date than scrip dividend. Bonds used to pay carry interest and it means that the company assumes the fixed obligation of interest payment annually and principal amount of bond at maturity date. Bond dividend posses p osses the following characteristic: •

Bond dividends are the means to dividend postponement for a while but more it is obligation.

•

It couldn’t bring back the psychological value as the cash dividend.

•

Bond and scrip dividend are same, only the difference between these are maturity time i.e. scrip has relatively less maturity time than bond d ividend.

d. Stock Split and Reserve Split A method that is commonly used to lower the market price of a firm’s stock by increasing the number of shares belonging to each shareholder. The effect of a stock split is an increase in the number of shares outstanding and a reduction in the par, or stated, value of shares. The total net worth of the firm remains unchanged. The stock split does not involve any cash payment, only

e. Stock Repurchase It is the process of repurchasing back outstanding share of any company. A corporation’s repurchase of its stock can serve as a tax advantages substitute for dividend payout. Repurchase have the effect of raising share prices so that shareholders can be taxes at the capital gain rate instead of ordinary dividend rate on cash dividend. Company can repurchase its shares in two ways: •

Open market repurchase

•

Tender (Offer) repurchase

Open market repurchase usually (but not always) involve gradual programs to buy back shares over a period of time. In tender offer, the company usually specifies the number of shares it is offering to repurchase, a tender price and a period of time during which the offer is in effect. If the number of shares actually tendered by the shareholders exceeds the maximum number specified by the company, then the purchases are usually made on a pro-rata basis. Alternatively, if the tender offer is under subscribed the firm may decide to cancel the offer of extend to expiration date. Share tendered during the extension may be purchased on either pro-rata or first-come, first-served basis. (Weston and Copeland, 1991, 682)

•

It increases the proportional ownership of existing stockholders.

•

It increases the stock price as net worth per share increases.

f. Cash Dividend The most common way to pay dividend is in the form of cash. A company should have enough cash in its bank account when cash dividends are declared. If the company doesn’t have enough cash at the time of paying cash dividend, arrangement should be made to borrow funds. Payment of cash dividend shouldn’t lead to liquidity problem for the company. The cash account and the reserve account of a company will be reduced when the cash dividend is paid. Both the total assets and the net worth of the company are reduced by the distribution of cash dividend. Beside the market price of the share affected in most cases by the amount of cash dividend distributed. Cash dividend has the direct impact on the shareholders. The volume of the cash dividend depends upon earnings of the firm and on the management attitude or policy. Cash dividend has psychological value for stockholders. Each and everyone like to collect their return in cash rather than non-cash means. So cash dividend is not only a way to earnings distribution but also a way of perception improvement in

significant sources of funds for financing corporate growth, but dividends constitute the cash flow that accrues to stockholders. (Weston and Copeland, 1991, p.657) The third major decision of the firm is its dividend policy, the percentage of  earnings it pays in cash to its stockholders. Dividend payout, of course, reduces the amount of earnings retained in the firm and affects the total amount of internal financing. The dividend payout ratio obviously depends on the way earnings are measured for case of exposition, we use account net earnings but assume that these earning can form true economic earnings. In practice, net earning may not conform and may not be an appropriate major of the ability of firm to pay dividends. (Van Horne, 2000, p.350) Dividend policy refers to the issue of how much of the total profit a firm should pay to its stockholders and how much to retain for investment so that the combined present and future benefits maximize the wealth of stockholders. The dividend policy, however, not only specifies the amount of dividend, but also form of  dividend, payment procedure etc. Dividend policy according to the application could be categorized as follows:

i) Constant dividend per share Constant dividend policy is based on the payment of a fixed rupee dividend in each period. A number of companies follow the policy of paying fixed amount per share as dividend every period, without considering the fluctuation in the earnings of the company. The policy does not imply that the dividend per share or dividend rate will never be increased. When the company reaches new level of earnings and expects to maintain it the annual dividend per share may be increased. Investors who have dividends as the only source of their income prefer the constant dividend policy.

ii) Constant payout ratio The ratio of dividend to earning is known as payout ratio. When fixed percentage of  earnings is paid as dividend in every period, the policy is called constant payout ratio. Since earnings fluctuate, following this policy necessarily means that the rupee amount of dividends will fluctuate. It ensures that dividends are paid when profits are earned, and avoided when it incurs losses.

iii) Low regular plus extra policy

is known as no immediate dividend policy. This policy is usually pursued the following circumstances: •

When the firm is new and rapidly growing concern, which needs large amount of funds to finance its expansion expan sion program,

•

When the firms’ excess to capital market is difficult,

•

When availability of funds is costlier,

•

When stockholders have agreed to accept higher return in future.

In fact, this policy should follow by issue of bonus shares.

 c.  Regular stock dividend policy If the company regularly pays dividends to its shareholders in stock instead of cash, then it is called regular stock dividend policy. Regular stock dividend policy is ale designated as bonus shares. Such policy should follow under the following circumstances: •

When the firm needs cash generated by earning to cover its modernization and expansion of projects.

•

When the firm is lacking in cash despite high earning, this is particularly true

e.  Irregular dividend policy This policy is based on the premise that investors prefer to have a firm retain and reinvest earnings rather than pay out them in dividends if the rate of return the firm can earn on reinvested earnings exceeds the rate of return investors can obtain for themselves on other investments of comparable risk. Further, it is less expensive for the firm to use retained earnings than is to issue new common stock.

2.3 Factors affecting Dividend Policy

2.3.1 Legal Requirements Requirements The legal rules provide that the dividends must be paid from earnings either form the current year’s earnings or from past years’ earnings as reflected in the balance sheet account ‘retained earnings’. State laws emphasize three rules: a)

Capital impairment Rules

The firm cannot pay dividend out of its paid up capital. If it does so there would be

2.3.2 Liquidity position The cash or liquidity position of the firm influences its ability to pay dividends. A firm may have sufficient retained earnings, but if they are invested in fixed assets, cash may not be available to make dividend payment. Thus, the company must have adequate cash available as well as retained earning to pay dividends.

2.3.3 Access to the capital markets A large, well-established firm with a record of profitability and stability of earnings has easy access to capital markets and other forms of external financing. A small, new or venturesome firm, however, is riskier for potential investors. Its ability to raise equity or debt funds from capital markets is restricted, and it must retain more earnings to finance its operations. A well-established firm is thus likely to have a higher dividend payout ratio than a new or small firm.

2.3.4 Need to repay debt Firms may have the policy to retire its past debts by means of retained earning. If  such alternative are being adopted then such firm will retain more and pays less

2.3.6 Growth rate of firm A rapidly growing concern will have constant needs of long-term funds to seize favorable opportunities for which it has to retain more and pays less dividend.

2.3.7 Control Another important variable is the effect of alternative sources of financing on the control situation of the firm. As a matter of policy, some corporations expand only to the extent of their internal earnings. This policy is defended on the ground that raising funds by selling additional common stock dilutes the control of the dominant group in that company. At the same time, selling debt increases the risks of  fluctuating earnings to the present owners of the company. Reliance on internal financing in order to maintain control reduces the dividend payout.

2.3.8 Stability of earnings A firm that has relatively stable earnings is often able to predict approximately what its earnings will be. Such a firm is therefore more likely to pay out a higher percentage of its earnings than a firm with fluctuating earnings. The unstable firm is not certain that in subsequent years earning will be realized, so it is likely to retain a

2.4 Payment Procedure followed by Companies

The actual payment procedure is of some importance, and the following is an outline of the payment sequence.

1.

Declaration date: This is the day on which board of directors declares the

dividend. At this time they set the amount of the dividend to be paid, the holder-of-record date and payment date. 2.

Holder-of-record date: This is the date the company opens the ownership

books to determine who will receive the dividend; the stockholders of record on this date receive the dividend. In that date, the company closes its stock  transfer books and make up a list of the shareholders as of that day. 3.

Ex-dividend date: The date when the right to the dividend leaves the stock is

called the ex-dividend date. In this case, the ex-dividend date is four days before holder of record date. Therefore if someone wants to receive the dividend, he/she must buy the stock four days before the holder of record day. 4.

Payment date: This is the day when dividend checks are actually mailed to

amount. Durand and May (1960) conducted another seminal work examining the ex-dividend day behavior of American Telephone and Telegraph stock (ATandT) for a time series of 43 consecutive dividends. They found that the average price change from the cum-dividend day to the ex-dividend day was $2.16, or about 4 percent less than the $2.25 dividend. Elton and Gruber (1970) were the first researchers that offered a reasonable explanation for the ex-dividend stock price anomaly. Using a one-year sample with 4,148 dividends, Elton and Gruber (1970) confirmed that ex-day stock prices tend to fall by significantly less than the dividend and developed a model explaining the effect known as “the long-term trading hypothesis” or “the tax-effect hypothesis”. Elton and Gruber showed that when dividends are taxed at a higher rate than capital gains, the stock price must drop by less than the dividend for investors to be indifferent between (i) selling the stock cum-dividend and (ii) holding the stock, receiving the dividend, and selling ex-dividend. Hence, in case that an investor decides to sell on the cum-dividend day he receives the cum-dividend price (Pc) and he pays tax at the capital gains rate (tg) on the excess of the cum-dividend price over to the price at which the share was bought (Po). On the other hand, if he decides to sell ex-dividend, he receives a dividend and the ex-dividend price (Pe) but he pays

Elton and Gruber (1970) sorted their sample into deciles by the dividend yield and computed the mean ∆ P/D for each group. They found that NP/D generally increase with the dividend yield, suggesting that investors in lower tax brackets prefer stocks with higher dividend yields, while higher-bracket investors prefer lower-yield stocks. Thus, Elton and Gruber (1970) confirmed the existence of the “dividend clientele effect” as firstly proposed by Miller and Modigliani (1961).

Frank and Jagannathan (1998) examined the ex-dividend day stock price behavior in the Hong Kong market, where neither dividends nor capital gains were taxed and unlike in the NYSE, in the Hong Kong Stock Market (HKSE) there were no market makers until 1993. They found that stock prices dropped on the ex-dividend day by half the dividend amount. Frank and Jagannathan argued that the unexpected price drop on the ex-dividend day was the result of transactions on the cum-dividend day occurring at the bid price, while transactions on the ex-dividend day took place at the asked price. That is, since for the average investor it is a burden to receive the dividend and then go through the process of collecting it, most investors prefer not to receive it. Market makers, instead, find themselves in a better position to collect the dividend, so they buy the stock on the cum-dividend day. As a consequence, on

two categories: Category “A” and Category “B”, on different criteria. According to the NEPSE criteria, only those companies are included in “A” categories that have: •

Paid-up capital exceeding Rs. 20 million

•

Reported profit for the last three consecutive fiscal years

•

Have at least 1,000 shareholders

•

Shares of the company should be trading in the stock exchange for a price above the face value

•

The company should have submitted the annual report to NEPSE within six months of the end of the fiscal year.

Organizations not falling under these criteria are kept in “B” category. If not fulfilled the criteria for long-term by the financial institutions they are de-listed by the NEPSE. (Bhattarai, 2006, p. 298)

2.7 Legal Provision Regarding Dividend Practice in Nepal

Company Ordinance, 2005 makes some legal provision for dividend payment in

a) Shareholder’s full name and address. b) No. of shares holding by shareholder. c) Total amount paid by shareholder and remaining balance if any. d) Registered date of shareholder’s certificate. e) Cancellation date of shareholder’s certificate. f) Ownership right on share after the death of the registered shareholder.

Section 182: Dividend Subsection (1) Expect in the following circumstances, dividend shall be distributed among the shareholders within 45 days from the date of decision to distribute them,

a) In case any law forbids the distribution of dividends. b) In case of right to dividend is disputed. c) In case dividends cannot be distributed within the time limit mentioned above owing to circumstance beyond anyone’s control and without any fault on the part of the company.

Subsection (5) The Company can’t issue any form/amount as dividend expected separate reserve amount for the distribution of dividend.

Subsection (6) The Company should deduct the operating cost, deprecation amount, payable, adjustment for previous year’s losses by-law before distributing dividend from profit.

Subsection (7) Under this section company can distribute interim dividend if it is provisioned in rules and if the dividend is verified by audit report and attested by the BOD.

Subsection (8) Except the amount declared from AGM, the company cannot distribute dividend from fund affecting the company’s reserve.

Subsection (9)

Subsection (11) After the dividend declared form AGM, the company should establish separate book  of account within 45 days and distribute to the shareholders and the amount should not be used for other purpose by the company.

2.8 Review of the International Studies

Linter (1956) conducted a study, which is focused in the behavioral aspect of  dividend policy. He investigated dividend pattern of 28 different companies of  America and found that, firm generally predetermines the desired payout and tries to achieve it and rarely considers other factors. The model developed firm is his research is as follows: DIV*t= pEPSt …………………………… …………………………………….. ……….. (i) and, DIVt- DIVt-1=a+b (DIV*t- DIVt-1) +e1…….…… (ii) Or, DIVt=a+b DIV*t+ (a+b) DIVt-1 +e1…………… (iii) Where,

•

Firm generally have target payout ratios in view while determining change in dividend per share.

Walter (1957) has proposed a model for share valuation which supports the view that the dividend policy of the firm has impact on share valuation. His works shows clearly the importance of the relationship between the firm’s internal rate of return on investments (r) and its cost of capital (k) in determining the dividend policy that will maximize the wealth of shareholders. Walters’s model is based on the following assumptions (Chandra, 1999, p.302) •

Retained earnings represent the only source of financing for the firm.

•

The return on the firm’s investment remains constant.

•

The cost of the capital for the firm remains constant.

•

The firm has an infinite life.

Walter’s formula to determine the market price per share is as follows.

P=

DPS r(EPS − DPS)/k  DPS + r(EPS − DPS)/k  = = k  k  k 

Growth Firm r>k 

Firm having r>k may be referred as growth firm. The optimum payout ratio for a growth firm is 0. The market price per share increases as payout ratio decreases.  Normal Firm r=k 

Firm having r=k may be referred as normal firm. There is no unique optimum payout ratio for a normal firm. One dividend policy is a good as the other. The market price per share is not affected by the payout ratio when r=k. The payout ratio for a normal firm is irrelevant.  Declining Firm r
Firm having r
Thus, in Walter’s Model the dividend policy of the firm depends on the availability of investment opportunities and the relationship between the firm’s internal rate of 

Modigliani and Miller’s model hypothesis of irrelevance is based ion the following assumptions. (Pandey, 2002, p.756) •

The firm operates in perfect capital markets where investors behave rationally, information is freely available to all and transaction and floatation cost do not exist. Perfect capital markets also imply that no investor is large enough to affect the market price of share.

•

Taxes do not exist or there is no difference in the tax rate applicable to the capital gains and dividends. This means that investors value a rupee of  dividend as much as a rupee of capital gains.

•

The firm has a fixed investment policy.

•

Risk of uncertainty does not exist i.e. investors are able to forecast future prices and dividend with certainty and one discount rate is appropriate for all securities and all time periods. Thus, r=k=kt for all t.

Modigliani and Miller’s Model provide falling model to prove their theory.

 Market Value of Share The market value of share at the beginning of the period is equal to the present of 

 No External Financing If no external financing exist the market value of firm can be computed by multiplying both sides by number of outstanding shares as follows:

V= nP0=

n (D1 + P1 )

(ii)

1 + k 

Where V

=

Total value of the firm

n

=

Number of shares outstanding

 New Shares If retain earning is not sufficient to finance the investment opportunities, issuing new shares is the other alternatives. Assuming that m is the number of newly issued equity share at the price of o f P1 the value of firm at time 0 will be:

nPo = Where

nD1 + (n + m )P1 − mP1 1 + k 

(iii)

Where I1

=

Total investment at time 1

E

=

Total net profit of the firm

E-nD1 =

Retained earning

Substituting equation (iv) to equation (iii) we get

nP0=

(n + m )P1 − I1 + E 1 + k 

A firm, which pays dividends, will have to raise funds externally to finance its investment plans. Modigliani and Miller’s argument, that dividend policy does not affect the wealth of the shareholders, implies that when firm pays dividends, its advantage is offset by external financing. This means that the terminal value of the share decline when dividends are paid .Thus, the wealth of shareholders dividend plus terminal price remains unchanged. As a result, the present value per share after dividends and external financing is equal to the present value per share before the payment of dividends. Thus the shareholders are indifferent between payments of  dividends and retention of earnings.

•

No external financing is available. Consequently retain earning would be used to financial expansion.

•

The internal rate of return (r) of the firm is constant. This ignores the diminishing marginal efficiency of the investment.

•

The appropriate discount rate (k) for the firm remains constant.

•

The firm and its stream of earning are perpetual.

•

The tax does not exist.

•

The relation ratio (b) ones decide upon, is constant. Thus the growth rate g=br, each constant forever.

•

k>br =g. if this condition is not fulfilled, we can’t get a meaningful value for the share.

According to Gordon’s Dividend Capitalization Model the market value of a share is equal to the present value of an infinite stream of dividend to be received by the share. Thus: P0 =

D1

+

D2

(1 + k )1 (1 + k ) 2

.............. +

Dn

(1 + k )n1

Gordon has further developed the following equation for the computation of the

risk associated with future capital gain. Gordon stressed that the higher payout increases the dividend yield and hence increases the value of stock. But the assumption of this model is also far from the reality. (Pandey, 2002, p.751) Friend and Puckett (1964) conducted a study on the relationship between dividend policy and price of stock by running regression analysis on the data taken from 110 firms from five industries in the year 1956 to 1958. Industries taken as samples were chemicals, electric utilities, food, steels, and electronics. These industries were selected to permit a’ distinction made between the results for growth and nongrowth industries and to provide a basis for comparison with the results by other authors for earlier years. They also considered cyclical and non-cyclical industries in their study. The study period covered a boom year for the economy when stock  prices leveled off after rise (1956) and a depressed for the economy when stock  prices, however rose strongly (1958). They used dividends, retained earnings and price earning ratio as independent variable in their regression model of price function and dividends as supply function. Earnings, previous year’s dividend and price earning ratio are independent variable in the dividend function. Symbolically, their price function and dividend supply function are as follows:

Where,

Pt= Per share price at time t Dt= Dividends at time t Rt= Retain earning at time t (E/P)t-1= Legged earning price ratio Dividend supply function Dt= e + fEt +gDt-1 +d(E/P)t-1 Where, Et= Earning per share at time t Dt-1= Last year dividend They found that more than 80% of the variation in the stock price could be explained by three independent variables. Dividends have predominant influence of  stock price in the same three out of five industries but they found the difference between the dividend and retained earnings coefficient are not quite so marked as in the first set of regression. They also found that the dividend and retained earning coefficient are closer to each other for all industries in the both the years except for steels in 1956 and the correlations are higher again except for steels.

retained earnings received greater relative weight than dividends in most of the cases. The only exception was steels and food in 1958. They considered chemicals, electronics, and utilities as growth industries in these groups and the retained earnings effect was larger than the dividends effect for both the years covered. For the other two industries, namely food and steels, there was no significant systematic difference between the retained earnings and dividends coefficient. Similarly, they tested the regression equation, Pt = a + bD, + cR, by using normalized earnings again, which they obtained by subtracting dividends from normalized earnings. This process of normalized earnings was based on the period 1950 to 1961. They again added prior year’s normalized earning price variable and compared the results and found that there was significant role of normalized earnings and retained earnings but the effect of normalized price earning ratio was constant. When they examined the later equation they found that the difference between dividend and retained earnings coefficient disappeared. Finally they conclude that management might be able to increase price somewhat by raising dividend in food and steel industries. They conducted more detailed examinations of chemical samples which disclosed

firm stock returns. Changes in dividend yield, on the other hand, have negative and significant coefficients in explaining stock returns in Trading/Services firms throughout 1993-1996 and the average crisis period. For Plantation firms, it is negatively significant only in 1994 and 1997. The main purpose in conducting this study was to identify the role of dividend in explaining Malaysian firm stock returns. They tested the relationship of firm stock  returns with the so-called the dividend related variables, comprising dividend yield, dividend stability and changes in dividend yield. Although they do not obtained very strong results that the dividend related variables are the main factors explaining firm stock returns, they do find that changes in dividend play some role in explaining firm stock returns, especially of the Trading/Services firms, which are essentially representing growth firms. If this holds true across the whole Malaysia listed firms, this suggests that CEO and top management of growth firms should pay careful attention to the changes of dividend yield in their firms, which has an inverse relationship with the stock returns. The frequent changes in firm dividend policy may be particularly useful in attempting to differentiate high value firm from their low-value counterparts that

from dividend announcement. Indeed shareholders lost about 20 percent of value over a period of 30 days prior to the dividend announcement through to 30 days after the announcement. The lost value may be partially compensated because of the current dividend yield. Overall, the evidence tends to support the dividend irrelevancy hypothesis. Evidence also indicates that dividend payment does not signal any information to the investors. The study shows that the highest average dividend was paid in the Fuel and Power sector, followed by that in the banking sector. The highest dividend was announced in the food sector, and lowest in the Jute and Services sectors. In Jute sector, only one company announced dividend during the sample period. The average dividend was 19.5 percent with standard deviation of 12.9 percent. Overall, the study shows that the sample includes stocks from all sectors, except the paper sector. The number of samples are also fairly equally distributed with 10 to 20 stocks from each sector except Paper, Jute and Services sectors. This is also noted that out of 137 companies, 34 companies announced dividend in 2001 and 103 in 2003. Sample also displays that 108 companies belong to A category, 17 belong to B category and 12 belong to Z category.3

comparing the actual value of the raw price ratio, market adjusted price ratio, raw price drop and market adjusted price drop to their theoretical values. The difference was tested for significance using the one sample t-test. The results showed that there are significant differences in the observed figures from their theoretical or expected values. The observed raw price ratio is higher than the expected value of 1, implying that the stock price on the ex-dividend day drops by an amount that is higher than the dividend paid. Similarly, the market adjusted raw price ratio is also higher than the expected value of 1. The raw price drop and market adjusted price drop are lower than the dividend yield, indicating again that the stock price drops by an amount that is less than the dividend paid. The study is inconsistent with the findings by Nikolas et al (2006), who studied the ex-dividend day stock price behavior in the SHSE and SZSE indices of the Chinese Stock Exchange using a similar method but consistent with Alm et al (1999) who carry out a study using the Stockholm stock exchange where his findings showed that the stock price drop on average is less than the dividend been paid out. •

Raw Price Ratio (RPR) is the drop in share price expressed as a fraction of  the difference between the cum-dividend price and the ex-dividend price all over the actual dividend paid. Under normal circumstances, that is, where

perfect capital markets, the hypothesized value of the raw price drop is equivalent to the dividend yield. •

Market Adjusted Price Drop (MAPD) is the difference between the cumdividend price and the market adjusted price expressed as a fraction of the cum-dividend price. Also, under perfect capital markets, the market adjusted price drop is equivalent to the dividend yield.

2.9 Review of the Thesis

Adhikari (2063) in his study on “Comparative Study of Dividend Policy and  Practices of Commercial Banks” found that there were irregularities in the dividend

payment by the commercial banks of Nepal. There was also no stability in the dividend payout ratio of the commercial banks. Thus he has recommended the investors to consider the select company having high profit companies for purchasing shares. Bista (2062) in his study on the “  Dividend Policy and Practices of Listed Joint 

2.10 Concluding Remarks

The empirical testing has been proved that ex-day stock price tend to fall by significantly less than the dividend. They interpret the result as consistent with a clientele effect where investors in high tax brackets show a preference for capital gains over dividends and vice versa. Another study examining the ex-dividend day behavior of American Telephone and Telegraph stock for a time series of 43 consecutive dividends has found that the average price change from the cumdividend day to the ex-dividend day was $2.16, or about 4 percent less than the $2.25 dividend.

Some argue that dividend policy of is irrelevant. It doesn’t affect the wealth of the shareholder. They said that the value of the firm depends on the firms earning, which result from its investment policy. Dividend payments should have no impact on shareholders value in the absence of taxes and market imperfections.

Chapter 3 Methodology

This chapter presents the short outline of the methods applied in the process of  analyzing the capital structure is a systematic method of finding out solution to a problem whereas research methodology refers to the various sequential steps to adopt by a researcher in studying a problem with certain objective in view.

3.1 The Research Design For the analysis of the cash dividends payments of the “A” class financial institutions of Nepal as categorized by NEPSE, analytical as well as descriptive designs are applied to achieve the objective of the research.

3.2 The Population and Sample

Out of which 23 financial institutions are taken covering 26.92% ≅27% of the population as sample (

21 78

×100%).

Commercial Banks 1. Development Credit Bank Ltd. 2. Everest Bank Ltd. 3. Himalayan Bank Ltd. 4. NABIL Bank Ltd. 5. Nepal Investment Bank Ltd. 6. Nepal SBI Bank Ltd 7. Standard Chartered Bank Nepal Ltd. Development Banks

8. Chimeki Bikas Bank Ltd. 9. Nirdhan Utthan Bank Ltd. 10. Sanima Bikas Bank Ltd 11. Sahayogi Bikas Bank Ltd.

19. Unilever Nepal Ltd. 20. Bottlers Nepal Ltd. ( Not an “A” Class Financial Institution Institution)

Hydropower Companies

21. Chilime Hydropower Company Ltd.

3.3 Sources of Data

This research is based on secondary data. Required data is collected from NEPSE, SEBON, previous thesis and various articles published by various people and organizations. The basic sources of data used are as follows: a. NEPSE and SEBON Annual Reports b. Financial statements of concerned financial institutions c. Related books and articles

3.4 Methods of Data Analysis

calculated for numerical data. The mean is an appropriate term than saying average. The mean of data is biased toward extreme values. The mean is suitable when the scores are distributed symmetrically about the center of the distribution. This is calculated by using following formulae:

3.5.2 Standard Deviation (S.D.) The measurement of the scatterness of the mass of figure in a series about an average is known as the dispersion. The standard deviation measures the absolute dispersion. The greater amount of dispersion, d ispersion, greater the standard deviation. A small standard deviation means a high degree of uniformity of the observation as well as homogeneity of a series and vice-versa. v ice-versa. This is calculated as follows:

∴ Standard deviation (S.D.) =

∑ (X − X)

2

n

3.5.3 Coefficient of Variation (CV) The coefficient of variance is the relative measure of dispersion, comparable across distribution, which is defined as the ratio of the standard deviation to the mean expressed in percent. It is calculates as follows:

The value of “r” lies between -1 to +1. When r=0, then there is no correlation between two variables.

3.5.5 T-statistics

To test the validity of our assumption, if the sample size is less than 30, t-test is used. For applying t-test in context of small sample the t-value is calculated first and compared with the t-value on table at certain level of significance for given degree of freedom. If calculated value of ‘t’ exceeds the tabulated value (say 0.05) we can say that the difference is significant at 5% level and vice-versa. The value is calculated by using following formula:

∴t =

X − µ  S n

3.5.6 F-statistics

Chapter 4

Presentation and Analysis of Data This is an analytical chapter, where an attempt has been made to analyze and evaluate the data collected. To analyze the data collected various presentation and interpretation is done in order to fulfill the objective of this study.

4.1 No. of Cash Dividend Paying Listed Companies

F/Y F/Y

2003/04 2004/05 2005/06 2006/07 2007/08

Table No. 4.1 No. of Cash Dividend Paying Listed Companies Tota Totall Lis Listed ted Comp Compan aniies Cash Cash Divi Divide dend nd Payi Paying ng Com Compani panies es

114 125 135 135 142

32 26 37 39 41

Rat Ratio

28.07% 20.80% 27.41% 28.89% 28.87%

Figure No. 4.1 No. of Cash Dividend Paying Listed Companies

The number of Nepalese listed companies that paying cash dividend is seen fluctuating. About 28% of the total listed listed companies distributed cash dividend during the fiscal year 2003/04. But it decreases to 20.80% in the fiscal year 2004/05. Thereafter the increase has been seen to the fiscal year 2007/08. Among the cash dividend paying total financial institutions majority are from the banking sectors or finance companies. Very few numbers of financial institutions are from development banks, manufacturing and processing companies and hydropower company. From the correlation calculation we came to conclusion that there is very low degree of positive correlation between the total no. of listed companies and the no. of cash dividend paying listed companies. Though, the general public is highly attracted towards the shares of the commercial banks of the country as they are performing well in the secondary market. Similarly they are providing the stock dividend to the shareholders. But the financial performance of other institutions is not so good. Even majority of the commercial banks are also not providing good percentage of 

2007/08 A.M. S.D. C.V.

10 19 4.90 25.78%

100 5 80 15 74 14.52 110 11.56 17.15 5.56 16.73 10.86 23.17% 38.29% 15.21% 93.94% Source: Annual Report of SEBON

10 4.60 4.08 88.69%

140 120    )  .   s    R 100   n    I    (    d 80   n   e    d    i   v 60    i    D    h   s   a 40    C

20 0 2003/04

2004/05

2005/06

2006/07

2007/08

Fiscal Year

EBL

NABIL

NIBL

SCBNL

HBL

SBI

DCBL

Figure No. 4.2 Cash Dividend Payment of Commercial Banks

12 11.20 0.98 8.75%

HBL payment of cash dividend has been seen fluctuating. The amounts it has paid as a cash dividend is minor with average of Rs.11.56. The C.V of the DCBL is the least among the sample commercial banks with 8.75%, show the cash dividend payment of the bank is most consistent than other commercial banks. The most inconsistent in paying cash dividend is HBL with C.V. 93.94%. The situation of SBI is also not good, it’s C.V, is also seen high. h igh.

4.2.2 Cash Dividend Payment of Development Banks

Table No.4.3 Cash Dividend Payment of Development Banks (In NPR) F/Y SBBL NUBL CBBL SBB

2003/04 2004/05 2005/06 2006/07 2007/08 A.M. S.D. C.V.

CDND CDND CDND CDND CDND CDND CDND 4 10 CDND 5 30 CDND CDND CDND 1.8 8.00 2.23 11.66 123.89 145.75 Source: Annual Report of SEBON

CDND CDND CDND CDND 3.50 0.70 1.40 200%

35 30    )  .   s    R   n    I    (    d   n   e    d    i   v    i    D    h   s   a    C

25 20 15 10 5 0 2003/04

2004/05

2005/06

2006/07

2007/08

Fiscal Fiscal Yea r

SBBL

NUBL

CBBL

SBB

Figure No. 4.3 Cash Dividend Payment of Development Banks Being categorized as an “A” class development banks, the situation of cash dividend payment of the bank is not seen good. Only NUBL and CBBL have been seen paying the cash dividend in fiscal year 2005/06 and 2006/07 with average of Rs. 1.80 and Rs. 8 per share respectively. Other development banks have not seen

The cash dividend situations of the Insurance Companies are not good in record. None of the Insurance Companies listed as “A” class financial institutions have declared cash dividend since past five fiscal year.

4.2.4 Cash Dividend Payment of Finance Company

Table No.4.5 Cash Dividend Payment of Finance Companies Co mpanies (In NPR) F/Y AFC EFL BFL

2003/04 2004/05 2005/06 2006/07 2007/08 A.M. S.D. C.V.

14 12

12 CDND 2.632 CDND 3.158 CDND 0.53 CDND 1.05 CDND 3.87 4.18 108.01% Source: Annual Report of SEBON

CDND CDND CDND CDND 0.50 0.10 0.2 200%

There is large no. of finance companies operating in Nepal. But most of them are not able to operate in an efficient ways. Their financial position is not so sound to be categorized as an “A” class financial institution. They are not been able to pay cash dividend to their shareholders. AFC has been paying cash dividend with average of  Rs. 3.87 per share in last five fiscal year. BFL has been paid Rs. 0.50 per share cash dividend in the fiscal year 2007/08.

4.2.5 Cash Dividend Payment of Manufacturing and Processing Company

450 400    )  .   s350    R   n300    I    (    d   n250   e    d    i   v200    i    D    h150   s   a    C100

50 0 2003/04

2004/05

2005/06

2006/07

2007/08

Fiscal Year

ULN

BNL (Balaju)

BNL (Terai)

Figure No. 4.5 Cash Dividend Payment of Manufacturing and Processing Companies

Under manufacturing and processing companies, only one company has been included under the “A” class financial institution i.e. ULN. The company has been

F/Y CHPCL

Table No.4.7 Cash Dividend Payment of Other Company (In NPR) 2003/04 2004/05 2005/06 2006/07

CDND

CDND

CDND

Source: Annual Report of SEBON

35 A.M. S.D. C.V.

2007/08

30 13 16 123.08%

Under this sector only three companies are listed. They are National Hydropower Company Ltd., Butwal Hydropower Company Ltd. and Chilime Hydropower Company Ltd. CHPCL has declared Rs. 35 and Rs. 30 cash dividend in the fiscal year 2006/07 and 2007/08 respectively. But in earlier fiscal year it has not been able to declare cash dividend.

4.2.7 Cash Dividend Payment of Hotel

None of the institutions under the hotel sector has distributed cash dividend to its shareholders since last five fiscal year except Soaltee Hotel Ltd. in fiscal year 2007/08 which pays Rs. 10 cash dividend per share. And even they did not come under the “A” class financial institutions as categorized by NEPSE.

4.2.8 Cash Dividend Payment of Trading Company Since none of the trading company come under “A” class even though they are

2.

SCBNL

1763

3.

EBL

445

4.

AFC

417

5.

NABIL

803

6.

HBL

995

7.

SBI

242

161 2003/12/05 1775 2003/12/21 444 2003/12/21 410 2004/01/04 800 2004/03/21 990 2004/03/28 241

1701

+12

-3

442

-1

-3

350

-7

-67

798

-3

-5

662

-5

-333

243

-1

+1

From the above table we see that MPS of the five companies who declared the cash dividend has declined on the ex-dividend date during the fiscal year 2003/04. The large amount loser company was HBL with the MPS decline of Rs. 333. The MPS of SCBNL was seen increased by Rs. 12 on the ex-dividend date.

4.3.2 For the Fiscal Year 2004/05

Principally, the MPS of the shares should decline on the ex-dividend date and after this date after the declaration of the cash dividend by the companies. But from the above data we see that the MPS of UNL, DCBL, NABIL and NIBL increased by Rs.13, Rs.7, Rs.6 and Rs38 respectively. Only the MPS of EBL and SCBNL has declined by Rs. 2 and Rs. 30 respectively on ex-dividend date and Rs. 5 and Rs. 21 after ex-dividend date.

4.3.3 For the Fiscal Year 2005/06

Table No. 4.10 Price Effect after Cash Dividend Payment on Fiscal Year 2005/06 (In NPR) S. No.

Company Name

MPS Before

MPS on Exdividend Date

MPS After

1.

UNL

2180

2.

SCBNL

2392

3.

DCBL

257

4.

NABIL

1660

2005/09/09 2200 2005/10/26 2430 2005/11/08 265 2005/11/30 1650

Price Change On Exdividend Date

After Exdividend Date

1845

+20

-335

2373

+38

-19

257

+8

-

1645

-10

-15

4.3.5 For the Fiscal Year 2006/07

Table No. 4.11 Price Effect after Cash Dividend Payment on Fiscal Year 2006/07 (In NPR) S No

Company Name

MPS Before

Ex-dividend Date

MPS After

1.

UNL

2823

2.

NABIL

2312

3.

NIBL

1447

4.

EBL

1328

5.

SCBNL

4285

6.

HBL

1303

7.

DCBL

809

8.

CBBL

102

9.

CHPCL

757

10.

SBI

790

2006/09/05 2810 2006/10/22 2340 2006/10/26 1435 2006/10/31 1345 2006/11/08 4400 2006/12/15 1300 2006/12/25 805 2006/12/26 105 2007/01/08 817 2007/02/03

Price Change On Ex-dividend Date

After Exdividend Date

2833

-13

+10

2320

+28

+8

1712

-12

+265

1421

+17

+93

4357

+115

+72

1301

-3

-2

813

-4

+4

124

-3

+22

795

+60

+38

802

+10

+12

4.3.5 For the Fiscal Year 2007/08

Table No. 4.12 Price Effect after Cash Dividend Payment on Fiscal Year 2007/08 (In NPR) S No

Company Name

MPS Before

Ex-dividend Date

MPS After

1.

EBL

2973

2.

HBL

2165

3.

NABIL

4770

4.

NIBL

1993

5.

SBI

1635

10/7/2007 2955 31-Dec-07 2054 7-Oct-07 4631 8-Nov-07 2120 22-Feb-08 1200 11-Jan-08 1125 13-Jan-08 640 10-Feb-08 1151 24-Jun-08 1560

6.

1052

7.

SBBL AFC

883

8.

CHPCL

1063

9.

NLIC

1644

Price Change On Ex-dividend Date

After Exdividend Date

2729

-18

-244

1973

-111

-192

4285

-139

-485

2311

127

-191

1286

-435

318

1199

73

147

720

-243

-163

1216

88

153

1698

-84

54

During the fiscal year 2007/08 four companies MPS decreased on and after ex-

ii.

Computation of test statistic

iii.

Fixing the level of significance

iv.

Finding the criteria region

v.

Deciding the two tailed or one tailed test

vi.

Making decision

4.4.1 Test of Hypothesis on Cash Dividend Payments of Commercial Banks

Null Hypothesis (Ho): µ 1 =µ 2 =µ 3 =µ 4 =µ 5 =µ 6 −=µ 7 i.e. there is no significant

difference among mean cash dividend payment of commercial banks i.e. cash dividend payment of commercial banks are homogenous. µ 1 ≠µ 2 ≠µ 3 ≠µ 4 ≠µ 5 ≠µ 6 ≠µ 7

i.e. there is a significant difference among mean cash dividend payment of commercial banks. Alternative Hypothesis (H1):

Note: For detail calculation see Annex-III

Decision: Since calculated F is greater than tabulated value, the null hypothesis, Ho

is rejected and hence the alternative hypothesis, H1 is accepted. Therefore, we conclude that there is a significant difference among mean cash dividend payment of commercial banks.

4.4.2 Test of Hypothesis on Cash Dividend Payments of Development Banks

Null Hypothesis (Ho): µ 1 =µ 2 =µ 3 =µ 4 i.e. there is no significant difference among

mean cash dividend payment of development banks i.e. cash dividend payment of  CBs are homogenous. Alternative Hypothesis (H1): µ 1 ≠µ 2 ≠µ 3 ≠µ 4 i.e. there is a significant difference

among mean cash dividend payment of development banks.

Note: For detail calculation see Annex-IV

Decision: Since calculated F is lesser than tabulated value, the null hypothesis, Ho is

accepted and hence the alternative hypothesis, H1 is rejected. Therefore, we conclude that there is no significant difference among mean cash dividend payment of development banks i.e. cash dividend payment of development banks are homogenous.

4.4.3 Test of Hypothesis on Cash Dividend Payments of Manufacturing and Processing Companies Null Hypothesis (Ho): µ 1=µ 2 i.e. there is no significant difference among mean cash

dividend payment of manufacturing and processing companies i.e. cash dividend payment of manufacturing and processing companies are homogenous. Alternative Hypothesis (H1): µ 1≠µ 2 i.e. there is significant difference among mean

cash dividend payment of manufacturing and processing companies i.e. cash dividend payment of manufacturing and processing companies are not homogenous. Note: For detail calculation see Annex-V

Decision: Since calculated F is greater than tabulated value, the null hypothesis, Ho

is rejected and hence the alternative hypothesis, H1 is accepted. Therefore, we conclude that there is significant difference among mean cash dividend payment of  manufacturing and processing companies i.e. cash dividend payment of  manufacturing and processing companies are not homogenous.

4.5 Major Findings 1. The no. of cash dividend paying companies listed at NEPSE is seen almost the same in context of total listed companies since last five fiscal year except 2004/05 in which it comprise of 20.80 percent of total listed companies. 2. There is the low degree of positive correlation between the total number of  listed companies and the number of cash dividend paying listed companies. 3. Large amount of cash dividend paying “A” class commercial bank of the sample is seen SCBNL. The average payment of cash dividend by SCBNL was Rs.110 per share. Being an “A” class financial institution SBI has not been able to declare cash dividend to its shareholders. EBL, NIBL, HBL and

6.

Most of the finance company is not being capable of declaring cash dividend to their shareholders. Only AFC has been paying cash dividend regularly, with an average of Rs. 3.87 in the past five fiscal year.

7. Under manufacturing and processing companies, only one company has been included under the “A” class financial institution i.e. ULN. The company has been paying the cash dividend regularly. Similarly, the amount of the cash dividend paid is also high than any other companies included in the sample. BNL is not included under the “A” class financial institution but we have taken as a sample from the manufacturing and processing companies for study. It has not been able to distribute cash dividend with good amount being one of  the renowned multinational soft soft drink company.

It has been paying cash

dividend with an average of Rs. 4 in the past five fiscal year. 8. Under the other company only three companies are listed. They are National Hydropower Company Ltd., Butwal Hydropower Company Ltd. and Chilime Hydropower Company Ltd. CHPCL has been categorized as “A” class financial institution and it has declared Rs.35 as cash dividend and Rs. 30 as interim dividend in the fiscal year 2006/07 and 2007/08 respectively. But in

from the above data we see that the MPS of UNL, DCBL and NIBL increased by Rs.13, Rs.10 and Rs.8 respectively in fiscal year 2004/05. 12. Similar is the situation in the fiscal year 2005/06. The MPS of majority of the cash dividend declaring companies is seen increased on ex-dividend date and decreased after ex-dividend date. 13. During the fiscal year 2006/07, MPS of majority of the cash dividend declaring companies is seen increased after ex-dividend date. The largest gainer was the shares of NIBL with the increase of Rs. after the ex-dividend date. 14. Since calculated F is greater than tabulated value, the null hypothesis, Ho is rejected and hence the alternative hypothesis, H1 is accepted. Thus, we conclude that there is a significant difference among mean cash dividend payment of commercial banks and manufacturing and processing companies whereas there is no significant difference among mean cash dividend payment of development. 15. Since calculated value of t is of t is less than tabulated value of t, the null

Chapter 5 Summary and Conclusions 5.1 Summary of Findings

After the restoration of democracy in 1990 A.D., Nepal has implemented liberal economic policy. As a result, many more companies are established in different sectors such as industrial, tourism, transportation, trade and mostly in financial sector who contribute to build up economy of the country. Nepal is a country trying to develop its economy through global trend and cooperation with developed countries. Shareholders make investment in equity capital with the expectation of making earning in the form of dividend or capital gains. High payout satisfies the dividend need whereas increase in market price of stock increases capital gain. Therefore, firm should make a proper balance between dividends and retained earning. Dividend distribution is the very important factor to any organization for effective

the best because shareholders may have investment opportunities to invest elsewhere.

In Nepal there is more practice of cash dividend and stock dividend. The payment of  cash dividend by the financial institutions especially by banks is seen well than other sectors. Thus, the study attempts to determine the impact of cash dividend on stock price. For this whole purpose different descriptive, financial and statistical analysis was done using various methodologies.

5.2 Conclusions

Different types of dividend are paid by the companies operating all over the world. They may be in different forms and basis. The main reason of the dividend payment is to provide the benefit to the shareholders of the company and to make them they are the part of the company. In Nepal, there is a practice of providing either stock 

behavior of American Telephone and Telegraph stock for a time series of 43 consecutive dividends has found that the average price change from the cumdividend day to the ex-dividend day was $2.16, or about 4 percent less than the $2.25 dividend.

But in Nepalese perspective the MPS of certain financial institutions is seen increased heavily on and after ex-dividend date. From Karl Pearson’ correlation analysis we found, there is a very low degree of  positive correlation between total listed companies and cash dividend paying companies. We have also found that the most of the companies are paying cash dividend and bonus share. From the hypothesis calculation, we found there is a significant difference among mean cash dividend payment of commercial bank and manufacturing and processing companies i.e. i.e. cash dividend payment commercial banks and of manufacturing and processing companies are not homogenous and there is no significant difference among mean cash dividend payment of development banks i.e. cash dividend payment of development banks are homogenous.

this, dividend declaration should be proposed to the AGM of shareholders for approval.

2. The legal rules and regulation must be in favor of investors to exercise the dividend practice and to protect the shareholders right.

3. The NEPSE and SEBON should properly handle, guide and inform the shareholders and the related companies about the market price increase or decrease from the impact of dividend declaration.

4. The investors should be careful in investing in the stock of development banks, insurance companies, hotel and other sector on the basis of cash dividend.

5. Each and every company should provide the information regarding the activities and performance, so that investors can analyze the situation and invest their money in the best company.

6. Having seen the history of dividend paying companies, it is seen that the net profit after tax is the main base for distributing the dividend. Thus, it is

REFERENCES

Adhikari, K. K. (2063). “The Comparative Study of Dividend Policy and Practices Commercial Banks in Nepal”. Kathmandu: Shanker Dev Campus. Bhattari, B. H. (2052 ). “Dividend Decision & Its Impact on Stock  Valuation”. Kathmandu: Shanker Dev Campus. Bista, S. (2062). “ Dividend Policy and Practices in Nepal: A Comparative Study of Listed Joint Venture Commercial Banks and Manufacturing Companies”. Master Degree Thesis, Shanker Dev Campus, Kathmandu. Bhattarai, R., (2006).  Investment- Theory and Practice. Kathmandu: Buddha Academic Publishers & Distributors Pvt. Ltd. Chandra, P. (1999). Financial Management. New Delhi: Tata McGraw-Hill Publishing Co. Ltd. Dasilasa, Apostolos (2007). “The ex-dividend day stock price anomaly: evidence from Greece.” Fama, E .F. & Babiak, H. (1968). “Dividend policy: an empirical analysis.”  Journal of American Statistical Association, 63, pp. 1132-1161.

Van Horne, J. C. (2005). Financial Management and Policy. New Delhi: Person Education, Inc. Weston, F. J. & Copeland, T. E. (2001 ). Managerial Finance. New York: The Dryden Press. Wolff, H. K. & Pant, P. R. (2005). Social Science Research and Thesis Writing. Kathmandu: Buddha Academic Enterprises Pvt. Ltd.

Appendix-I

Karl Pearson’s correlation coefficient (r) Correlation Coefficient Between Total Listed Companies and Cash Dividend Paying Listed Companies F/Y

Total listed Companies (X) 114 125 135 135 142 X =651

2003/04 2004/05 2005/06 2006/07 2007/08 N=5

Total Cash Dividend paying listed companies(Y)

∑

∑

 X  =

∑ x = 651 = 130.20

Y  =

∑

∴ r  =

n  y

n

32 26 37 39 41 Y =175

x=X- X

y=Y- Y

-16.20 -5.20 4.80 4.80 11.80 x =0

-3 -9 2 4 6

∑

∑ y =0

x2

∑

1024 676 1369 1521 1681 x 2 =6271

∑

9 81 4 16 36 y 2 =146

5

=

175

= 35

5  xy

∑

∑ x ∑ y 2

2

=

195 6271 146

=

195 79.19 × 12.08

= 0.203

Finding: There is a very low degree of positive correlation between total listed companies and cash dividend paying companies.

xy

y2

48.60 46.80 9.6 19.20 70.80  xy =195

∑

Appendix-II

Dividend Announcement Name of Listed Company Fiscal Year

2003/04

Dividend in (%) 2004/05 2005/06 COMMERCIAL BANK

2006/07

2007/08

Nabil Bank Ltd.

Cash Dividend 50

Cash Dividend 65

Cash Dividend 70

Cash Dividend 85

Nepal Investment Bank Ltd.

Cash Dividend 20

Cash Dividend 15

Cash Dividend 12.58

Cash Dividend 20 Bonus Share 35.46

Cash Dividend 100 Bonus Share 40 Cash Dividend 5 Bonus Share 25

Standard Chartered Bank (Nepal) Ltd. Himalayan Bank Ltd.

Cash Dividend 110

Cash Dividend 110

Cash Dividend 120

Cash Dividend 130 Bonus Share 10

Cash Dividend 80 Bonus Share 50

Cash Dividend 1.32

-

Cash Dividend 11.5 Bonus Share 20

Cash Dividend 30 Bonus Share 5

Cash Dividend 15 Bonus Share 25

Nepal SBI Bank Ltd.

Cash Dividend 8

-

-

Cash Dividend 5

Cash Dividend 10 Bonus Share 35

Development Credit Bank Ltd.

Cash Dividend 10

Cash Dividend 10

Cash Dividend 12

Cash Dividend 12

Bonus Share 12

Everest Bank Ltd.

Cash Dividend 20

Cash Dividend 20

Cash Dividend 20

Cash Dividend 25

Cash Dividend 10 Bonus Share 30

Cash Dividend 30 Cash Dividend 5 Bonus Share 20

Bonus Share 70 Bonus Share 20

DEVELOPMENT BANK Chimeki Bikas Bank Ltd. Sanima Bikas Bank Ltd. Sahayogi Bikash Bank Ltd. Nirdhan Utthan Bank Ltd.

-

-

Annapurna Finance Co. Ltd.

Cash Dividend 12

Cash Dividend 2.632 Bonus Share 50

Cash Dividend 10 Cash Dividend 4 Bonus Share 10

Cash Dividend 3.50 Bonus Share 10

FINANCE COMPANY

Bhajuratna Finance and Saving Co. Ltd. Everest Finance Co. Ltd.

-

-

Cash Dividend 3.158 Bonus Share 60 -

-

-

-

Cash Dividend 0.53 Bonus Share 10

Cash Dividend 1.05

-

Cash Dividend 0.5 Bonus Share 10

-

-

Bonus Share 20

INSURANCE COMPANY Himalayan General Insurance Co. Ltd. Everest Insurance Co. Ltd. Nepal Life Insurance Co. Ltd. United Insurance Co. Ltd.

-

-

-

Bonus Share 100 -

-

Bonus Share 50 -

Bonus Share 20 -

Bonus Share 12.50

-

-

Cash Dividend 10 -

Cash Cash Divid Dividend end 250 250

-

Bonus Share 110

Bonus Share 20

HOTEL Soaltee Hotels Ltd. Taragaon Regency Hotel Ltd. Oriental Hotel Ltd. Yak and Yeti Hotel Ltd.

MANUFACTURING AND PROCESSING COMPANY Bottlers Nepal Ltd. (Balaju) Bottlers Nepal Ltd. (Terai) Unilever Nepal Ltd. Salt Trading Corporation Ltd. Bishal Bazar Co. Ltd.

Cash Dividend 5 Cash Dividend 10 Cash Cash Divide Dividend nd 90

Cash Dividend 20 Cash Dividend 75

Cash Dividend 5 Cash Cash Divid Dividend end 100 100

Cash Cash Divid Dividend end 400 400

TRADING COMPANY Cash Dividend 20 Cash Dividend 20 Cash Dividend 85 Cash Dividend 90

Cash Dividend 20 Interim Dividend 100

Cash Dividend 275 Cash Dividend 20 Cash Dividend 20 Bonus Share 80

OTHERS National Hydro Power Co. Butwal Power Co. Ltd. Chilime Hydro power Co.

-

-

-

Source: Annual Report of SEBON

-

Cash Dividend 30 Cash Dividend 35

Cash Dividend 6 Cash Dividend 25 Cash Dividend 30

Appendix-III

Test of Hypothesis on Cash Dividend Payments of Commercial Banks Null Hypothesis (H o): µ 1 =µ 2 =µ 3 =µ 4 =µ 5 =µ 6 −=µ 7 i.e. there is no significant difference among mean cash dividend payment of commercial banks i.e. cash dividend payment of commercial banks are homogenous.

≠ ≠ ≠ ≠ ≠ ≠µ 7

Alternative Hypothesis (H1): µ 1 µ 2 µ 3 µ 4 µ 5 µ 6

i.e. there is a significant difference among mean cash

dividend payment of commercial of commercial banks  X 1

 X 2

20 20 20 25 10

 X 3

50 65 70 85 100

 X 4

20 15 12.58 20 5

 X 5

110 110 120 130 80

 X 7

 X 6

1.32 0 11.50 30 15

8 0 0 5 10

2  X  11 10 10 12 12 12

∑ X 1 = ∑ X 2 = ∑ X 3 = ∑ X 4 = ∑ X 5 = ∑ X  = ∑ X 6

95

370

T=

72.58

∑ +∑

C.F.=

X1

T

2

N

T.S.S.=

=

∑

X2

+

(1224.4) 35 2

X11

+

550

∑ +∑

2

∑

X3

57.82

X4

+

X5

56

24

∑ +∑ +∑ X6

7

X7

=

400 400 400 625 100 2  X  = 11

∑

1925

2

+

∑

2

X3

+

∑

2

X4

+

∑

2

X5

+

∑

2

X6

+

2500 4225 4900 7225 10000 2  X  = 2 28850

∑

2  X  3 400 225 158.26 400 25 2  X  = 3 1208.26

∑

2  X  4

∑

2

X7

− C.F.

=1925+28850+1208.26+61900+1258.99+189+632-42833.01 =53130.24

12100 12100 14400 16900 6400 2  X  = 4 61900

∑

=95+370+72.58+550+57.58+24+56=1224.40

=42833.01 X2

2  X  2

2  X  5 1.74 0 132.25 900 225 2  X  = 5 1258.99

∑

2

2

 X 6

 X 7

64 0 0 25 100

∑ X 

2 6

189

100 100 144 144 144

=

∑X

2 7

632

=

S.S.C.=

(

=

∑ X ) + (∑ X ) + (∑ X ) + (∑ X ) + (∑ X ) + (∑ X ) (∑ X ) 2

2

1

n1

(95) 5

2

2

3

n2

+

(370) 5

2

+

2

4

n3

(72.58) 5

2

+

2

5

n4

(550) 5

2

+

2

6

n5

(57.82) 5

2

+

(24) 5

2

2

n6

+

(56)

=49307.19 S.S.W.= T.S.S.-S.S.C.= 53130.24 - 49307.19= 3823.05

5

2

− 42833.01

7

n7

2

− C.F.

Appendix-IV

Test of Hypothesis on Cash Dividend Payments of Development Banks

= = =

Null Hypothesis (Ho): µ 1 µ 2 µ 3 µ 4 i.e. there is no significant difference among mean cash dividend payment of  development banks i.e. cash dividend payment of CBs are homogenous.

≠ ≠ ≠

Alternative Hypothesis (H1): µ 1 µ 2 µ 3 µ 4 i.e. there is a significant difference among mean cash dividend payment of  development banks.  X 1

 X 2

0 0 0 0 0

0 0 4 5 0

∑ X 1 =

C.F.=

1

T

N

T.S.S.=

=

2

(52.50) 20

2

∑ X 3 =

9

3

4

=0+9+40+3.5=52.50

=137.81

∑ X  + ∑ X  + ∑ X  + ∑  X  2 11

2 2

2 3

2 4

=0+41+0+1000+12.25-137.81 =915.44

− C .F .

2  X  11

0 0 0 0 3.5

∑ X 4 =

40

∑ X  + ∑ X  + ∑ X  + ∑ X  2

 X 4

0 0 10 30 0

∑ X 2 =

0

T=

 X 3

3.5

2  X  2

0 0 0 0 0

2  X  3

2  X  4

0 0 16 25 0

0 0 100 900 0

0 0 0 0 12.25

∑ X 12 =

∑ X 22 =

∑ X 32 =

∑ X 42 =

0

41

1000

12.25

1

∑ X  ) + (∑ X  ) + (∑  X  ) + (∑ X  ) S.S.C.= 2

(

2

n1

=

(0) 5

2

+

2

2

1

3

n2

(9) 5

2

+

(40) 5

2

n3

+

(3.5) 5

2

4

n4

− 137.81

=200.84 S.S.W.=T.S.S.-S.S.C.= S.S.W.=T.S.S.-S.S.C.= 915.44-200.84=714.60 915.44-200.84=714.60

2

− C .F .

Appendix-V

Test of Hypothesis on Cash Dividend Payments of Manufacturing and Processing Companies

Null Hypothesis (Ho): µ 1=µ 2 i.e. there is no significant difference among mean cash dividend payment of Mfg. and PCs i.e. cash dividend payment of CBs are homogenous. Alternative Hypothesis (H1): µ 1≠µ 2 i.e. there is a significant difference among mean cash dividend payment of Mfg. and PCs.

 X 1

 X 2

2  X  11

2  X  2

900 100 400 250 275

15 5 0 0 0

400 8100 10000 160000 62500

400 225 25 0 0

∑ X 12 =

∑ X 22 =

316225

250

∑ X 1 = 1115

T=

∑ X  + ∑ X  =1115+20=1135

C.F.=

1

T

2

N

T.S.S.=

=

2

(1135) 10

2

=128822.50

∑ X  + ∑ X  2 11

2 2

− C .F .

=3166225+250-128822.50

∑ X 2 = 20

1

=187652.50 S.S.C.=

(

=

∑X )

2

1

n1 (1115) 5

2

+

+

(

(20) 5

∑X ) 2

n2 2

2

− C.F.

− 128822 .50

=119902.50 S.S.W.=T.S.S.-S.S.C.= 187652.50-119902.50=67750

Appendix-VI

Test of hypothesis on ex-dividend day test for the MPS of commercial banks

Null Hypothesis (Ho): µx =µy i.e. there is no significant difference between the average MPS before and after the cash dividend payment of commercial banks. Alternative Hypothesis (H1): µx > µy (Right tailed test) i.e. the average MPS decrease after the

payment cash dividend. MPS Before Cash Dividend (x) 152 1763 445 803 995 242 687 1860

MPS After Cash Dividend (y) 157 1701 442 798 662 243 682 1839

2

d-x-y

d

-5 62 3 5 333 -1 5 21

25 3844 9 25 110889 2 25 441

∴d = ∑ = d

946

n

23

= 41.13

⎡ 2 (∑ d ) 2 ⎤ ∴ sd = ⎢∑ d − ⎥ n −1 ⎣ n ⎦ 1

2 ⎡ (946) ⎤ = ⎢∑ 776220 − ⎥ 23 − 1 ⎣⎢ 23 ⎦⎥

1

1

=

22

* 737310.60

= 183.07

∴ tcal =

∴t

d

s

=

d

n

= 1.08

41.13 183.07 23

Appendix-VII

Test of hypothesis on ex-dividend day test for the MPS of development banks and finance company

Null Hypothesis (Ho): µx =µy i.e. there is no significant difference between the average MPS before and after the cash dividend payment of development banks and finance company. Alternative Hypothesis (H1): µx > µy (Right tailed test) i.e. the average MPS decrease after the

payment cash dividend. MPS Before Cash Dividend (x) 102 1052 417 577 883 n=5

MPS After Cash Dividend (y) 124 1199 350 420 720

d-x-y

-22 147 67 157 163 d =218

∑

d

∑

2

484 21609 4489 24649 26569 2 d =77800

∴ tcal =

d

s

=

d

n

43.60 139.12 5

∴ tcal = 0.70

∴ degree of freedom (d.f.) = n-1 = 5-1 ∴level of significance, α =0.05

=4

Critical Value: The tabulated value of t at α =0.05 and 4 d.f. for right tailed test is 2.132. Decision: Since the calculated value of t is less than tabulated value of t, the null hypothesis is accepted and concluded that there is no significant difference between the average MPS before and after the cash dividend payment of development banks and finance company.

Appendix-VIII

1

When a stock pays higher dividend, the lesser the profit after-tax is being retained for firm’s growth, thus affecting the expansion activities of the firms’ operations. On the other hand, if all of the profit after-tax is retained, this will cause dissatisfaction among investors and in a way encouraging them to invest in other stocks.

2

This statistic is known as the ex-dividend price drop ratio, drop-off ratio, premium, price change to dividend drop ratio ∆ P/D etc.

3

DSE classifies the listed companies into A, B and Z categories. A category companies are good stocks as their operating performance are assessed to be good and pay regular dividends, B-category companies are moderate companies whose operating performance are satisfactory and pay some dividends from time to time, and Z-category companies are those whose operating performance are not good and normally pay no dividend

APPENDIX IX

Average MPS calculation for ex-dividend test for fiscal year 2003/04 Average MPS

Average MPS

Ex‐dividend

Before

After

Company Name

date

Dividend

Dividend

1

EBL

21‐Dec‐03 444

17‐Dec‐03 445

18‐Dec‐03 445

19‐Dec‐03 444

22‐Dec‐03 441

445

442

2

DCBL

12‐Nov‐03

5‐Nov‐03

6‐Nov‐03

7‐Nov‐03

13‐Nov‐03 14‐Nov‐03 15‐Nov‐03

150

155

158

157

156

152

157

SCBNL

161 5‐Dec‐03

151

3

1‐Dec‐03

3‐Dec‐03

4‐Dec‐03

8‐Dec‐03

9‐Dec‐03

12‐Dec‐03

1775

1760

1756

1774

1771

1782

1550

1763

1701

4

A FC

21‐Dec‐03 410

12‐Dec‐03 420

15‐Dec‐03 420

19‐Dec‐03 410

9‐Jan‐04 350

23‐Jan‐04 350

25‐Jan‐04 350

417

350

5

NABIL

4‐Jan‐04

30‐Dec‐03

31‐Dec‐03

2‐Feb‐04

5‐Feb‐04

7‐Feb‐04

7‐Feb‐04

810 24‐Feb‐04

800 26‐Feb‐04

800 27‐Feb‐04

800 26‐Mar‐04

800 5‐Apr‐04

795 6‐Apr‐04

798

HBL

800 21‐Mar‐04

803

6

994

997

994

7

SBI

28‐Mar‐04

S. No.

990 241

15‐Mar‐04 19‐Mar‐04 26‐Mar‐04 245 240 241

23‐Dec‐03 442

24‐Dec‐03 442

630

661

694

995

662

1‐Apr‐04 240

2‐Apr‐04 245

5‐Apr‐04 245

242

243

Average MPS

Average MPS

Average MPS calculation for ex-dividend test for fiscal year 2004/05

S. No. Company Name 1 EBL

Ex‐dividend

Before

After

date

Dividend

Dividend

31‐Oct‐04

26‐Oct‐04

27‐Oct‐04

28‐Oct‐04

1‐Nov‐04

2‐Nov‐04

685 17‐Dec‐04

690

685

685

685

680

680

687

682

18‐Nov‐04 26‐Nov‐04 16‐Dec‐04 1510 1450 1500

23‐Dec‐04 1500

27‐Dec‐04 1500

15‐Jan‐05 1500

1487

1500

1860

1839

3‐Nov‐04

2

UNL

3

SCBNL

2‐Dec‐04 1830

29‐Nov‐04 30‐Nov‐04 1889 1860

1‐Dec‐04 1830

3‐Dec‐04 1840

4‐Dec‐04 1840

5‐Dec‐04 1838

4

DCBL

18‐Dec‐04

10‐Dec‐04

17‐Dec‐04

20‐Dec‐04

21‐Dec‐04

22‐Dec‐04

5

NABIL

208 22‐Dec‐04

6

NIBL

1500

14‐Dec‐04

198

198

208

212

210

212

201

211

1230

17‐Dec‐04 1230

20‐Dec‐04 1266

21‐Dec‐04 1280

23‐Dec‐04 1260

24‐Dec‐04 1270

29‐Dec‐04 1215

1259

1248

25‐Dec‐04

22‐Dec‐04

23‐Dec‐04

24‐Dec‐04

27‐Dec‐04

28‐Dec‐04

29‐Dec‐04

1155

1147

1155

1155

1163

1162

1154

1152

1160

Average MPS

Average MPS

Average MPS calculation for ex-dividend test for fiscal year 2005/06 Ex‐dividend

Before

After

Company Name

date

Dividend

Dividend

1

UNL

9‐Sep‐05 2200

6‐Sep‐05 2140

7‐Sep‐05 2200

8‐Sep‐05 2200

23‐Nov‐05 24‐Nov‐05 29‐Nov‐05 1800 1885 1850

2180

1845

2

SCBNL

26‐Oct‐05

9‐Oct‐05

23‐Oct‐05

25‐Oct‐05

27‐Oct‐05

3

DCBL

2430 7‐Oct‐07

4

NABIL

30‐Nov‐05 1650

24‐Nov‐05 27‐Nov‐05 29‐Nov‐05 1660 1660 1660

1‐Dec‐05 1700

5

NIBL

14‐Dec‐05

11‐Dec‐05

12‐Dec‐05

13‐Dec‐05

6

HBL

785 16‐Dec‐05

800 13‐Dec‐05

790 14‐Dec‐05

785 15‐Dec‐05

1140

1140

1135

A FC

1140 26‐Dec‐05

1126

7

20‐Dec‐05

21‐Dec‐05

20‐Dec‐05

20‐Feb‐06

627

563

570

598

400

420

441

S. No.

265

2370

2400

2405

2‐Oct‐07 255

3‐Oct‐07 255

4‐Oct‐07 260

30‐Oct‐05

2446

2472

8‐Oct‐07 261

9‐Oct‐07 261

7‐Nov‐05 2200

2392

2373

10‐Oct‐07 248

257

257

6‐Dec‐05 1631

7‐Dec‐05 1605

1660

1645

18‐Dec‐05

19‐Dec‐05

20‐Dec‐05

788 18‐Dec‐05

790 19‐Dec‐05

770 20‐Dec‐05

792

783

1123

1100

1135

1119

26‐Mar‐06

4‐Apr‐06 577

420

Average MPS

Average MPS

Before Dividend

After Dividend

Average MPS calculation for ex-dividend test for fiscal year 2006/07

S. No. 1

Company Name

Ex‐dividend date

NABIL

22‐Oct‐06

17‐Oct‐06

18‐Oct‐06

18‐Oct‐06

26‐Oct‐06

31‐Oct‐06

2340

2295

2300

2340

2340

2300

2320

2312

2320

31‐Jan‐07 785

1‐Feb‐07 800

4‐Feb‐07 800

5‐Feb‐07 805

6‐Feb‐07 800

790

802

19‐Dec‐06 1303

1303

1301

4285

4357

1328

1421

1‐Nov‐06

2

SBI

3‐Feb‐07 800

29‐Jan‐07 785

3

HBL

15‐Dec‐06 1300

12‐Dec‐06 1305

13‐Dec‐06 1305

14‐Dec‐06 1300

17‐Dec‐06 1300

18‐Dec‐06 1301

4

SCBNL

8‐Nov‐06

5‐Nov‐06

6‐Nov‐06

7‐Nov‐06

9‐Nov‐06

12‐Nov‐06 13‐Nov‐06

4400

4255

4300

4300

4440

4550

4081

5

EBL

31‐Oct‐06

26‐Oct‐06

29‐Oct‐06

30‐Oct‐06

1‐Nov‐06

2‐Nov‐06

6‐Nov‐06

1345

1300

1340

1345

1365

1440

1458

NIBL

26‐Oct‐06

17‐Oct‐06

18‐Oct‐06

19‐Oct‐06

29‐Oct‐06

30‐Oct‐06

1456

1450

1435

1414

1423

2300

7

DCBL

1435 25‐Dec‐06

20‐Dec‐06

21‐Dec‐06

24‐Dec‐06

26‐Dec‐06

27‐Dec‐06

28‐Dec‐06

805

810

801

815

805

816

8

UNL

5‐Sep‐06 2810

24‐Aug‐06 2810

27‐Aug‐06 2850

30‐Aug‐06 2810

7‐Sep‐06 2900

18‐Sep‐06 2750

9

CBBL

26‐Dec‐06

2‐Apr‐06

3‐Apr‐06

27‐Nov‐08

25‐Jun‐08

29‐Jun‐08

30‐Jun‐08

105

100

100

105

120

120

132

10

CHPCL

8‐Jan‐07

3‐Jan‐07

4‐Jan‐07

7‐Jan‐07

9‐Jan‐07

10‐Jan‐07

11‐Jan‐07

817

735

745

790

810

775

800

6

31‐Oct‐06 1447

1712

819

809

813

12‐Oct‐06 2850

2823

2833

102

124

757

795

Average MPS Before

Average MPS After

Dividend

Dividend

2750 12‐Jan‐08

2973

2729

Average MPS calculation for ex-dividend test for fiscal year 2007/08 Ex‐dividend Company Name

date

1

EBL

7‐Oct‐07

2‐Oct‐07

3‐Oct‐07

4‐Oct‐07

2

HBL

2955 31‐Dec‐07

2970 25‐Dec‐07

2950 26‐Dec‐07

3000 27‐Dec‐07

3

NABIL

2054 7‐Oct‐07

4

NIBL

5

S. No.

2220

2180

2095

4631

2‐Oct‐07 4800

3‐Oct‐07 4800

4‐Oct‐07 4710

8‐Nov‐07 2120

5‐Nov‐07 1940

6‐Nov‐07 2000

SBI

22‐Feb‐08

16‐Feb‐08

17‐Feb‐08

6

SBBL

1200 11‐Jan‐08

7

A FC

8 9

1850

1230

8‐Oct‐07 2587 9‐Jan‐08

9‐Oct‐07 2849 10‐Jan‐08

1880

2165

1973

10‐Oct‐07 4150

4770

4285

7‐Nov‐07 2040

12‐Nov‐07 13‐Nov‐07 14‐Nov‐07 2162 2280 2490

1993

2311

19‐Feb‐08

25‐Feb‐08

1825

2054

1985

8‐Oct‐07 4450

9‐Oct‐07 4255

10‐Oct‐07

1275

27‐Feb‐08 1301

28‐Feb‐08 1635

1286

1125

8‐Jan‐08 1020

9‐Jan‐08 1018

10‐Jan‐08 1119

12‐Jan‐08 1332

13‐Jan‐08 1175

14‐Jan‐08 1090

1282

1052

1199

13‐Jan‐08 640

6‐Jan‐08 610

11‐Jan‐08 650

12‐Jan‐08 1390

21‐Jan‐08 684

22‐Jan‐08 710

31‐Jan‐08 767

883

720

CHCPL

10‐Feb‐08

3‐Feb‐08

4‐Feb‐08

5‐Feb‐08

12‐Feb‐08

14‐Feb‐08

16‐Feb‐08

1151 24‐Jun‐08

1078 4‐Jun‐08

1036 5‐Jun‐08

1076 9‐Jun‐08

1145 25‐Jun‐08

1335 29‐Jun‐08

1167 30‐Jun‐08

1063

1216

NLIC

1560

1601

1633

1698

1825

1620

1650

1644

1698