Dividend Policy

                       Critical Literature Review

Article: The Impact of Dividend Policy on Share Price Volatility: Empirical Evidence from Jordanian Stock Market.

Dividend decision refers to the policy that the management formulates in regard to earnings for distribution as dividends among shareholders.

In 1956 John Lintner, Harvard University’s Gand Professor of Economics and Business Administration proposed the Lintner model for corporate dividend policy that focused on two core notions: (1) a company's targeted pay out ratio and (2) the speed at which current dividends adjust to the target. The Dividend Decision, in corporate finance, is a decision made by the directors of a company about the amount and timing of any cash payments made to the company's stockholders. In 1956, John Lintner developed this dividend model through inductive research with 28 large, public manufacturing firms. Companies tend to set long-run target dividends-to-earnings ratios according to the amount of positive net-present-value (NPV) projects they have available.

Modigliani Miller theory was proposed by Franco Modigliani and Merton Millerin 1961. They were the pioneers in suggesting that dividends and capital gains are equivalent when an investor considers returns on investment. This theory also believes that dividends are irrelevant by the arbitrage argument. They argue that, when the dividend is constant, it has no impact on the firm’s value. In addition, the effect of the firm’s dividend policy on the current price volatility is of interest not only to the corporation but also to investors and economists. There are three conflicting theories examined the relationship between dividend and share prices; Lintner and Myron Gordon indicated that there is a positive relationship between dividend policy and stock price (Bird In Hand Theory). On the other hand, Modigliani and Miller argue that there is no relationship between the dividend policy and the stock prices (Irrelevant Theory). The third view indicated that there is a negative relationship between dividend policy and stock prices (Tax Preference Theory).

The main purpose of this study is to investigate the impact of dividend policies on stock prices changes in Jordanian companies listed in ASE.

Dividend policy

Main objectives of this study are:

·     Providing empirical research on the dividend policy and stock prices, in the emerging market.

·    Analyzing the impact of a cash dividend, stock dividend, and buyback stocks on the stock prices volatility.

·      Demonstrating the dividend policy followed by Jordanian companies.

According to the signaling hypothesis developed by Bhattacharya (1979), managers have more knowledge of the company's investments than those shareholders who are outside the company and use the company's dividend payout decisions as a means to convey this information to the outsider.

Miller and Modigliani (1961) criticize this approach, suggesting that the company is fundamentally driven by its cash flows, not by the way it distributes its earnings. Bhattacharya describes the bird in hand theory as an illusion and suggests that a company's cash flow risk will affect that company's dividend payments but not decrease the risk by increasing dividend payments. A company's cash flows are reflected in its dividend payments.

Warrad, et al. (2012) examined the relationship between ownership structure and dividend payout policy in the Jordanian Companies during the period 2005-2007 by using Tobin’s Q. The results indicated that there is a positive and significant relationship between foreign ownership structure and dividend payout policy.