Abstract:
Purpose- The purpose of the study is to examine the relation between free cash flow and
dividend policy with share price volatility. It is to understand the behavioural response of
investors toward excess offree cash flow and the management of dividend policy.
Design: Descriptive and quantitative analysis are used to perform analysis. Panel data is
collected 12 companies from 4 manufacturing sectors from year 2015-16 to 2019-20.
Quarterly data is taken from 12 companies whose year ended in June.
Findings: Free cash flow and dividend policy have significant statistical relation with share
price volatility in single linear regression. However, in multiple linear regression along with
control variable free cash flow turn insignificant, whereas, dividend policy remains
significant. Investors prefer low dividend from top performing sectors as increasing dividend
increases the volatility of a stock. Excess free cash flow should be reinvested instead of
dividend payment.
Research limitations: Quarterly data is unavailable from more than 5 years, in some cases
quarterly data is available of only 2-3 years.
Originality: This paper is useful for both management and researchers as it analysis investor
preference and expectation from well-performing sectors. This paper provides valuable
insight about treatment of free cash flow in making dividend policy.
Recommendation: Further researches can be performed by increasing the sample size and
time period. Including all sectors in the sample will give general idea about the investors
preference from management.
