The Relationship between Dividend Policy and Stock Price Volatility: Panel Data Analysis of Financial and Non-Financial Firms of Pakistan

Abstract

This study is conducted to observe the behavior of stock prices in response to dividend policy of the non-fmancial and fmancial firms listed evidence from Pakistan stock exchange (PSX). Data is collected for the period from 2009 to 2018. Stock price volatility is taken as dependent variable whereas dividend policy is taken as independent variable. Proxies for dividend policy are taken dividend pay-out and dividend yield. Control variables take are Firm size, Growth in Assets and Net income. Data is taken for 20 Non fmancia1 and 20 financial listed ftrms.Non-financial20 firms consist of Cement, Textile, Oil & Gas Exploration, Refinery, Power Generation & Distribution, Technology & Communication, Tobacco, and Food sectors of PSX. And data for 20 financial firms consist of commercial banks, insurance companies, modarabas, investment companies and leasing sector of PSX.AII40 firms are carefully selected on the basis of dividend pay-out basis. Those farms who did not paid dividend for 4 consecutive years are excluded from the study. The results of the study after applying fixed effect regression model revealed that for Non-financial firms, stock price volatility and dividend pay-out shows significant negative relationship. Whereas there is significant positive relation between dividend yield and stock price volatility. While among control variables the firm size has Insignificant results, which suggest that firm size have no significant impact on SPY. The Asset growth has significant positive influence on SPY. Moreover the last control variable Net income has significant negative impact on SPY, which indicates that increase in net income will cause decrease in SPY. For Financial firms, the finding of our study suggest that, SPY and dividend pay-out shows significant positive relationship, This result is in line with the (Memon et al, 20 17) and contradict with Baskin, ( 1989), Allen & Rachim, ( 1996) and Hussairtey, (20 11) fading's. Whereas there is insignificant positive relation between dividend yield and stock price volatility, which indicates that, dividend yield have closer to no impact on the volatility of stock. This results also contrary to the research findings of Baskin, (1989), Allen & Rachim, ( 1996)& Husseini, (20 II). While among control variable firm size has significant positive association with SPY. The Net income has insignificant impact on SPV and Asset growth has significant negative influence on SPY. The overall results for Nonfinancial and financial sector's listed firms are consistent with the dividend relevance theories whereas contradict with the Miller & Modigliani, ( 1961) dividend irrelevance theory. The empirical evidence suggests that dividend policy have significant influence on Stock price risk.