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Effect Of Dividend On Stock Market

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1.1 BACKGROUND OF THE STUDY:
Shareholders earn the profit on their investments by two ways either by Dividends or by Capital Gains. A dividend can be thought of as the cost of Equity Capital to the shareholders. Dividend is actually a profit which is paid to the shareholders in terms of Cash/Stocks in each year or in each quarter as per company’s policy whereas Capital gain is rise in market value of an asset. It is not compulsory for a company to declare dividend in each period.
Dividend announcements can be used as a direct signal of strength regarding a company’s liquidity in the market. The announcement of a dividend can be seen in two perspectives: if the dividend that is announced is up to expectations of shareholders, the market price …show more content…

It states that the only way an investor can enjoy higher returns is by making the investment in riskier stocks.
According to Fama there are three type of market efficiencies those are weak form, semi – strong form, and strong form of market efficiency. Market efficiency can be defined as the time period it takes for the announced public information affect on the stock market. These three forms of efficiencies are as stated:
The strongest version of market efficiency is Strong Efficiency which states that all the public and private information in the market affect the stock …show more content…

However the question remains whether paying out of earnings would essentially create value for the shareholders or not. In this respect, we have found two schools of thought of dividend policy: (1) dividend irrelevance and (2) dividend relevance. Both of the thoughts have conflict with each other and none of them provides complete and satisfactory guidelines.

1.1.1 THEORIES REGARDING DIVIDEND POLICY:
There are three different theories regarding dividend payout. One of them is Irrelevance theory which states that investors do not care about dividend payout; in fact they are not concerned with the company’s dividend policy since they can sell a portion of portfolio of their equities if they want cash.
Another theory is Birds in the hand theory which states that the investors prefer a high payout and shareholders prefer dividends and are willing to accept a lower required rate of return. Apart from these theories, the last theory is Tax preference theory in which the investors prefer a low payout, in other words a theory that postulates that investors prefer dividends from a stock to potential capital gains because of the inherent uncertainty of the

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