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Impact of Dividend Policies on the Value of the Firm.

M P Birla Institute of Management 1

RESEARCH PROJECT

ON

IMPACT OF DIVIDEND POLICIES

ON THE VALUE OF THE FIRM

By

PRASANNA HEGDE

06XQCM6061

Under the Guidance and Supervision

Of

Prof. SATHYANARAYANA

M.P.BIRLA INSTITUTE OF MANAGEMENTAssociate Bharatiya Vidya Bhavan

# 43, Race Course RoadBangalore-560001

2006 08


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DECLARATION

I here by declare that the report entitled. IMPACT OF DIVIDEND POLICIES

ON THE VALUE OF THE FIRM. is prepared under the guidance of

Prof.Sathyanarayana (Faculty, M.P.Birla Institute of Management).I also

declare that this project report has not been submitted to any other University/

Institute for the award of any other degree, diploma, fellowship or other similar

title or prizes.

Date: PRASANNA HEGDE

Place: Bangalore (O6XQCM6061)


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ACKNOWLEDGEMENT

I am thankful to Dr. Nagesh Malavalli, Principal M.P. Birla Institute of

Management, Bangalore, who has given his valuable support during the study.

I am extremely thankful to Sathyanarayana, Professor M.P. Birla Institute

of Management, Bangalore who has guided me to do this project by giving

valuable suggestions and advice.

My gratitude will not be complete without thanking God and I am most

grateful to my beloved parents who have been a constant source of aspiration and

blessings in my pursuit for studies. Finally, I express my sincere gratitude to all my

friends and well wishers who helped me to do this project.

Place: Bangalore

Date: (PRASANNA HEGDE)


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TABLE OF CONTENTS

CHAPTERS PARTICULARS PAGE NO.

CHAPTER - I Research Extract 7

CHAPTER - II Introduction 10

Background & Need for the Study 11

Statement of the Problem 12

Objectives of the study 13

Hypothesis 13

Theoretical Background 13

Operational Definitions 18

Scope Of The Study 19

Limitations 19

CHAPTER - III REVIEW OF LITERATURE 21

CHAPTER- IV METHODOLOGY 29

Research Design 29

Study Setting 29

Population 29

Sampling 29

Data Collection 31

Statistical Analysis and Model Used 32

CHAPTER - V ANLYSIS AND INTERPRETATIONS 35

SECTION-I Cross Sectional Regression Analysis 35

SECTION-II Time Series Regression Analysis 42

CHAPTER-VI DISCUSSION 64

Findings of the study 65

Summary and Conclusion 66

Limitations 67

Recommendations 67

BIBLIOGRAPHY 68


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LIST OF TABLES

TABLE NO PARTICULARS PAGE NO

V-1 Cross Sectional Values for the 35

year 2002/03

V-2 Cross Sectional Values for the 36

year 2003/04

V-3 Cross Sectional Values for the year 37

2004/05


2005/06


2006/07

V-6 Cross Sectional Regression Results 40

V-7-34 Time Series Table of the Companies 42 - 55

V-35 Time Series Regression Results 56


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RESEARCH EXTRACT

To pay or not to pay dividend is a critical decision any management takes.

Maximizing the value of the firm or maximizing the shareholders wealth is the

ultimate objective of any firm. So any decision of the management has to be

valued on the basis of its effect on the value of the firm.

Aim of the study was to understand the Impact of dividend policies on the

value of the firm. Along with dividend other variables such as retained earnings,

debt-equity and the return on equity share prices of the Indian public limited

companies are studied to understand the relationship between the dividend and

the share prices. The objectives of the study were to describe the samples in

terms of its pattern of dividend distribution and debt and to find out the

relationship between the dividend and debt & the return on the equity shares.

The findings of the study can be used to understand the influence of dividend

decisions and capital structure decisions on the value of the firm.

A descriptive research, which is quantitative in nature, was conducted.

Convenient sample of 28 companies, shares of which are traded in Bombay

Stock Exchange and National Stock Exchange was studied. The historical data

were collected from the Bangalore stock Exchange and the web site of the

Bombay Stock Exchange and National Stock Exchange. The relationship

between the Value of the firm & Dividend Policies of the firm and the capital

structure of the firm is studied using Multiple Regression model.

Results of the study show that there is no evidence of significant

association between dividend policies on the value of the firm (Significant at 5%

level using t test). The findings include both cross-sectional interpretation for


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the entire sample companies for five years (2002/2003 to 2006/2007) and time

series interpretation for each of the sample companies separately for ten years

(1997/1998 to 2006/2007). The findings also include the dividend distribution and

debt patterns of the samples under study.


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INTRODUCTION

The Dividend decision of the firm is a crucial area of financial

management. The important aspect of dividend policy is to determine the amount

of earnings to be retained and the amount to be distributed to share holders.

Retained earnings are the most significant internal source of financing. On the

other hand, dividends may be considered desirable from shareholders point of

view as they tend to increase their current return. During the first part of the

twentieth century, dividends were the primary reason investors purchased stock.

It was literally said, The purpose of a company is to pay dividends. Today, the

investors view is a bit more refined; it could be stated, instead, as, the purpose

of a company is to increase my wealth. Indeed, todays investor looks to

dividends and capital gains as a source of increase.

The objective of any dividend policy should be to increase the

shareholders return so that the value of his investment is maximized.

Shareholders return has two components; dividends and capital gains. There are

many reasons for paying dividends and there are many reasons for not paying

any dividends. As a result, `dividend policy' is controversial. A higher payout of

dividend means lower retained earnings, which may affect the growth of the firm

and perhaps a lower market price per share. The decision becomes more critical

when there exists an investment opportunity to the firm. If the profits earned are

distributed to investors then the retained earnings to that extent will be reduced

which will result in increasing debt to finance the investment opportunity. On the

other hand the investors requirement also must be satisfied by providing the

optimum dividend. All these factors, which go through the minds of the

shareholders, will be reflected in the market price of the shares. Thus the

dividend decision is very vital to any organization.


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BACKGROUND AND NEED FOR THE STUDY

How share prices differ from each other? To what extent financialdecisions of the management have a bearing on the shareholders wealth?

These are some of the several questions arose in the minds of the investors and

other stakeholders of the firm. No matter what type of industry, growth

perspective, capital structure etc of a firm the ultimate objective is maximizing

shareholders wealth. Shareholders wealth or the total value of the firm being the

final goal, all the decisions of the management is directed towards it. The next

question arises is how to value these decisions. It is always believed that the

market value of shares reflects the emotions and reactions of the investors to

each and every decision the management takes.

The major decision of financial management is the dividend decision; in

the sense that the firm has to choose between distributing the profits to the

shareholders and plaguing back the profits in to the business. The choice would

obviously hinge on the effect of the decision on the maximization of shareholders

wealth. Given this objective firms should be guided by the consideration as towhich alternative use is consistent with the goal of wealth maximization. A firm

will be well advised to distribute the net profits as dividend if such a distribution

results in maximizing the share holders wealth; if not it would be better to plough

back the profits into the business for future investment and growth. There are

however conflicting view regarding impact of dividend on the valuation of the firm.

On the relationship between the dividend policy and value of the firm different

theories have been advanced. One school of thought treats it as relevant and the

other as irrelevant. There are two extreme views, that is; a) dividend are good as

it increases the shareholder value; b) dividends are bad as it decreases the

shareholders value. The crux of the arguments is whether to distribute the

earnings or retain the earnings.


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Another important financial decision is capital structure decision. Under

normal conditions the earnings per share increases when the leverage is more.

More debt or leverage also increases the risk of the firm. Thus it cannot beclearly said whether the value of the firm increases with leverage. As the

objective of the firm is to increase the value of the firm, the capital structure, or

leverage, decision should be examined from the point of view of its impact on the

value of the firm. If the capital structure affects the value of the firm, then every

firm will try to achieve the optimal capital structure that maximizes the value of

the firm. There exist conflicting theories on the relationship between the capital

structure and the value of the firm.

Thus there exists a research gap and the purpose of the current study is

therefore to describe whether the dividend decisions really influence the value of

the firm or not. In this study an attempt has also been made to understand the

relationship between the capital structure and the value of the firm.

STATEMENT OF THE PROBLEM

There exist conflicting views with regard to the impact of dividend

decisions on the value of the firm. Some are of the opinion that dividends do

affect the market price of the shares while others argue it does not. Thus there

exists a knowledge gap. The research problem under consideration is as follows.

To what extent does the dividend decision affect the value of the widely held

public limited companies in India?


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OBJECTIVES OF THE STUDY

1 To describe the samples selected in terms of the financial ratios.

2 To explain the dividend distribution / retention and the debt equity patterns of

the samples.

3 To understand the relationship between the dividend policies of the company

and the value of the firm.

4 To study the effect of capital structure decision on the value of the firm.

HYPOTHESIS

H0: Dividend Policies affect the value of the firm.

H1: Dividend Policies do not affect the value of the firm.

THEORETICAL BACKGROUND

Dividend

Companies that earn a profit can do one of the three things; pay that profit

out to shareholders, reinvest it in the business through expansion, or both. When

a portion of the profit is paid out to shareholders, the payment is known as a

dividend. The dividend is a variable income, the amount of which depends on the

amount of annual profit made by the company. The dividend corresponds to the

share of income that the Annual General Meeting opts to distribute to


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The various terms with regard to Dividends are as follows:

Cum Dividend: Phrase used to indicate that a stock is selling with a

recently declared right or dividend.

Ex Dividend: A security that no longer carries the right to the most recently

declared dividend; or the period of time between the announcement of the

dividend and the payment.

Indicative Dividend: The total amount of dividends that would be paid on a

share of stock over the next 12 months if each dividend were the same

amount as the most recent dividend.

Interim Dividend: A dividend, which is declared and distributed before the

company's annual earnings have been calculated; often-distributed

quarterly.

Omitted Dividend: A dividend which was expected, but which was not

declared, usually due to financial difficulties. Also called passed dividend.

Optional Dividend: Dividend which the shareholder can choose to take as

either cash or stock.

Participative Dividend: Dividend paid on participating preferred stock. This

is an unusual dividend structure, since it allows holders of preferred stock

to receive payouts in addition to the stated dividend rate under certain

circumstances.

Patronage Dividend: A taxable distribution made by a cooperative to its

members or patrons.


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Trading Dividend: The practice by some corporations of buying and selling

other corporations' stock to maximize collected dividends, for tax benefits

(since corporations pay very little tax on dividend income). It is also called

dividend capture.

Special Dividend: A nonrecurring dividend that is exceptional in terms of

either size or date issued.

Capital Structure (Debt-Equity)

Another important variable, which affect the value of the firm, is the capital

structure of the firm. Finance theory tells us that, in the absence of bankruptcy

costs, corporate income taxation, or other market imperfections, the value of a

firm is independent of its financial structure. The theory is intuitive, because real

assets determine a firms value; it cannot be changed by purely financial

transactions. In other words, financial assets on the right side of the balance

sheet have value only because of the real assets, including intangibles and

growth opportunities, on the left side. Therefore, if markets are doing their job, it

should not be possible to create value by shuffling the paper claims on the firm's

real assets. However, if there are imperfections such as taxes, underdeveloped

financial markets, and inefficient legal systems financial structure becomes

relevant. Firms must decide whether to issue debt or equity securities to

minimize the costs entailed by these imperfections.

How Shareholders' Wealth Grows

Shareholders benefit financially from their investment in successful companies in

three main ways:


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Dividends, which are a distribution of part of a company's net profit to

shareholders, as part owners of the company. Most large industrial

companies pay dividends twice yearly, and often these dividends have tax

advantages as well.

Capital growth, which is the increase in the market value of a company's

shares over the total cost of those shares. It usually reflects the growth in

the company's profits and assets, but it can also be affected by a change

in the sentiment of the whole share market as it goes through its cycles.

Prices of shares are determined by many factors, which are interrelated to

each other.

New Issues of shares, which may be made by a company when it requires

further funds. Such new shares are usually offered at a discount to

existing shareholders, based on a predetermined ratio, without having to

pay brokerage. The entitlements to the new shares offered are known as

Rights, as shareholders have the right to acquire the shares or to sell the

rights to these new shares on the stock market. A company may also

make a Bonus Issue to shareholders at no cost.


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OPERATIONAL DEFINITIONS

1. DIVIDEND PAYOUT

A ratio showing the percentage of net profits paid out in dividends on common

stock, after reducing net profits by the amount of dividends paid on preferred

stock. It calculated as the percentage of dividend paid on profit after tax. In this

study dividend payout ratio is expressed as the ratio of dividend paid to the net

profit after tax.

D/P Ratio = Dividend Paid / Net profit after tax

2. RETENTION RATIOS

Retention ratio shows the rate of earnings retained by the company for financing

the investments needs. Retained earnings are the main internal source of finance

for the company. This explains to what extent the earnings of the firm are

ploughed back to the business. Technically it is one minus the dividend paid out

ratio.

Retention Ratio = 1 D/P Ratio.

3. DEBT EQUITY RATIOS

Debt Equity ratio shows capital structure of the firm. This represents the capital

structure of the company. It is defined as the ratio of debt to equity of the firm.

D/E Ratio = Debt / Equity

4. RETURNS ON SHARES

Return on shares is calculated by dividing the previous years price from the

current year price and the log natural of the resultant figure is calculated as it

gives a continuously compounded rate of return


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Ln (P1 / P0)

5. VALUE OF THE FIRM

The effect on the value of the firm is analyzed by studying the return on equityshares.

Return on Equity share = P1 / P0, where P1 is the market price of equity

share for current year and P0 is the market price of the equity share for the

previous year.

SCOPE OF THE STUDY

Here an attempt is made to understand increase or decrease in the share

price due to the different dividend payout ratios. Here the ratios such as dividend

payout, retention ratio, debt equity ratios and return on the shares are studied.

The findings of the study can be used to understand the influence of dividend

decisions and capital structure on the value of the firm.

LIMITATIONS

It is needless to say that the factors, which affect the share prices, are an

endless list. Factors other than dividend payout, retention and debt equity

ratios are not studied.

The study has taken only ten years data of 31 companies to explain the

phenomenon.


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REVIEW OF LITERATURE

RELEVANCY OF DIVIDEND

This approach purports that the value of the firm is affected by the

dividend policy and the optimal dividend policy is the one, which maximizes the

firms value. These variables consider dividend decisions to be an active variable

in determining the value of a firm. Two famous models in support of this are

explained below.

Walter Model (James & Walter, 1963)(Extracts from James Walter, Dividend Policy: Its Influence on the Value

of the Firm, Journal of Finance (May 1963), 280-291)

Walter model supports that the dividend policy of the firm is relevant. The

investment policy of the management cannot be separated from its dividend

policy and both are interrelated. Thus the choice of dividend policy does affect

the value of the firm. Walter model is built around certain assumptions such as

constant return, constant cost of capital, constant earnings and dividend. He also

made an assumption that financing of new investment is done through retainedearnings and debt and no new equity shares are being issued.

Walter in his argument explains three situations

If the return on investment exceeds the cost of capital then the firm has to

retain the earnings and should not be distributed as dividends.

If the cost of capital exceeds the return on investment then the firm has to

pay the entire earnings as dividend

If the return on investment and the cost of capital is same then rate of

dividend payout can be 0 to 100.


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According to this model if the firm retains the earnings it gives a signal that

the investment opportunities are more and it increases the share prices. Similarly

when the firm distributes the entire earnings as dividend, share prices will

automatically increase, as the income on the shares are more. The Walter modelis criticized on the unrealistic assumptions on which it is made such as no debt

financing, constant return, cost of capital and earnings etc are not practically

possible.

Gordon Model (Gordon Myron J, 1962)(Extract from M.J.Gordon, The Investment, Financing and Valuation of the

Corporation, Homewood, III, Richard Irwin, 1962)

Myron Gordon (1962) came up with a dividend relevance model, which is

popularly known as the bird in the hand argument. The crux of the argument is

that the

Investors are risk averse and

They put a premium on the certain returns and discount or penalize the

uncertain returns

Gordon says that the current dividends are certain and the reinvestment of

current dividend for future returns is uncertain. Thus the investors would be

inclined to pay higher prices for shares on which current dividends are paid and

discounts the value of the shares on which dividends are postponed.

This model is based on the belief that a bird in the hand worth two in the

bush. Thus incorporating the uncertainty into the model, Gordon concludes that

the dividend policy affects the value of the firm. His model justifies the behavior

of investors who value a rupee of dividend income more than a rupee of capital

gains income, because dividends are less uncertain when compared to capital

gains. However this model is also not free of criticism because of the

assumptions on which it is based.


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IRRELEVANCE OF DIVIDEND

Dividend irrelevance approach implies that the value of the firm is

unaffected by the distribution of dividends and is determined by the earning

power and risk of its assets. It is based on the assumption that the investors are

indifferent between dividends and capital gains. So long as the firm is able to

earn more than the equity capitalization rate, the investors would be content with

the firm retaining the earnings.

MM Hypothesis (Modigliani and Miller, 1961)(Extracts from M.H.Miller and F.Modigliani, Dividend Policy, Growth and the

Valuation of Shares, Journal of Business, vol 34 (October 1961), 411-433.)

Modigliani and Miller argued that the dividend decisions have no effect on

the share prices of the firm and therefore no consequence. According to them it

is the investments policy through which a firm can increase its earnings and there

by the value. Under the conditions of perfect capital market, rational investors,absence of tax discrimination between the dividend income and capital

appreciation, given the firms investment policy, its dividend policy may have no

influence on the market price of the shares.

The crux of the argument is the arbitrage process. When the earnings are

paid out as dividend, the funds required for additional investment has to be

raised from either sale of new shares or additional loans, thus the two acts offset

or balance each other. Rational investors prefer more wealth to less wealth and

they know that the present value of prospective dividends is the terminal value of

the shares. MM argue that when dividends are paid out, the market prices of the

shares will decrease. What is gained by the investors as a result of dividends will

be neutralized completely by the decrease in the terminal value of the shares.


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The market price before and after the payment of dividend is same and the

investors are indifferent between dividend and the retained earnings. As the

investors are indifferent; the wealth would not be affected by the current and

future dividend policies. It would entirely depend up on the expected futureearnings. Thus MM says that the difference in current and the future dividend

policies can not affect the market price of the shares as the present value of the

prospective dividends is nothing but the terminal value of the shares.

The assumption under which the MM hypothesis lies is highly unrealistic

and untenable in practice. As a result the conclusion that the dividend payment

and the other methods of finance will exactly offset and hence the dividend is

irrelevant is not a practical proposition. The validity of MM hypothesis is criticized

on imperfections of market also.

OTHERS

Gragg & Malkeil in their paper on Expectations and Structure of Share

Prices present the results of an empirical study of year-end common stock

prices from 1961 to 1965. The ratios of market prices earnings are related tosuch factors as earnings growth, dividend pay out, and various proxy variables

designed to measure the quality of the return. They demonstrate in the study that

it is possible to explain, for several successive years the percentage of variability

in market price earnings ratios with the variables included in the study.

David & Julio (2004) University of Illinois and Urbana Champaign in their

paper on Reappearing Dividends studied the reappearing phenomenon on

United States of America. They observed that the cash dividend paid by the US

companies during 1984 to 1999 has fallen down from 32% to 16.%. But after

reaching a low percentage of 15% in 2001 now the dividend payout ratios have

increased to 20% in first quarter of 2004. In their study they found out that the

downward trend in dividends experienced a sharp reversal with the new


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millennium. They have also identified certain reasons such as tax cut in

dividends, investment opportunities, corporate governance etc responsible for

the reappearing of dividend.

RETAINED EARNINGS

S M Gupta (1989) studied the behavior of retained earnings in private

sector and public limited companies in India, for a period from 1975-76 to 1984-

85. The results showed that the retention ratio (retained earnings / Net profit after

tax) moved from 62.22 to 31.87 percentage with an average of 53.27. The overall

study concluded that the corporations tries to stabilize the dividends over a

period and any increase in profits go to the retained earning for reinvestment in

the business. It is also observed that the constant profit earning industries

maintained a retention ratio; but low profit earning industries or loss incurring

industries neither maintained any retention ratio nor maintained dividend payout

ratios.

CAPITAL STRUCTURE vs. FIRMS VALUE

The two principal sources of finance for a company are equity and debt.

What should be the proportion of equity and debt in the capital structure of the

firm? One of the key issues in the capital structure decision is the relationship

between the capital structure and the value of the firm. There are several views

on how this decision affects the value of the firm.

Optimal Capital Structure Theory: Optimal capital structure theory of

Modigliani-Miller (1958) suggest there exist an optimal leverage at which the firm

obtains a maximum value by minimizing its weighted average costs of capital,

given the market imperfections and tax deductibility of interest costs from pre-tax

income of firms. The proposition asserts that the value of a firm with tax-

deductible interest is equal to the value of an all-equity firm as enhanced by the


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tax savings. According to this approach, the capital structure decision of a firm is

irrelevant. This approach supports the NOI approach and provides a behavioral

justification for it. This approach indicates that the capital structure is irrelevant

because of the arbitrage process which will correct any imbalance i.e.expectations will change and a stage will be reached where further arbitrage is

not possible.

Durand D (1959) identified two views; Net income approach and Net

operating approach. Under the Net income approach the cost of debt and the

cost equity are assumed to be independent to the to the capital structure. This

approach says that the weighted average cost of capital of the firm declines and

the total value of the firm rise with increased use of leverage. Under the Net

operating income approach, the cost of the equity is assumed to increase linearly

with leverage. As a result, the weighted average cost of capital remains constant

and the total value of the firm also remains constant as the leverage is changed.

Davidson N W, et.al., (1994) in their report on The effect of firm and

industry debt ratios on market value analyzed 183 firms and studied the effect of

debt ratios to the market value of the firm. Overall conclusion of the study is that

the relationship of the firms debt level and that of its industry does not appear to

be of concern to the market.

Arsiraphoongphisit O & Ariff M (2003) in their report on Optimal capital

structure and firm value- an Australian evidence, 1991-2003 (Corporate

Finance) analyzed 654 observations for a period of 1991 to 2003 in Australian

market on the effect of capital structure change and firms value. The findings

indicate that the market reacts positively to announcements of financing that leadto capital structure moving closer to their relative industrial Debt-Equity ratio.

Thus market perceives and reacts positively to the optimal debt-equity ratio. Thus

debt-equity ratio has an impact on market value of the firm.

From an overall review of the literature it is clear that there exist certainly a


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contradicting view on the impact of the dividend policy of a firm on the value of

the firm. The studies on the effect of debt equity combination on share prices

show that the relationship is almost zero. But theoretically as the debt increases

because of the tax shield available the earnings must also increase and increasein earnings always increases the market price of the shares. Thus we can see

that there exists a knowledge gap in the subject.


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METHODOLOGY

The methodology is the major phase of research in which the investigatormakes a number of decisions about the methods and materials to be used to

study the research problem, basically through collection of data. The

methodological decision generally has control implications for the validity of the

study findings

RESEARCH DESIGN

Type of research is Descriptive research, which is Quantitative in nature.

STUDY SETTING

Indian Public Limited Companies

The Equity Shares of companies are traded in Indian Stock Exchanges.

(BSE & NSE)

POPULATION

A population is a group whose members possess specific characteristics

that a researcher is interested in studying. In this study the population includes all

widely held public companies whose shares are publicly traded through a stock

exchange.

SAMPLING FRAMEWORK

This study includes analysis of public limited companies, which are listed

in Bombay stock exchange and National Stock Exchange of India.


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SAMPLING TECHNIQUE

A sample is a portion of the population that has been selected to represent

the population of interest. Here in this study 28 companies are selected whichare listed in Bombay stock exchange and National stock Exchange, India.

Sampling technique used here is convenient sampling.

SAMPLE

The sample size is 28. The companies studied are the followings.

Associated Cement Company Ltd. Bharat Heavy Electricals Ltd.

Cipla Ltd.

Dr.Reddys Laborotaries Ltd.

Grasim Industries Ltd.

Ambuja Cements Ltd.

Hero Honda Ltd.

Hindalco Ltd. Hindustan Lever Ltd.

Infosys Technologies Ltd.

Indian Tobacco Company Ltd.

Larsen & Turbo Ltd.

Ranbaxy Laboratories Ltd.

Reliance Energy Ltd.

Reliance Industries Ltd.

Satyam Computers Ltd.

Tata Motors Ltd

Tata Power Ltd.

Tata Iron and steel Company Ltd.

Wipro Ltd.


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Zee Telefilms Ltd.

ABB Ltd.

Bharat Petroleum Corporation Ltd.

Britannia Industries Ltd. Colgate Palmolive Ltd.

Mahindra & Mahindra Ltd.

Steel Authority of India Ltd.

Mahanagar Telecom Nigam Ltd.

The shares of the above companies are commonly traded in the stock

exchange for the period under study i.e., 1997/98-2006/07.

DATA COLLECTION

Secondary Data

Income statements of companies under study

Balance sheets

Historical stock prices

Data obtained

Figures and facts

Unclassified raw data

Method of Data collection and steps

The data required for the study has been collected from the Data Basemaintained in the Bangalore Stock Exchange, Bangalore and from the Data Base

of the Bombay Stock Exchange and National Stock exchange through their web

sites. The raw data collected were converted in to the ratios and classified

according to the requirement of the study.


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STATISTICAL ANALYSIS

Descriptive Statistics is used to describe the pattern of dividend payout,

Debt equity and the return on shares.

Five Year Moving Average is used to estimate the expected Dividend

Payout, Retention Ratio and Debt-Equity Ratio of the successive years.

This approach is used to estimate the values incorporating its behavior for

the past five years.

Expected Value for the Year 6 = (Y5+Y4+Y3+Y2+Y1) / 5

Statistical model used: The model used here is multiple - regression

model.

The regression equation for the study is as under.

Y = a + b1 X1 + b2 X2

Y = Actual Return on Equity (For the year)

X1 = Expected Debt-Equity Ratio (Moving average for five years)

X2 = Expected Dividend Payout (Moving average for five years)

For Cross sectional Regression analysis the above variables X1 and X2 for

ten years are converted in to five year moving averages.

For time series analysis the actual data for the years are taken.


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As there exist high correlation between the dividend payout and retention

ratio there will be Multi Co-linearity effect on the regression analysis. To

avoid this retention ratio is not included in the regression model.

t test significance at 5% level is used to accept or reject the hypothesis


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SECTION-I CROSS SECTIONAL REGRESSION ANALYSIS

Table no .V- 1 Cross sectional values for the year 2002/03

Moving Average for 1997/98 to 2001/02

CompanyReturn2002/03

Debt-Equity

DividendPayout

RetentionRatio

ACC Ltd -0.11 1.39 0.66 0.14

Bharat Heavy Electricals Ltd. 0.23 0.16 0.17 0.83

Cipla Ltd. -0.3 0.05 0.15 0.85

Dr.Reddys Laborotaries Ltd. -0.16 0.31 0.16 0.84Grasim Industries Ltd. 0.14 0.83 0.29 0.71

Ambuja Cements Ltd. -0.22 0.92 0.4 0.6

Hero Honda Ltd. -0.47 0.27 0.32 0.68

Hindalco Ltd. -0.29 0.21 0.12 0.88

Hindustan Unilever Ltd. -0.34 0.08 0.68 0.32

Infosys Technologies Ltd. 0.13 0 0.13 0.87

Indian Tobacco Company Ltd. 0.11 0.42 0.26 0.74

Larsen & Toubro Ltd. 0.0016 0.95 0.46 0.54

Ranbaxy Laboratories Ltd. 0.11 0.27 0.46 0.54

Reliance Energy Ltd. -0.02 0.45 0.22 0.78

Reliance Industries Ltd. -0.07 0.94 0.21 0.79

Satyam Computers Ltd. 0.31 0.74 0.13 0.87

Tata Motors Ltd 0.23 0.87 0.48 0.52

Tata Power Ltd. -0.0079 0.68 0.25 0.75

Tata Iron and steel Company Ltd. 0.36 1.1 0.52 0.48

Wipro Ltd. -0.27 0.45 0.05 0.95

Zee Entertainment Ltd. -0.62 0.15 0.22 0.78

ABB Ltd. 0.08 0.06 0.46 0.54

Bharat Petrolium Corporation Ltd. -0.34 0.74 0.3 0.7Britannia Industries Ltd. -0.09 0.69 0.25 0.75

Colgate Palmolive Ltd. -0.16 0.03 1.04 -0.04

Mahindra & Mahindra Ltd. -0.11 0.78 0.38 0.62

Steel Authority of India Ltd. 0.77 2.92 0.07 0.93

Mahanagar Telecom Nigam Ltd. -0.36 0.75 0.19 0.81


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Table no. V -2 Cross sectional values for the year 2003/04


Company Return2003/04

Debt-Equity DividendPayout

Retention

ACC Ltd. 0.81 1.44 0.41 0.39


Cipla Ltd. 0.62 0.05 0.18 0.82

Dr.Reddys Laborotaries Ltd. 0.06 0.27 0.13 0.87

Grasim Industries Ltd. 2.18 0.78 0.3 0.7

Ambuja Cements Ltd. 0.8 0.94 0.43 0.57

Hero Honda Ltd. 1.56 0.19 0.43 0.57

Hindalco Ltd. 1.21 0.22 0.15 0.85






Reliance Energy Ltd. 2.53 0.36 0.26 0.74

Reliance Industries Ltd. 0.9 0.9 0.21 0.79


Tata Motors Ltd 2.02 0.86 0.47 0.53

Tata Power Ltd. 2.26 0.67 0.25 0.75

Tata Iron and steel Company Ltd. 1.79 1.16 0.49 0.51

Wipro Ltd. 0.06 0.24 0.04 0.96

Zee Entertainment Ltd. 0.87 0.12 0.22 0.78

ABB Ltd. 1.69 0.05 0.39 0.61

Bharat Petroleum Corporation Ltd. 1.12 0.78 0.34 0.66

Britannia Industries Ltd. 0.26 0.64 0.24 0.76

Colgate Palmolive Ltd. 0.08 0.03 1.07 -0.07

Mahindra & Mahindra Ltd. 3.59 0.75 0.43 0.57

Steel Authority of India Ltd. 2.41 3.48 0 1

Mahanagar Telecom Nigam Ltd. 0.29 0.46 0.23 0.77


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Table no. V- 3 Cross sectional values for the year 2004/05



Debt-Equity Dividend Payout Retention

ACC Ltd. 0.37 1.39 0.49 0.51


Cipla Ltd. 0.09 0.06 0.2 0.8

Dr.Reddys Laborotaries Ltd. -0.24 0.22 0.12 0.88



Hero Honda Ltd. 0.09 0.15 0.49 0.51

Hindalco Ltd. 0.0073 0.24 0.16 0.84








Satyam Computers Ltd. 0.33 0.3 0.16 0.84Tata Motors Ltd -0.16 0.77 0.39 0.61

Tata Power Ltd. -0.06 0.61 0.24 0.76

Tata Iron and steel CompanyLtd.

0.53 1.12 0.4 0.6

Wipro Ltd. 0.47 0.08 0.18 0.82

Zee Entertainment Ltd. -0.0068 0.08 0.25 0.75

ABB Ltd. 0.48 0.03 0.28 0.72

Bharat Petroleum CorporationLtd.

-0.28 0.78 0.33 0.67




Steel Authority of India Ltd. 0.84 3.53 0 1



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Table no. V- 4 Cross sectional values for the year 2005/06




ACC Ltd. 1.14 1.32 0.46 0.54


Cipla Ltd. 1.55 0.08 0.23 0.77

Dr.Reddys Laborotaries Ltd. 0.91 0.17 0.22 0.78Grasim Industries Ltd. 0.67 0.65 0.21 0.79


Hero Honda Ltd. 0.63 0.14 0.56 0.44

Hindalco Ltd. 0.43 0.3 0.17 0.83

Hindustan Unilever Ltd. 1.05 0.29 0.89 0.11




Ranbaxy Laboratories Ltd. -0.14 0.09 0.74 0.26

Reliance Energy Ltd. 0.13 0.37 0.23 0.77



Tata Motors Ltd 1.15 0.69 0.24 0.76

Tata Power Ltd. 0.6 0.56 0.25 0.75

Tata Iron and steel Company Ltd. 0.31 1 0.37 0.63

Wipro Ltd. 0.66 0.02 0.23 0.77


ABB Ltd. 1.43 0.02 0.23 0.77

Bharat Petroleum Corporation Ltd. 0.15 0.76 0.35 0.65





Mahanagar Telecom Nigam Ltd. 0.52 0.17 0.26 0.74


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Table no.V-5 Cross sectional values for the year 2006/07




ACC Ltd. -0.06 1.12 0.36 0.64


Cipla Ltd. -0.1 0.11 0.25 0.75

Dr.Reddys Laborotaries Ltd. 0.02 0.12 0.24 0.76


Ambuja Cements Ltd. 0.03 0.79 0.44 0.56Hero Honda Ltd. -0.22 0.14 0.59 0.41

Hindalco Ltd. -0.28 0.36 0.17 0.83



Indian Tobacco Company Ltd. -0.22 0.05 0.35 0.65


Ranbaxy Laboratories Ltd. -0.18 0.24 0.83 0.17




Tata Motors Ltd -0.21 0.63 0.31 0.69

Tata Power Ltd. -0.12 0.53 0.26 0.74

Tata Iron and steel Company Ltd. -0.16 0.86 0.33 0.67

Wipro Ltd. 0.0005 0.02 0.3 0.7


ABB Ltd. 0.21 0.01 0.19 0.81

Bharat Petroleum Corporation Ltd. -0.28 0.74 0.36 0.64


Colgate Palmolive Ltd. -0.23 0.02 0.83 0.17





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Table No V- 6

Cross Sectional Regression Results

Model Y = a + b1 X1 + b2 X2

ear Multiple R R2

a b1 b2 t Stat(b1)

t Stat (b2) P-value (b1) P-va(b2

002/03 0.568105702 0.322744 -0.21639 0.27919117 -0.0235 3.414586 -0.106873 0.002185902 0.9157

003/04 0.416793091 0.173716 0.776505 0.57346257 0.155849 2.274929 0.1981405 0.031747941 0.8445

004/05 0.391987013 0.153654 0.051613 0.18019055 0.084841 2.124125 0.3172954 0.043729321 0.7536

005/06 0.21476446 0.046124 0.865467 -0.1496694 0.123884 -0.96335 0.2948673 0.344595005 0.770

006/07 0.43999166 0.193593 0.122114 0.08086299 -0.44055 0.925565 -1.949585 0.363521334 0.0625


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The above table shows the year wise regression results of all the samples

studied. Here Y denotes the return on the equity shares, X1 denotes debt

equity ratio and X2 denotes dividend payout.

From the P- Values ascertained, we can conclude that:-

In the year 2002/03 there is no relationship between debt- equity ratio

and return on equity whereas there is relationship between dividend

payoutratio and return on equity.



payout ratio and return on equity.



payout ratio and return on equity.

In the year 2005/06 there is relationship between debt- equity ratio and

return on equity and also between dividend payout ratio and return on

equity.

In the year 2005/06 there is relationship between debt- equity ratio and

return on equity and also between dividend payout ratio and return on

equity.


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SECTION-II TIME SERIES REGRESSION ANALYSIS

V-7 ACC Ltd Return onShares

Debt-Equity Ratio Dividend PayoutRatio

RetentionRatio

1997/98 -0.36 1.22 1.7 -0.7

1998/99 0.07 1.45 0.4 0.6

1999/00 0.1 1.35 0 0

2000/01 0.08 1.4 0.79 0.21

2001/02 -0.04 1.52 0.39 0.61

2002/03 -0.11 1.39 0.66 0.14

2003/04 0.81 1.44 0.41 0.39

2004/05 0.37 1.39 0.49 0.51

2005/06 1.14 1.32 0.46 0.54

2006/07 -0.06 1.12 0.36 0.64

V-8 BHEL Ltd. Return onShares


RetentionRatio

1997/98 0.46 0.28 0.1 0.9

1998/99 -0.11 0.1 0.13 0.87

1999/00 -0.52 0.06 0.14 0.86

2000/01 -0.28 0.17 0.26 0.74

2001/02 0.08 0.2 0.21 0.79

2002/03 0.23 0.16 0.17 0.83

2003/04 1.58 0.13 0.2 0.8

2004/05 0.2 0.13 0.21 0.79

2005/06 1.79 0.14 0.22 0.78

2006/07 0.0087 0.12 0.22 0.78


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V-9 Cipla Ltd Return onShares


RetentionRatio

1997/98 0.25 0.07 0.12 0.88

1998/99 0.5 0.06 0.15 0.85

1999/00 0.77 0.05 0.15 0.85

2000/01 0.31 0.03 0.17 0.83

2001/02 -0.1 0.04 0.18 0.82

2002/03 -0.3 0.05 0.15 0.85

2003/04 0.62 0.05 0.18 0.82

2004/05 0.09 0.06 0.2 0.8

2005/06 1.55 0.08 0.23 0.77

2006/07 -0.1 0.11 0.25 0.75

V-10 DR.Reddy's Return on Debt-Equity Ratio Dividend Payout Retention

Lab Ltd. Shares Ratio Ratio

1997/98 0.29 0.19 0.26 0.74

1998/99 0.77 0.24 0.17 0.83

1999/00 0.65 0.35 0.15 0.85

2000/01 0.13 0.56 0.1 0.9

2001/02 0.16 0.19 0.13 0.87

2002/03 -0.16 0.31 0.16 0.84

2003/04 0.06 0.27 0.13 0.87

2004/05 -0.24 0.22 0.12 0.88

2005/06 0.91 0.17 0.22 0.78

2006/07 0.02 0.12 0.24 0.76


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V-12

Ambuja Cement Return on Debt-Equity Ratio Dividend Payout Retention

Ltd. Shares Payout Ratio Ratio

1997/98 -0.12 0.98 0.43 0.57

1998/99 0.07 0.83 0.45 0.55

1999/00 0.18 0.74 0.18 0.82

2000/01 -0.02 0.94 0.45 0.55

2001/02 -0.06 1.1 0.5 0.5

2002/03 -0.22 0.92 0.4 0.6

2003/04 0.8 0.94 0.43 0.57

2004/05 0.32 0.94 0.41 0.59

2005/06 0.87 0.9 0.46 0.54

2006/07 0.03 0.79 0.44 0.56

V-11 Grasim Return on Debt-Equity Ratio Dividend Payout Retention

Industries Ltd. Shares Ratio Ratio

1997/98 -0.33 0.95 0.24 0.76

1998/99 -0.32 0.92 0.38 0.62

1999/00 -0.05 0.87 0.35 0.65

2000/01 0.22 0.71 0.21 0.79

2001/02 -0.08 0.69 0.27 0.73

2002/03 0.14 0.83 0.29 0.71

2003/04 2.18 0.78 0.3 0.7

2004/05 0.11 0.73 0.24 0.76

2005/06 0.67 0.65 0.21 0.79

2006/07 0.01 0.6 0.22 0.78


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IV-13 Hero Return on Debt-Equity Ratio Dividend Payout Retention

Honda Ltd. Shares Ratio Ratio

1997/98 0.69 0.55 0.11 0.89

1998/99 0.8 0.35 0.23 0.77

1999/00 0.31 0.19 0.23 0.77

2000/01 -0.05 0.11 0.26 0.74

2001/02 0.36 0.14 0.75 0.25

2002/03 -0.47 0.27 0.32 0.68

2003/04 1.56 0.19 0.43 0.57

2004/05 0.09 0.15 0.49 0.51

2005/06 0.63 0.14 0.56 0.44

2006/07 -0.22 0.14 0.59 0.41

V-14 Hindalco Return on Debt-Equity Ratio Dividend Payout Retention

Ltd. Shares Ratio Ratio

1997/98 -0.06 0.26 0.09 0.91

1998/99 -0.33 0.24 0.09 0.91

1999/00 0.06 0.18 0.11 0.89

2000/01 0.21 0.16 0.15 0.85

2001/02 -0.29 0.21 0.12 0.88

2002/03 -0.15 0.31 0.24 0.76

2003/04 1.21 0.22 0.15 0.85

2004/05 0.0073 0.24 0.16 0.84

2005/06 0.43 0.3 0.17 0.83

2006/07 -0.28 0.36 0.17 0.83


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V-15 HUL Ltd Return onShares


RetentionRatio

1997/98 0.43 0.15 0.66 0.34

1998/99 0.42 0.12 0.66 0.34

1999/00 0.19 0.06 0.72 0.28

2000/01 0.03 0.04 0.7 0.3

2001/02 -0.08 0.02 0.68 0.32

2002/03 -0.34 0.08 0.68 0.32

2003/04 -0.0023 0.11 0.75 0.25

2004/05 -0.14 0.23 0.85 0.15

2005/06 1.05 0.29 0.89 0.11

2006/07 -0.24 0.29 0.91 0.09

V- 16 Infosys Return on Debt-Equity Dividend Retention

Technologies Ltd. Shares Ratio Payout Ratio Ratio

1997/98 1.06 0 0.13 0.87

1998/99 1.64 0 0.09 0.91

1999/00 1.73 0 0.11 0.89

2000/01 0.17 0 0.12 0.88

2001/02 -0.45 0 0.17 0.83

2002/03 0.13 0 0.13 0.87

2003/04 0.19 0 0.12 0.88

2004/05 0.76 0 0.26 0.74

2005/06 0.33 0 0.28 0.72

2006/07 0.35 0 0.37 0.63


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V- 17 ITC Ltd. Return onShares


RetentionRatio

1997/98 0.59 0.68 0.23 0.77

1998/99 0.47 0.66 0.24 0.76

1999/00 -0.02 0.39 0.28 0.72

2000/01 -0.05 0.24 0.27 0.73

2001/02 -0.06 0.15 0.28 0.72

2002/03 0.11 0.42 0.26 0.74

2003/04 0.66 0.3 0.28 0.72

2004/05 0.23 0.17 0.28 0.72

2005/06 1.16 0.1 0.3 0.7

2006/07 -0.22 0.05 0.35 0.65

V- 18 L&T Ltd. Return on

Shares

Debt-Equity Ratio Dividend Payout

Ratio

Retention

Ratio1997/98 0 0.75 0.335 0.665

1998/99 0.08 0.88 0.38 0.62

1999/00 0.08 0.98 0.53 0.47

2000/01 0.01 1.06 0.57 0.43

2001/02 -0.27 1.06 0.50 0.50

2002/03 0.0016 0.95 0.46 0.54

2003/04 2.09 0.99 0.49 0.51

2004/05 0.7 0.96 0.48 0.52

2005/06 1.38 0.87 0.46 0.54

2006/07 0.33 0.74 0.41 0.59


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V-19 Ranbaxy Return on Debt-Equity Dividend Retention

Laboratories Ltd. Shares Ratio Payout Ratio Ratio

1997/98 0.03 0.42 0.31 0.69

1998/99 0.41 0.34 0.53 0.47

1999/00 0.27 0.26 0.49 0.51

2000/01 -0.04 0.19 0.53 0.47

2001/02 0.11 0.12 0.46 0.54

2002/03 0.11 0.27 0.46 0.54

2003/04 0.48 0.19 0.49 0.51

2004/05 0.02 0.08 0.49 0.51

2005/06 -0.14 0.09 0.74 0.26

2006/07 -0.18 0.24 0.83 0.17

V-20 Reliance Return on Debt-Equity Dividend Retention

Energy Ltd Shares Ratio Payout Ratio Ratio

1997/98 0.13 0.68 0.21 0.79

1998/99 -0.14 0.56 0.23 0.77

1999/00 0.07 0.42 0.22 0.78

2000/01 0.05 0.31 0.21 0.79

2001/02 0 0.26 0.21 0.79

2002/03 -0.02 0.45 0.22 0.78

2003/04 2.53 0.36 0.26 0.74

2004/05 -0.3 0.33 0.23 0.77

2005/06 0.13 0.37 0.23 0.77

2006/07 -0.19 0.44 0.22 0.78


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V-21 Reliance Return on Debt-Equity Dividend Retention

Industries Ltd. Shares Ratio Payout Ratio Ratio

1997/98 0.27 0.9 0.24 0.76

1998/99 0 1.01 0.24 0.76

1999/00 0.35 1.07 0.19 0.81

2000/01 0.47 0.93 0.19S 0.81

2001/02 -0.04 0.78 0.20 0.80

2002/03 -0.07 0.94 0.21 0.79

2003/04 0.9 0.9 0.21 0.79

2004/05 0.02 0.84 0.17 0.83

2005/06 0.73 0.74 0.17 0.83

2006/07 0.73 0.65 0.16 0.84

V-22 Satyam Return on Debt-Equity Dividend Retention

Computers Ltd. Shares Ratio Payout Ratio Ratio

1997/98 1.06 0.83 0.30 0.70

1998/99 1.86 1.37 0.12 0.88

1999/00 1.91 1.04 0.11 0.89

2000/01 0.03 0.4 0.05 0.95

2001/02 -0.72 0.06 0.09 0.91

2002/03 0.31 0.74 0.13 0.87

2003/04 0.63 0.58 0.14 0.86

2004/05 0.33 0.3 0.16 0.84

2005/06 1.01 0.1 0.18 0.82

2006/07 0.1 0.02 0.21 0.79


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V-23 TATA Return on Debt-Equity Dividend Retention

MOTORS Ltd. Shares Ratio Payout Ratio Ratio

1997/98 -0.19 0.79 0.53 0.47

1998/99 -0.34 0.9 0.87 0.13

1999/00 -0.42 0.86 1 0

2000/01 -0.4 0.86 0 1

2001/02 -0.08 0.93 0 1

2002/03 0.23 0.87 0.48 0.52

2003/04 2.02 0.86 0.47 0.53

2004/05 -0.16 0.77 0.39 0.61

2005/06 1.15 0.69 0.24 0.76

2006/07 -0.21 0.63 0.31 0.69

V-24 Tata Return on Debt-Equity Dividend Retention

Power Ltd. Shares Ratio Payout Ratio Ratio

1997/98 -0.1 0.62 0.29 0.71

1998/99 -0.23 0.73 0.29 0.71

1999/00 -0.35 0.7 0.23 0.77

2000/01 0.2 0.67 0.27 0.73

2001/02 0.25 0.66 0.19 0.81

2002/03 -0.0079 0.68 0.25 0.75

2003/04 2.26 0.67 0.25 0.75

2004/05 -0.06 0.61 0.24 0.76

2005/06 0.6 0.56 0.25 0.75

2006/07 -0.12 0.53 0.26 0.74


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V-25 Tisco Ltd Return onShares


RetentionRatio

1997/98 -0.15 1.08 0.51 0.49

1998/99 -0.2 1.16 0.58 0.42

1999/00 -0.17 1.13 0.41 0.59

2000/01 0.11 1.01 0.39 0.61

2001/02 -0.12 1.13 0.73 0.27

2002/03 0.36 1.1 0.52 0.48

2003/04 1.79 1.16 0.49 0.51

2004/05 0.53 1.12 0.4 0.6

2005/06 0.31 1 0.37 0.63

2006/07 -0.16 0.86 0.33 0.67

V-26 Wipro Ltd Return onShares


RetentionRatio

1997/98 1.01 1.11 0.08 0.92

1998/99 1.68 0.79 0.07 0.93

1999/00 1.87 0.31 0.04 0.96

2000/01 0.02 0.04 0.02 0.98

2001/02 -0.77 0.02 0.03 0.97

2002/03 -0.27 0.45 0.05 0.95

2003/04 0.06 0.24 0.04 0.96

2004/05 0.47 0.08 0.18 0.82

2005/06 0.66 0.02 0.23 0.77

2006/07 0.0005 0.02 0.3 0.7


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V-27 ZeeEntertainment ltd.

Return onShares


RetentionRatio

1997/98 0.51 0.27 0.28 0.72

1998/99 1.25 0.29 0.18 0.82

1999/00 2.1 0.06 0.24 0.76

2000/01 -0.06 0.06 0.16 0.84

2001/02 -1.28 0.09 0.24 0.76

2002/03 -0.62 0.15 0.22 0.78

2003/04 0.87 0.12 0.22 0.78

2004/05 -0.0068 0.08 0.25 0.75

2005/06 0.73 0.11 0.26 0.74

2006/07 0.05 0.15 0.36 0.64

V-28 ABB Ltd Return onShares


RetentionRatio

1997/98 -0.01 0.07 0.6 0.4

1998/99 -0.12 0.07 0.62 0.38

1999/00 -0.45 0.08 0.47 0.53

2000/01 -0.39 0.03 0.35 0.65

2001/02 0.12 0.03 0.27 0.73

2002/03 0.08 0.06 0.46 0.54

2003/04 1.69 0.05 0.39 0.61

2004/05 0.48 0.03 0.28 0.72

2005/06 1.43 0.02 0.23 0.77

2006/07 0.21 0.01 0.19 0.81


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V-29 BPCL Ltd Return onShares


RetentionRatio

1997/98 0.11 0.61 0.16 0.84

1998/99 -0.26 0.56 0.3 0.7

1999/00 -0.24 0.65 0.33 0.67

2000/01 0.05 0.89 0.3 0.7

2001/02 0.07 0.99 0.39 0.61

2002/03 -0.34 0.74 0.3 0.7

2003/04 1.12 0.78 0.34 0.66

2004/05 -0.28 0.78 0.33 0.67

2005/06 0.15 0.76 0.35 0.65

2006/07 -0.28 0.74 0.36 0.64

V-30 Britannia Return on Debt-Equity Dividend Retention

Industries Ltd. Shares Ratio Payout Ratio Ratio

1997/98 0.47 0.73 0.35 0.65

1998/99 1.03 0.8 0.29 0.71

1999/00 0.07 0.68 0.27 0.73

2000/01 -0.49 0.67 0.24 0.76

2001/02 -0.06 0.59 0.1 0.9

2002/03 -0.09 0.69 0.25 0.75

2003/04 0.26 0.64 0.24 0.76

2004/05 0.38 0.53 0.21 0.79

2005/06 1.07 0.4 0.21 0.79

2006/07 0.3 0.27 0.22 0.78


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V-31 Colgate Return on Debt-Equity Dividend Retention

Palmolive Ltd Shares Ratio Payout Ratio Ratio

1997/98 0.02 0.02 0.55 0.45

1998/99 -0.16 0.02 1 0

1999/00 -0.37 0.02 0.87 0.13

2000/01 -0.03 0.04 1.9 -0.9

2001/02 -0.06 0.05 0.88 0.12

2002/03 -0.16 0.03 1.04 -0.04

2003/04 0.08 0.03 1.07 -0.07

2004/05 0.35 0.03 1.09 -0.09

2005/06 1.37 0.03 1.1 -0.1

2006/07 -0.23 0.02 0.83 0.17

V-32 M & M Return on Debt-Equity Dividend Retention

Ltd. Shares Ratio Payout Ratio Ratio

1997/98 0.05 0.98 0.25 0.75

1998/99 -0.13 1 0.28 0.72

1999/00 0.04 0.69 0.26 0.74

2000/01 -0.28 0.52 0.55 0.45

2001/02 -0.57 0.71 0.55 0.45

2002/03 -0.11 0.78 0.38 0.62

2003/04 3.59 0.75 0.43 0.57

2004/05 0.04 0.66 0.42 0.58

2005/06 1.47 0.62 0.43 0.57

2006/07 0.24 0.6 0.39 0.61


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V-33 SAIL Ltd Return onShares


RetentionRatio

1997/98 -0.51 2.2 0.34 0.66

1998/99 -0.56 2.64 0 1

1999/00 -0.16 2.95 0 1

2000/01 0.02 2.99 0 1

2001/02 -0.3 3.82 0 1

2002/03 0.77 2.92 0.07 0.93

2003/04 2.41 3.48 0 1

2004/05 0.84 3.53 0 1

2005/06 0.28 3.13 0.04 0.96

2006/07 0.37 2.62 0.08 0.92

V-34 MTNL Ltd. Return on

Shares

Debt-Equity Ratio Dividend Payout

Ratio

Retention

Ratio1997/98 0.18 1.63 0.18 0.82

1998/99 -0.14 0.91 0.17 0.83

1999/00 -0.08 0.52 0.2 0.8

2000/01 -0.08 0.39 0.2 0.8

2001/02 -0.29 0.32 0.22 0.78

2002/03 -0.36 0.75 0.19 0.81

2003/04 0.29 0.46 0.23 0.77

2004/05 -0.17 0.27 0.23 0.77

2005/06 0.52 0.17 0.26 0.74

2006/07 -0.2 0.09 0.31 0.69


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Table No V-35

Time Series Regression Results for 28 Companies Studied (1998-2007)

Model Yi t = a + b1t X1t + b2t X2t

Companies Multiple R R2 a b1 b2 t Stat

(b1)t Stat(b2)

P-value(b1)

P-v(b

ACC Ltd. 0.40288827 0.162319 -0.0246 0.32125863 -0.37511 0.226499 -1.01632 0.827285 0.34

BHEL Ltd. 0.2436021 0.059342 -0.54422 2.28502478 2.944206 0.486555 0.517941 0.641437 0.62

Cipla Ltd. 0.1678232 0.028165 -0.04685 -0.2160775 2.352908 -0.01954 0.37337 0.984953 0.71

Dr ReddyLab

0.35474375 0.125843 -0.46095 0.65455647 3.264638 0.449173 0.975223 0.666884 0.36

Grasim Ind.Ltd.

0.27356157 0.074836 1.3709 -2.2413817 2.275601 -0.73794 0.377251 0.484548 0.7

AmbujaCementsLtd.

0.14922557 0.022268 0.570709 -0.7156693 0.63643 -0.39533 0.300263 0.704371 0.77

Hero HondaLtd.

0.27135725 0.073635 -0.12946 1.49072382 0.420736 0.705298 0.29337 0.503412 0.77

HindalcoLtd.

0.36991977 0.136841 0.352976 -3.0252098 3.296591 -0.99295 0.797534 0.353812 0.45


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HUL Ltd. 0.45733485 0.209155 1.688412 3.64549665 -2.75115 1.319079 -0.97115 0.228653 0.36

ITC Ltd. 0.27932319 0.078021 1.746411 -0.2599336 -4.96708 -0.19452 -0.55695 0.851291 0.59

L & T 0.20352151 0.041421 0.613064 -2.3858241 4.40579 -0.48769 0.5495 0.64067 0.59

M & M 0.05270704 0.002778 0.565903 -0.2987944 0.219584 -0.07327 0.037139 0.943639 0.97

RanbaxyLab Ltd

0.48819009 0.23833 0.410134 0.20725845 -0.65498 0.287061 -1.22619 0.782377 0.2

RelianceEnergy

0.79496339 0.631967 -9.67432 -0.0688275 44.23942 -0.04507 3.418412 0.965308 0.01

RelianceIndustry

0.42198657 0.178073 1.504832 -0.5021859 -3.65775 -0.41056 -0.68077 0.693669 0.51

SatyamCom Ltd

0.81616009 0.666117 -0.53525 1.45097903 2.680491 3.632467 1.026393 0.00837 0.33

Tata MotorsLtd

0.14733989 0.021709 0.812577 -0.6536685 -0.27784 -0.20595 -0.29904 0.842689 0.77

Tata PowerLtd.

0.10533996 0.011097 0.995187 -0.0393482 -2.87795 -0.00863 -0.2801 0.993353 0.78

TISCO Ltd. 0.45757401 0.209374 -2.72145 3.73087675 -2.24392 1.340533 -1.02148 0.221943 0.34

Wipro Ltd. 0.54852847 0.300883 -0.07844 1.28895358 1.465521 1.735694 0.508889 0.126198 0.62

ZeeTelefilms

0.17748475 0.031501 0.348287 2.01824475 -1.13219 0.459031 -0.16669 0.660125 0.87

ABB Ltd 0.38281811 0.14655 1.001274 -0.9003199 -1.70145 -0.03429 -0.40177 0.973605 0.69

BPCL Ltd. 0.25774483 0.066432 -0.47933 1.05771114 -0.96189 0.698066 -0.31029 0.507654 0.76


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BritanniaInd Ltd.

0.37974608 0.144207 0.172297 -0.99189613

3.011934 -0.82797 1.009351 0.435002 0.34

ColgatePalmolive

0.16596328 0.027544 -0.19744 5.81655243 0.106256 0.278919 0.178019 0.788367 0.8

SAIL 0.44672251 0.199561 -2.25903 0.84645154 0.225942 0.996269 0.057933 0.352304 0.95

MTNL 0.31459737 0.098972 -0.81307 0.23544767 2.969568 0.741758 0.859731 0.482374 0.4


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From the above Table, considering the P- Values we may conclude

that:-

ACC Ltd - There exists relationship between return on equity and debt- equity

ratio and also between return on equity and dividend payout ratio.

BHEL Ltd - There exists relationship between return on equity and debt-

equity ratio and also between return on equity and dividend payout ratio.

CIPLA LTD - There exists relationship between return on equity and debt-


DR REDDY LAB - There exists relationship between return on equity and debt-


GRASIM IND LTD - There exists relationship between return on equity and

debt- equity ratio and also between return on equity and dividend payout

ratio.

AMBUJA CEMENTS LTD - There exists relationship between return on equity

and debt- equity ratio and also between return on equity and dividend payout

ratio.

HERO HONDA LTD - There exists relationship between return on equity and


ratio.

HINDALCO LTD - There exists relationship between return on equity and debt-



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HUL LTD - There exists relationship between return on equity and debt- equity


ITC LTD - There exists relationship between return on equity and debt- equity


L & T - There exists relationship between return on equity and debt- equity


M & M - There exists relationship between return on equity and debt- equity


RANBAXY LABS LTD - There exists relationship between return on equity and


ratio.

RELIANCE ENERGY - There exists relationship between return on equity and

debt- equity ratio whereas there is no relationship between return on equityand dividend payout ratio.

RELIANCE INDUSTRIES LTD - There exists relationship between return on

equity and debt- equity ratio and also between return on equity and dividend

payout ratio.

SATYAM COMPUTERS - There is no relationship between return on equity

and debt- equity ratio whereas there exists relationship between return on

equity and dividend payout ratio.


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TATA MOTORS LTD - There exists relationship between return on equity and


ratio.

TATA POWER LTD - There exists relationship between return on equity and


ratio.

TISCO LTD - There exists relationship between return on equity and debt-


WIPRO LTD - There exists relationship between return on equity and debt-


ZEE ENTERTAINMENT - There exists relationship between return on equity


ratio.

ABB LTD - There exists relationship between return on equity and debt- equityratio and also between return on equity and dividend payout ratio.

BPCL LTD - There exists relationship between return on equity and debt-


BRITANNIA INDUSTRIES LTD - There exists relationship between return on

equity and debt- equity ratio and also between return on equity and dividend

payout ratio.

COLGATE PALMOLIVE - There exists relationship between return on equity


ratio.


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SAIL - There exists relationship between return on equity and debt- equity


MTNL - There exists relationship between return on equity and debt- equity



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DISCUSSION

The study started with reviewing the previous research papers explaining

the impact of the dividend decisions on the value of the firm. The most popular

research result is that of Modigliani and Miller. They prove that dividend is

irrelevant. As against this theory Walter and Gordon through their model

explained that dividend is very relevant. Here the study focused on finding out

whether dividend affects the value of the firm or not.

Through convenient sampling 28 Indian Public Limited companys actual

data were analyzed. Here under the study the effect on the return on equity is

considered as an indicator to the effect on the value of the firm. Using a multiple

regression model an attempt is made to establish the relationship between the

return on equity & debt and dividend of the companies selected for the study.

Here the expected values of the dividend pay out and debt to equity is regressed

with actual return to find out the association, if any.

The results of the study show that the impact of the dividend on the value

of the firm is significant. Out of the 28 sample companies studied all the

companies showed a significant association between the debt and the return on

equity except one that is SATYAM COMPUTERS. Similarly, all the companies

showed evidence of significant relation between dividend and return on shares

except one that is RELIANCE ENERGY. Thus it can be observed that in the

cross sectional analysis of the companies the Return on Equity shares does

show significant relationship with Debt Equity and dividend Payout. And in case

of Company wise time series analysis all the companies, except two as shown inTABLE 35 above, shows relationship between the variables. Thus we infer that

investors do give importance to capital structure and the dividend policy of the

companies as a whole.


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FINDINGS OF THE STUDY

Cross Sectional Regression Analysis

The results of the Cross sectional Regression for the Five Years from1997/98 to 2006/07 (Table No.6) Shows that for the selected samples

there is evidence of significant relationship between Return on Equity &

the Debt Equity ratio and dividend payout.

Time Series regression Analysis

The results of the Time Series Regression for the Ten-year data (1997/98 to

2006/07) as per the Table No.35 show that there exists significant relationshipbetween the Return on equity & Debt Equity and Dividend payout other than for

the following samples.

Reliance Energy: This sample also shows that there does not exist a

significant relationship between the Return on the Equity and the Dividend

Payout Ratio. The t calculated value is 3.41.

Satyam Computers Ltd: The Capital structure does not seem to have a

relationship with the Return on equity shares in this sample. For the variable,

Debt Equity Ratio the t calculated value is 3.63.

Hypothesis Testing

H0: Dividend Policies affect the value of the firm.

H1: Dividend Policies does not affect the value of the firm.

The hypothesis is tested by using t test significant at 5%.


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The Cross sectional Regressions results as per table no. 6 shows the t value

calculated for the period of analysis i.e.; 2002/3 to 2006/07. It can be seen that

the t values calculated show significant relationship between the return on

equity & dividend payout. The Time series Regression results as per table no. 35shows the t value calculated for each sample for ten years value (1997/98 to

2004/07). Here also there is evidence of relationship between return on equity

share prices and dividend payout.

Thus at 5% level of significance using t test H0 IS ACCEPTED, which

implies there is effect.

SUMMARY AND CONCLUSION

The main objectives of the study were

To find out whether dividend decisions affect the share prices.

To find the extent to which the Debt Equity ratio affects the share prices.

To describe the companies under study in terms of their dividend payout

ratio, Retention ratio and Debt Equity ratios.

The study was conducted in three stages

1. Collection of the required data namely the Income statement, Balance

Sheet and the share prices for ten years (1998-2007) of the samples

under study.

2. Calculation and tabulation of the variables under study namely Dividend

payout Ratio, Retention Ratio, Debt-Equity Ratio and Return on Equity

share prices.

3. Analysis and interpretation: The study was focused on finding the

relationship existing between the dependent variable; return on equity


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share prices and the independent variables, dividend payout and debt

equity ratio. The data were collected through verification of financial

statements of the company and the historical price data available in the

NSE and BSE websites. The data were interpreted using descriptivestatistics and Multiple Regression Analysis.

The salient findings of the study are:

There is significant effect of dividend / retention and debt equity ratio

on share prices.

Out of the variables under study it can be noticed that dividend and share

prices have a notable relationship between each other.

LIMITATIONS

The sampling technique used is a convenient sampling technique, which

limits the generalization of the findings.

The data collected are historical data and no adjustment is made to

capture the abnormal events which affect the variables under study

RECOMMENDATIONS

The same study can be conducted including more samples and for a

longer period.

The relationship existing between the Debt-Equity Ratio and Dividend

Payout can be studied in depth.


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Bibliography

BOOKS

Financial Management, Sixth Edition, M Y Khan and P K Jain, Tata

McGraw Hill Publications.

Financial Management Theory and Practice, Sixth Edition 2004, Prasanna

Chandra, Tata McGraw Hill Publications.

Financial Management, Eight Edition 2004, I M Pandey, Vikas

Publications Pvt Ltd.

Business Research Methods, Nineth Edition 2006, Donald R Cooper &

Pamela S Schindler, Tata McGraw Hill Publications.

Statistical Methods, 6th Edition (2006), S.P Gupta, Sultan Chand & Sons.

JOURNALS

Prasanna Chandra, (1995). Shareholder Wealth Maximization, The ICFAI

Kenneth M Eades, (1982). Empirical evidence on dividends as a signaling

of firms value, journal of Finance and Quantitative Analysis, November.

WEBSITES

www.capitaline.com

www.beginersinvest.about.com

www.investopedia.com

www.investorwords.com

prasanna hegde

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