Dividend Policy Analysis

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Recommended: Literature Review of Dividend Policy

This chapter mentions about the background, objective and problem statement of this research. The limitation and contribution of this study will also be provided in this chapter. The structure of the study that is at the end of this chapter will help readers more easy to follow this study.

1.1 Background of the study
To maximize the shareholder’s wealth is the most important goal that each manager achieves by using different strategies and policies. One of the most familiar and important financial policy is applied by managers is dividend policy. Dividend policy is also a widely, common topic that was studied by researchers in field of financial and investment.
In the current market, dividend policy plays an important role. Dividend policy is one of the most important financial decisions that firm’s managers has to face and decide whether how much of the profits earned from operation will be distributed to shareholders in form of dividend and how much will be retained as reinvesting back to the company to gain more profits and increase the value of company’s stock. An optimal decision has to be chosen not only to satisfy the shareholders but also ensure enough internal funds to finance for company’s activities. In specific, managers not only consider how to maximize shareholder’s wealth, firm’s income, the budget that used for investment, they also must take care about the effect of their decision on share price. So, the questions about dividend payment are: whether all the profits will be distributed for shareholders in form of dividend, or it should be kept to reinvestment on firm? And if reinvest, how much it will be used for reinvestment and how much will be transform to dividend that was paid for investors? In order to cl...

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...measure risk. It would continuous change over time, so it is very complicated to predict the stock price in the future. Because of the importance of share price volatility, different research was conducted to investigate the relationship between dividend policy and share price volatility in different point of time such as Baskin (1989), Hussainey et al (2011), Allen & Rachim (1996), Kinder (2002), Rashid and Rehman (2008) etc. While Baskin (1989) found that there is a negative relationship between dividend yield and the volatility of share price; and Rahshid and Rehman (2008) failed to support for Baskin (1989) by finding the result that although there is a non-significant relationship, the relationship between share price volatility and dividend yield is positive. These studies created the conflicting point of views that is needed to clarify based on specific case.

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