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Contrast Of Dividend Policies Of Indian Companies

The Sub-continent has become the prime target for foreign direct investment. India ranks 6th among the top 10 countries for Foreign direct investment. Although not in the front line, it has become an attractive destination for foreign investment. India’s economic policies are tailored to attract substantial capital inflows and to sustain such inflows of capital. Policy initiatives taken over a period of years have resulted in significant capital inflows of foreign investment in all areas of economy including the public sector. This paper analysis the structure of economic reforms during the pre- independence and post independence era in the context of growth of foreign direct investment and the risks posed by the political, economic and social conditions for foreign investors. Essentially, this research seeks to analyze and understand the economics and politics of India’s progressive integration with the global economy.

Prior to understanding the economic progress of India, it is vital to first identify the current economic status of India so that it is easy to retrace the process leading to the current status. India presently enjoys the status of an attractive emerging market. However, this status has been the result of numerous economic reforms adopted over the years. India intent to open its markets to foreign investment can be traced back to the economic reforms adopted during two prime periods- pre- independence and post independence.

Pre- independence, industrialised economies of India was the supplier of foodstuff and raw materials to the of the world and was the exporter of finished products- the economy lacked the skill and means to convert raw materials to finished products.Post independence with the advent of economic planning and reforms in 1951, the traditional role played changes and there was remarkable economic growth and development. International trade grew with the establishment of the WTO. India is now a part of the global economy. Outside world is now linked with india either through direct involvement in international trade or through direct linkages with export and economic transaction.

Consequently economic reforms were introduced initially on a moderate scale and controls on industries were substantially reduced by 1985 industrial policy. This set the trend for more innovative economic reforms and they got a boost with the announcement of the landmark economic reforms in 1991. After nearly five decades of insulation from world markets, state controls and slow growth, India in 1991 embarked on an accelerated process of liberalization. The 1991 reforms ensured that the way for India to progress will be through globalization, privatisation, and liberalisation. In this new regime, the government is now assuming the role of facilitator and catalyst agent instead of the regulator and controller of economic activities.

India has a number of advantages which make it an attractive market for foreign capital namely, political stability in democratic polity, steady and sustained economic growth and development, significantly huge domestic market, access to skilled and technical manpower at competitive rates, fairly well developed infrastructure. FDI has attained the status of being of global importance because of its beneficial use as an instrument for global economic integration.








Now the market is further divided into PRIMARY MARKET and SECONDARY MARKET.


Deals with the new issues of securities.


Deals with outstanding securities.

Also known as “STOCK MARKET?.












Stock exchanges



Depositories and their participants

Securities and Exchange Board of India (SEBI)


Stock market indices are the indicators of the stock market.

Some of the market indices types are BSE SENSEX, NSE-50 etc.

Their usefulness:

Board trends of the market can be recognize by indices.

The funds are rationally allocated by the investors among stock by using indices.

Future market can be predict by analyst using indices.

The general economy report can be made on the basis of indices.


Possible reasons for the increment and decrement of rising prices:

Company News.

Country News.

Foreign Exchange rate .

Depends upon the market forces i.e demand and supply of stock.

1.4 Research Aims

The primary aim of this research is to develop an elaborate discussion on how Stock market works and to give the main concepts of Stock market and give the technical analysis of Indian stock market and shares.

1.5 Research Objectives

The following will be the objectives of the study:

1) To describe the Trends of Stock market of India,

2) To identify the Stock behaviour at various time slots,

3) To examine and analyse strategies adopted to make money in Stock market,

4) To identify the role of market activities on economy,

1.6 Research Questions

The following are the research questions of the study:

1). How many Exchanges are there in India?

2). what is an Index & How does one execute an order?

3).Why Stock market is so volatile?

4). Computation of Stock Index?

5). Shareholder Protection and Stock Market Development?

1.7 A selective review of the literature

There has been considerable research that seeks to identify the determinants of corporate Dividend policy. One branch of this literature has focused on an agency-related rationale for paying dividends. It is based on the idea that monitoring of the firm and its management is helpful in reducing agency conflicts and in convincing the market that the managers are not in a position to abuse their position. Some shareholders may be monitoring manage rs, but the problem of collective action results in too little monitoring taking place. Thus Easterbrook (1984) suggests that one way of solving this problem is by increasing the payout ratio. When the firm increases its dividend payment, assuming it wishes to proceed with planned investment, it is forced to go to the capital market to raise additional finance. This induces monitoring by potential investors of the firm and its management, thus reducing agency problems. Rozeff (1982) develops a model that underpins this theory, called the cost minimisation model. The model combines the transaction costs that may be controlled by limiting the payout ratio, with the agency costs that may be controlled by raising the payout ratio. The central idea on which the model rests is that the optimal payout ratio is at the level where the sum of these two types of costs is minimized.

Thus Rozeff’s cost minimisation model is a regression of the firm target payout ratio on five variables that proxy for agency and transaction costs. Transaction costs in the model are represented by three variables that proxy for the firm’s historic and predicted growth rates and risk. High growth and high risk imply greater dependency on external finance due to investment needs, and in order to honor financial obligations, respectively. This, in turn, means, that the firm raises external finance more frequently, hence bears higher transaction costs that are associated with raising external finance. The model captures agency costs with two proxies. First, the fraction of the firm owned by insiders is a proxy for insider ownership and is expected to be negatively related to the target payout ratio. As insiders hold more of a firm’s equity, the need to monitor their actions is reduced because the incentive for managers to misuse corporate resources falls. Second, the natural logarithm of the number of outside shareholders is a proxy for ownership dispersion. It is expected to be positively related to the target payout ratio because the greater the dispersion, the more severe is the collective action problem of monitoring. Indeed results from an Ordinary Least Squares (OLSQ) cross sectional regression using 1981 data on 1000 US firms, support the theory put forward. Thus the model provides good fit and consequently has attracted the attention of subsequent studies.

Llyod, Jahera and Page (1985) is one of the first studies to modify Rozeff’s cost

minimisation model by adding a size variable. An OLSQ cross sectional regression is applied to 1984 data on 957 US firms, and the results provide support for the cost

minimisation model and show that firm size is an important explanatory variable. Likewise Schooley and Barney (1994) add a squared measure for insider ownership, arguing that the relationship between dividend and insider ownership may be non-monotonic. Indeed the results from an OLSQ cross sectional regression, using 1980 data on 235 industrial US firms, provide further support for Rozeff’s model in general and for the hypothesis put forward in particular.

More support and further contribution to the agency theory of dividend debate, is provided by Moh’d, Perry and Rimbey (1995). These authors introduce a number of modifications to the cost minimisation model including industry dummies, institutional holdings and a lagged dependent variable to the RHS of the equation to address possible dynamics. The results of a Weighted Least Squares regression, employing panel data on 341 US firms over 18 years from 1972 to 1989 support the view that the dividend process is of a dynamic nature. The estimated coefficient on the institutional ownership variable is positive and significant, which is in line with tax explanations but contradicts the idea about the monitoring function of institutions.

Holder, Langrehr and Hexter (1998) extend the cost minimisation model further by considering conflicts between the firm and its non-equity stakeholders and by introducing free cash flow as an additional agency variable. The study utilises panel data on 477 US firms each with 8 years of observations, from 1983 to 1990. The results show a positive relation between the dependent variable and the free cash flow variable, which is consistent with Jensen (1986). Likewise the estimated coefficient on the stakeholder theory variable is shown to be significant and negative as predicted. The estimated coefficients on all the other explanatory variables are also shown to be statistically significant and to bear the hypothesized signs.

Hansen, Kumar and Shome (1994) also take a broader view of what constitutes agency costs, and applies a variant of the cost minimisation model to the regulated electric utility industry. The prediction is that the agency rationale for dividend should be particularly applicable in the case of regulated firms because agency costs in these firms extend to conflicts of interests between shareholders and regulators. Results of cross sectional OLSQ regression for a sample of 81 US utilities and for the period ending 1985 support the cost minimisation model and the contribution of regulation to agency conflicts in the firm.

Another innovative approach to Rozeff’s cost minimisation model is offered in Rao and White (1994) who apply it to 66 private US firms. Using a limited dependent variable,

Maximum Likelihood (ML) technique, the study shows that an agency rationale for dividends applies even to private firms that do not participate in the capital market. The authors note that perhaps by paying dividends, private firms can still induce monitoring by bankers, Accountants and tax authorities.

To summarize, the agency theory of dividend in general, and the cost minimization model in particular, appear to offer a good description of how dividend policies are determined. The variables in the original cost minimisation model remain significant with consistently signed estimated coefficients, across the other six models reviewed above.

Specifically, the constant is, without exception, positively related to the dividend policy decision, while the agency costs variable, the fraction of insider ownership, is consistently negatively related to the firms’ dividend policy. The latter is with exception of the study by Schooley and Barney (1994) where the relationship is found to be of a parabolic nature.

Similarly, the agency cost variable, ownership dispersion, is consistently positively related to the firm’s dividend policy, while the transaction cost variable, risk, is consistently negatively related to the firm’s dividend policy regardless of the precise proxy used. The other transaction cost proxies, the growth variables, are also mainly significant and negatively related to the firm’s dividend policy, although past growth appears to be a less stable measure than future growth.

However, in spite of the apparent goodness of fit of the cost minimisation model to

US data, its applicability to the Indian case may be challenged. Indeed, Samuel (1996)

hypothesises that agency problems are less severe in India compared with the US. In contrast, it may be argued that some aspects of the Indian economy imply a particular suitability of the agency theory, and of the cost minimisation model, to this economy.

Notably, as explained in Haque (1999), many developing countries, including India,established state-centred regimes following their independence. These regimes drew their ideology from socialist and Soviet ideas and were accompanied by highly centralized economic policies, which may increase agency costs in at least three ways as follows.

First, such policies may increase managers’ agency behavior per se. Indeed Joshi and Little (1997) note that when domestic firms enjoy subsidies or a policy of protectionism, the pressure on managers to become more efficient is relaxed. Second, high state intervention means an extension of agency problems to shareholder-administrator conflicts.

Indeed, Hansen, Kumar and Shome (1994) show that the degree of industry regulation enters the dividend policy decision. Third, to the extent that management of the economy is based on social philosophies of protecting the weaker sectors such as employees or poorer customers, this may influence managers to consider the interests of non-equity stakeholders.

This all method of stock can also been seen that the ups and down in the stock market is only the gamme of risk but if we discussed and see the main game is played by a mathematician who play the whole game behind the market and people are unaware of these things they are only focusing on there on shares and now be more effective due to the ups and downs in the rate of the stock market.

This implies that stakeholder theory should be particularly relevant to the Indian case, and, as shown by Holder, Langrehr and Hexter (1998) this may lead to a downward pressure on dividend levels. However, the relevance of stakeholder theory to the Indian case also implies enlargement of agency problems to conflicts of interests among capital holders and other shareholders, increasing the need for shareholders to monitor management behaviour.

It is thus the case that on the one hand stands the prediction by Samuel (1996) that agency costs should be lower in the Indian business environment. This implies that the agency rationale for dividends should be less applicable in the case of India. To contrast this, the agency rationale for dividends is predicted to become particularly applicable to India, due to the extension of agency conflicts on at least three accounts as explained above. An empirical procedure is the natural way to settle these differences and it is to this task that we now turn.

1.8 Overview of the Dissertation

Chapter 1 is a general summary and a brief introduction of the study. It mapped out the research aims, research objectives and research questions. It also suggests topics for complementing research, and an overview of the dissertation. Chapter 2 will be the review of the related literature that will put the study in context with the research aims. It will proceed with addressing the research objectives, thereby meeting the research aims. Chapter 3 will present a detailed picture of the methodology. Chapter 4 will expound on the discussions of the study and the final chapter shall present the conclusions and recommendations of the study.

1.9 Conclusion

The study develops an elaborate discussion on how to effectively be in the Stock market and a brief discussion on Stock market of India such that results favourable to it will commence using empirical data from secondary documents.

Chapter 2

Dividend behaviour of Indian firms after share split


As we have to discussed in this section about the dividend behaviour so it can be discussed,dividend policy remains a source of prolonged public disagreement despite years of theoretical and practical research, one aspect of dividend policy is the link between dividend policy and stock price risk . Risk can be reduced by paying large dividends (Golin 1986) and is a proxy for the later on earnings (Basken, 1990). Many theoretical mechanisms have been given advice that cause dividend policy and payout rolls to vary directly with common stock volatility. These are the effect of duration, effect of rate of return , pricing effect and information effect. Duration effect complies that high dividend rolls give more near the amount of money being transferred. If dividend policy is stably high dividend stocks will have a shorter time. Gordon john Model can be used to suggest so that high-dividend will be less intensive to Rise and fall irregularly in number or amount in discount rates and thus ought to show higher price volatility.

Now we can also take a look on some agency type reports being played in stock market agency cost argument, as developed by Johnson and Micken (1970), that is payment of dividends people motivates managers to remove sediment cash which is invested below at the cost of capital or waste on it on organizational capabilities (Roeff, 1991 and Eastrbrook 1990). Many authors have pressure the importance of facts content of dividend (Daniel and Thomson, 1989; Bern, Mosey 1989). Diller and Rack (1986) suggested that dividend announces provide the missing cuts of

Facts and figures about the firm and allows the market to tell about the firm’s current savings.

The main thing in the dividend policies is that if one company suggests the rate of its share too low all the investors which want to purchase the shares are the same as the stake holders are willing to do so and that back in the loop. Investors may have greater trust on that reported earnings reflect economic profits and loss statements when announcements are as a companion or escort by sample dividends. If investors are more certain in their suggestion, they may ere act less to questionable sources of facts and figures and their main theme value may be insulated from irrational development, or behavior.

The best discussion be made on this topic can be emphasized as rate and effect of market rate of return effect, as discussed by Godin (1967), is that a firm with low payroll and high dividend interest may tend to be valued more in terms of future investment chances (Daisy, 1965). As a result, its stock price may be more intensive to changing rates of return over rare time intervals.

Volatility Index is a major tool of measuring market’s expectation of volatility over the next term. Volatility is often described as the “rate and magnitude of changes in prices? and in stock often suggest to as risk. Volatility Index is a measure, of the amount by which an Index is expected to change over the time, in the next term, (calculated as analyzed volatility, denoted in percentage e.g. 40%) based on the order book of the index options. Fama (1992) and Fames and French (1995).People were speechless, many broke.


2.2(a) Control variables:

Share price ups and downs should be relevant to the basic risks ensured in the product markets. There is a impact of stock market’s risk on the firm's dividend policy. Volatility Index is a good indicator of the investors’ behavior on how markets are expected to be changed in the next term. Usually, during periods of market volatility, market moves steeply up or down

And the volatility index tends to rise. As volatility subsides, option prices tend to

Decline, which in turn causes volatility index to decline. The information of the less listed firms the market in the stocks of small listed firms, more illiquid, and as a complicated subject to greater price in the ups an down of the stock market. Baskin (1985) suggests that firms with a more deplored body of stakeholders may be more disposed off towards using dividend policy as a device for signaling. Function of size and thus a size control was required in the form of latter.

A value of 2 indicates there appears to be no distortion. Small values of d indicate relevant and supporting error terms are, on average, close in value to one another, or positively corrected .It is also possible that main and important differences in market hall hull, cost effectiveness, restrictions in varying infrastructure etc. This all lead to differences in dividend policy. These also have impact on ups and downs of the share prices in the stock.

2.2(b) Variable definition

Price volatility (PV)

The policy of central planning adopted by the government sought to ensure that the government laid down marked goals to be achieved by the economy thereby establishing a regime of checks and balances. The government also encouraged self sufficiency with the intent to encourage the domestic industries and enterprises, thereby reducing the dependence on foreign trade. Although, initially these policies were extremely successful as the economy did have a steady economic growth and development, they weren’t sustained. Square root transformation can be used to show the average measures of variance for all available years and can be transformed to a standard deviation. Parkison (1982) describes the method of closing and opening prices how this method is very easy to the traditional method of summation.

2.2(c) Dividend yield Policy (DYP)

The variable has been calculated by the summation of all the annual cash which have to paid to common stake holders and then dividing this sum by the average stock’s value of the stock in the year. The government approached the World Bank and the IMF for funding. In keeping with their policies there was expectation of devaluation of the rupee. This lead to a lack of confidence in the investors and foreign exchange reserves declined.

2.2(d) Earning volatility Of Stock (EV)

In order to develop our sense about this variable, the first step is to get an approximate average of available years of the ratio of last year going earnings (before taxes and interest) to intellectual assets. In order to compare the shocks to US markets over countries and the sample period, it is

Necessary to impart shocks of the “same magnitude?. Since financial markets are volatile, it

Would be misleading to compare shocks of the same nominal magnitude across different

Periods of time. Thus, the responses of the Asian markets have been tracked to a one standard

Deviation shock in the US variable.

2.2(e) Payout Ratio (POR)

When total dividend exceeds total cumulative profit than payout ratio is set to one. From begin the total cumulative self owned company earnings were calculated for all years. The ratio of total dividends to total earnings is payout. The use of this procedure controls the problem of extreme values in individual years attributed to low or possibly negatively effect on the net income.

2.2(f) Size (SZ)

The variable was so made by taking the average market value of common stocks.

The variable size was also think in a form that gives impact in the order of magnitude in real terms.

2.2(g) Long-term Debt (DA)

Sum of all the long-term debt (debt with maturity more than a year) to total assets is taken as a ratio. An average is taken over all available years.

2.2(h) Growth in Assets (ASG)

The ratio of the change in total assets in a year was taken by the early growth. Then the ratio was averaged over the years.

2.3 Conclusion

In this chapter Present day India enjoys the status of an emerging market. Skilled and managerial labor and technical man-power are such as that they match the best available in the world. Urban middle-high class people has been targeted from the chasing of the market these people did not know about the superior brands and ups and down of the market the status of people very much matter in the stock market. A combination of these factors contributes to India having a distinct and a cutting edge in the globe. India has been termed as the ‘stealth’ miracle economy of the new millennium. We observe a common pattern of triggered by changes in the market and technological environment. Changes adopts in the form of innovation, avoidance and of regulation.