Audit and Accounting Review (AAR) : Issn: 2790-8267 ISSN: 2790-8275 Homepage

Audit and Accounting Review (AAR)
Volume 2 Issue 1, Spring 2022

ISSN(P): 2790-8267 ISSN(E): 2790-8275
Homepage: https://journals.umt.edu.pk/index.php/aar
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Cash Dividend Disbursement, Retained Earnings and Their Impact

Title: on Stock Price Volatility: A Case of Selected Non-Financial Firms of
Pakistan
Author (s): Adil Shaheen, Farah Yasser, Kinza Ashraf
Affiliation (s): University of Management and Technology, Lahore
DOI: https://doi.org/10.32350/aar.21.01
History: Received: February 11, 2022, Revised: May 09, 2022, Accepted: May 11, 2022
Shaheen, A., Yasser, F., Ashraf, K. (2022). Cash dividend disbursement, retained
Citation: earnings and their impact on stock price volatility: A case of selected non-
financial firms of Pakistan. Audit and Accounting Review, 2(1), 1-24.
https://doi.org/10.32350/aar.21.01
Copyright: © The Authors

Licensing: This article is open access and is distributed under the terms of
Creative Commons Attribution 4.0 International License
Conflict of
Interest: Author(s) declared no conflict of interest
A publication of
The School of Commerce and Accountancy
University of Management and Technology, Lahore, Pakistan
Relationship of Cash Dividend Disbursement and Retained Earnings
with Stock Price Volatility - A Case Study of Selected Non-Financial
Firms of Pakistan
Adil Shaheen, Farah Yasser *, Kinza Ashraf
University of Management and Technology, Lahore
Abstract
The prime objective of the current study is to determine the relationship
between corporate dividend policy and retained earnings and its impact on
stock price volatility. The impact of corporate dividend policy and retained
earnings on stock price volatility has been debated and discussed variously
over the course of the last five decades. Past researches showed mixed
evidences of this relationship and the results remained inconclusive.
Moreover, in this regard, only a few studies have been conducted in
Pakistan. So, it remains undecided whether the relationship exists or not and
further study is required to establish or refute its existence. For this purpose,
modern statistical techniques and tools available for analyzing the data were
used. Data from a total of 75 companies was initially collected and
scrutinized according to different parameters mentioned in the study. Only
50 companies from year 2010 to 2018 were left to be analyzed as the data
was not wholly available for the remaining companies as per research
requirement. Two separate models were run and the results determined that
there exists a positive relationship of corporate dividend policy and retained
earnings with stock price volatility.
Keywords: cash dividend policy, stock price volatility, Pakistan
Introduction
In the history of corporate finance, only a few topics have remained
ambiguous but important simultaneously. One such topic is the impact of
corporate dividend disbursement policy on market stock price volatility and
many studies have been conducted to investigate it accordingly (Nazir,
2012). It has been suggested that managers should pay dividends open-
heartedly because stock returns are not enhanced by retained earnings
(Javed & Shah, 2015). It is evident that the corporate dividend disbursement
policy does effect the movement of share prices in the stock market, thus
*
Corresponding Author: [email protected]
Audit and Accounting Review
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Shaheen et al.
causing volatility in the market share prices of the firms. Indeed, the more
influence this policy has the more it is important to the investor (Ajayi &
Seyingbo, 2015). Dividends are basically a division of the earnings of a
company which should be divided into two portions: one needs to be
disbursed and the other needs to be retained (Hashemijoo et al., 2012).
Advancements in the dividend policy go hand in hand with corporate
development. It has been concluded that change in financial markets drives
the dividend policy. There are several debates as whether to disburse
dividends at 100% dividend payout ratio or to retain the earnings at 100%.
Moreover, if it is needed to avail both of these options, then it may lead to
an optimal dividend decision resulting in the end effect of a firm’s value
and shareholders’ return on investment. Throughout the preceding years,
researchers have attempted to design an optimal dividend policy for firms.
Yet, none of the proposed theories are universally accepted. However, over
the last few decades, several theories have emerged which explain the
effects of the dividend policy of firms on the market value of their stocks
(Al-Hasan et al., 2013).
Finance managers are usually required to take three main decisions. The
first decision is about investment and capital budgeting. The second
decision is the dividend payout decision. Whereas, the third and the last
important decision they need to take is the financing decision, that is, how
a firm’s assets are to be financed. Dividend payout decision usually needs
to be taken when a firm starts generating profits. Once it has generated
profit, it needs to be decided whether it should distribute it all, or should it
retain some portion of it for future investment, or should it invest the profit
wholly back into the business? The answer is simple. The managers should
focus on the wealth maximization of shareholders but should also
contemplate the influence of their decisions on share prices in the stock
market (Ahmad & Naz, 2015).
The financial worth of corporations mainly depends on their earnings,
which ultimately are an outcome of their investment policies. However, this
argument is against the assumption of Walter and Gordon, that is, the
dividend relevance theory which says that the dividend announcement of a
firm mainly depends on the available opportunities for investing in the
future. Furthermore, it also depends on the association among the internal
rate of return and weighted average cost of the capital (Ajayi & Seyingbo,
2015).
School of Commerce and Accountancy
3
Relationship of Cash Dividend…
Stock price is the value of a single share of stock in the stock market.
Market share prices help the investors to decide whether or not they should
invest in a specific stock (Saleem et al., 2013). Every private investor
invests with the motive of earning profit and growth in investments. For a
company that is listed on the stock exchange, there are many causes which
exist and affect the shareholders’ wealth. Out of the many factors, studies
suggest that the variables which mostly affect stock prices include earnings
per share, return on stockholders’ equity, retention ratio, and earnings after
tax and dividend yield.
Furthermore, out of all the variables which affect stock market prices,
there is a noteworthy effect of dividends on market share prices of the
company (Majanga, 2015). There was found a significant positive
association among the announcement of dividends and volatility in the share
prices of companies in the banking sector of Bangladesh (Masum, 2014).
Since dividend policy is related to earnings, so it is simultaneously related
to the capital structure of the organization. When earnings are retained, they
affect the capital structure of the firm as well, if not distributed in the right
proportion. The reason behind the close association of dividend policy and
capital structure is that both directly affect the shareholders’ wealth
(Hashemijoo et al., 2012).
For a company, it remains important to decide and implement a suitable
corporate dividend policy. It would give them the flexibility to invest in
future projects (Oyinlola & Ajeigbe, 2014). Dividend policy represents the
company policy regarding the disbursement of dividends and the retained
amount of earnings for making future reinvestments. Some of the decisions
answer the core question that whether the earnings should be distributed or
not. In order to answer this question, managers should be able to decide
which dividend policy may lead to stockholders’ wealth maximization. By
considering shareholder wealth, they would be considering the effect of
dividend policy on the stock prices of the firm (Hashemijoo et al., 2012).
In Pakistan, insufficient investigation has been conducted to establish
the link among corporate dividend policy, retained earnings, and share price
volatility. The current study attempts to discover the relationship of
corporate dividend policy and retained earnings with share price volatility.
Although, this area has been covered by many researchers in developed
countries; still, sufficient number of studies haven’t been carried out by the
researchers in emerging economies around the world including Pakistan
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Shaheen et al.
(Nazir et al., 2012). Furthermore, Pakistan Stock Exchange (PSX) is a high-

risk market where the investors want high return. There are only a few
studies available which covered the long-term behavior of stocks and very
little work has been conducted on the relationship between dividend payout
and stock prices (Sadiq et al., 2013).
Therefore, the prime objective of this study is to evaluate the impact of
corporate dividend policy and retained earnings on market share price
volatility of companies listed on PSX (Al-Hasan et al., 2013). The sub-
objectives intend to examine the relationship which exists between
corporate dividend policy and stock market price, to discover the
association between retained earnings and stock market price, to help the
investor to invest in the most appropriate way, to help the Government of
Pakistan to amend the policy in order to promote economic activities, and
to help companies to devise their corporate dividend policy to attract
investors.
This study is conducted in the Pakistani context. The results would
allow the authors to determine the actual relationship between the study
variables. The findings would put the investors in a much better condition
to make an optimum decision based on their interest. As a result, it would
boost their confidence to invest in PSX listed companies. Moreover, the
decision-makers of such firms can optimize their decisions to attract the
maximum number of investors towards their firms.
Literature Review
Commonly, researchers classify dividend approaches into three types. The
first approach is based on the premise that the dividend policy directly
increases a firm’s value. The second approach contradicts the first approach
by stating that the dividend policy affects a firm negatively. The third
approach denies any association between the dividend policy and firm
value, either positive or negative. All these approaches were studied in
certain periods of time and authenticated (Manos, 2001). The level of effect
created by cash dividends was found to be higher on stock prices as
compared to the effect of retained earnings on these prices, as contrast with
the study conducted by (Gordon, 1959).
Dividend is the means through which a company distributes its earnings
to its shareholders. There are many ways to distribute earnings, for instance,
in the form of bonus shares or cash. There are occasions when companies
5
decide to pay additional dividends, other than the regular cash dividend.
Moreover, there are companies which pay dividend annually, semi-
annually, or quarterly (Hooi et al., 2015).
There are different theories associated with the dividend policy. In the
dividend irrelevance theory, there are no agency issues among shareholders
and managers of the firm. Also, the stocks are fairly priced. Furthermore,
the shareholders are least concerned with the dividend policy, since they
may sell their part of equities portfolio if they need cash (Hooi et al., 2015;
Miller & Modigliani, 1961). The bird in hand theory states that capital gains
remain uncertain as compared to dividends. Hence, the investors have
imperfect evidence related to the firm’s profitability. Consequently, they
may be inclined towards cash dividends as compared to the uncertainty of
capital gains at a later stage (Bhattacharya, 1979; Hooi et al., 2015).
According to the agency theory, the management often overinvests in
different projects to enhance the firm size. Since firm size determines their
compensation, there arises a conflict of interest among the management and
shareholders (Al-Malkawi et al., 2010; Hooi et al., 2015). Whereas,
according to the signaling theory, some investors take dividend
announcement as a signal that the firm has strong prospects and payouts in
the form of dividends indicate these prospects (Al-Malkawi et al., 2010;
Hooi et al., 2015).
Dividend policy effectively indicates the market value of companies in
the Pakistani market, where earnings and price volatility have a positive
relationship (Nazir, 2012). Contrarily, there is a negative relationship
between share price volatility and firm size. Moreover, stock price volatility
is the most affected by dividend yield and size (Hashemijoo et al., 2012). A
study showed a negative association between stock price volatility and
dividend payout. On the other hand, the relationship of stock price volatility
with dividend yield was found to be positive and strong (Al-shawawreh,
2014). Return on equity and earnings per share were found to have an
encouraging relationship with share value, whereas profit after tax (PAT)
was found to have a negative relationship with share value in the
Bangladeshi stock market and more specifically, the listed commercial
banks of Bangladesh (Masum, 2014).
Firm managers need to decide which dividend policy they need to adopt,
that is, how much profit they need to distribute among their shareholders.
The distribution of profit needs to be seen from two different aspects. On
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Shaheen et al.
the one hand, the distribution of profit in the form of dividends affects
investment. On the other hand, stockholders wait for dividend disbursement
in cash form. So, the managers of the firms should maintain a balance
between availing investment opportunities and dividend payout (Irandoost
et al., 2013). It has been suggested that the announcement of dividend by
banks affects the market price of shares, whereas retained earnings causes
less volatility in banks of Nigeria. Furthermore, banks should retain all
earnings and make use of them, whereas investors should focus on capital
gains as return on their investment, rather than dividend collection (Ajayi
& Seyingbo, 2015).
The relationship between market share price volatility and the dividend
policy of a firm has been debated for several years. Some of the factors
which influence the dividend policy include long-term debt, whereas age
and size have been used as control variables (Hooi et al., 2015). There are
mix evidences in favor or against the existence of this relationship. Many
scholars are of the view that there exists a relationship between the
corporate dividend policy and market share price volatility, while others
deny its existence. As of the signaling theory, dividend signifies to the
stockholders that the company is working so effectively that it is able to
distribute the earnings among its shareholders (Hashemijoo et al., 2012).
The volatility level of the shares indicates the risk which the investors
are exposed to. Investors have a keen eye for both dividends and volatility,
even the companies are well aware of this fact. This makes share price
volatility an important issue (Hussainey et al., 2010). Dividend policy is
important and equally consider by investors, firm management, and
policymakers. Investors are not only concerned about return on stocks but
also evaluate a firm’s future growth prospects at the same time by
examining its dividend policy. Dividends not only signify profit for
investors but also signal the markets regarding firm performance. This is
why policymakers for any organization have a critical responsibility to
make a suitable dividend policy (Ahmad & Naz, 2015).
According to the literature, there exists a negative association of market
value volatility with dividend yield and size, whereas a negative association
between leverage and stock price volatility (Profilet & Bacon, 2013). On
the other hand, Harkavy (1953) investigated the association between
retained earnings and stock prices and the results were quite surprising,
showing that the firms which have higher retained earnings also have higher
7
stock prices. Moreover, Hancock (1977) investigated the association

between stock prices, dividend yield, and taxes. The results showed a
significant and direct connection between dividend yield and stock prices.
Similarly, Jordanian firms were analyzed to know the association between
cash dividends, stock prices, and retained earnings and a direct relationship
between them was found (Friend & Puckett, 1964; Gordon, 1959; Naamon,
1989). Furthermore, a significant positive relationship was explored
between stock prices and cash dividends (Marsh & Power, 1999).
It has been suggested that the share price of a firm is determined by its
dividend and retained earnings. Moreover, the dividend payout theory is
stronger in case of mature firms in terms of retained earnings. While, in the
case of firms which are still growing, the retained earnings hypothesis
dominates the divided hypothesis; the reason being these firms have more
investment opportunities. It has been observed that more cash is retained by
growing firms as compared to the distribution of dividend. For a firm that
is still growing, the bird in hand theory is not applicable. Whereas, the firms
which are already grown up and mature have surplus cash available with
them to distribute as dividend after retaining some portion of the income.
Although, the bird in hand theory is truly applicable for mature firms where
dividend hypothesis dominates over retained earnings (Ahmad & Naz,
2015).
Similarly, a significant correlation exists between stock price volatility
and dividend yield (Asghar et al., 2011). It is evident that dividend policy
has a positive relationship with stock prices (Murhadi, 2008). Firms which
pay dividend give their investors the benefit of having stocks which can be
easily liquidated, as compared to the firms which don’t pay dividend. So,
the liquidity of stock is positively related to the firm being a dividend payer
(Igan et al., 2010). The firms which are larger in size and have fewer growth
opportunities have the potential to pay dividend to their shareholders,
although a significant decline over the years has been observed in payout
ratios of the firms (Fatemi & Bildik, 2012).
A research conducted in Nigeria showed a positive association between
the performance of firms and dividend payouts (Uwuigbe et al., 2012).
Furthermore, it was concluded that improved firm performance is depicted
by dividend yield (Henne et al., 2007). Out of all theories about dividend
policies, the bird in hand theory has the highest level of acceptance among
scholars and practitioners alike. Analysis has shown that share prices have
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Shaheen et al.
declined in the US stock market on the announcements of dividend payouts

since 1978 (Amihud & Li, 2002). Similarly, empirical analysis points
towards an indirect association of dividend policy (as dividend yield and
dividend payout) with share price volatility (Hashemijoo et al., 2012).
Theoretical Framework
Dividend policy basically decides the percentage of profit a firm retains
or distributes among its shareholders based on their shareholding. The
crucial decision remains at the discretion of the directors. The pricing of
stocks in the stock exchange market is based on the principle of demand and
supply. Hence, when the demand for stocks is increased the price may
increase and when it is decreased, the price may also decrease. When stocks
are held by existing stockholders with a future expectation of return, then
stock prices increase for both the existing and potential stockholders. This
is because investors are mostly concerned with the returns from their stocks
in the form of dividends (Barfield, 1995).
Many factors affect stock prices. A study conducted on the firms of
Bahrain revealed that a number of factors affect the stock price movements.
Some of these factors include return on investment (ROE), price earnings,
dividend yield, per share dividend distributed, and firm size. Out of all the
factors that affect stock prices, dividend is considered as an important
factor. This study concluded that dividend cannot be ruled out as a
determinant of stock prices in the Bahrain Stock Market (Sharif et al., 2015).
Another analysis of the listed firms of New York Stock Exchange (NSE)
concluded that stock price movements occur due to investor reaction
towards dividend announcement by the firms, since investors’ sentiments
are significantly related to by stock price movements. Therefore,
stockholders are the most influencer of stock prices in the stock exchange
market (Julius et al., 2011). A similar study was conducted on the listed
firms of the stock exchange of Germany. It was found that an increased
dividend announcement excites stockholders and it results in the movement
of stock prices (Andres et al., 2011).
The consequences of dividend announcement strategy for share price
volatility have been discussed for many years by several researchers, such
as Gordon (1959) and Baskin (1989). It was found that investors are of the
view that future income in the form of capital gain is uncertain, therefore,
they are more interested in dividends rather than capital gains. So, the
9
results showed that investors do appreciate dividends (Al‐Malkawi, 2007).

A research was conducted to differentiate between the effects of retained
earnings and dividends on the market prices of stocks. The results showed
that dividends have a greater effect on stock prices as compared to retained
earnings (Friend & Puckett, 1964). Another research was conducted to
understand the nature of the existing relationship between stock prices,
taxes, and dividend yield. The results showed that there is a highly
significant and positive relationship between stock prices and dividend
yield (Litzenberger & Ramaswamy, 1979). A similar study was conducted
to establish the relationship between cash dividends and earnings that are
nor distributed, that is, retained earnings. The results showed that market
stock prices are affected by cash dividends and retained earnings (Nishat,
1992).
An investigation was conducted to know the effect of change in
dividends in accordance with market stock prices. It was determined that
whenever a large dividend is announced, the response or the movement of
stock prices remains positive (Dhillon & Johnson, 1994). Moreover, a
relationship among retained earnings, market stock prices, and dividend
was found (MacDonald & Power, 1995). Another research was conducted
in Nepal. The results informed that market stock prices are determined by
cash dividend disbursements and retained earnings (Azhagaiah & Sabari,
2008). The impact of cash dividend announcements on market stock prices
was assessed and evaluated and the results showed a positive relationship
(Chen et al., 2009). Based on the above theoretical discussion, the following
two hypotheses were developed:
H1: There is a significant positive relationship between share price
volatility in the stock market and corporate dividend policy.
H2: There is a significant positive relationship between share price
volatility in the stock market and retained earnings.
Methodology
In the current study, the data of fifty (50) companies from the non-financial
sectors of Pakistan that are listed on PSX was collected for a period of eight
(08) years (2010 to 2018). Quantitative data was collected from their annual
reports. SPSS, Eviews, and Microsoft Office were used for data analysis to
discover the relationship of market stock price volatility with corporate
dividend policy and retained earnings. Before conducting regression
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Shaheen et al.
analysis, a diagnostic test of OLS assumptions, which are named as

multicollinarity, auto correlation, and normality (Ilaboya & Aggreh, 2013).
Table 1 below indicates the sampled firms and the categories they belong
to.
Table 1
Categories of Companies Selected
Total Number of Firms Firms Selected for
Category
Listed on PSX the Current Study
Automobile 15 10
Chemicals 16 7
Energy 8 8
Fertilizers 6 4
Pharmaceuticals 9 6
Textile 21 15
Total 75 50
In the first stage, 8-year data of seventy-five (75) companies was

collected. Moreover, twenty-five (25) firms were excluded from this
research for which data was not available for all the years, that is, 2010-
2018. For the current study, stock price volatility is the dependent variable,
whereas dividend yield, dividend payout ratio, and retained earnings are
independent variables. Furthermore, leverage, asset growth, size, and
earnings volatility were introduced as control variables (Nazir et al., 2012).
Stock price volatility basically measures responsiveness in the form of
change in stock prices and this change shows the risk associated with that
particular stock. It is calculated as the difference between the highest and
the lowest stock price during the year, divided by their average and in the
end taking square of it (Nazir et al., 2012; Profilet et al., 2013; Ajayi &
Seyingbo, 2015; Sadiq et al., 2013; Habib et al., 2012). Dividend yield is
defined as the dividend distributed by the company in the form of cash to
stockholders in relation to the average market stock price of the firm
(Masum, 2014; Nazir, 2012; Profilet et al., 2013; Ajayi & Seyingbo, 2015;
Saleem et al., 2013; Sadiq et al., 2013).

11
Payout ratio is calculated by dividing the total cash dividend by the total
earning of every stock (Nazir et al., 2012; Profilet et al., 2013; Ajayi &
Seyingbo, 2015; Saleem et al., 2013; Sadiq et al., 2013; Habib et al., 2012).
Retention ratio, as a proxy of retained earnings, is calculated by deducting
total dividends from total earnings and then dividing the resultant value with
the earnings (Masum, 2014; Majanga, 2015). Leverage is the ratio of long-
term debts (debts which are due only after one year) to the total assets of
the firm. It can also affect stock price volatility (Nazir et al., 2012; Profilet,
2013).
Asset growth is considered as a control variable. It is calculated by
taking the difference of the closing and opening values of the assets of the
current year. The resultant value is then divided by the previous year’s total
assets (Nazir et al., 2012; Profilet, 2013; Sadiq et al., 2013). Companies
which are bigger in size are more diversified with respect to the risk they
face, whereas the firms which are smaller in size are more exposed to the
risk because of the volatility and limited liquidity of their stock. Size
calculated as the natural logarithm of the average market value of the
common stock, size is calculated by multiplying the number of shares in the
market with the number of shares issued and then taking base 10 logarithm
(Ajayi & Seyingbo, 2015; Al-shawawreh, 2014; Habib et al., 2012;
Hussainey et al., 2010; Irandoost et al., 2013; Nazir, 2012). Earnings
volatility is introduced for the special purpose of limiting the effect of any
change in earnings on stock price volatility. It is represented by “Evol” and
calculated in the current study by taking the moving standard deviation of
the net earnings of companies. Earnings volatility is a control variable in the
current study (Ajayi & Seyingbo, 2015; Habib et al., 2012; Nazir et al.,
2012).
Followings models were developed based on the research objectives of
the current study.
Model 1: 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 =∝
+𝛽𝛽1 𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖 +𝛽𝛽2 𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖 +𝛽𝛽3 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑖𝑖𝑖𝑖 +𝛽𝛽4 𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖 +𝛽𝛽5 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ𝑖𝑖𝑖𝑖 +𝛽𝛽6 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖 +ϵ
Model 2: 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 =∝
+𝛽𝛽1 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅+𝛽𝛽2 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑖𝑖𝑖𝑖 +𝛽𝛽3 𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖 +𝛽𝛽4 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺ℎ𝑖𝑖𝑖𝑖 +𝛽𝛽5 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖 +ϵ
where,
PVOL= Price Earnings Volatility

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Shaheen et al.
DY= Dividend Yields

DPR= Dividends Payout Ratio
SIZ = Size of the firm
LEV = Leverage of the firm
Growth = Asset growth of the firm
RETRAT = Retention Ratio
ASGR = Asset Growth
EARVOL = Earnings Volatility
Results and Discussion
Initially, data normality test, multicollinearity test, Pearson correlation test,
heteroscedasticity test, and stationarity test of both models were performed
and no issues were found in the data. Since the data was penal data, so fixed
and random effects models were used. In this study, Hausman test is used
to differentiate between the fixed effects model and the random effects
model, to decide which one should be used for regression analysis. If p-
value is more than 0.05, then the null hypothesis is rejected, which
implicates that the random effects model is rejected. Whereas, if p-value is
less than 0.05, then the null hypothesis is accepted, which implicates that
the fixed effect model is rejected.
Table 2
Hausman Test for First Model
Correlated Random Effects – Hausman Test
Test Summary Chi-Sq. Statistic Chi-Sq. df. Prob.
33.4975 6 0.00
Comparison of Period Random Effects Test
Variable Fixed Random Prob.
DPR -0.1237 -0.1362 0.179
DY -0.7954 -0.7345 0.3197
ASGR -0.0312 -0.0018 0.0444

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Variable Fixed Random Prob.

EARVOL 1.58769 1.67684 0.001
LEV -0.1509 -0.1503 0.8004
SIZ -0.0766 -0.0848 0.1291
Period Random Effects Test Equation
Variable Coefficient Std. Error t-Statistic Prob.
C 0.53609 0.06231 8.60342 0.00
DPR -0.1237 0.06879 -1.7983 0.0729
DY -0.7954 0.29461 -2.6998 0.0072
ASGR -0.0312 0.07985 -0.3904 0.6965
EARVOL 1.58769 0.42676 3.7203 0.0002
LEV -0.1509 0.05247 -2.8771 0.0042
SIZ -0.0766 0.02074 -3.6956 0.0003
Effects Specification
R2 0.20006 Mean dependent var 0.41589
Adjusted R2 0.17312 S.D. Dependent var 0.2623
F-statistic 7.42582 Durbin-Watson stat 1.83842
Prob (F-statistic) 0
Table 2 shows that the p-value is less than .05. So, the null hypothesis
was rejected and the fixed effect model was used for the purpose of analysis.
Both of the main independent variables show significant results, that is,
DPR is 7.29%, whereas DY is 0.07% at 10% level of significance. All the
control variables except ASGR are also significantly positive. These results
are consistent with the literature and the latest studies. Hence, the first
hypothesis is accepted as there exists a significant positive relationship
between the corporate dividend policy and stock price volatility. These
results are consistent with the findings of AlTroudi and Milhem (2013) and
Masum (2014).

14
Shaheen et al.
Table 3
Fixed Effect Model for the First Model
Dependent Variable: SPV
Method: Panel Least Squares
Variable Coefficient Std. t-Statistic Prob.
Error
DPR -0.123709 0.068792 -1.798324 0.0729
DY -0.795412 0.294614 -2.699844 0.0072
ASGR -0.031175 0.079852 -0.390406 0.6965
EARVOL 1.587689 0.426764 3.720301 0.0002
LEV -0.150947 0.052465 -2.877117 0.0042
SIZ -0.076647 0.02074 -3.695556 0.0003
C 0.536087 0.062311 8.603415 0
Period Fixed (Dummy Variables)
Adjusted R2 0.173118 S.D. dependent var 0.2623
Prob (F-
0
statistic)
Hausman Specification Test-Second Model: In this model, the

relationship of retention ratio (as a proxy of retained earnings) with stock
price volatility is checked, whereas size, leverage, asset growth, and
earnings volatility remain the control variables. Firstly, Hausman test is
performed to know that whether the fixed effect model or the random effects
model needs to be run. Since the data was panel data, Hausman Test was
performed to differentiate between the fixed effects and random effects
model to know which one should be used for regression analysis. If p-value
is greater than 0.05, then the null hypothesis is rejected, that is, the random

15
effects model is rejected. On the other hand, if p-value is less than 0.05 then
the null hypothesis is accepted and random effect model is used.
Table 4
Hausman Test for the Second Model
Correlated Random Effects - Hausman Test
Test period random effects
Test Summary Chi-Sq.
Chi-Sq. df. Prob.
Statistic
Period random 10.2422 5 0.0687
Period Random Effects Test Comparisons
Variable Fixed Random Var (Diff.) Prob.
RETRAT 0.09886 0.09531 9E-06 0.2326
ASGR -0.0325 -0.0233 7.9E-05 0.3013
EARVOL 1.60179 1.63205 0.00027 0.0658
LEV -0.1581 -0.1579 3E-06 0.9169
SIZ -0.0801 -0.0831 0.00001 0.3316
Period Random Effects Test Equation
Method: Panel Least Squares
C 0.40454 0.06863 5.89453 0
Variable Fixed Random Var (Diff.) Prob.
RETRAT 0.09886 0.03095 3.19392 0.0015
ASGR -0.0325 0.08055 -0.4033 0.687
EARVOL 1.60179 0.43193 3.70846 0.0002
LEV -0.1581 0.05307 -2.9791 0.0031
SIZ -0.0801 0.02128 -3.7652 0.0002

16
Shaheen et al.
Period Fixed (Dummy Variables)

Prob (F-
0.00
statistic)
As per the results of Hausman test with respect to the second model, the
value of probability is 6.8% which is more than 5%. So, the null hypothesis
is rejected
Table 5
Random Effect for the Second Model
Method: Panel EGLS (Period Random Effects)
Swamy and Arora Estimator of Component Variances

RETRAT 0.09531 0.03081 3.09357 0.0021
ASGR -0.0233 0.08006 -0.291 0.7712
EARVOL 1.63205 0.43162 3.78126 0.0002

LEV -0.1579 0.05304 -2.9773 0.0031
SIZ -0.0831 0.02105 -3.9482 0.0001
C 0.4096 0.07029 5.82708 0

17
Weighted Statistics
Prob (F- 0.00
statistic)
The above results show that there is a significant and positive

relationship between SPV and RETRAT, whereas all control variables also
have a positive and significant relationship with SPV except ASGR. Hence,
there exists a significant and positive relationship between retained earnings
and stock price volatility, which proves the second hypothesis that
establishes a relationship between stock price volatility and retained
earnings. The results are also consistent with the findings of Masum (2014)
and Oyinlola and Ajeigbe (2014).
It becomes evident after the statistical analysis that there exists a
significant and positive relationship of retained earnings and corporate
dividend policy with stock price volatility. Hence, both hypotheses are
accepted. As far as sub objectives are concerned, the first and the second
sub objectives have been achieved. Furthermore, the fourth objective is
discussed in detail and it has helped to conclude the results. Whereas, the
third objective is also achieved.
Conclusion
It is explicit from the results that a significant and positive relationship
between corporate dividend policy, retained earnings, and stock price
volatility exists. Hence, both hypotheses were accepted. It was found that
any change in corporate dividend policy or retained earnings impact stock
price volatility and investors are keen to observe these changes. This
supports the signaling theory which expounds that dividend announcement
is an indication that the firm has positive future prospects. These results are
consistent with earlier studies, although this study aimed to fill the gap by
covering all firms which other researches were unable to cover in that
particular period of time. The corporate dividend policy has a significant
impact which causes share price volatility and, in turn, economic activity is

18
Shaheen et al.
generated. The firms which distribute dividends have volatile share prices
and thus they attract investors. So, other firms can amend their corporate
dividend policy to attract investors. Whereas, the government can introduce
the policy of tax rebates and thus can increase the volume of tax collection.
Besides, some funds can also be made available for the investors which they
can use on easy terms and conditions for investment purposes.
This study would help investors to better comprehend the factors which
affect stock price volatility and to invest more appropriately. The
government can improve its policies to attract more investors around the
world. Since the findings of this study support the signaling theory, they can
also help the government along with the investors to understand the
financial performance of firms. Hence, the investors can better invest in
stock exchange as this study would assist them to analyze the relationship
between corporate dividend policy, retained earnings, and stock price
volatility. Also, these factors affecting the stock prices to change. The
Government of Pakistan can amend the policies to promote investment in
stock exchange which would, in turn, generate revenue and economic
growth.
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Volume 2 Issue 1, Spring 2022

Cash Dividend Disbursement, Retained Earnings and Their Impact

Author (s): Adil Shaheen, Farah Yasser, Kinza Ashraf

Affiliation (s): University of Management and Technology, Lahore

Copyright: © The Authors

(Nazir et al., 2012). Furthermore, Pakistan Stock Exchange (PSX) is a high-

stock prices. Moreover, Hancock (1977) investigated the association

declined in the US stock market on the announcements of dividend payouts

results showed that investors do appreciate dividends (Al‐Malkawi, 2007).

analysis, a diagnostic test of OLS assumptions, which are named as

In the first stage, 8-year data of seventy-five (75) companies was

School of Commerce and Accountancy