Effect of Dividends on Stock Prices– A Case of Chemical and Pharmaceutical Industry of Pakistan

Abstract

Corporate sector of Pakistan is adversely facing co mpetition due to economic downturn in the world and making efforts to survive in a co mpetitive and uncertain economic environ ment. Th is study will help to ameliorate div idend decisions of corporate sector through felicitously appropriate imp lementation of their div idend policies. This paper is an attempt to explicate the affect of d ividend announcements on stock prices of chemical and pharmaceutical industry of Pakistan. A sample of twenty nine co mpanies listed at KSE-100 Index is taken fro m the period of 2001 to 2010. Results of this study is predicated on Fixed and Random Effect Model wh ich is applied on Panel data to exp licate the relationship between dividends and stock prices after controlling the variables like Earnings per Share, Profit after Tax and Return on Equity. The Results show that Stock Dividend, Earnings per Share and Profit after Tax have a significant positive relation to stock market prices and significantly explicates the variations in the stock prices of chemical and pharmaceutical sector of Pakistan while Retention Ratio and Return on Equity have the negative insignificant relat ion with stock prices. This paper further shows that Dividend Irrelevance Theory is not applicable in case of chemical and pharmaceutical industry of Pakistan.