DIVIDEND POLICY DECISIONS AND SHARE PRICES RELATIONSHIP

Abstract

Dividend policy is about a company’s decision related to the retention of profit and distribution of profit. In this study, the objective is to understand the effects of dividend policy on share prices for the selected companies in the Indonesian stock exchange. The findings of the study are that higher dividend yield stocks along with higher pre-tax risk adjusted returns give investor some compensation for the disadvantageous position of tax return. The findings are matching with the Brennan’s model (Brennan, 1970). The findings of the study also pointed out that increase in a company’s stock trading volume influence the share prices and investors who wanted current investment income owned shares in high dividend payout firms. Free cash flow is causing conflict between management and shareholders and this is another important finding of the study. Overall, results shows that a company’s dividend policy influence its share prices.