The Dividend Effect on Stock Price- An Empirical Analysis of Malawi Listed Companies

Abstract

The estimation of a firm’s stock price has been a subject of debate considering the various factors that cause its increase or decrease. Chief among the outstanding factors touted by most scholars is the amount of dividends declared by the firm to its stockholders. This paper aims at establishing if there exists such a direct relationship between a firm’s dividends and its stock price on with particular emphasis on the Malawi stock exchange. The study analyses secondary data sets of thirteen local companies listed on the Malawi Stock Exchange for the period 2008 to 2014 inclusive. Using the correlation analysis on two variables, dividends and stock price, annually over the seven years, the study shows a positive R factor in ten out of thirteen companies. The study therefore establishes that on the Malawi Stock Exchange (MSE), there is a strong positive relationship between a firm’s dividends and its stock price on the stock market. The study further finds that stock price is an outcome of a number of factors, dividends being one of them and having a very significant contribution. The findings in this study will help investors, both potential and existing; as well as managers of listed companies, who are the stewards, to understand and appreciate the impact of dividend declaration or absence of it, on the psychology of stockholders which later affects the respective company’s stock price on the stock exchange. Key words: shareholder wealth, stock price, dividends, earnings retention