Profitability, Dividend Policy and Stock Prices

Abstract

There has always been controversy among researchers over how dividend policies affect share prices, and this equivocal relationship varies throughout international markets. This study is set to examine the relation between share prices and number of dividend policy and profitability variables. Based on the information from five insurance companies that are listed on Kuwait Stock Exchange (KSE) over the period 2014 and 2022, findings indicates that 55.3% of stock prices could be explained by factors related to profitability and dividend policy. The relationship between stock price, as a dependent variable, and earnings per share (EPS), dividend yield (DY), earning to price ratio (EP), risk premium (RP), and retention ratio (RR), as independent variables, was investigated in this study using OLS regression approach. The results of the regression analysis demonstrated a significant direct relationship between stock price and earnings per share (EPS), suggesting that investors choose highly profitable shares. At the 99% confidence level, the earnings to price ratio (EP) likewise revealed a statistically significant direct relationship with the stock price. At 90% confidence level, risk premium (RP) also shown a substantial direct relationship. The only variable that significantly correlated negatively with share prices was dividend yield (DY), suggesting that investors choose more stable payouts over uncertain future capital gains. Conversely, the retention ratio (RR) demonstrated a negligible direct impact on share prices.