DIVIDEND POLICY OF COMMERCIAL BANKS OF

NEPAL WITH REFERENCE TO HBL, SCBNL AND NIBL

Submitted by
Pritima Rajbhandari
Roll No: 1069/059
T.U. Regd. No: 47438-95
Shanker Dev Campus

A Thesis Submitted to
Office of the Dean
Faculty of Management
Tribhuvan University

In Partial fulfillment of the requirement for the Degree of

Master of Business Studies (MBS)

Shanker Dev Campus

Putalisadak, Kathmandu
March 2009

1
 RECOMMENDATION
This is to certify that the Thesis

Submitted by:
PRITIMA RAJBHANDARI
Shanker Dev Campus

Entitled:
DIVIDEND POLICY OF COMMERCIAL BANKS OF
NEPAL WITH REFERENCE TO HBL, SCBNL ANDNIBL.
has been prepared as approved by this Department in the prescribed format
of the Faculty of Management. This thesis is forwarded for examination

……………...................... ……………………………
Prakash Singh Pradhan. Dr. Kamal Deep Dhakal
(Supervisor) (Campus Chief)

2
 VIVA – VOCE SHEET

We has conducted the viva – voce examination of the thesis presented

By:

Pritima Rajbhandari
Shanker Dev Campus

Entitled

DIVIDEND POLICY OF COMMERCIAL BANKS OF NEPAL WITH

REFERENCE TO HBL, SCBNL AND NIBL.

Found the thesis to be original work of the student and written according to
the prescribe format we recommend the thesis to be accepted as partial
fulfillment of the requirement for the Master of Business Studies (MBS).

Viva – voce committee

Head of Research Department …………………..
Member (Thesis Supervisor)…………………….
Member (External Expert)………………………
Date………………

3
 DECLARATIION

I hereby declare that the work reported this thesis entitled “Dividend policy of
commercial banks of Nepal with reference to HBL, SCBNL and NBL”,
submitted to Shanker Dev Campus, Faculty of Management, T.U, is my
original work done in the form of partial fulfillment of the requirement for the
Master of Business studies (MBS) under the supervision of supervisor Mr.
Prakash Sigh Pradhan of Shanker Dev Campus.

Pritima Rajbhandari
Researcher
Shanker Dev Campus
Roll no.1069/059
T.U. [Link]. 47438-95

Date: March,2009

4
 ACKNOWLEDGEMENT

I would like to express my sincere appreciation to Shanker Dev Campus

faculty of Management, TU for providing me the opportunity to work upon the
topic.

I would like to thank my teacher Mr. Prakash Sigh Pradhan, Director of BBA,
Shanker Dev Campus for being my supervisor of the research work and for
his guidance.

My especial thanks goes to the staff of Security board of Nepal (SEBON)

especially P.K Shrestha who always guided me in collecting information of my
research work.

I also want to thank my parents and sister for providing me their support
during the research work. And Mr. Harish Chandra Adhikari who helped me
for typing the thesis and friend Prabha of KMI.

Pritima Rajbhandari
Researcher
Sanker Dev Campus
Roll no.1069/059
T.U. Regd. No. 47438-95

Date: March 2009

5
 TABLE OF CONTENTS

Recommendation

Viva- Voce

Declaration

Acknowledgement

Abbreviation

Contents

List of Tables

List of Figures

CONTENT Page No.

CHAPTER I: INTRODUCTION

1.1 History 1

1.2 Background of the Study 3

1.3 Organization Under Study 4

1. Standard charted Bank Ltd 4

2. Himalayan Bank Ltd 6

3. Nepal Investment Bank Ltd 7

1.4 Focus of the Study 9

1.5 Statement of the Problem 10

1.6 Objectives of the Study 11

1.7 Significance of the Study 12

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1.8 Limitation of the Study 13

1.9 Chapter Scheme 13

CHAPTER II: REVIEW OF LITERATURE.

2.1 Conceptual Framework 15

2.1.1 Major From of Dividend 16

2.1.2 Theories of Dividend 18

2.1.3 Factors Effecting Dividend Policy 22

2.1.4 Legal Provisions Regarding Dividend Practices in Nepal. 24

2.2 Review of Major Studies 26

2.2.1 Walter’s Study 26

2.2.2 Gordon’s Study 28

2.2.3 Modigliani and Miller’s study 30

2.2.4 Linter's Study 33

2.2.5 Van Horne and Mc Danald’s Study 34

2.2.6 Chawala and Shrinivasan’s Study 34

2.2.7 Fried and Puckett’s Study 35

2.2.8 H.K Baker, GE. Farrelly and 37

Richard B. Eddmen’s Study

2.3 Review of Journals and Article 39

2.4 Review of Thesis 42

CHAPTER III: RESEARCH METHHODOLOGY

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 Research Design 49

Population and Sample Selection 49

Data Collection Procedure 50

Method for Analysis 50

Data Analysis Tool 51

Financial Tools Used For Analysis 51

1. Earning per share (EPS) 51

2. Dividend per share (DPS) 51

3. Dividend in percent 52

4. Dividend pay-out Ratio(DPR) 52

5. Price Earning Ratio (P/E Ratio) 52

6. Dividend Yield 52

7. Market Value Per Share to Book Bale Per Share Ratio 53

8. High Ratio 53

9. Profitability 53

Statistical Tools Used 53

i. Mean 54

ii. Standard Deviation (S.D) 54

iii. Coefficient of Variations (C.V) 55

iv. Coefficient of Correlation ( r ) 55

v. Coefficient of Multiple Determination (r2) 56

vi. Regression Analysis 57

vii. T- Test 57

viii. F – Test 57

ix. Standard Error of Estimate (SEE) 57

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 x. Probable Error (P/E) 58

3.6 Limitation of the Methodology. 59

CHAPTER IV: PRESENTATION AND ANALSIS OF DATA

4.1 Analysis of Financial Indicators 60

4.1.1 EPS Analysis of Commercial Bank 60

4.1.2 DPS Analysis of Commercial Banks 62

4.1.3 DPR Analysis of Commercial Banks 64

4.1.4 Market Value per Share / Bank Value per Share 66

4.1.5 P/E Ratio Analysis of Commercial Bank 68

4.1.6 Earning Yield Analysis of Commercial Bank 69

4.1.7 Dividend Yield Analysis of Commercial Bank 70

4.2 Correlation Analysis

4.2.1 Correlation between EPS and DPS of Commercial Banks 72

4.2.2 Correlation between MPS and DIVIDEND (Dt-1) 74

4.2.3 Correlation between EPS and MPS of Commercial Bank 74

4.3 Regression Analysis 75

4.3.1 Simple Regression Analysis 75

4.4 Test of Hypothesis 76

i. First Hypothesis 76

ii. Dividend Per Share 76

iii. Second Hypothesis 79

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 iv. Dividend Pay-Out Ratio 79

4.5 MAJOR FINDINGS 82

4.6 ISSUES AND GAPS. 83

CHAPTER V: SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary 86

5.2 Conclusion 88

5.3 Recommendation 90

5.3.1 For future researcher 90

5.3.2 For the Investor 90

5.3.3 For company’s management 91

5.3.4 For the government 91

BIBLIOGRAPHY

APPENDIX

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 List of Tables Page No.

Table 4.1. EPS Analysis of Commercial Bank 61

Table 4.2 DPS Analysis of Commercial Bank 63

Table 4.3 DPR Analysis of Commercial Bank 64

Table 4.4 MVPS/ BVPS Analysis of Commercial Bank 66

Table 4.5 P/E Ratio Analysis of Commercial Bank 68

Table 4.6 Earning Yield Analysis of Commercial Bank 69

Table 4.7 Dividend Yield Analysis Commercial Bank 71

Table 4.8 Correlation between EPS and DPS of Commercial Bank 73

Table 4.9 Correlation between MPS and Div (t-1) 74

Table 4.10 Correlation between IPS and MPS of Commercial Bank 74

Table 4.11 Simple regression on Analysis MPS and EPS 75

Table 4.12 (a) Table of Anova 76

Table 4.12 (b) Computation of Anova 77

Table 4.12 (c) One way Anova 79

Table 4.13 (a) Table of Anova 79

Table 4.13 b) One way Anova 80

Table 4.13 (c) One way Anova 82

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 List of Figures

Figure No. Title Page. No

4.1 EPS Multiple Diagram 62

4.2 DPS Multiple Diagram 65

4.3 D/P Ratio Multiple Diagram 66

4.4 MVPS/BVPS Multiple Diagram 67

4.5 P/E Ratio Multiple Diagram 69

4.6 E/Y Ratio Multiple Diagram 70

4.7 D/Y Ratio Multiple Diagram 72

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ABBREVIATIONS

a = Constant of Regression
b = Regression Line
BVPS = Book Value Ser Share
C.V. = Coefficient of Variation
DPS = Dividend Per Share
DPR = Dividend Payout ratio
Dt-1 = Dividend of last year
DY = Dividend Yield
EPS = Earning Per Share
EY = Earning Yield
HBL = Himalayan Bank Limited
NIBL = Nepal Investment Bank
No = Number
MVPS = Market value Per Share
P/E Ratio = Price Earning Ratio
r = Coefficient of Correction
r = Coefficient of Determination
S.D. = Standard Deviation
S.E (e) = Standard Error of Estimate
SEBON = Security Board of Nepal
SCBNL = Standard Chartered Bank Nepal Limited.

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 CHAPTER I

INTRODUCTION

1.1 HISTORY
The Banking has come to the present advanced through various stages.
Some sort of banking activities has been carried out since the time
immemorial. Traditional forms of banking were traced during the civilization of
Greek, Rome and Mesopotamia.

In Greece, the temple of Delphi and other safer places acted as store houses
for the precious meals before the days of coinage. Later coin is used as a
money .It is difficult to carry physical money like coins each time from one
place to another for trading .So the merchant s were popular and credit worthy
that the letters issued by them were treated as good as money. Geoffrey
Crowther says that merchant, goldsmith and the money lenders are the
ancestors of modern banking

Goldsmiths started issuing a receipt the depositor with a notation.” I owe you
(IOU)……….”which could be transferred to any person to deposit so wished.

The origin of the word “Bank is liked to

 Latin word “bancus”meaning a bench
 Italian word “banca” meaning a bench
 French word “banque” meaning a bench

However modern bank was emerged in the medieval Italy .Bank of Venice,
set up in 1157 in Venice is regarded as the first modern bank.

14
In Nepal, goldsmiths and landlord were the ancient banker , “Tejaratha Adda”
established during the tenure of the Rana Prime minister Ranodip Singh was
functioning as financial institutions in some sense Tejaratha Adda did not
collect deposits from the public but gave loans to employ and public against
the bullion.

The history of modern banking in Nepal begun in 1994 BS , when Nepal Bank
Limited was established as a first bank in non –government sector ,after 16
years of establishment , it became public limited company and carried out the
functions of commercial bank.

Bank plays a pivotal role in the overall development of an economy of the

country. Bank is a business organization that receives and holds deposits and
funds from other, makes loans and extends credits and transfers funds by
written order by depositors.

A commercial bank exchanges money, accepts deposits, grants loans, and

performs other commercial bank functions and is not a bank meant
cooperative, agriculture, industrial as per specific functions (commercial Bank
Act, 2031)

The economic reforms initiated by the government more than one and a half
decade ago have changed the nature of several sectors of the Nepali
economy. The Nepal banking sector is no exception so banks, financial
institutions are mush rooming is a short span of time in sector of investment.

We all know that to run business or any economic activity finance is the very
necessary component. In the modern era no one can imagine to run business
without the aid of finance. So finance is life blood of any economic activities.
Actually any small or large business world. Its lies between the function of
rising of fund and utilization of funds.

15
It is not only rising of funds but it considers accumulation of fund from various
sources as well as appropriate use of funds in the produce process to achieve
ultimate goal. Finance is a practical activities of business promotion includes
money, credit, banking, securities, insurance, investment are the component
of money market and capital market.

‘So one of the perceptions of finance is dividend to attract the investors’

attention towards the world of finance.

1. 2 BACKGROUND OF THE STUDY

Dividend refers to the portion of net earning or profit made by firm that is
distributed to the shareholders as return of investment in shares. The policy
related to payment of dividend called dividend policy. Any change in dividend
policy has both favorable and unfavorable effects on the firm’s stock price.
The dividend policy should be optimal which balances the opposing forces
and minimizes stock price.

Dividend policy determines the division of earrings between payment to stock

holders and re-investment in the firm. Retained earnings are of the most
significant sources of funds for financing corporate growth but dividends
constitute the cash flows that accrue to share holder.

The payment of the corporate dividend is at the discretion of the board of

directors. Dividend can be paid quaterly, semi –annually and annually,
Dividend may be paid in cash, stock or merchandise cash dividend is the
most common and merchandise dividends are the least common. In Nepal,
most company pay dividend yearly.

The policy of company on the division of its profit between distribution to

shareholders as dividend and relation for its investments is known as dividend

16
policy. Due to issue of shares to the shareholders, dividend policy becomes
major decision of financial management, dividend is the earning or profit
distributed to shareholders by a company, it may be cash, shares and
securities or a combination of these. Firstly, the company should decide
whether the dividend should be paid or not, secondly the management should
determine how much should be paid. All aspects and question related to the
payment of dividend are contained in a dividend policy .It includes percentage
, timing and method of dividend , cash dividend and retained earning has
reciprocal relationship, if retained earning is kept more by the company less
will be cash dividend and vice- versa. The management has to choose
between distributing profits to shareholders and plugging them back into the
business. The decision depends upon the objective of management i.e.,
wealth maximization, if it will lead maximization of the wealth of the owners. If
not, it is better to distribute them to finance investment programs. The
relationship between dividend and value of the firm should be criterion for
making dividend decision (Pnday 1999).

After the establishment of corporation in Nepal actual owners of corporation

do not seem adequately respected by paying dividends. The government is
unable to receive dividends from public enterprises, which is clearly known
survey published by HMG, Ministry of finance. Whereas some joint venture
banks and other public limited companies have shown new trend of paying
dividend to the shareholders

1.3 ORGANIZATION UNDER STUDY

1) Standard Charted Bank Ltd.
Standard Charted Bank Nepal Ltd. formerly known as Nepal Grind lays Bank
Ltd incorporated in the year 1985 to 1987. On 31july, 2000 standard Charted
Bank concluded the previous acquisition with new acquisition, 50%shares of
standard

17
charted Grind lays Bank, 33%shares of Nepal Bank Ltd and 17% sharers of
general public with effective from July 16, 2001.

It is an international bank focused on the emerging market of Asia, Africa, the

Middle East and Latin America with a network of over 140 offices in more than
55 Countries world-wide. It has in depth understanding of these Markets and
strong long term commitment to them.

SCBNL is up- to- date with modern day technology. The bank has online V-
SAT connection; SCBNL is the first bank, which has facilities cash withdraw
using international debit cards in the country.

The bank mainly focuses on corporate consumer and commercial banking

providing services for international forms as well as embassies, and agencies,
airlines, hotel and government corporations.

The banking service range includes full trade finance capabilities as well as
working capital and medium term loan facilities, remittances, deposit service
firm, standard chartered Bank Nepal Ltd and Remittance services and foreign
exchange.

SCBNL offer many things as;

1) Payroll Account:
A one step banking solution for company’s and there employees that
improves that salary payment on managed. The account offers bank wide
range of benefits to employment and salary press convenience to the
employer.

2) Women’s Account
A Bank account designed specifically to meet the financial needs of women.

18
3) eSaver:
Helps to manage our money anytime anywhere and watch our saving grow
faster with banks most competitive. Interested rate.

4) Foreign Currency Account

This account facilitates us to save our money in multiple foreign currencies.
It’s easy with SCB and it comes with a high interest rate as well.

The Share Capital of Standard Chartered Bank Nepal limited.

Share Capital and Reserve Net profit (RS)

Authorized Capital 100,00,00,000
Issue Capital 100,00,00,000
Paid up Capital 62,07,84,000

2) Himalayan Bank Limited.

Himalayan Bank Limited is one joint venture commercial banks of Nepal
which was established in Partnership with employee’s provident fund and
internationally renowned “Habit Bank of Pakistan.”

It is the first commercial bank of Nepal with maximum shareholding by the

Nepalese Private Sector. Besides commercial activities: the Bank also offers
industrial and merchant banking.

Himalayan Bank has access to the worldwide correspondent network of

HABB bank of funds transfer, letters of credit or any banking business and
where in the world.

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Bank has different product and services
i) Credit Card
ii) Tele Banking
iii) Any Branch Banking
iv) ATM
v) 24 Hours Banking

Functions of Himalayan Bank Limited are

 Various deposit facilities for the i.e., saving, current, fixed, call, etc.
 Collection and payment of cheques, drafts, promissory notes etc.
 Keeping valuables in safe custody called lockers.
 Issuing letter of credit, traveler's cheque, draft etc.
 Remittance of funds
 Dealing with transaction of foreign exchange
 Saving as agent of correspondent on behalf of client.

The share capital of Himalayan Bank limited.

Share Capital and Reserve Net profit

Authorized Capital 2,00,00,000
Issue Capital 1,20,39,14,400
Paid up Capital 120,39,14,400

3) Nepal Investment Bank Ltd.

Nepal Investment Bank Limited previously named Nepal Indosuez Bank which
was established on 21 January 1986 AD (magh 6, 2042 BS) as a joint venture
bank between Nepal and the French‘s partnership. Now it is known as Nepal
Investment Bank Limited.

The French Partner (holding 50% of the capital of NIBL) was credit Agricole
Indosuez, a subsidiary of one of the largest banking group in the world. With
the decision of credit Agricole Indosuez to divert a group of companies
compromising

20
of bankers, professional, industrialists and business, has acquired on April
2002 the 50% shareholding of credit Agricole Indosuez in Nepal Indosuez
Bank Limited. The name of the bank has been changed to Nepal Investment
Bank Ltd upon approval of bank’s Annual General meeting, Nepal Rastra
Bank and Company Register’s office with the following shareholding structure.
i) A group of companies holding 50% of the Capital.
ii) Rastriya Banijay Bank Holding 15% of the Capital.
iii) Rastriya Beema Ssnsthan Holding 15% of the Capital.

The remaining 20% being held by the general Public NIBL offered several
products and Services to the Customer For their Satisfaction Are Following.
1) Deposits
2) Internet Banking
3) ATM
4) Loans and Advances
5) Card Services
6) State Deposit Locker
7) Ezee Saving
8) Premier Banking
9) NTC Mobile Bill Payments
10) 365 Days Services.

NIBL believes that success can only be achieved by living on their core values
and principles are: Customer Focus Quality Team Work.

The share capital of Nepal Investment Bank limited.

Share Capital and Reserve Net profit (RS)

Authorized capital paid up capital 2,0,00,00,000
Issue Capital 1,01,35,12,500
Paid up Capital 1,01,35,12,500

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Commercial banks are:-
1. Nepal Arab Bank Limited (2041 B.S)
2. Nepal SBI Bank limited (2050 B.S)
3. Nepal Bangladesh Bank limited (2051 B.S)
4. Bank of Kathmandu Limited (2051 B.S)
5. Everest Bank Limited (2051 B.S)
6. Lumbini Bank Limited
7. Nepal industrial and commercial bank Limited.
8. Himalayan Bank Limited.
9. Kumari Bank Limited
10. Laxmi Bank Limited
11. Machhapuchhre Bank Limited
12. Nepal credit and commercial Bank Limited
13. Nepal investment Bank Limited
14. Nepal Merchant Bank Limited
15. Siddhartha Bank Limited
16. Standard Charted Limited
17. Global Bank
18. Prime Bank
19. Asian Bank
20. Sunrise Bank
21. Citizen Bank

1.4 Focus of the Study

Dividend policy is one of the important decisions which play a vital role in the
financial sector. In any firm, dividend policy is taken as the major financial
decision which affects the value of the firm. Any investor does not invest in
stock with out knowing the dividend policy of the firm. In any firm, dividend
policy is taken as major financial decision, which affects the value of the firm.
Any investor does not invest in stock with out knowing the dividend policy of
the firm.

22
This study is mainly focused on the dividend behavior of which includes 3
banks, 2finance companies and one insurance company. This helps to the
investor to choose the better firm for investment .In Nepalese context, most of
the investors is investing in the stock without the knowledge of company’s
performances and policies. This is due to the lack of availability of research
about these company’s performances. In this study it is tried to find out the
appropriate dividend policies of sample companies and their performances
regarding to the dividend payment. It is believed that this comparative study
will be useful to those investors who are interested to have knowledge about
the performances of sample companies.

1.5 Statement of the Problem

‘Dividend policy determines the division of earnings between payments to
stockholders and reinvestment in firm. Retained earning is one the most
significant sources of finds for financing corporate growth, but dividends
constitute the cash flows that accrue to stockholders.’[Link] Weston and
Eugene [Link], 1972.

Among financing, investment and dividend policies later is the third major
decision of the firm. It deals with how much should pay to shareholders from
the earnings. Dividend payout reduces the amount of earnings retained in the
business, which affects the internal financing of the firm. This is still confusing
whether dividend payment affects the value of the firm or not.

MM Model tells that dividends are irrelevant to the value of the firm. It believes
that the earning should retain only for getting benefit of investment
opportunities. If there is no investment opportunity, all the earning should be
distributed as dividend. But other financial experts have their own view toward
dividend payment such as Stable Dividend policy, Constant payout ratio, Low
regular plus

23
extras. So different experts have different views but none of these are
completely satisfactory.

In Nepalese context, it has been found that especially Joint venture

commercial banks and even sound insurance companies, manufacturing
companies, finance companies and hotel industries have been distributing
regular and satisfactory dividend. However single convincing dividend policy
is not being followed. They have adopted different policies and dividends
are paid in different forms such as cash dividend, stock dividend, stock
dividend etc. Nowadays stock dividend is being more popular in Nepal
especially in banking sector. But there is no any rigid rule for dividend
payment because few companies are generating profit and they are focusing
their attention towards the reinvestment.

In this research it is tried to get the answer of the following questions:

1. What is the prevailing dividend policy of sample listed joint venture

commercial banks?
2. Are dividend policies affected the market price of stock and value of the
firm.
3. Are all the sample companies adopting same dividend policy?
4. Is there any relationship between dividend policy and Dividend per
share (DPS), Earning per share (EPS), Dividend pay out ratio (DPR),
Price earning ratio (P/E Ratio), Liquidity Ratio, Market price of share
(MPS)?
5. Is there any consistency in DPS and DPR of sample bank?

1.6 Objectives of the study

The Objectives of study are:

 To identify the dividend policies of different sample joint venture
commercial bank.

24
  To identify the relationship between dividend policy and other financial
indicators.
 To analyze the relationship between Dividend per share (DPS), Market
price of share (MPS) and Earning Per Share (EPS)

1.6 Hypothesis

The study will test the following hypothesis :( the hypothesis test is based on
t-test and F test.)

Hypothesis I
Null Hypothesis (Ho): There is no significant difference between the DPR of
banks

Hypothesis II
Null Hypothesis (Ho): there is no significant difference between the DPS of
banks.

1.7 Significance of the study

In Nepal, the earning capacity of people is very low, as result they can hardly
save the money to invest in profitable sector. This research will help them to
choose profitable firm, which will provide higher return to their investment.
Actually the return of investment in share is dividend provided by companies.
So, this study will help them to choose the better company for investment.
This research will also useful for management to point out the loopholes and
suggest the remedies about the appropriate dividend policy and also for
stockbrokers, financial agencies, scholars, policy makers and other interested
persons. While investing in shares, the investor forgoes opportunity income
that he could have earned. In capital market, the return can be earned in two
ways.

25
a) By means of dividends
b) By capital gains

Due to lack of enough knowledge, people are investing in hit or miss in

shares. It is necessary to establish clear concept about the return that results
from investing in securities.

1.8 Limitation of the study

The study is limited to the following factors;
1. Most of data are secondary and may not be timely. The study is based
on the Trading Report published by NEPSE.
2. Only three banks are taken as sample due to lack of time.
3. Only five years data from 2004 to 2009 are taken for analysis.
4. Most of the forms are not interested to provide actual report of their
activities. There may be lack of detailed information required for the
research.

1.9 Chapter Scheme

The study has been divided into five different chapters. The titles of these
chapters are as follows:

Chapter 1 : Introduction
Chapter 2 : Review of literature
Chapter 3 : Research Methodology
Chapter 4 : Presentation and analysis of data
Chapter 5 : Summary, Conclusion and Recommendation

Chapter 1 – this chapter deals with the subject matter of the study, focus of
the study, statement of the problem, objectives of the study and limitation of
study.

26
Chapter 2 – This chapter deals with and is focused to the theoretical analysis
and review of the related and pertinent literature available and thesis related
to the dividend behavior in Nepalese context.

Chapter 3 - This chapter describes the research methodology used to

conduct the research. This chapter also contents the sample selection, data
collection procedure, the model of analysis, definition of financial variables
and statistical tools, and limitation of the study.

Chapter 4 - This chapter is the main part of the study, which describes about
the presentation and analysis of data to find out the appropriate dividend
behavior of the sample companies.

Chapter 5 - This is the last chapter of the study and includes the major
findings and conclusion of the study that deals about the main themes of the
study and the comparison of dividend policies of different sectors with
recommendation for improvement of dividend behaviors of the selected
companies.

The exhibits, bibliography, and appendixes are incorporated at end to the

study.

27
 CHAPTER II

REVIEW of LITERATURE
In this chapter relevant literature, which are related to the dividend policy are
reviewed topics from different book and different studies published in
magazines, theses to servers and journals related to the study are reviewed
with conceptual framework and review to various studies

2.1 Conceptual framework

Dividend is that portion to the net earning dividend by the company among the
shareholder as return for their money invested. In other words dividend is
periodic payment made to the shareholders to compensate them form the use
to risk to their investment

Dividend policy is and integral part to the firm's financing decision. "James c.
van Horne and john M. choices, 1997". the dividend policy to the firm its
regarded as a tool to determine the appropriate allocation to profits between
dividend payments and the amount to be retained in the firm in every firm,
there's own dividend policy. That determines dividends to be distribute, thus
dividend policy it's the most important financial any company, which effects
the financial structure to the firm.

Any change in dividend policy has both favorable and unfavorable effects on
the price to the firm's stock higher the profit, higher the dividend. But there is
reciprocal relationship between retained earning and cash dividend. If
retained earning is kept more by the company less will be dividend to
shareholders or if retained earning is kept less by the company higher will be
dividend paid to the shareholders on company's profit. It is in the sense that
the firm has to choose between distribution profits to shareholders and
ploughing them back into the business.

28
How much it is desirable to pay dividend is always a controversial topic.
Because owners expect higher dividend, from company whereas company
ensure toward setting a side funds for maximizing the overall the shareholders
wealth. Thus, shareholders expectation can be fulfilled through either dividend
or capital gain. Dividend generally paid in cash which reduces the cash
bankers of the company. In Nepal, dividend payout ratio seems to be 40%.

It any firm makes profit, then they have two alternatives, one is to reinvest
earnings in profitable sector or to distribute it to the shareholders. So
shareholders and firms must try to make balance between those two
alternatives.

2.1.1 Major Forms of Dividend

Corporation needs to use different forms of dividend in view of the objective
and policies, which they implement. The major forms of dividends are cash
dividend and sock dividends" (Shrestha: 1980). The type of dividend that
corporation follows is partly a matter of the various circumstances and
financial constraints that bound corporate plan and policies" Ordinary
dividends are paid in cash however dividend disbursements may be scrip,
stock and property dividends (Gitman; 1994:696)

a) Cash Dividend
Cash dividend is the dividend paid in cash. It is the most popular and widely
used form of dividend all over the world. Everyone likes to collect their return
in cash rather than non cash means. So, cash dividend is not only a way to
distribute earnings, but also a way to improve perception of the capital market
(Niraula, Dilip: 2003,). A company should have enough cash in its bank
account when cash dividends are declared. If the company does not have
enough bank balance at the time of paying cash dividend, arrangement
should be made to borrow funds. When the company follows a stable dividend
policy, it should prepare a cash budget for the coming period to indicate the
necessary funds which would be needed to meet the regular dividend
payments of the company. It is relatively difficult to make cash planning in

29
anticipation of dividend needs when an unstable dividend policy is followed
(Pandey, I.M.:2002,).
The cash account and the reserves account of a company will be reduced
when the cash dividend is paid. Thus, both the total assets and the net worth
of the company are reduced when the cash dividend is distributed. The
market price of the share drops in most cases by the amount of the cash
dividend distributed (Hastings, 1996: 370,).

(b) Stock Dividend and Stock Split

A stock dividend is the distribution of additional shares of stock to existing
shareholders instead of cash "the firm pays stock dividends either as a
replacement for or supplement to the payment of cash dividend." (Gitman,
1994: 696)

A stock split is essentially the same. When stock splits, shareholders are
given a larger number of shares for the old shares they already own. Although
stock dividends do not have a real value, firms pay stock dividend as a
replacement for a supplement of cash dividend. Under this policy,
stockholders receive additional shares of the company in lieu of cash
dividends. But in India, stock dividend (Bonus share) can be issue in lieu of
cash dividend (Pandey; 1999: 708)

The effects of a stock divided or a stock or a stock split can be summarized as

follows (Schall and Charles: 1991: 448)
1. There is no change in the firm's assets or liabilities or in shareholders
equity.
2. There is fall in per share earnings book value and market price due to
an offsetting rise in the number of shares held by each shareholder.
Some of the joint venture banks of Nepal have followed the practice of
paying stock dividend or stock split along with cash dividend (NABIL,
and NIBL)

30
C. Bond Dividend
Bond dividend by its name is a dividend that is distributed to shareholders in
form of a bond. Bond dividend helps t postpone the payment of cash. In other
word, companies declared in the from of its own bond with a view a view t
avoid cash outflow.

d. Scrip Dividend
A dividend paid in promissory notes is called scrip dividend “scrip dividends
are those paid in the company’s promises to pay instead of cash
“(Encyclopedia Americana, 1997). When earning of the companies justify
dividends but the company’s cash position is temporarily weak and does not
permit cash dividend. It may declare dividend in the form of scrip. Scrip
dividends may bear a definite maturity date or non interest bearing.

2.1.2 Theories of dividends

Different dividend theories have been advanced by now and thus head to the
controversy regarding these theories as the theories consider the dividend
decision to be both relevant and irrelevant. Some of the relevant and
irrelevant theories have been discussed bellow.

a. Residual theory of dividend

According to one school of thought the residual theory of dividends suggest
that the dividend paid by a firm should be viewed as a residual amount left
after all acceptable investment t opportunities have been undertaken
(Encyclopedia Americana; 1997). Dividend policy can be viewed as one of a
firm’s investment decisions. A firm that behaves in this manner is said to
believe in the residual theory of dividend. According to this theory, dividend
policy is a residual after investment. Whether or not a company pays
dividends depends on the availability to investment opportunity.

31
The staring point in this theory is that investors prefer to have the firm retain
and reinvest earning, instead do buying dividends, if the return on
reinvestment is higher than the opportunity cost of fund for investors (Weston
and Brigham, 1983:68). The dividend under residual dividend policy equals
the amount left over from earning after investment. No dividends are paid and
new shares are sold to cover deficit for investment that is not covered by
retention of earning if there is not any investment opportunity then cent
percent earning is distributed to shareholders dividend is therefore merely a
residual i.e. percent remaining after all equity investment needs are fulfilled
(Rao: 1992: 458)

As long as there are investment projects with returns exceeding than that are
required, the firm retains the earning to invest in such profitable projects
rather than paying dividends when the firm has the opportunity of investments
in profitable project a first is used internally generated funds as externally
generated funds are comparatively expensive due to floatation costs.
Although the residual theory of dividends appears to make further analysis of
dividend policy, it indeed not clear the dividends are solely a mean s of
disbursing excess funds (Schall and Charles: 1991:1)

Dividend policy is influenced by (i) the company’s Investment opportunities

and (ii) the availability of internally generated capital. According to this
concept dividend policy is totally passive in nature “when we treat dividend as
strictly a financing decision, payment of cash dividend is a passive residual
(Van Horne; 2000:306)

When the firm has opportunity of investment is profitable sector at first, they
prefer the internally generated fund (retained earning) rather than the
externally generated fund which is comparatively expensive due to the
floatation cost and others. So the amount of dividends fluctuates the to time in
keeping with availability of acceptable investment opportunity of the firm
although, the residual theory of dividend appears to make further analysis of
dividend policy unnecessary it is not clear that dividends are solely an means
of disbursing excess funds142. Thus, we can conclude that the company

32
investment importunity as will as the availability in internally generated fund
determines the dividend amount of a firm.

(b) Stability of Dividend

Stability of dividend refers to the regularity in paying dividend even though the
amount of dividend may fluctuate from period to period. Stability of dividends
is considers as a desirable policy by the management of most companies
shareholders also generally favor this policy and value stable dividends higher
than the fluctuating ones. All other things being the same, stable dividends
have a positive impact on the market price of the share. (IM pandey 1995).
There are three major types of dividend policies developed (established)
under dividend stability which is a follows

i. Constant dividend per Share

The company which follows this policy, pays a fixed amount per share as
dividend every year, irrespective of the fluctuation the company faces
difficulties to maintain such policy. This policy does not imply that the dividend
per share will never be increased. When the company reaches level of
earning and 3espects to maintain it, the annual dividend per share may be
increased.

Figure No. 1
Constant Dividend per share Policy.

EPS
Y
EPS & DPS (Rs.)

DPS

Time (Yrs)
Constant Dividend per Share Policy

33
The dividend policy of paying a constant amount of dividend per year treats
common shareholders without giving any consideration to investment
opportunities without giving any consideration to investment opportunities
within the firm and opportunities available to shareholders 14.

This policy is generally preferred by those persons and institutions that

depend upon the dividend income to meet their living and operating expenses
because of the constant amount of dividend they received.

ii. Constant payout ratio

Constant payout ratio refers to the paying a fixed percentage of net earnings
every year as dividend, under this policy. The amount of dividend fluctuates
with direct proportion of earnings. If the company incurs losses on dividend
shall be paid regardless of the desire of shareholders. Internal financing with
retained earnings is automatic when this policy is followed. At any payout ratio
the amount of dividend and the additions to retained earnings increase with
increasing earnings and vice versa.

Figure No. 2
Constant Payout Ratio Policy.

EPS
EPS & DPS (Rs.)

DPS

Time (Yrs)
Constant Payout Ratio Policy

34
iii. Low Regular Dividend Per Share Plus Extra
The company having fluctuating earnings follows this policy. In this policy, a
small amount of dividend is fixed to reduce the possibility of ever missing a
dividend payment. In the period of prosperity extra dividend is paid to prevent
investors from expecting that the dividend represent an increase in the
established dividend amount. This type of policy enables a company to pay
constant amount of dividend regularly without a default and allows a great
deal of flexibility for supplementing the income of shareholder only when the
company’s earnings are higher than the usual, without committing itself to
make larger payments as a part the future dividend. (IM Panday, 1996). Some
shareholder like his policy because of the certain amount of dividend with
surprise extra dividend.

2.1.4 Factors Effecting Dividend Policy

The factors affecting dividend decision is one of the main focus of this study.
Mostly government owned public limited companies are in loss. There is no
question of paying dividend rather they are attempting to minimize losses.
However in case of join venture companies, insurance companies and other
private owned enterprise, management has somewhat understood the
importance of the dividend, though all of them are not distributing dividend.
Therefore it is desirable to study the factors recognized as active variable in
determination of dividend in the Nepalese Companies.

1. Legal rules constraints:

Dividend payments on certain conditions are as following:
a. A. the new profit rule states that dividend must be paid from present
profit and or past retained earnings.
b. The capital impairment rules states the dividends cannot be paid out of
invested capital.

35
 c. The insolvency rules states that o dividends can be paid during
insolvency situation (when liabilities exceeds assets)

2. Liquidity Positions :
The cash or liquidity position of a firm influences its ability to pay dividends a
firm may have sufficient retained earnings, but if they are invested in physical
assets cash may not available to make dividend payments.

3. Need to repay debt:

It also influences the availability of cash flow to pay dividends.

4. Restrictions in debt contracts:

It may specified that dividends may be paid only out of earning generated
after signing the loan agreement and only when net working capita is above
a specified amount. Also preferred stock agreement after specified that
preferred dividends take precedence over common stock dividend.

5. A high rater of assets expansion creates a need to retain funds rather than
to pay dividends.

6. A high rate of profit on net worth makes it desirable to retain earnings

rather than to pay them out if the investor will earn lesson them .

7. A fir access to capital market will be influenced bay the age and size of the
firm , therefore a well established firm is likely to have a higher payout ratio
than a smaller and newer firm.

8. Control considerations: may influence dividend policy, since additional

external financing is influenced by the dividend payout, if the owners rely
on internal financing in order to maintain control the dividend payment will
be reduced.

9. the tax position of stockholders also affects dividend policy

36
 a. Corporation owned largely; by taxpayers in high income tax tend
toward Lower dividend payouts.
b. Corporations owned by small investors tend toward higher dividend
payouts.

Sometimes there may be conflict between stockholders in lower tax brackets

i. The dividend policy may be a compromised on intermediate payout

ratio.
ii. If one group dominates the members of the other grout are likely to sell
their share, overtime. There fore a firm’s dividend policy dictates the
type of stockholders it has and vice- versa. This is called the clientele
effect.

2.1.5 Legal Provisions Regarding Dividend Practices in Nepal

In Nepal the Nepal Company act 1997 makes some legal provisions for
dividend payments. These provisions may be seen as under.

Section 2 (m) states that bonus share (stock dividends means share issued
in the form of additional shares to shareholders by capitlizi9ng the surplus
from the profits or the reserve fund of a company. This term also denotes an
increase in the paid up value of shares after capitalizing surplus or reserve
funds.

Section 47 has prohibited company fro purchasing its own share. This section
states that no company shall purchase its own share or supply loans against
the security of its own share.

Section 137 bonus shares and subsection (I) states that the company must
inform the office before issuing bonus share and under sub section (I) this
may be done only according to special resolution passed by general meeting.
Section 140and sub sections are as follows except in this following

37
circumstance dividend shall be distributed among the shareholders within 45
days from the date of decision to distribute them.

1. In case any low forbids the distribution dividends.

2. In case the righted to dividend is dispute.
3. In case dividends cannot be distributed within the time limited
mentioned above owing to circumstances beyond anyone’s control
and without any fault on the part of the company.

sub –section (3) in case dividend s are not distributed within the time limit
mentioned kin sub- section (9i) this shall be done by adding interest at the
prescribed rate.

Sub- section (3):- only the person whose name stand registered in the
register as existing shareholders at the time of declaring the dividend shall be
entitled to receive dividend.
The above provision of act indicates the Nepalese law jprohivi9ts repurchase
of stock, which is against the theory of finance.

Section 140 Dividends and subsections of this section are as follows.

Subsection 1: Except in the following circumstances, dividend shall be
distributed among the shareholders with in 45 days from the date of decision
to distribute them.

a) Case any law forbids the distribution of dividends.

b) In case the right to dividend is disputed.
c) In case dividends cannot be distributed with the limit mentioned above
owing to circumstances beyond anyone’s control and without any fault
on the part of the company.

Subsection 2: In case dividends are not distributed with in the time limit
mentioned in subsection (1), this shall be done by adding interest at the
prescribed rate.

38
Section B explains that only the person whose name stands registered in the
register of existing shareholders at the time of declaring the dividend shall be
entitled to it

The above indicates that Nepalese law prohibits repurchase of stock, which is
against the theory of finance. The reason for this kind of prevision is not
known.

2.2 Review of Major Studies

2.2.1 Walter’s study

Professor James E. Walter conducted a research in 1996 regarding dividend
policy, in which he argues that value of the firm always affected by the
dividend policy adopted by the firm. In his approach, investment policy of the
firm is directly affected by the dividend policy that is opposite the Modigliani
and miller’s approach.

His study is mainly focused to find out the relationship between internal rate of
return and firm’s cost of capital. By analyzing these tow factors firm can
allocate the total earnings to dividend and retained earning.

His model is best on following assumptions

1. The firm finances all investment through retained earnings; that is

debt or new equity is not issued.
2. The firm’s internal rate of return and its cost of capital are constant.
3. All earnings are either distributed as dividends or reinvested internally
immediately.
4. Beginning earnings and dividends never change. The values of the
earnings per share, EPS, and the dividend per share, DIV, may be
changed in the model to determine results, but any given values of
EPS/DIV are assumed to remain constant forever in determining a
given value.

39
 5. The firm has a very long or infinite life.

Walter’s formula to determine the market price per share is as follows:

DPS
+ r / k (EPS – DPS)
P=
K K

Where,
P = Market price per share
DPS = Dividend per share
EPS = Earning per share
r = Internal rate of return
k = Cost of capital

In Walter’s model, the optimum dividend policy depends on the relationship

between the firm’s internal rate of return, r and its cost of capital; k. Walter’s
view on the optimum dividend-payout ratio can be summarized as follows:

i. Growth Firm
If the internal rate of return is higher than the firm’s cost of capital, these firms
said to be growth firm. These firms assumed to have sufficient profitable
investment opportunities. Such firms can maximize the value of share by
retaining all earnings for internal investment. Thus, the optimum payout ratio
for a growth firm is zero

ii. Normal Firm

The firm having equal internal rate of return and cost of capital knows normal
firm. For these firm dividends policy does not affect the market value share.
There is now unique optimum payout ration for a normal firm. One dividend
policy is a good as other. The market value per share is not affected by the
payout ratio.

40
iii Declining Firm
Firm having r<k may be referred as declining firm. The optimum pay out ratio
for a declining firm is 100 per cent. The market value per share, increases as
pay out ratio increases when r>k.

Figure No.3: Earning, Investment& New Financing Under Walter’s

Model

r>k r=k r<k

Return and cost (%)

I r Rs.
Earning, Investment and New Financing

Thus, in Walter’s model, the dividend policy of the firm depends on the
availability of investment opportunities and the relationship between the firm’s
internal rates of return (r) and its cost of capital (k). The firm should use
earnings to finance investments if r>k; should distribute all earnings when r<k
and would remain indifferent when r=k. (Pandey, I.M; 2002:746-749) Thus,
dividend policy is treated as a financing decision; the payment of cash
dividends is a passive residual (Solomon, Ezra; 1963:139-140).

2.2.2 Gordon’s Model

Myron Gordon (1962) modified the Walter’s model for determining the market
price of the stock. In his study he conducted the dividend policy has the direct

41
relationship with market value of the stock. So dividend policy affects the
market value of the stock even when the internal rate of return (return on
investment) is equal to the capitalization rate. This study suggests that
investor prefer present dividend rather than future gains so, the higher
dividend yield causes increase in market price of stock

This study is mainly based on following assumptions.

1. The firm is an all equity firm.
2. No external financing is available. Consequently retained earning would
be used to finance any expansion.
3. The internal rate of return, r, of the firm is constant. This ignores the
diminishing marginal efficiency of investment.
4. The appropriate discount rate k for the firm remains constant. Thus,
Gordon’s model also ignores the effect of a change in the firm’s risk-
class and its effect on k.
5. The firms and its stream of earnings are perpetual.
6. The corporate taxes do no exist.
7. The retention ratio b, once decided upon, is constant. Thus the growth
rate, g=br, is constant forever.
8. k>br=g. If this condition is not fulfilled, we cannot get a meaningful value
for the share.

Gordon has further developed the following equation for the computation of
market value of stock:

EPS (1  b)
P=
ke  br
Where,

P = Market Price per share

EPS = Earning per share
b = Retention ratio
K = Cost of capital
1-b = Payout ratio

42
 br = Growth rate

Gordon’s relevant theory is a popular theory of dividend. As investors prefer

current dividend earnings rather than expected higher future income so as to
eliminate the risk associated with future capital gain, Gordon stressed that the
higher payout increases the dividend yield and hence increases the value of
stock. But the assumptions of this model are also far from the reality.

2.2.3 Modigliani and Miller’ Study ( MM Study)

According to Modigliani and Miller (M-M), dividend policy of a firm is irrelevant
as it doesn’t affect the wealth of the shareholder. They argue that the value of
the firm depends on the firm’s earnings which result from its investment
policy. Thus, when investment decision of the firm is given, dividend decision-
the split of earnings between dividends and retained earnings- is of no
significance in determining the value of the firm.M-M’s hypothesis of
irrelevance is based on the following assumptions:

1. The firm operates in perfect capital markets where investors behave

rationally, information is freely available to all and transactions and
flotation costs do not exist. Perfect capital markets also imply that no
investor is large enough to affect the market price of a share.
2. Taxes do not exist; or there are no differences in the tax rates applicable
to capital gains and dividends. This means that investors value of rupee
of dividend as much as a rupee of capital gains.
3. The firm has a fixed investment policy.
4. Risk of uncertainty does not exist. That is, investors are able to forecast
future prices and dividends with certainty, and one discount rate is
appropriate for all securities and all time periods. Thus r=k=kt for all t.

Modigliani and Miller provided following model to prove their theory (Niroula;
2003: 25-26).

43
Market value of share
The market value of a share at the beginning of the period is equal to the
present value of dividend paid at the end of the period plus the market price of
the share at the end of the period. Symbolically,

D  P1
P0=
1  ke

Where,
P0 =Market price of share at the beginning of the period
D1 =Dividend per share at the end of the period
Ke =Cost of equity capital

No external financing
If no new external financing exists the market value of a firm can be computed
by multiplying both sides by the number of outstanding shares as follows:

n( D1  P1 )
nP0 = …………………………………….. (ii)
1 Ke
Where,
n=Numbers of outstanding shares

New Shares
If retained earning is not sufficient to finance the investment opportunities,
issuing new shares is the other alternative. Assuming that m is the number of
newly issued equity share at the price of P1, the value of firm at time 0 will be:
nD1  P1 (n  m)  mP1
nP0= ……………………………..(iii)
1  ke

Where,
n = No. of shares at the beginning

44
 m = No. of shares issued at the end of the period

Total numbers of shares

A firm can pay dividends and raise funds to undertake the optimum
investment policy. If the firm finances all investment opportunities either by
issue of new equity of retained earnings, the total numbers of new shared can
be computed on the following way:

MP1=I-(E-nD1)………………………………. (iv)

Where,
MP1 = Amount obtained from the sale of new shares
I = Amount required for new investment during the period
E = Total earnings during the period
E-nD1 = Retained earning
nD1 =Total dividend paid

Substituting the value of mP 1 of equation (iv) to equation (iii) we get,

nD1  P1 (m  n)  I  E  nD1
nP 0 =
1  ke

P1 (m  n)  I  E
=
1  ke

A firm which pays dividends will have to raise funds externally to finance its
investment plans. M-M’s argument, that dividend policy does not affect the
wealth of the shareholders, implies that when the firm pays dividends, its
advantage is offset by external financing. This means that the terminal value
of the share declines when dividends are paid. Thus, the wealth of the
shareholders- dividends plus terminal price – remains unchanged. As a result,
the present value per share after dividends and external financing is equal to
the present value per share before the payment of dividends. Thus, the

45
 shareholders are indifferent between payment of dividends and retention of
earnings.
M-M assert that their hypothesis of dividend irrelevance is not affected if the
firm raises external funds by issuing debt instead of shares. When external
financing involves debt M-M invoke their indifference hypothesis with respect
to leverage (Pandey, I.M; 2002:756-759)

2.2.4 Linter’s Study:

[Link] conducted a study in 1956, which is focused in the behavioral aspect
of dividend policy. He investigated dividend pattern of 28 different companies
of America and found that, firm generally predetermines the desired payout
and tries to achieve it and rarely considers other factors. The model
developed from his research is as follow :( Pandey, I.M; 2002: 802)

D* t = [Link] t

Dt  Dt 1 = a  b( D * t  Dt 1 )  e

Where,
D*t = Desired dividend
EPS t = Earning per share
P = Targeted payout ratio
a = Constant relating to dividend growth
b = Adjustment factor relating to previous period’s
dividend and desired level of dividend (b<1).

Major findings of this study are as follows:

i. Firm generally prefer desired proportion of earning to be paid as dividend.
ii. Investment opportunities are not considered for modifying the pattern of
dividend behavior.
iii. Firm generally have target payout ratios in view while determining change
in dividend per share.

46
2.2.5 Van Horne and Mc Donald's study
Van Horen and Mc Donald (1971) concluded a comprehensive study of 86
electric utility firms and 39 electronics and electric component industries by
using cross sectional regression model in 1968 to know the combined effect
of dividend policy and new equity financing decision on the market value of
the firm's common stock. From their study they concluded that the market
price of share was not affected by new equity financing in presence of cash
dividend except for these in the highest new issue group and it made new
equity more costly form of financing than retention of earning. They also
indicated that the payment of dividend through excessive equity financing
reduces the market price of share. (Van Horne; 1971:507-519)

2.2.6 Chawala and Shrinivasan's Study

This study is also focused on the impact of dividend and retention market
price of stock. They estimated cross sectional relationship of 18 chemical and
13 sugar industries for the year 1963 to 1973, the basic objective of the
studies are
i. To set a model which explains the relationship between share price,
dividend and retained earning?
ii. Te test he dividend, retained earning hypothesis.
iii. To examine the structural changes in the estimated relations overtime.

To achieve above objectives, they used simultaneous equation model as

developed by friend and Puckett in 1964.

The unspecified form of the model is as follows.

Price function
Pt= F (Dt, Rt, P/Et-1)
Dividend supply Function:
Dt = F ( Et, Dt-1, P/Et-1)
Identity, E1 = Dt + Rt

47
Where,

P = Market price of Share

D = Dividend per Share
R = Retained Earning per Share
E = Earning Per Share
P/E = Deviation from the sample, Average of price earning
Ration
T = Subscript for time.

They used two stage least square techniques for estimation. They found that
the estimated coefficient had a correct sign and coefficient of determination of
all equation was higher in case of chemical industry. Which implies that the
stock price and dividend paid variation can be explained by their independent
variables. But in case of sugar industry sign for retained earning is negative.
From their study they concluded that both dividend and retained earnings
significantly explain the variations in share price of the industry.

2.2.7 Friend and Puckett's Study

Friend and Puckett (1964) conducted a study on the relationship between
dividends and stock prices, by running regression analysis on the data of
110firms from five industries in the year 1956 to 1958. These five industries
were chemicals, electric utilities, electronics food and steels. These industries
were selected to permit a distinction made between the results for growth and
non growth industries and to provide a basis for comparison with result by
other authors for earlier years. They also considered cyclical and no cyclical
industries which they covered. The study periods covered a boom year for the
economy when stock price leveled off after rise (1958) and a somewhat
depressed year for the economy when stock prices however rose strongly
(1958: 656-682)

48
They used dividends, retained earnings and price earning ratio as
independent variables in their regression model of price function. They used
supply function, i.e. Dividend functions also. In their dividend function.
Earnings, last year's dividend and price earning, last year's dividend and price
earning ratio are independent variables. They quoted that the dividend supply
function was developed by adding to the best type of relationship developed
by linter.

Symbolically, their price function and dividend supply function are.

Where,
Pt = Share Price at time t
Dt = Dividends at time t
Rt = Retained earnings at time t
(E/P)t-1 = lagged earning price ratio

Dividend supply function: Dt = e + fEt + gDt-1 + h(E/P)t-1

Where
E1 = Earning per Share at time t
Dt-1 = last year dividend

Their study was based on the following assumptions:

i. Dividends do react to year – to – year fluctuations in earnings.
ii. Price doesn't contain speculative components.
iii. Earnings fluctuations may not sum zero over the sample.

Their regression results based on the equation of pt = a+bDt+ cRt showed the
customary storing dividend and relatively weak retained earnings effects in
there of the five industries, ie chemicals foods and steel. Again they tested
other regression equations by adding lagged earnings price ratio to the above
equation and resulted the following equation: pt = a+bDt =cRt+d(E/P) t-1. they
found the following results: they found that more than 80% of the variation in
stock prices can be explained by three independent variables. Dividends have

49
a predominant influence on stock prices in the same three out lf five industries
but they found the differences between his dividends and retained earnings
coefficient are not quite so marked as in the first set of regressions. They also
found that the dividends and retained earnings coefficient re closer to each
other for all industries in both years except for steels in 1956, and the
correlation are higher, again except for steels.

H.K. Baker, G.E. Farrelly and Richard B. Edelman's Study

H.K. Baker, Gail E. Farrelly and Richard B. Edelman surveyed management
view on dividend policy. (1985) they asked corporate financial managers what
they considered most important in determining their firm's dividend policy.

The objectives of their survey were as follows.

i. to compare the determinants of dividend policy today with linter's
behavioral model of corporate dividend policy and to assess
managements agreement with linter's findings
ii. to examine management's perception of signaling and clientele
effect and
iii. to determine whether managers in differe3nt industries share
similar views about the determinants of dividend policy

The firms they surveyed were listed on the New York stock exchange and
classified four digit standard industrial classification codes. Total of 562 NEPE
firms were selected from three industrial groups, utility (150) manufacturing
(309) and whole sale /retail (103)

They mailed questionnaire to obtain information about corporate dividend

policy. The questionnaire consisted of three parts (i) 15 closed end
statements about the importance of various factors that each firm used tin
determining its dividend policy, (ii) 18 closed end statement about theoretical
issues involving corporate dividend policy , and (iii) a respondent's profile

50
including such items as the firm's dividends and earnings per share. They
send the final survey instrument to the chide financial officer of the 562 firms ,
followed by a second complete mailing to improve the response rate and
reduce potential non response bias. Their survey yielded318 usable
responses (56.6% response rate), which were divided among the three
industry and 57 wholesale/ retail (5.3%) Based on dividend and earning per
share data provided by the respondents, the average dividend payout ratio
were computed. They found that payout ratio of the responding utilities
(70.6%) were considering for manufacturing (36.6%) and wholesale / retail
(36.1%).

The results of their survey on the aspect of determinants of dividend policy

were as follows

 The first highly ranked determinants are the anticipated level of firm's
future earnings and the second factor is the pattern of the past
dividends. They found the high ranking of these two factors is
consistent with linter's findings.
 A third factor cited as important in determining dividend policy is the
availability of cash.
 A fourth determinant is concerned about maintaining or increasing
stock price. They found this factor is particularly strong among utilities
that ranked this second in importance.

Similarly, the results of their survey on the aspect of attitudes on theoretical

issues were as follows.

 Respondents from all three – industry groups agreed relatively

strongly that dividend payout affects common stock prices.
 The respondents from all three- industry groups agreed, on average,
that dividend payouts provide a signaling device of future company
prospects and that the market uses dividend announcements as
information for assessing security value.

51
  The respondents also demonstrated a high level of agreement that the
reason for dividend policy changes should be adequately disclosed to
investors.
 Respondents from all three industry groups thought that investors
have different perceptions of the relative riskiness of dividends and
retained earnings and hence are not indifferent between dividend and
capital gain returns.

Whereas coefficient of retained earnings was significant at ten- percent level

in 1969 and one – percent level in 1973. Finally they concluded that the
dividend hypothesis holds good in the chemical industry. Both dividend and
retain earnings significantly explain the variation in share price in chemical
industries.

Review of Journals and Articles in Nepalese Perspective

There is not much research articles published about dividend practices in
Nepal. The two major studies are reviewed as follows:-

Manohar K. Shrestha’s Study (1992)

Mr. Manohar k. Shrestha presented a paper on “’Shareholder’s democracy
and annual general meeting feedback” deals with the polices and financial
performance of some financial companies in Nepal.

In his view, the common problems and constraints of the shareholders are as
follows:
 The cost-push inflation at exorbitant rate has made the
shareholders to expect higher return from their investment.
 Multiple decrease in the purchasing power of the Nepalese
currency to the extent that higher return by way of dividend is just a
natural economic consequence of it.
 Erosion in the purchasing power of the income has made it clear
that dividend payment must be directed to enhance shareholder’s

52
 purchasing power by raising dividend payment ratio on the basis of
both earnings and cost theory.
 Indo-Nepal trade and transit deadlock has become a sort of
economic welfare putting rise in the cost of living index to a
considerable extent. This is the reason, which made shareholders
to expect higher demand for satisfactory dividend.
 One way to encourage risk taking ability and preference is to have
higher return must be the investment rule for higher risk- takers
that comprise bank’s shareholders.

Regarding these difficulties he requests the bank management board to

rethink about the payment of dividend. At the close of paper, Shrestha opines
that the bank is trying its best to satisfy both the shareholders and employees.

Radhe Shyam Pradhan’s study (1993)

[Link] Shyam Pradhan conducted a landmark study in the field of dividend
policy in Nepal. He studied stock market behavior of 17 firms covering the
period 1986 to 1990 with the following objectives (Pradhan, R.S.:1993):

i. To access the stock market behavior in Nepal.

ii. To exam in the relationship of market equity, market value, price
earning and dividend with liquidity, profitability, leverage, assets
turnover and interest turnover.
Findings of his study are as follows:
 Higher earnings in stock leads to the larger ratio of dividend per
share.
 Stock with larger ratio of dividend per share to market price have
lower leverage ratio.
 Stock with larger ratio of dividend per share to market price has
higher liquidity.
 Positive relationship between the ratio of dividend per share to
market price and interest coverage ratio.
 Dividend per share and market price per share are positively
correlated.

53
 1. Positive relationship of dividend payout with liquidity, profitability,
assets turnover and interest coverage ratios.

Kamal Das Manadhar’s Study (2000)

Mr. Kamal Das Manandhar conducted a study to test the lagged structure of
dividend and different hypothesis on relationship of dividend payout and other
financial factors were tested. He carried out his study based on the data taken
from 17 Nepalese corporate firms and covered the period of 1987 to 1998.
The conclusions of his study are as follows (Manandhar, K.D.:2000):

i. There is significant relationship between changed in dividend

policy in terms of DPS and change in lagged earnings.
ii. There is relationship between distributed lagged profits and
dividends.
iii. In overall there is a positive relationship between in lagged
consecutive earnings and dividend per share.
iv. When change in lagged consecutive earnings is greater than zero,
in 65% cases, change in DPS.
v. Nepalese corporate firms have followed the practice of
maintaining constant dividend payment per share.
vi. Corporate firm do not take into account that one-year and two
year lagged earnings.

Major findings of this study are as follows:

 Significant relationship is found between change in dividend policy in
terms of dividend per share and change in lagged earnings
 There is relationship between distributed lagged profit and dividend.
 The difference is found significant between overall proportions of
changing dividend and due to increase and decrease in earning per
share during the study period.
 In overall, increase in EPS (t) has resulted to increase in the dividend
payment in 66.6% of the cases while decrease in EPS resulted
decrease in dividend payments which come to equal to 33.3% of the
cases.

54
  It is found that Nepalese corporate firms have followed the practice of
maintains constant dividend payment per share or increase it
irrespective of change in earning per share as reflected by the total
percentage of constant and increased dividend payment of 78.33% of
the cases. In other words forms are reluctant to decrease dividend
payment.
 In overall, Nepalese corporate firms are found reluctant to decrease
dividend either keeping dividend payment constant or higher to take
the advantages of information contents and signaling effects of
dividend relating to the firm’s continued progress and performance,
sound financial strength favorable investment environment, lower
risk, ability; to maintain sustained dividend rate finally to increase the
market price of the stocks in the stock market.

In overall Nepalese corporate firm are reluctant to decrease dividend either

keeping dividend payment constant or higher to take the advantages of
information contents and signaling effect of dividend relating to the firms.
Investment environment, lower risk, ability to maintain dividend rate and finally
to increase the market price of the stock in the stock market

Review of Thesis
Master’s degree studies in Nepal regarding dividend and dividend policy done
by master’s students. Some of them are as follows:-

Pramesh K.C. Study (1991)

This thesis on “Dividend Policy of Joint Venture Bank in Nepal” had covered
the period of 1984/85 to 1989/90.

The objectives of this study were as follows:

1. To provide conceptual framework of dividend models

55
 2. To analyze the financial variables affecting the stock value and
interpret the dividend paying implication under dividend valuation
model and
3. To provide suggestions, which will give vision for determination and
espousal of dividend policy of joint venture banks (K.C., 1991)

He has the following findings:

 the earnings per share of all joint venture banks were raised
satisfactorily
 there was correlation between EPS and DPS
 Amount of cash dividend had been raising each year
 The P/E ratio, earning yield, dividend yield percentage exposed
cyclical behavior.
 the P/E ratio was fluctuated in smaller proportion
 the market value per share of joint venture banks tocks in security
exchange center were significantly fluctuated and trading on high
price joint venture banks in Nepal were seen as growth banks
because actual capitalization rate ® is higher than the normal
capitalization rate (k) which is r>k,
 Under CAPM beta risk of joint venture banks were less riskier.
 Cash dividend per share (CDPS) of joint venture banks were
significantly increasing in each year
 The annual average growth rate in CDPS of NABIL and NISBL and
NGBL were recorded as 35.0%, 51.7% and 100.0%respectively.

Hari Ram Aryal’s Study (1997)

He has conducted a research work on “Dividend policy comparative study
between NABIL and NGBL”. He analyzed the data of these two banks for the
year 1978/88 to the year 1994/95.
The objectives of this study; were as follows:

i. To analyze the relationship of dividend with various important variable

such as earning per share. Net profit, net worth and stock prices.

56
He has the following findings:
 The relationship between dividends per share with earning per share,
net profit net worth and stock prices are positive.
 Market price per share is affected by dividend decision, if change in
dividend i.e. share.
 there is not uniform dividend policy in both the banks

However, Aryal’s study has following limitation:

number of sample selected for the study are small i.e. only two banks are
selected, that way not represent the exact practice of dividend policy in
commercial banks.

Sadaker Timilsina’s Study (1997)

MBA Thesis entitled “Dividends and Stock Prices: An Empirical Study”
conducted by Mr. Sadakar Timilsina was carried out by using the data of 16
enterprises for the period of 1990 to 1994.

i. To test the relationship between DPS and Stock Prices.

ii. To determine the impact of dividend policy on stock prices.
iii. To identify whether it is possible to increase the market value of the
stock changing dividend policy or payout ratio.

To explain the behavior, he used multiple regression models of three

independent variables as developed by Friend and Puckett. Further he tired to
highlight the relationship between stock price and other independent variables
setting separate simple linear regression equations. The findings of the study
are as follow:

 The relationship between DPS and stock prices is positive in the sample
companies.

57
  DPS affects the share prices variably in different sectors.
 Changing the dividend policy of dividend per share might help to
increase the market price of share.
 The relationship between stock prices and retained earnings per share is
not prominent.
 The relationship between stock prices and lagged earnings price ratio is
negative.

The relationship between stock prices and retained earning per share is not
prominent.

Rishi Raj Gautam’s Study (1998)

Mr. Rishi Raj Gautam conducted a comparative study of dividend policy of
commercial banks by using the secondary data of three banks in 1996.
Objectives of the study are as follows (Gautam, R.R.:1996)

i. To identify what type of dividend policy is being followed and find out
whether the policy followed is appropriate or not.
ii. To examine the impact of dividend on share prices.
iii. To identify the relationship between DPS and other financial indicators.
iv. To know if there is any uniformity among DPS, EPS and DPR of the
three sample commercial banks.

Major finding of the study are as follow:

 Average earning per share and dividend per share of all concerned banks
are satisfactory.
 Analysis indicates the largest fluctuations in earning per share and
dividend per share. No banks exhibit constant dividend payout ratio.
 No commercial banks seen to be guided by cleanly defined dividend
strategy in spite of the good earnings and potentials.
 Shares of the financial institution are actively traded and market prices
are increasing.
 Correlation between DPS and EPS of all sample banks is fairly positive.
But it is fairly safe to say that the relationship is not significant.

58
  Theoretically, issue of bonus share has equal impact on EPS, MPS, and
DPS. But in case of these sample banks, a significant variation in the
degree of impact is observed.

Navaraj Adhikari’s study (1999)

This thesis on “Corporate Dividend Practices in Nepal” had covered the period
of 1990 to 1996 with the total observation of 47 in financial sector and 39 non
– non financial sectors

The objective of this study was as follows:

i. To analysis the proportion of portfolio formed on dividends.
ii. The test the relationship between dividend and stock price.
iii. To survey the opinion of financial executives on corporate dividend
practices.

He has the following findings

 Positive relationship between the ratio of dividend per share to book
value per share and turnover ratios.
 There is positive relationship between the ratio of dividend per share to
book value per share and interest coverage.
 Market price of the share is affected by dividend
 Financial executives of Nepal reject dividend as a residual decision in
Nepalese companies
 Stock with larger ratio of dividend per share to book value per share has
higher liquidity. .
 Stock with larger ratio of dividend per share to book value per share has
higher Profitability.

P.L. Rajbhandari’s Study (2001)

This thesis on “Dividend Policy Comparative Study Betwe3en Banks and
Insurance Companies” had taken into consideration of data of only five year
1994/95 through 1998/99. Six companies are taken as sample.

59
The objectives of this study were as follows:
i. To examine the relationship between and market price of the stock.
ii. To identify the appropriate dividend policy followed by the banks and
insurance companies.
iii. To analyze the relationship between dividend policy decision of banks
and insurance companies.

She has the following findings

 Average earning per share seems satisfactory of all sample companies.
 The positive relationship between dividend per share and earning per
share
 The co- efficient of correlation between earning per share and market
price to the negative.
 The relationship between market price per share and dividend is positive
 Dividend payment is not consistency of all six sample companies.

The institution does not seem to follow the optimal dividend policy of
paying regular dividend as per shareholders expectation and interest.

At first, her study is based on secondary; data of past five year

1994/1995 to 1998/99. That may not represent the exact practice of dividend
policy of joint venture banks and insurance companies based on secondary
data only.

Secondly, she did not explain the existing capital market in Nepal.

Bijay Ranabhat study (2006)

This thesis on “Dividend policy of banks insurance companies and finance
companies” carries out the study from 1997 through 2002.

The objectives to this study were as follows:

60
 i. Study and comparing various aspects of dividend polices of the bank,
insurance and finance companies in Nepal
ii. Earning the relationship between dividend and market price of stock
iii. Analyzing factor affecting dividend policy between of the banks
insurance companies and finance companies

The major finding of this study are the below

 Average DPS to finance company and insurance do not seem quite
satisfactory
 The analysis to coefficient of variance shows fluctuation in EPS and DPS
 The calculation of DPR Show none of the in situations have constant
payout notice during the study period.

Dinesh Gurung’s study (2008)

This thesis on "Dividend pattern is Nepal a case study of listed commercial
banks in NEPSE" had take into considerations data of only five year.

The objectives to this study were as follows.

ii. To identity the appropriable dividend policy followed by commercial
banks that whether commercial banks are guided by and specific
dividend policy or not
iii. To examine the relationship between market price to the stock that
whether dividend policy affects the stock price of Nepalese commercial
bank or not.

He has the following finding.

 Dividend payment is not consistency of commercial banks
 Average earning per share seems satisfactory.
 Market price to share is affected by dividend.

61
 CHAPTER III

RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research problem.

It refers to the various sequential steps to adopt by a researcher in studying
the problem with certain objectives. It describes the method and process
applied in the entire aspect of the study. In this research, the research design,
data collection procedure and analysis are described thoroughly. Analysis is
conducted with using appropriate financial and statistical tools and the
findings are presented in a systematic way.

3.1 Research Design

Research design can be defined as the plan, structure and strategy on
investigation concerned so as to obtain answer to reason questions and to
control variants. A researcher can design his research in many different ways.
This research is based on secondary data. It is simply an analytical and
descriptive research. It covers the data from the year 2003 to 2008. So the
research is somehow limited. The collected data is analyzed with financial as
well as statistical tools and interpreted.

3.2 Population and Sample Selection

As this study is based on the data of the join venture bank listed in NEPSE.
So the population is taken from only those banks which are listed in NEPSE.
Since the topic implies the study should be done among the dividend paying
and actively traded companies. The sampling will be done according. This
study will cover all together 3 banks.

The sample banks were selected random from the financial institution listed
with the Nepal stock exchange. Data necessary for the data analysis section
of the study of the selected samples were easily available and in an

62
economical way. The study has taken 3 banks as sample bank three are
taken from banking sector among fourteen banks listed at the NEPSE.
Banks

I. Himalayan Bank Limited

II. Nepal Investment Bank Limited
III. Standard Chartered bank Limited

3.3 Data Collection Procedure

Almost all the data required for the research is collected are collected from the
secondary source, mainly from the financial statement of listed bank. Trading
report published by Nepal stock exchange. Other necessary information has
been taken from the individual investors, related organizational officials.
SEVO/N and NEPSE staffs and other relate personalities as well. Also from
newspaper and magazines, annual report, national planning commission
central business opt statistics.

3.4 Method for Analysis

Specific financial and statistical tools are used in this research. The analysis
of data is done according to pattern of data available. The relationship
between different variables related to study topic would be drawn out by using
financial and statistical tools. The calculated results are tabulated under
different heading for ease of reading, and then they are compared with each
other to interpret results. In this study simple regression analysis has been
used to analyze the effect of independent variable on dependent variable. It
helps in studying the effect and magnitude o the single independent variable
on one dependent variable to determine whether the variable of DPS is
related to dividend decision.

63
 Data Analysis Tools
3.5.1 Financial tools used for analysis

1. Earning per share (EPS)

EPS is calculated to know the earning capacity and to make comparison
between concerned companies. It is defined as the result received by dividing
net profit after taxes by no. of common stock outstanding

Net profit after Taxes

EPS = No. of common stock outstanding

2. Dividend per Share (DPS

The part of earnings distributed to the shareholders as per share basis on
known as DPS. It is the amount calculated by dividing the total dividend with
total numbers of share outstanding

Total dividend
DPS =
No. of common share outstanding

3. Dividend in Percent
Dividend percent indicates the ratio of dividend per share to the paid up price
per outstanding share. It is obtained by dividing dividend per share by paid up
price per share.

Dividend in Percent (%) = Dividend per Share (DPS)

Paid up Price per Share

64
4. Dividend pay- out Ratio (DPR)
The percentage of the profit on share that is distributed as dividend is called
dividend pay – out ratio (DPR). It is the result received by dividing DPS by
EPS.

Dividend per Share (DPS)

DRP =
Earning value per share (EPS)

5. Price Earning Ratio (P/E Ratio)

P/E Ratio expresses the amount currently paid to each rupee of currently
reported by the balance sheet of company’s earning per share by the market.
IT is calculated using following formula

Market Value per Share (MVPS)

P/E Ratio =
Earning per share (EPS)

6. Dividend Yield
Dividend yield may define as the ratio of dividend per share to the market
value per share. IT is also expended in terms of the market value per share.
OT is the result obtained by dividing KPS by the MVPS. AS

Market Value Per share = Dividend per Share

Dividend Yield

7. Market value per share to book value per share ratio

This ratio reflects the price of the market or outsiders are paying for each
rupee of currently or reported by the company. It is calculated by dividing the
market value per share by book value per share.

65
 = Market Value per Share (MVPS)
Booking Value per Share (BVPS)

8. Liquidity Ratio
This ratio is calculated through dividing total assets by total liability.

Liquidity ratio = Total Assets

Total Liability

9. Profitability Ratio
This ratio is calculated by dividing net assets by capita employed (EBIT). That
is

Profitability Ratio = Net Assets

EBIT

3.5.2 Statistical Tools Used

The research holds various statistical tools, which are defined as follows.

Mean ( X )
The arithmetic mean or average is the sum of total values to the number of
observation in the sample. It represents the entire data which lies almost
between the tow extremes. Foe this reason an average is frequently referred
to as a measure of central tendency. On this study it is used in data related to
dividend of sample companies over different years. It is calculated as

66
Mean = sum of total values
No. of values

X=
X
n
Where,
X =Mean
N = Number of value

X = Sum of total value

i. Standard Deviation  (S.D)

The measurement of the scatter ness of the mass of figures in a series about
an average is known as dispersion. The standard deviation (S.D.) is an
absolute measurement of dispersion in which the drawbacks present in other
measures of dispersion are removed. The high amount of dispersion reflects
high standard deviation. The small standard deviation means the high degree
of homogeneity of the observations. it is calculated for selected dependent
and independent variables specified. It is the positive square root to mean
square deviation from the arithmetic mean it is denoted by o. that is

Formula S.D =
(X  X )
n

Where S.D = standard deviation.

iii. Coefficient of variations (C. V.)

Coefficient of variables reflects the relation between standard deviation and
mean. The relative measure of dispersion based on the standard deviation is
known as coefficient of standard deviation. The coefficient of dispersion based
on standard deviation multiplied by 100 is known as the C.V. it is used for

67
comparing variability of two distributions. If the x be the arithmetic mean and 0
the standard deviation of the distribution, then the C.V. is defined as,

C.V. = S.D x 100

X

Where, C.V. = coefficient of variations

Less the C.V. more will be the uniformity; consistency and more the C.V.
less will be the uniformity, consistency.

Iv. Coefficient of correlation(r)

Correlation analysis is the statistical tools that we can use to describe the
degree to which one variable is linearly related to another. "Coefficient of
correlation is the measurement it the degree of relationship between two
casually related sets of figure whether positive or negative. Its value lies
somewhere ranging between –I to + I. if the both variables are constantly
changing in the similar direction, the value of coefficient will be 1+ indicative
of perfect positive correlation, when the coefficient will be -1 two variables
take place in opposite direction. The correlation is said to be perfect negative.
In this, simple coefficient of correlation is used to examine the relation ship of
different factors with dividend and other variables. The data regarding
dividend over different years are tabulated tend their relationship with each
other s are drawn out in practical life, the possibility of obtaining either perfect
positive or perfect negative correlation is very remote.

v. Coefficient of multiple Determination(r2)

The coefficient of determination is a measure of the degree of linear
association or correlation between two or more independent variables. It
measured that percentage total variation in dependent variables explained by
independent variables .to r2 has a zero value then, it indicates the there is no
correlations which means all the data points in the scatter diagram fall exactly

68
on the regression line, if it has a value equal to 1 then it indicates the there is
perfect correlation and as such the regressing line is a perfect estimator. But
in most of the cases the value of r3 will lie somewhere between the tow
extremes of 1 and 0. One should remember that r2 close to 1 indicates a
strong correlation between two variables and re near to zero means there is
little correlation. It is symbolically indicates as r2 through some would prefer to
put it as r2 the coefficient of determination value can have ranging between
zero to one. A value of one can occur only if the unexplained variation is zero
which means that all the data pints in the scatter diagram fall exactly on the
regression line. If r2 is 70% of the total variation in the dependent variable.

R2 = 1- Unexplained Variation
Total Variation

Vi. Regression Analysis

Simply, using the relationship between a know variable independent and an
unknown (Dependent) variable to estimate the unknown one is termed as
regression analysis. But in real life, so many independent variables do affect
the dependent variable and any study of correlation must take all variable into
consideration. Such relationship between a single dependent variable and a
number of independent variable in combinations on known as multiple
regressions.

Regression Constant (a)

The regression content (a) which is the intercept of the model rep resents the
average level of dependent variable when independent variable has a value of
zero. In other words , it can be termed as an indicator which specifies average
effect on dependent variable if all the variables are omitted from the model.
Theist term has practical meaning only if a zero value for the independent
variable is possible.

69
Regression Coefficient (b1, b2, b3........)
The regression coefficient (b) is a parameter which indicates the marginal
relationship between independent variable and value of dependent variable
holding constant the effect of all other independent variables in the regression
model. The coefficient specifies a part of change in the dependent variable
regarding part of change in the independent variables.

vii. T – Test
In case of all small sample where 'n' is less than 30, we make use of the't'
distribution. It used for finding more appropriately the two limits where in the
estimate would probably lie. For applying t- first of all 't' value should be
calculated and compared with the table value of 't'. At a certain of significance
for given degree of freedom, if the calculated value of't'. Excess the table
value. (say 0.05) we know that the different is significant an 5% level, but it 't'
is less than the concerning table value of the 't' the different is not trended as
significant.

Viii. F- Test
A technique which is generally known as the variance ratio and is mostly used
in contest of analysis of variance. F – Test is used to identify the significance
of difference between more than two samples means from same normal
populations with equal variance. In case of f- test there is now assumption of
equality of vafiances as it was in the case of t-test. So one- way ANOVA
method so used to examine the equality between sample variances.

Ix. Standard Error of estimate (SEE)

Standard error of estimate measures the line variability or scatter of the
observed values around the regressing line. It also measures the reliability
after finding the regression. It the i.E. of estimate happens to be zero then
there is cent percent correct estimator. In other words, the estimating equation
of the dependent variable is a 'perfect" estimator. IT is possible for us to
ascertain how well and representative the regressing line is as a description if
the average relationship between two series. It is worded out as under. The

70
square root or the se is also known as the variance of the error term which is
the basic measure of reliability

Se = e2
n-2

Where,
e = the error term
Se = Standard Error
N = no. of observation

x. Probable error (P.E)

Probable error of the correlation efficient denoted by P.E. is the measure of
testing the reliability of the calculated value of 'r'.

Where, r = correlation coefficient between x and y

P.E. = 0.6745 1-r2

√n

(1) If r<P.E., it is insignificant. So perhaps there is no evidence of

correlation coefficients may be used to determine the limits within
which the population correlation lies.
(2) If r > 6 P.E., Limits for population correlation coefficient may be used
to determine the limits within which the population correlation lies. are r
+ P.E.
In the present study, probable error has been calculated to determine
reliabilities the value to coefficients to EPS and DPS,/DBS and net profit
and DPS and net work.

71
 Limitation of the methodology
i) The analysis is based an secondary data
ii) Only three banks are taken as sample
iii) Only dividend is considered for data analysis
iv) Only six years data are presented

72
 CHAPTER IV

PRESENTATION AND ANALYSIS OF DATA

The purpose of this chapter is to carry out the secondary data analysis to
achieve the objectives, the relevant data and information regarding dividend
policy of commercial banks.

This chapter begins with the descriptive analysis of earning per share,
dividend per share market price per share dividend payout ratio, banks with
the hypothetical and explanatory analysis.

The companies of financial indicators of the concerned of financial indicators

of he concerned institutions is done with the help of statistical tool correlation,
regression analysis to different components to each bank are made and the
data are presented in a systematic tabulated from.

4.1 Analysis of Financial Indicators

4.1.1 EPS Analysis of commercial Bank

Generally, the success and failure of business organization depends on its
capacity to generate earning. The earning of any business organization helps
to evaluate the performance and achievement and also status of goodwill of
the organization in the market.

Higher earning shows higher strength while lower earning show weaker
strengths of business organization for growth, expansion and diversification.
So EPS is the amount of earnings of the share invested in the company.
Higher the EPS of the company, better position seen in the market so, all the
business organization always see to have more and more earning that could
sustain efficient in the competitive market.

73
 Table No. 4.1
EPS
year HBL SCBNL NIBL Pooled
Average
2002/03 49.45 149.3 39.56 79.44
2003/04 49.05 14.55 51.7 81.43
2004/05 47.91 143.44 39.5 76.85
2005/06 59.24 175.84 59.35 98.14
2006/07 60.66 167.37 62.57 96.87
2007/08 62.74 131.92 57.87 84.18
Average 54.84 155.84 51.76 86.16
S.D 6.14 15.08 9.23 8.33
C.V % 11.19 9.93 17.83 9.67
Source: Annual Report of Concerned Banks

Above table shows the amount of earning per share is paid by the banks from
year 2002/03 to 2007/08.

EPS of HBL, SCBNL and NIBL for the six year period are presented in the
table. According to table SCBNL has highest EPS than HBL and NIBL. In year
2005/06 SCBNL has highest EPS among all the six year. Whereas in year
2006/07 and 2007/08, SCBNL has less earning than year 2005/06, which
shows decline trend HBL has higher earning than previous year NIBL has not
Constant EPS.

Pooled average shows highest EPS in year 2005/06 is 98.14. The lower
earning made by all sample banks at year 2004/05 is 47.91, 143.14 and 39.5
respectively. And pooled average is 76.85.

Since the average of EPS of SCBNL is highest among all three banks, it has
been able to pay considerably higher amount of dividend to its shareholder in
comparison to other two banks. NIBL has the lowest EPS among all three
banks. Without considering the rate of fluctuation the analysis of variance is

74
studied. it is observe that C.V of SCBNL is 9.93 and HBL and NIBL are 11.19
and 17.83 respectively.
The Comparative EPS of selected banks can be presented with the helps of
following diagram
Figure No. 4.1

EPS of Sample Commercia Bank

200

150 HBL
SCBNL
EPS in RS 100
NIBL
50 Pooled Average

0
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Fiscal Year

4.1.2 DPS Analysis of Commercial Banks

Dividend per share indicated the part of earning distributed to the shareholder
on per share basis. It is calculated by dividing the total dividend to equity
shareholders by the total number of equity share.

Generally higher the dividend higher the satisfaction level of shareholders. But
there may be different cases when shareholders. Prefer their dividend to be
retained for future prospective. Dividend can only be provided when there is
profit in any organization. So any company who is in a position to pay
dividend means it is earning at least some profit.

75
 Table No 4.2
DPS
Year HBL SCBNL NIBL Pooled Avg.
2002/03 1.32 110 20 43.77
2003/04 - 110 15 41.67
2004/05 11.58 120 12.5 48.03
2005/06 30 130 20 60
2006/07 15 80 5 33.33
2007/08 25 80 7.50 37.5
Average 13.82 105 13.33 44.05
S.D 11.11 18.93 5.71 8.50
C.V 80.39 18.03 42.84 19.30
Source: Annual Report of Concerned Bank.

The DPS of three sample bank for six year period are presented on table 4.2
in year in year 2005 /06 DPS of SCBNL market highest figure. The table
shows that HBL didn’t distribute cash dividend on year 2003/04. In year
2006/07, NIBL just earned lower amount.
The entire sample banks issued bonus share. HBL issued dividend including
bonus on share capital.

While observing pooled average and aggregate average of bank data, SCBNL
maintain highest position in the fiscal year 2005/05, though, this study deals
with cash dividend, only glimpse of stock dividend is mentioned. From DPS
table SCBNL is number one position to give dividend for each year.

Besides considering the average, the analysis of DPS is preferable to state

the rate of fluctuations with the help of co-efficient of variance C.V. measures
risk per unit of asset according to table the C.V of HBL is 80.39, SCBNL is
18.03 and NIBL is 42.84.

The Comparative DPS of selected banks can be presented with the helps of
following diagram.

76
 Figure No. 2

DPS of Sample Commercial Banks

140
120
100 HBL
DPS in Rs.

80 SCBNL
60 NIBL
40 Pooled Avg.
20
0
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Fiscal Year

4.1.3. DPR Analysis of commercial Banks.

Dividend payout ratio reflects the percentage of the profit distributed to
shareholders as dividend against the percentage that is retained as resume
for the growth of any banks. Dividend payout ratio is calculated by dividing
EPS by DPS .

Table No. 4.3

Year HBL SCBNL NIBL POOLED
AVERAGE
2002/03 2.67 73.68 50.56 42.30
2003/04 0 76.63 29.01 35.21
2004/05 24.17 83.83 31.65 46.55
2005/06 50.64 79.62 33.69 54.65
2006/07 24.72 77.67 7.99 36.79
2007/08 39.85 60.64 12.96 37.82
AVERAGE 23.68 75.35 27.64 42.22
S.D. 18.23 7.26 14.03 6.78
C.V.% 77.00 9.63 50.77 16.06
Source: Annual Report of Concerned Banks

77
The above table 4.3 shows the dividend payout ratios of three sample banks
.The table helps to find out the percentage of dividend payout ratio of the total
earning made by every bank for every year during the period of study .D/P
ratio of SCBNL is highest in the year 2005/06 recorded as 79.62%.There is no
dividend payout ratio of HBL in year 2003/04. The lowest D/P ratio is 2.67% of
HBL in the year 2002/03 whereas in 2006/07, NIBL has only 7.99% dividend
paid.

Before analyzing the DPR, we can segregate DPR of these banks in their
differently categorized policy.

Policy DPR
Conservative Less than 20%
Moderate 20% to 50%
Aggressive more than 50%

From table, in year 2003/03, HBL followed conservative policy, SCBNL and
NIBL followed aggressive dividend 73.68 and 50.68 respectively. But their
pooled average data shows DPR of 42.30 which falls under moderate
dividend policy according to assumption.

In year 2003/04, SCNBL has 76.63 DPR, NIBL has 29.01 and HBL has no
DPR. SCNBL again followed aggressive dividend policy with the increment
ratio whereas other two sample bank has decreased. In the year 2004/05,
again SCBNL have aggressive dividend policy of DPR 83.88 which is highest
in six consecutive years. HBL and NIBL have 24.17 and 31.65. DPR ratio. But
average polled data shows DPR of 46.55 which is in moderate dividend
policy.

In the year 2005/06 again SCBNL have aggressive dividend policy of DPR
79.62 but HBL and NIBL has 50.64 and 33.67 as DPR. And pooled average is
54.65 with aggressive dividend policy.

78
And in six year HBL and NIBL have DPR below 50% and SCBNL has 60.64
with moderate dividend policy.
The C.V. of DPR suggests that the DPR of HBL is fluctuating than other two
banks C.V. of NIBL is also fluctuate.

The Comparative DPR of selected banks can be presented with the helps of
following diagram.
Figure No. 3

DPR of Sample Commercial Bank

90
80
DPR in Percent

70 HBL
60
50 SCBNL
40 NIBL
30
20 POOLED AVERAGE
10
0
3

8
/0

/0

/0

/0

/0

/0
02

03

04

05

06

07
20

20

20

20

20

20

Fscal Year

4.1.4 Market Value per Share/ Book Value per Share

The ratio between market value per share MPS and book value per share (net
worth) gives the idea on the different between the book value of a share i.e.;
the real value of the share and market value i.e., the price of share will earn if
sold, In general, it may be thought that book value per share and market value
per share will be of about the same value. But the calculation of the ratio gives
a slightly different picture, which is shown below in the table

Table No. 4.4

Year HBL SCBNL NIBL Pooled Avg.
2002/03 3.37 4.07 3.68 3.71
2003/04 3.04 4.37 3.18 3.86

79
2004/05 3.84 5.55 3.99 4.46
2005/06 4.81 8.06 5.26 6.04
2006/07 6.57 11.52 7.38 8.49
2007/08 7.99 17.01 10.98 8.99
Average 4.99 8.43 5.85 5.93
S.D 1.73 4.60 2.62 2.13
C.V 34.67 54.59 44.87 35.96
Source; annual Report of Concerned Banks

In table 4.4, highest ratio between MPS and net worth is 11.52 of sample
bank and highest average MPS and net worth is 8.43 of SCBNL is 7.99 and
10.98 respectively.

It is always good to have higher MVS than face value. Because in today’s
open market shareholders maximize wealth than profit maximization. C. V.
measure risk per unit of assets it can be observed the CV of SCBNL is greater
than other sample banks. Greater the CV means greater the risk. So MPS/
BVPS are fluctuated in SCBNL than other two sample banks.

The Comparative MVPS/BVPS of selected banks can be presented with the

helps of following diagram.
Figure No 4

MVPS/BVPS of Sample commercial Bank

18
16
MPS/BVPS in Rs

14
HBL
12
10 SCBNL
8 NIBL
6
Pooled Avg.
4
2
0
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Fiscal Year

80
4.1.5 P/E Ratio Analysis of Commercial Bank.
Profit earning ratio shows the standing of the share in the capital market. In
general, we may think that market value per share has some link with EPS or
MPS is determined by EPS. But this always may not be true.

Table 4.5
P/E Ratio
Year HBL SCBNL NIBL Pooled Avg.
2002/03 16.91 10.98 20.1 15.99
2003/04 17.12 12.16 18.18 15.82
2004/05 19.2 16.38 20.25 18.61
2005/06 18.57 21.47 21.23 20.42
2006/07 28.69 35.25 27.63 30.52
2007/08 31.56 51.77 42.33 41.89
Average 22.01 20.62 24.95 23.88
S.D 5.85 15.09 8.31 9.45
C.V 26.59 73.18 33.32 39.57
Source: Annual Report of Concerned Banks.

Above table 4.5 shows the P/E ratio of three sample banks. The ratio
describes the relationship between EPS and MPS.

So in the year 2002/03, the P/E ratio of HBL, SCBNL, NIBL are 16.91,
1098and 201 respectively from year 2003/04 to 2007/08, the ratio of profit
earning is in increasing trend. From poded Average, in the year 2007/08 bas
highest P/E ratio of 41.89 percent. The C.V of three banks HBL, SCBNL and
NIBL are 26.59, 73.18, and 33.23 respectively C.V of SCBNL is large. It
reveals That SCBNL has more variation in its P/E ratio during the study
period. This indicates that there exacts high degree of risk in the P/E ratio of
SBNL.

81
The Comparative P/E ratio of selected banks can be presented with the helps
of following diagram.
Figure No 4.5

P/E Ratio of Commearcial Bank

60
50
P/E in Ratio

HBL
40
SCBNL
30
NIBL
20
Pooled Avg.
10
0
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Fiscal Year

4.1.6 Earning Yield Analysis of Commercial Banks.

Earning yield means the percentage relationship between EPS and MPS
which is one of the reliable tools to calculate the real value of the share.

Table No. 4.6

P/E Ratio
Year HBL SCBNL NIBL Pooled Avg.
2002/03 5.92 9.10 4.98 6.63
2003/04 5.84 8.23 5.5 6.25
2004/05 5.21 6.10 4.94 5.42
2005/06 5.39 4.66 4.71 4.92
2006/07 3.49 2.84 3.62 3.32
2007/08 3.17 1.93 2.36 2.49
Average 4.84 5.48 4.35 4.89
S.D 1.09 2.62 1.06 1.55
C.V 22.66 47.87 24.26 31.62
Source: Annual Report of Concerned Banks.

82
The above table 4.6 depicts the relationship between EPS and MPS. The
main reason to illustrate the earning yield of the concerned bank helps to
calculate the real value of current market value of each share.
Comparing earning yield of sample banks, SCBNL has highest average of
5.48. the C.V of SCBNL is higher than other two sample banks. We know that
higher the C.V. more the Risky. So greater C.V indicates that there is
actuation on earning yield of SCBNL. However HBL and NIBL Maintain
Consistency. The C.V. of HBL and NIBL Maintain Consistency. The C.B of
HBL and NIBL is 22.66 percent respectively.

The Comparative Earning yield ratio of selected banks can be presented with
the helps of following diagram.

Figure No. 4.6

Earning Yield of Commearcial Bank

10
Earning Yield in Ratio

8
HBL
6 SCBNL
4 NIBL
Pooled Avg.
2

0
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Fiscal Year

4.1.7 Dividend yield Analysis of Commercial Bank.

Dividend yield means the percentage relationship between DPS and MPS
which is also one of the reliable tools to calculate the real value of the share

83
and find out if there is any consistency in DPS and market value of bank in the
consecutive years.

Table No. 4.7

Dividend yield
Year HBL SCBNL NIBL Pooled Avg.
2002/03 0.16 6.71 2.52 3.13
2003/04 0 6.30 1.59 2.63
2004/05 1.26 5.12 1.56 2.65
2005/06 2.73 3.44 1.59 2.59
2006/07 0.86 1.36 0.29 0.84
2007/08 1.26 1.17 0.31 0.91
Average 1.10 4.02 1.13 2.125
S.D 0.90 4.98 0.79 4.92
C.V 81.90 123.95 60 231.42
Source: Annual Report of Concerned Banks.
The above table 4.7 shows the dividend yield analysis of three sample banks
from the year 2002/03 to 2007/08 respectively.

In year 2002/03, SCBNL has highest dividend yield 6.71 and the pooled
average is 3.13, SCBNL has highest dividend yield than other two banks.
Like wise in time period SCBNL has highest dividend yield than HBL and
NIBL except in year 2007/08 HBL has 1.26 as a dividend yield. Ass the banks
don’t have constant dividend yield is volatile.
According to pooled average, dividend yield has decreased trend.

Here C.V of NIBL is lowest in comparison to HBL and SCBNL, so its dividend
yield can be considered more consistent.

The Comparative Dividend of selected banks can be presented with the helps
of following diagram.

84
 Figure No 4. 7

Dividend Yield of Commearcial Bank

8
Dividend in Ratio 7
6 HBL
5
SCBNL
4
NIBL
3
2 Pooled Avg.
1
0
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Fiscal Year

4.2 Correlation analysis

Correlation analysis helps to determine the strength of the linear relationship
between two variables that it shows how strength the two variables are
correlated.

It helps to determine whether a positive or negative relationship exists

between two variables and whether the relationship is significant or not.

In this study, the correlation analysis is referred to identify the relationship

between DPS and other variables like MPS, EPS, CR, D t -1 and whether
theses relationships holds any significance.

We can calculate correlation coefficient as:

∑xy

r=
∑x2 ∑y2

85
Where

= x = (n – x)

= y = (n – y)

Again
r= (1- (r)2 )
n

- If 6PE is greater than ‘r’ then insignificant.

- If 6PE is less than ‘r’ then significant.

4.2.1 Correlation between EPS and DPS of Commercial Banks

Table No.4.8

Banks r Relationship r2 Probable Sig / Insig

error
HBL 0.80 Positive 0.64 0.09 Sig.
SCBNL -0.39 Negative 0.16 0.23 Insig
NIBL -0.49 Negative 0.24 0.21 Insig

Above table 4.7 shows the relationship between EPS and DPS of three
banks. It can be observed that the correlation coefficient of HBL is positive
whereas SCBNL, NIBL is negatively corrected. It can be conclude that KPS of
HBL is more dependent on its earning. Increase and it earning decrease,
dividend is also decreasing.

86
4.2.2 Correlation between MPS and DIVIDEND (Dt-1)

Table No. 4.9

Banks r Relationship r2 Probable Sig / Insig

error
HBL 0.49 Positive 0.24 0.21 Insig
SCBNL -0.12 Negative 0.02 0.27 Insig
NIBL -0.69 Negative 0.48 0.14 Insig

In the above table SCBNL and NIBL have negative correlation coefficient and
HBL has positive correlation which is significant. Relationship between MPS
and Dt-1 . Since SCBNL and NIBL are negatively correlated the MPS is not
dependent on last year’s dividend. Value of r of HBL is grater than GPE. So
grater the value of r, lesser the value of 6PE is signification relationship

4.2.3 Correlation between EPS and MPS of Commercial Bank.

Table No. 10
Banks r Relationship r2 Probable Sig /
error Insig
HBL 0.94 Positive 0.84 0.03 Sig
SCBNL 0.02 Positive 0.0004 0.28 Insig
NIBL 0.72 positive 0.51 0.13 Insig

Above table shows the relationship between market share of the stock and
earning per share. It can be observed that the correlation co- efficient of HBL
SCBNL and NIBL, all three banks has positive correlation, but two bank
SCBNL and NIBL hare Insignification relationship since 6JPE greater than r of
SCBNL and same as NIBL. Here, HBL have aggressive degree of correlation
so we can conclude that increase or decrease stock price is dependent.

87
4.3 Regression Analysis
Regression analysis is used to determine the statistical relationship between
two or more variables and to make predication of one variable on the basis of
the others. The regression analyses can either simple regression or multiple
regressions.

When we take only one independent variable to predict the value of the
dependent variable through the appropriate regression time then the analysis
is known as simple regression analysis. But when we take two or more
independent variable to predict the value of the dependent variable through
the appropriate regression tune, then the analysis in known as multiple
regressions.

Here the statistical tool sample and multiple regression analysis is presented
in this study is to identify the relationship between MPS, EPS, D (t-1) and net
worth of sample banks.

4.3.1 Simple regression Analysis

This analysis shows the relation between the dependent variable and
independent variable. Dependent variable market price per share (MPS) or Pt
on independent variable EPS or ET.

Table No. 4.11

Bank Constant(a) Reg .Coeff. Std. errors ‘t’
(b)
HBNL -3818 92.16 4.2.45 0.22
SCBNL 2944.41 5.01 4742.76 1.06
NIBL -61520.81 46.33 2281.63 0.02

88
From above table MPS on EPS, beta co-efficient (b) is positive in all sample
bank and content (a) is negative is HBL and NIBL whereas SCBNL has
Positive constant (a)

Beta co – efficient indicates that one rupee increase in EPS leads to decrease
in MPS; IT is very ridiculous to say that increase in earning per share leads to
decrease in MPS. It is almost impossible however when could concluded that
MPS of HBL and NIBL did not depend upon. Whereas SCBNL’s MPS is
depend on EPS.

4.4 TEST of Hypothesis

First Hypothesis

Dividend per share

Table No. 4.12 (a)
Year HBL SCBNL NIBL
2002/03 1.32 110 20
2003/04 - 110 15
2004/05 11.58 120 12.5
2005/06 30 130 20
2006/07 15 80 5
2007/08 25 80 7.50

Here,

Null Hypothesis (Ho): μa = μb = μc i.e. there is no significant

difference between DPS of HBL, SCBNL and NIBL.

89
 Alternative Hypothesis (H1): μa ≠ μb ≠ μc i.e. there is significant
difference between DPS of HBL, SCBNL and NABIL.

Computation of Hypothesis
Table No. 4.12 (b)
Xa Xb Xc Xa2 Xb2 Xc2
1.32 110 20 1.47 12100 400
- 110 15 - 12100 225
11.58 120 12.5 134.09 14400 156.25
30 130 20 900 16900 400
15 80 5 225 6400 25
25 80 7.50 625 6400 56.25
∑xa 82.9 630 80 1885.83 68300 1262.5

Now,
Grand Total (T) = ∑xa + ∑xb + ∑xc

= 82.9 + 630 + 80

= 792.9

Correction factor (C. F) = T2

h

= 628690.41
17
= 36981.79
Total sum of square

(TSS) = ∑Xa2 + ∑Xb2 +∑Xc2

= 71448.33

90
Sum of square between Samples.

SSB = (∑xa) 2 + (∑xb) 2 + (∑xc) 2 - CF

na nb hc

= (82.9)2 + (630)2 + (80) - 36981.79

5 6 6

= 6872.41 + 396900 + 6400 - 36981. 79

5 6 6

= 1374.48 + 66150 + 1066.67 - 36981.78

= 31609. 37

Sum of square within sample

SSW = TSS - SSB

= 39838.96

91
 Table No. 4.12 (c)

ONE WAY ANOVA

Source of Sum of D. F Mean sum o F = ratio
variation square Square
Between 31609. 37 2 15804.69 F = 5.55
sample
Within 39838.96 14 2845.64
sample
Total 16

Critical value; the tabulated value of at 5% level of significance for 2 and 14

degree of freedom is 3.7

Decision: since calculated ‘f’ value is 5.55 is greater that tabulated ‘f’ value
3.74 ho is rejected. There is significant difference between the DPS of HBL
SCBNL and NIBL, i.e., null hypothesis is rejected and h 1 alternative
hypothesis is accepted.

Second Hypotheses

Dividend Paid out Ratio

Table No. 4.13 (a)
Year HBL SCBNL NIBL
2002/03 2.67 73.68 50.56
2003/04 0 76.63 29.01
2004/05 24.17 83.83 31.65
2005/06 50.64 79.62 33.69
2006/07 24.72 77.67 7.99
2007/08 39.85 60.64 42.33

92
Null Hypothesis: (Ho): μa = μb = μc i.e. there is no significant difference
between DPR of HBL, SCBNL and NIBL.

Alternative Hypothesis (H1): μa ≠ μb ≠ μc i.e. there is significant difference

between DPR of HBL, SCBNL and NABIL.

Computation of Hypothesis
Table No.4.13 (b)
Xa Xb Xc Xa2 Xb2 Xc2
2.67 73.68 50.56 73.13 5428.74 2556.31
0 76.63 29.01 - 5872.16 841.58
24.17 83.83 31.65 584.19 7027.47 1001.72
50.64 79.62 33.69 2564.14 6339.34 1135.01
24.72 77.67 7.99 611.08 6032.63 63.84
39.85 60.64 42.33 1588.02 3677.21 1783.37
142.05 425.07 195.13 5354.83 34377.55 7381.83

Grand Total (T) = ∑xa + ∑xb + ∑xc

= 279.24

Correction factor (C. F) = T2

h

= 346064.42

Total sum of square

(TSS) = ∑Xa2 + ∑Xb2 +∑Xc2

93
= 47114.2

SSB = (∑xa) 2 + (∑xb) 2 + (∑xc) 2 - CF

n n h

= 3363.03 + 34061.21 + 6345. 95 - 346064.44

= - 302294.23

Sum of square within sample

SSW = TSS - SSB

= 47114.21- (- 302294.23 )

= - 349408.44

94
 ANOVA table 4.13 (C)

ONE WAY ANOVA

Source of Degree of Sum of Mean sum of F - ratio
variation freedom square Square
Between 2 302294.23 151147.12 6.92
Banks

Within Banks 16 349408.44 21838.03

Total 17

Critical Value: The tabulated value of F at 5% level of significance is per 2

and 16 degree of freedom.

Decision: since the calculated ‘f’ value is 6.92 greater than tabulated value is
3.63. Null Hypothesis is rejected. Alternative Hypothesis is accepted. So there
is significance difference between the DPR of HBL, SCBNL and NIBL at 5%
level of Significance.

4.5 MAJOR FINDINGS

The major findings of three sample banks obtained from the secondary
data analysis are stated as follows.

 The average earning per share EPS of sample banks do not seem
satisfactory except SCBNL has highest earning per share in all
consecutive years.
 Similarly, the average dividends per share of sample banks do not
seem satisfactory except SCBNL. SCBNL paid higher rate of dividend
to its shareholder which seems quite satisfactory. But in case of HBL
and NIBL, dividend paid for share is quite low.
 The analysis of co-efficient of Vance shows that higher the CV, higher
will be risk. Higher the risk means it is risky to shareholder because of

95
 volatile and not consistent relationship, so SCBNL should retained
capital for retention.
 It is found that the calculation of DPR shows none of the sample banks
have constant payout. Ratio during the study period. The DPR is always
fluctuating.
 MVPS and BVPS show that SCBNL have higher net worth. Higher net
worth gives the real value of the share and market price i.e., the price of
share will earn if sold. So SCBNL is satisfied from the view point of
shareholders.
 Average price earning ratio of NIBL is highest among the all sample
however EPS and DPS are low. C, V analysis shows that HBL and
NIBL has more consistent P/E ratio. While SCBNL have higher CV
which is risky.
 The earning yield also shows that SCBNL has higher earning yield
SCBNL take aggressive policy while making dividend decision. While
other low bank have consistent relationship between EPS and MPS.
 The dividend yield of SCBNL is higher than other two sample bank.
Other two banks HBL and NIBL have lower dividend risk.
 The correlations between EPS and DPS have both positive and
negative relation among the sample banks.
 The correlations between MPS and last year dividend have both
positive and negative relation of insignificant.
 The correlations between EPS and MPS of all sample banks have
positive relationship.

5. ISSUES AND GAPS.

During the writing session of the thesis, the issues relating to dividend
factors to dividend factors were found. There have been many national and
international studies in the field of dividend policy to date, In Nepalese
context, Pradhan’s and Mandhar’s research can be considered to be
landmark in the field of dividend market in last few years and the validity of
past results are doubtful in the present context. So, it is necessary to

96
 carryout a fresh study related to dividend pattern of Nepalese financial in
institution.

Lock of legal Rules and Regulations

There is a lack of rules and regulations while paying dividend every year by
the [Link] government does not have any clear policy towards
dividend so that companies may force to pay the minimum dividend in
recession also.

Lack of strategic Policy in Dividends

There is hardly any company which adopts the dividend policy out of number
of listed companies. There seems instability and inconsistency is dividend
payment. Dividend payout ratio hardly shows the stability and co-ordination
with other factors.

Investors with no-conscience

In context of Nepal, shareholders are not so much literate about the
investment divisions, so they do not know about dividend payment system,
shareholders are the investors who have the right to get dividend from their
investment but they are exploited by the companies. Open market concept is
one who invests money to gain more money in return. There is a lack of legal
body to educate the share holders.

Lack of strategic Policy in Dividends:

There are hardly any banks which adopts the dividend policy out of 100 listed
banks. There seems instability and inconsistency in dividend payment.
Dividend payout ratio hardly shows the stability and co-ordination with others
factors.

Verbal and professional Commitments Differ

Verbal and professional commitments are always differ made by companies
at earlier stage of raising the capital from general public. Companies always
attract investor mentioning to pay higher rate of dividend. Which never done in
practices.

97
Government silence in unbalanced economy
Government does not have clear policy regarding dividend amount paid by
the companies. The numbers of companies are suffering from loss.

98
 Chapter v

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary
Dividend simply means the portion of net profit distributed to shareholders by
the company. So dividend policy refers to the division of earnings between
payments to stockholder and re-investment in the firm. Theory of dividend
policy and implementation of dividend payment to the common stock holders
do differ in practical [Link] and Muller theory insists the hypothesis on
dividend as an irrelevance theory.

M.M hypothesis insists that dividend policy does not affect the stock price
which makes dividend decision irrelevant conveys passive residual theory
earning available for payment where as other argue that dividend policy does
affect the value due to the factors of uncertainty.

Many factors affect the dividend payment depending upon investors need and
preference on one side and the financing needs of the financial institutions to
potential investment opportunities on the other side. Dividend policy involves
many aspects such as selecting the types of dividend as well as selecting
constant or fluctuating dividend payment and also other extra dividend
payment and forms of dividend and dividend policy.

After the economic liberalization in Nepal, the governments of Nepal make an

open market policy in the country. So due to open market policy after 1984,
many commercial banks, joint venture banks, financial institutions and
insurance companies are established in Nepal which got opportunity and
appropriate environmental to expand their activities.

Stock has always a high desire and expectation that market price share will
be higher than its net worth and getting high percentage of dividend from
earnings. So distributing dividend to the shareholders is one of the effective

99
ways to achieve the attention and trust to investors to encourage them to
invest in the share market
dividend policy study mainly aims to access the prevailing practices of listed
sample banks regarding dividend payment.

Dividend paying financial industries has been selected for the study, so
implication of dividend, Instability of dividend and haphazard payout ratio
Nepalese financial institution and such financial institutions do not adequately
maintain cash balance for dividend payment.

From shareholders perspective, shareholders have always high expectations

that marker prices of share will be significant higher than the net worth of
shock price. so companies invested by foreigners are paying dividend that is
more attractive dividend than the companies promoted by the Nepalese
promoters. Because higher net worth do not benefit the foreigner rather than
market prices of share. They invest their capital only for higher return in the
investment. For example, SCBNL have 70% foreigner investment so the
preference of this bank is cash dividend rather than any other form of
dividend.

However, joint venture banks are not guided by an appropriate dividend

policy. This will actually affect the market price, goodwill of all such banks in
the long run. So this study covers banks of Nepal paying dividend which
covers a period of six years from the year 2002/03 to 2007/08.

To analyze the dividend payment practices of sample banks, different

financial ratio and statically tools and hypothesis have been calculated and
interpreted. In order to assess the impact of dividend on market price of
shares, available information for banking are reviewed and analyzed

100
The major aspects of the study are discussed in this chapter.

Test of hypothesis of DPS shows that there is significant difference between

DPS of banks at 5% level of significance. Test of hypothesis of DPR shows
that there is no significant difference between DPR of sample banks at 5%
level of significance.

5.2 Conclusion
Above mentioned major findings led this study conclude that earnings of
sample bank SCBNL is comparatively high than other two bank. The results
high than other two banks. The results of this analysis are not strong enough
to establish the relationship between dividend policy and dividend practices of
Nepalese companies. Though it shows the glimpse of dividend practices in
Nepal in recent years.

The insignificant relationship between DPS and other financial indicators

indicates that the dividend policy of all these companies is not better. From
the analysis it is found that the market price of stock is not affected by other
variables. But in Nepalese context, changes in these variables affect the
market price of the stock. This indicates about the irrational behavior of
investor. They are investing the money to securities randomly without
analyzing the company’s financial and investment policies. It shows the in
efficient capital market of Nepal.

Sample banks don’t seem to follow the optimum dividend policy of paying
regular dividends per shareholder’s expectation. It might cause uncertainty
among stockholders.
The situations of capital market of Nepal are improving day by day. As a
result, the capital market seems to be efficient while comparing to previous
years. But it is reality that the capital market of Nepal is still immature. The
major findings have also led to conclude that the sample banks are neglecting
the major factors like earnings position of the firm, liquidity position while
paying dividend.

101
Dividend practices of all sample banks are neither stable not constantly
growing.

The study of the impact of cash dividend that dividend on market price of
share revealed that dividend per share has positive impact on the market
price of share in all sectors.

The study deals with only examining and analyzing the dividend practices of
sample banks. For a period covering 5 years from 2002/03 to 2007/08 due to
limited period. It a large sample is taken for the whole population the result
might very and be more accurate and absolute. So, dividend policy may be
subjected of further study, which can be more appropriate.

The correlation of EPS and DPS shows that it is positively correlated then, it
means higher the EPS, higher will be DPS and if it is negatively correlated
than vice-verse. EPS and DPS are positively correlated in all sample banks
which means higher the EPS, higher will be MPS.

From the analysis, it is found that name of the sample companies have
followed a relevant and appropriate dividend policy except SCBNL. Other
banks are neither followed neither fixed dividend policy nor constant payout
ratio. This fluctuation in dividend distribution may causes uncertainly among
stockholders. Analysis shows that the sample companies are ignoring the
liquidity position of company while making dividend decision.

All companies must accept one major fact that EPS is to be considered for
determining dividend amount. The analysis shows the insignificant
relationship between EPS and DPS. This indicates that EPS is not taken in
account for declaration of dividend. So, it is important for the companies to
consider earning rather than neglecting it while making dividend decision.

102
5.3 Recommendations
Although, this study is concerned with dividend practices of Nepalese
Financial Institutions, it may be appropriate to provide a package of
suggestion in the light of major findings and conclusions. The given
recommendation have been classified in five different parts i.e. for the future
researcher, for share holders, for company’s management, for the stock
broker and lastly for government.

5.3.1 For future Researcher

This study has concluded within various shortcoming and limitations. There
are several avenues for future research in the area of dividend practices in
Nepal. Since dividend affects an individual shareholders on the one hand and
whole economic development of the nation on the other hand. Hence, it may
be pertinent to suggest the researcher of finance to develop on the subject of
dividend policy and practices. And, it is hoped that present study helps them.
A first avenue of research is to make study by additional years and by
increasing sample companies to get greater insight into the effect of dividend
practices. A second research avenue is to find out other relevant variables
which will explain the variation in stock price besides the variable presented in
this study. Lastly, the models developed by financial expert are not applicable
to have the rational dividend practices in the Nepalese financial sector. So
one Important Avenue of research is to estimate and forecast an appropriate
model by proving it to practices among various model available in the
literature.

5.3.2 For the Investors

Actually, shareholders are the owners of company. In the case of Nepalese
companies, shareholders are exploited by the company’s management in
many ways, so knowledgeable investors are needed to protect their rights.
Conscious shareholders will protect their interest by themselves and lead the
company in profitable way. However, Nepalese investors are investing their
funds on companies haphazardly, randomly and without consulting capital
market analyst. So they are suggested to analyze the capital market situations

103
before investing their fund. It is noted that, there must be such kind on of
institution which is fully devoted to educate investors about their rights on
dividend income and other specific right. Such kind of organization should be
recognized by government. The government should encourage this kind of
organization to promote the activities and to protect the interest of investors,
which will help the steady growth of the company, as well as create the good
atmosphere of understanding between company’s management and share
holders.

5.3.3 For Company’s Management

Companies are paying dividend without adopting any appropriate policy. It
seems impossible to increase shareholders wealth. Companies management
are advised to adopt the long-run dividend policy like, fixed divined payout
policy which helps to boost up the wealth of shareholders. By considering the
different responsibilities to protect investors interest but not for the operation
of company in a way desired by themselves and every policy should be
passed on the consensus of shareholders.

5.3.4 For the Government

The legal rule for treatment of dividend is must for the smooth growth of the
companies as well as growth of national economy. But, since most of the
public enterprises are suffering losses and efforts are continuously made to
minimize less rather than payment of dividend, government has not given any
consideration to legislate legal rules regarding the dividend policy. Some of
the companies are in position to pay dividend but there is already unequal
distribution of dividend as reflected by some cases. Therefore, the
government should act in favor of investor’s and their companies by making
distinct rules.

104
 BIBLIOGRPHY

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JOURNALS, REPORTS AND PERIODICALS:
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Dividend Payout Ratios" , Journal of Financial Research, Fall, 249-59.

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Thesis:
Adhikari, Navraj, (1999). Corporate Dividend Practices in Nepal. An
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Aryal, Hari Ram (1997). Dividend Polcy comparative study between Nepal
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Policy of Grindalys Bank [Link] Indosuez Bank Ltd. And Nepal Arab Bank
Ltd. An Unpublished master’s Thesis. Kathmadu. Sanker Dev Campus. T.U.

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Unpublished MBA. Thesis Kathmandu .(CDM,TU).

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107
 APPENDIX 1

Data Presentation
1) Himalayan Bank Limited
Years EPS DPS DPR% P/E Earning MPS CRR Dt-1
Ratio Yield

2002/03 49.45 1.32 2.65 16.91 5.92 836 8.32 25

2003/04 49.05 - 0 17.11 5.84 840 8.28 1.32

2004/05 47.91 11.85 24.17 92.2 5.12 920 7.86 -

2005/06 59.24 30 50.64 18.57 5.39 1100 5.92 11.85

2006/07 60.66 15 24.72 28.69 3.49 1740 5.92 30

2007/08 62.74 25 39.85 31.56 3.17 1980 5.13 15

Source: Annual Report of HBL Bank

108
 APPENDIX 2

Data Presentation
2) Standard Chartered Bank Nepal Limited
Years EPS DPS DPR% P/E Earning MPS CRR Dt-1
Ratio Yield

2002/03 149.3 110 73.68 10.98 9.10 1640 9.07 100

2003/04 149.3 110 76.63 12.16 8.23 1745 9.46 110

2004/05 143.14 120 83.83 16.38 6.10 2345 8.77 110

2005/06 17.84 130 79.62 21.47 4.66 3775 6.86 120

2006/07 167.37 80 77.67 35.25 2.84 5900 5.46 140

2007/08 131.92 80 60.64 51.77 2.84 6830 5.84 80

Source: Annual Report of SCBNL Bank

109
 APPENDIX 3

Data Presentation

3. Nepal Investment Bank Limited

Years EPS DPS DPR% P/E Earning MPS CRR Dt-1

Ratio Yield

2002/03 39.56 20 50.56 20.1 4.98 795 10.11 30

2003/04 51.7 15 29.01 18.18 5.5 940 9.19 20

2004/05 39.5 12.5 31.65 20.25 4.94 800 9.78 15

2005/06 59.35 20 33.69 21.23 4.71 1260 13.61 12.5

2006/07 62.57 5 7.99 27.63 3.62 1729 10.47 20

2007/08 57.87 7.50 12.96 42.33 2.32 2450 10.91 5

Source: Annual Report of NIBL Bank

110
 APPENDIX 4

Regression Analysis of HBL

Note: Value of X represents EPS

Value of Y represents MPS

Output of Regression Result

X = 54.84 a = -3818

Y = 1236 b = 92.16

∑x2 = 18271.9 S.E = 421.45

t = 0.22

∑x = 32.05

∑xy = 427.552

∑y2 = 10408896

∑y = 7416

111
 APPENDIX 5

Regression Analysis of NIBL

Note: Value of X represents EPS

Value of Y represents MPS

Output of Regression Result

X = 1329 a = - 61520.81

Y = 51.79 a = - 61520.81

b = 46.43 t = 0.02

∑x2 = 16584.49 S.E = 2281.63

∑x = 310.55

∑xy = 436394.23

∑y2 = 12735166

∑y = 7974

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 APPENDIX 6

Regression Analysis of HBL

Note: Value of X represents EPS

Value of Y represents MPS

Output of Regression Result

X = 151.88
a = 2944.4 1
Y = 37.05.83 b = 5.01

t = 1.06
2
∑x = 139721.47
S.E = 4742.76
∑x = 911.12

∑xy = 3383302.65

∑y2 = 106943175

∑y = 22235

113