Introduction

1.1 Background of the study

Nepal Is a country trying to develop its through global trend and of course with country

suited economic liberalization. Development in the financial term is the efficient flow and

generation of the funds in the most productive sectors. The nation having effective fund

collection from the nook and corners of the country and investing in the productive areas are

the economic heroes at the present scenario. European and American economies are the best

examples for this argument. Similarly the security against the risk is also one of the vital

concerns while making investments. Therefore the two basic and important elements for an

investment are fund as well as security.

Banks generates the fund through different means and insurance companies insure against the

risk of any business. That is the reason the country having the efficient and effective banking

and insurance facilities is seemed to be successful at the twenty first century.

The establishment of banks and insurance companies are necessary either by the government

or by private sectors. Both have equal contribution for the generation as well as mobilization

of the funds.

It is always discussed that the participation of the private sectors plays even more important

role for any the economic development. But, however, even with the rapid development

views of financial institutions, Nepal has not been able to achieve the desired income so far

which is due to the poor capital market situation of the nation and due to the initial stage of

modern economy.

Among these circumstances, capital market and its extensity also play great roles. Capital

market generates and liquidates the security as per the requirements. So is the reason

extension of capital market is only the way to productive mobilization of the funds. But

unfortunately, Nepalese capital market has not efficient communication network even today.

1
It has made capital market less efficient and inefficiency results the risk. Even though, it is

hoped that Nepalese capital market will be moving towards efficiency in the earlier future.

The history of securities market began with the flotation of shares by Biratnagar Jute Mills

Ltd. And Nepal Bank Ltd. In 1937. Introduction of the company Act in 1964, the first

insurance of Government Bond in 1964 and the establishment of securities Exchange Centre

Ltd. In 1976 were other significant development relating to capital markets.

When security exchange centre converted into Nepal Stock Exchange (NEPSE) in 1993 , the

objectives of this institution become; to import free marketability and liquidity to the

government and corporate securities by facilitating transactions in its only trading floor

through market intermediaries i.e. brokers as well as market makers.

Nepal Stock Exchange, in short NEPSE, is non-profit organization, operating under securities

Exchange Act, 1983. NEPSE opened its trading floor on 13 th January 1994. Members of

NEPSE are permitted to act as intermediaries in buying and selling of government bonds and

listed corporate securities. At present, there are 27 member brokers and 2 market makers,

who operate on the trading floor as per the Securities Exchange Act, 1983, rules and byelaws.

At present Nepal have so many banks and insurance companies performing different tasks. It

shows there is perfect competition between these institutions. In some cases both insurance

companies and commercial banks work mutually. Commercial banks are more effectively

working than insurance companies. It is because, the banks have highly skilled personnel,

modern banking services, management skills, quick and prompt services, international

network and country suited services. However, two big banks namely, Nepal Bank Ltd. And

Rastriya Baniya Bank are going to be run by contracted management, which shows still

Nepalese commercial banks have some practical problems and limitations.

Besides these all, banks are performing various functions such as money creation and

generation, deposit collection, credit extension, credit card issue and cheque transaction,

2
import letter of credit, traveler cheque, export bill, issue of draft, telex transfer and safe

keeping of value.

Insurance companies on the other hand, playing duel role in the economy, safeguard the

insured against the risk of the loss of the life and property and intermediate scarces of

resources.

If a company has surplus cash, it can buy back outstanding numbers of shares, which is

known as repurchase of shares. In the developed capital market, corporations are allowed to

buy shares back for better utilization of their unused cash. However, Nepalese company acts

1997, section 47 has prohibited company from purchasing its own shares. It states that no

company shall purchase its own shares and supply loans against the security of its own

shares.

People invest their hard money for satisfactory and expected return. To these objectives, firms

distribute the earning to their shareholders. Earning is that amount which remains after

deducting or submitting all operational and non-operational expenses. Stockholders

expectations may vary with their investment priorities, even though. Some participates in

capital market in order to have some dividend as return whereas some hope for capital

appreciation of stocks. In fact primary intention in investing share is to earn as dividend but

in Nepalese context people are interested in investing with keeping the views and expectation

of more capital appreciation of stocks, but that is secondary expectation, theoretically.

The main focus of investors however is the dividend. But there is not any consistency and

regular practice of dividend announcement in different firms. They are exactly different as

per their dividend policies. Similarly in the secondary market the declaration of the dividend

or the dividend policy of the firm changes the market price of the shares. Therefore it is

expected that there is some impact of dividend policy over the market price of the stock.

3
Dividend Policy & Market Price of Stock (MPS)

Once a company makes a profit, they must decide on what to do with those profits. They

could continue to retain the profits within the company or they could pay out the profits to the

owners of the firm in the form of dividends. Once the company decides on whether to pay

dividends, they may establish a somewhat permanent dividend policy, which may in turn

impact on investors and perceptions of the company in the financial markets. What they

decide depends on the preferences of investors and potential investors.

Dividend in the simple term is part of earnings, which is announces to distribute between the

stockholders. In one way it is the cost of sacrificing hard money but as an investment. But

unfortunately, some company pay whole earnings as dividend and some company do not and

some company retains more and pays less as dividend.

In practice, company pays whole earnings as dividend at the beginning to create better image

and existence in the financial market but later they may change their policy and announce a

certain percentage of dividend payout term. The decision to keep some portion of earning or

pay some portion of earnings as dividend is known as dividend policy.

The dividend payout ratio may be different but the common dividend payout ratio (D/P ratio)

is 40% as different studies reveal. Keeping, all these things into consideration, it could be

said that, the actual owner of the firm or company are not treated rightly by not giving

sufficient and reasonable dividend. Moreover in some companies dividend is not announced.

But recently the trends of the dividend payment are increasing.

The present scenario of the worlds capital market is more dependent in capital appreciation

base. But for capital appreciation improvement, some sorts of dividend policy are practiced

or adopted by a firm, is vital.

In the Nepalese context, dividend policy is less balanced. Theoretical and practical deviation

has proved, everything as written is not practiced and everything practiced is not of actual

4
theory. Therefore dividend policy is the practice, strategy or decision made by a firm as per

their requirements to establish market reputation as well as to meet general expectations of

the shareholders.

The payment of the corporate dividend is at the discretions of the Board of Directors. Most

corporations pay dividend quarterly. Dividends may be paid in cash, stock or merchandise.

Cash dividend is the most common; merchandise dividends are at least common.

Stockholders are not promised a dividend, but he/she grows to expect certain payment on

historical dividend pattern of the firm. Before dividend are paid to common stockholders the

claims of creditors, the government and preferred stockholders must be satisfied.

Market price of the stock is the trading price of the stock listed in authorized or legal stock

exchanges. In context of Nepal, MPS is the price that is coated for purchasing or selling

under Nepal Stock Exchange Act or related laws and regulations, on the stock exchange floor.

MPS is that value of stock, which can be obtained by a firm from the market. Market value of

a share is one of the variables, which is affected by the dividend per share and earning per

share of the firm. If the earning per share and dividend per share is high, the market value per

share will also be high. Market values of the share may be high or low than the book values.

If the firm is growing concern and its earning power is greater than cost of capital, the

market value of the share will be higher than the book value. If the firms earning capacity is

lower than the cost of capital MPS will also be lower. MPS determined by capital market.

Market price of the stock usually fluctuates by the adequate information. No one can earn

more in the inefficiency and inefficiency is legally prohibited in order to regulate the security

market in every nation. But being focused in this study, dividend policy and its impact on

market price of stock, there should be discussed different models and practices which have

significant effects in MPS or not. So MPS and security valuation are integral parts in it. With

out valuation no one can coat the price without price there is no chance of trading.

5
Every day in newspaper one can see the market price of the different shares from different

companies. The trading of the share definitely requires the MPS, which can be obtained by

the stock valuation.

Share valuation in an economic progress generates rational securities prices. Although the

price fluctuations may appear to be chaotic, they are random fluctuations that result from the

random arrival of the new information.

Dividend policy and MPS has always correlation; if the company pays high dividend the

MPS increases and vice-versa. But in some cases out of this interrelation, the price may

remain constant or decrease too. Therefore, the information lack or flow is also vital in the

analysis of MPS.

1.2 Focus of the study

The main focus of the study is to examine the practice made by the Nepalese firm in regards

to the dividend policy. But for whole these purpose different other studies are going to be

done i.e. comparison of earning per share(EPS),dividend per share(DPS),market price per

share(MPS) and others as per the requirement with respect to the sample firm. They study

will be more focusing on the dividend policy and MPS; however other qualitative discussion

will be submitted including the Nepalese practices. The relationship between different

variables(s) will be individually and combine analyzed in order to state the particular

suggestion. In the same way, the study will be focus on behavioral aspects of Nepalese

investors but in regards to dividend practices made in past five years by the sample firms.

1.3 Statement of problems

Dividend policy itself is not well-known subject or practice by large numbers of financial

community even today. Form the past many years it has been tried to see the relevant and

practicable dividend policy in the firms all over the world. In context of Nepal, firms have

followed some kinds of dividend policy but of course, with an adhoc trend. That is the

6
reason; it can be said that dividend policy is not matching with the earnings made by the

firms. But at the same time, it is the truth that many scholars have not been able to define

simple and conclusive relationship between dividend policy and market price of the stock.

Some experts believe to have positive relationship but other believes no relation at all.

The capital market of Nepal is just in the way to development, yet investors are investing in

new companies with out having the perspective analysis of those companies. Stock price

increases with the announcement of dividend although the firm-announcing dividend might

be of under capitalized.

In popular practice of Nepal, when the firms earn big earnings they retain more and when

they do not have good figure of earnings, company announces high dividend to protect their

image in the capital market. Studying the dividend trend of Himalayan bank it can be proved

as this bank had paid Rs35 in the year 1995/96 when the EPS was Rs103.43 but in the year

1997/98 it had paid Rs110 as dividend, it is because the bank wanted to increase the

perception value to protect the image in the capital market. In the same way many other

examples can be found even these days.

Many researches have been made earlier in this concern. However, no other studies have been

made to see the impact of dividend policy on the market price of the stock including the

actual scenario of Nepalese capital market.

Moreover, research question is to find out what sorts of limitation or gap have made a culture

of stock price change. Therefore the main focus of this study is to deal with the following

problems so far it will be possible to cope with:

a) What is the impact of dividend policy on the market price of the stock?

b) Is there any uniformity between the firms in regards to financial indicators and

variables?

7
 c) What are the reasons behind stock price increasing after the announcement of

dividend and are there any gaps, which have to be remarked?

1.4 Objectives of the study

i) To study the prevailing practices and effort made in dividend policy in the Nepalese

firms with help of sample firms.

ii) To find out the impact of dividend policy on market price of stock.

iii) To analyze if there is any uniformity among DPS, EPS, MPS and DPR in the sample

firms.

iv) To provide suggestions on the basis of findings.

1.5 Hypothesis of the study

1. Mean values of EPS of NABIL and HBL

Ho: There is no significance difference between mean value of EPS of NABIL and HBL

H1: There is significant difference between mean value of EPS of NABIL and HBL.

2. Mean values of EPS of LCIC and SICL

Ho: There is no significance difference between mean value of EPS of LCIC and SICL

H1: There is significant difference between mean value of EPS of LCIC and SICL

3. Mean values of DPS of NABIL and HBL

Ho: There is no significance difference between mean value of DPS of NABIL and HBL

H1: There is significant difference between mean value of DPS of NABIL and HBL.

4. Mean values of DPS of LCIC and SICL

Ho: There is no significance difference between mean value of DPS of LCIC and SICL

H1: There is significant difference between mean value of DPS of LCIC and SICL

5. Mean values of MPS of NABIL and HBL

Ho: There is no significance difference between mean value of MPS of NABIL and HBL

H1: There is significant difference between mean value of MPS of NABIL and HBL.

8
6. Mean values of MPS of LCIC and SICL

Ho: There is no significance difference between mean value of MPS of LCIC and SICL

H1: There is significant difference between mean value of MPS of LCIC and SICL

1.6 Significance of the study

As dividend is one of the factors in every organization and dividend policy decision is one of

the most important decisions, this might serve to be important information for these

respective firms taken as sample. Besides, the shareholders and financial institutions may also

be benefited from this study. Moreover, this study will support the future researcher by

providing valuable information. Especially the significance of this study can be summarized

in the following points:

i) The study helps to the management and policy maker in setting and making a

suitable dividend policy.

ii) The dividend policy of the banking and insurance sector plays vital role for socio-

economic development in the nation , that is way the study of dividend policy of

these sector is needed so far as possible,

iii) To raise public awareness about dividend policy and market price of share relation

in order to help them for rational decision of their investment.

Limitations of the study

i) Most of the data used in the research are of secondary nature; therefore there

might be reporting errors.

ii) All the data are based in fiscal year 2008/2009 to 2012/2013 for commercial

Banks and 2008/2009 to 2012/2013 for Insurance Companies.

iii) Among the different aspects of dividend policy only the market price of the stock

been selected & only cash dividend is taken for the analysis.

9
iv) Due to annual distribution system in Nepal, dividend has not been considered for

calculation of holding monthly periodic return.

v) The data being taken from secondary source the authentic of the data is dependent

on the accuracy of the website used.

1.8 Organization of the study

This study has been organized into five chapters:

Chapter1: introduction

This chapter deals with subject matters of the study consisting background of the study ,

focus of the study, statement of the problem, objective of the study and significance of the

study.

Chapter 2: Review of Literature

This chapter deals with review of the different literature of the study field. Therefore it

includes conceptual framework along with the review of major books, journals, research

works and thesis etc.

Chapter 3: Research Methodology

This chapter deals with research methodology and it includes research design, population

and sample, source and technique of data collection, data analysis tools and limitation of

the methodology.

Chapter 4: Data Presentation & Analysis

This chapter deals with analysis and interpretation of the data using financial and

statistical tools described in chapter three. Similarly this chapter also includes the major

finding of the study.

Chapter 5: Summary, Conclusion and Recommendations

10
This chapter deals with summary of the study held, the conclusion made ultimately and

the possible suggestions.

11