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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT © 2013 Institute of Interdisciplinary Business Research 211

JANUARY 2013

VOL 4, NO 9

EFECTS OF DIVIDEND ANNOUNCEMENT ON STOCK RRICES: EVIDENCE FROM PAKISTAN

Faiza Saleem(Corresponding author)

Lecturer - Department of Management Sciences, University of Wah

The Mall, Quaid Avenue, Wah Cantt (47040) – Pakistan

Laraib Zafar

MBA Student - Department of Management Sciences, University of Wah


Saba Anwar



Sadia Tariq



Haris Khurshid



Umair Karim



ABSTRACT

The objective of this research study is to analyze the impact of dividend announcement on stock prices in Pakistani

economy. The study investigates whether change in dividend announcement leads to change the stock prices. Time

period selected for this research is from 2007-2011. The study employed ratio analysis of five selected companies

from each oil and textile sector listed in Karachi stock exchange and the ratios are; dividend payout ratio, Dividend

yield, earning per share, price earnings ratio and dividend cover ratio. This result shows that dividend announcement

have strong impact on stock prices. Increase in dividend announcement increase the stock prices and vice versa.

Keywords: Dividend announcement, stock prices, ratio analysis, oilsector, textile sector.

1. INTRODUCTION:

Increase and decrease in dividend payments have major impact on stock prices of the firms. Announcement of

increase in dividend payments tends to be related with increase in stock price and announcement of decrease in

dividend payments tends to be associated with decrease in stock price around the time of the dividend announcement.

Such market process is known as dividend announcement effect. A dividend is a portion of company's earnings that

is paid to its shareholders out of the retained earnings. It is declared by the company’s board of directors. Companies

pay dividends to transfer their profits directly to their shareholders. A company's willingness and ability to pay

dividends regularly to shareholders from retained earnings gives the investors insight information about its future

growth and performance. Dividend variations bring important information to the market in the way that dividend

changes reflect inside information about current and future cash flows. Dividend increases (decreases) convey

positive (negative) information of the future prospects of the firm. So, the announcement of dividend increase

(decrease) is associated with a rise (fall) in stock prices(Miller and Rock 1985).On the whole stable and profitable

companies pay dividends. However it does not suggest that companies which do not pay dividends are profitless. If a

company thinks that its growth opportunities are better than investment opportunities presented to shareholders

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elsewhere, the company would reinvest profits into the business. Dividends can be determined by either a fixed rate

known as preferred dividends or a variable rate based on the company's latest profits known as common dividends.

Companies are restricted to pay dividend to preference shareholders first and then to common stock holders

according to Companies Ordinance 1984. Dividends are normally paid in cash but they can also take the form of

stock when a company issues extra shares instead of paying in cash. The market assessment of stocks is dependent on

the predictable future dividends.Change in the dividend policy is more frequently followed by change in the market

value of stocks. If the company pays out all of the earnings, funds for future investment will decrease and dividend

may not increase in the future resulting in a decline in stock price. Larger changes in the dividend involve greater

changes in the firm's cash flow. Therefore, the extent of the market reaction is positively related to the size of the

dividend change.

Dividend announcement is imperative to the shareholders because of tax implication. A negative relationship between

dividend announcement and stock price is expected due to tax factor. Very often dividend is taxed at a higher rate as

compared to capital gains which may have negative impositions for investors. In Pakistan dividend is taxed at the rate

of 10% and capital gain only at 0.1%.There are many factors that influence stock price other than dividend

announcement. The share prices of the companies listed on stock exchange are daily moving upward or downward

due to transactions done on stock exchange. The stock price will fall if sellers are more than the buyers. On the other

hand, if there are more investors who want to buy the stock than the number of shareholders who are willing to sell

their shares, the price will rise. As a result, stock prices fluctuate consistently. Another factor that affects the stock

prices is budget deficit(Faiza et al 2012). Company’s profitability, business expansion, economic estimate and market

condition are some of the factors been responsible for price fluctuations. News is absolutelyan important factor that

changes the stock price. There are some other factors like war, natural disaster and other ones that influence the

stocks causing a fall in the prices. In 2008 the global recession had taken count of all of the primary stock markets of

the world. Whereas there are some factors like some new business partnership, a new innovation, dividend

announcements and earnings announcement and so on that causes a rise in the prices of certain stocks. All these

factors influence stock price but this research will consider only the impact of dividend announcement on stock price

as investors focus too much on the dividends.

Stock price is the price of one share of stock. Share prices enable the investors to make their decision to invest or not

in a particular stock. Shares are issued to the general public in various phases during the life time of companies.

When the company issuesits shares for the very first time to the general public it is called initial public offering. The

shares are floated at this time on their face value / nominal value (means no extra amount in the shape of share

premium is charged) by advertisement in all the leading newspapers of the country. After IPO, whenever the

company will sell its shares to general public by means of advertisement in the newspapers; it is called secondary

public offering. The price offered at this time varies from the face value of shares. Companies with good repute

charges share premium for their shares whereas those companies which are not performing well are likely to offer

shares at discount. Publicly listed companies shares are traded in stock exchanges daily. The price offered in the stock

exchange is termed as “Market Price” of the shares. For the purposes of this research project, the term stock price

would mean market price of the share. For practical implementation of this study we select two different sectors of

Pakistan. Firstly, we select oil sector and secondly, textile sector. The reason of selection these two sectors is to

analyses the dividend announcement impact on stock prices. As oil sector of Pakistan is consider as stable sector

where as textile sector are in crisis. So these two sectors are considered as best choice to made comparison. Stocks of

all these companies are enlisted in all three stock exchanges of Pakistanlike Karachi stock exchange, Lahore stock

exchange and Islamabad stock exchange respectively.

2. LITERATURE REVIEW:

A literature review is a structure of text; its basic purpose is to review the critical points of current knowledge

including substantive findings as well as theoretical and methodological contributions to the related topic i.e,

dividend announcement and stock prices. Literature review is the secondary sources of collecting theoretical data

related to the selected topic. Dividend announcement and stock prices show different relationship in different

countries due to different factors.

http://en.wikipedia.org/wiki/Secondary_sources

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The empirical relationship between share price reaction and dividend announcements has been examined by (Capstaff

and Marshall 2004) by using signaling model from the Oslo Stock Exchange and subsequent changes in the cash

flows of the firms involved. This paper adds to existing evidence by examining the role of dividends in a market

where the corporate ownership structure is notably different from the U.S and the U.K, and where the motivation to

use dividends as a signaling mechanism appears to be stronger. The results indicate significant abnormal stock returns

are associated with announcements of dividend changes. The results are robust to alternative models of dividend

expectations, after controlling for the impact of earnings announcements, and are consistent across sub-periods in the

sample. The stock market reaction is most pronounced for large, positive dividend announcements that are followed

by permanent cash flow increases. This evidence provides modest support for the signaling theory of dividends in

Norway, but it does not support the proposition that corporate ownership structure is an important influence on the

use of dividends as a signaling mechanism. (Nishat and Irfan 2000) conducted research on the role of dividend policy

measures i.e. dividend yield and dividend payout ratio on stock prices of 160 firms listed on Karachi stock exchange.

The pre-reform period (1981-1990) and post-reform period (1991-2000) was considered for the research. Share price

changes are related with the market risk so some control variables were also included to control that variability. These

variables included leverage ratio, size of the firm, earnings volatility and growth of assets. The ratios were calculated

and averaged over the years under study. The data was interpreted by regression analysis .The results showed that

dividend yield and payout ratio had noteworthy impact on stock price. The correlation between stock price and

dividend yield was -0.218 considerable at 0.01 levels. The correlation between stock price and dividend payout ratio

was -0.177 significant at 0.05 levels. During the pre-reform period the coefficient of dividend yield was greater than

that of payout ratio. Payout ratio was having important impact only at lower level of significance .During the whole

period size and leverage ratio had positive and major impact on stock price. Finally the impact of earning volatility

was negative and insignificant.

(Modigliani and Miller 1999) concluded that dividends do not affect firm value under perfect capital markets with no

taxation, transaction costs and information asymmetries. They said that only investment policy can affect corporate

value. The decision to disburse dividends is based on market imperfections due to information asymmetries between

management and investors. Management is more knowledgeable about the current and future financial position of the

firm than investors. Therefore, dividend changes express precious information to the market in the sense that

dividend changes reflect inside information about current and future cash flows i.e. dividend increases (decreases)

suggest positive (negative) information of the future projection of firms. Therefore, an announcement of dividend

increase (decrease) is follow by a rise (fall) in stock prices. (Venkatesh 1989)examined the weight of pre-dividend

and post dividend initiations on stock prices. He also investigated whether the dividend announcement acts as an

option for earning announcements and the influence of size and trading history. CRSP firms were considered for the

period of 1972-1983. Market model was applied and Pre and post comparison are done with cross-sectional

regression. The results showed that the average price reaction to earnings announcements is smaller in the post-

dividend period. The results are significant at the 1% level. The trading history, size and market had no noteworthy

impact.Lonie et al (1996) were the first who analyze market reaction to both announcements of dividend and

earnings. The sample comprised of 620 firms listed on London stock exchange. The data was interpreted through

cross sectional regression analysis. The results showed that both announcements had major impact on stock price but

earning announcements had bigger influence on stock prices than dividend announcements. (Randal 1983) conducted

a research paper; the paper analyzed the effect of unexpected dividend changes on the value of common stock,

preferred stock and bonds. The study acknowledged two potential effects first wealth transfer effect and second

signaling effect. Previous studied had showed that positive (negative) dividend change announcements produce

positive (negative) common stock price changes. For the research the sample size selected was 225 companies

initially from NYSE, the results shows that unexpected dividend increase (decrease) is associated with positive

(negative) debt and preferred stock return.

(Petit 1972) investigated that positive changes in dividend payments bring about positive abnormal returns while

negative changes in dividend payments bring about negative abnormal return. (Watts 1973) carry forward the results

of (Petit 1972). The study investigated the importance of dividend in two different ways. Firstly the relation whether

the unexpected dividend changes were associated with positive future earning changes and secondly the relation

between unexpected changes in share price and changes in annual dividends which convey priceless information to

shareholders. The sample consisted of 310 firms. The results showed that relationship was positive but not very

strong. (Watts 1973)conclude that, “The market is unable to distinguish between the changes in dividend due to

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information and changes due to noise in the dividend model, so that the effect on the price of firm’s stock of an

unexpected change in dividends is small.”

The impact of stock splits and stock dividends on stock price has been examined by (Rankine and Stice 1997). The

emphasis was that on which announcements put more effect on stock price. For the research sample size selected was

of 337 companies and used t-test for interpreting the results. The results showed that independent of the intent of

accounting rule makers in formulating GAAP, managers use the choices allowed under current accounting rules as a

vehicle for signaling private information. (Hamid-Uddin 2002)evaluated that market assessment of stock depends on

the expected future dividends. If company pays out all of the earnings, funds for future investment will decrease and

dividend may not increase in the future. Moreover, when dividend is taxable, paying out more cash would increase

the shareholders tax legal responsibility. Companies pay cash dividends to their shareholders to indicate information

about the future earnings prospects. Based on the 137 DSE listed companies declaring dividends during October 2001

and September 2002 it was found that investors do not benefit from dividend announcement. Over the period starting

from 30 days prior to dividend announcement to 30 days after the announcement of dividend payment, investors

incurred losses up to 19.52 percent of stock value. Although this loss of value was partly compensated by the current

dividend yield, investors in Bangladesh seem to have no net advantage due to dividend payments.

(Ahmad and Chaudhary 2003) investigated the impact of dividend announcement on common stock prices of firms

listed on Lahore stock Exchange. The study considers 24 companies for period of 2002 -2003 and was selected on the

basis of high stock turnover. Market-Adjusted Abnormal Return (MAAR) and Cumulative Abnormal Return (CAR)

were used to examine data. The results showed that average MAAR on the day of dividend announcement was 0.001

for year 2002 and -0.009 for year 2003 which was not statistically noteworthy. MAAR of three and four days before

the dividend announcement were higher than the MAAR of other days of window period which implied that market

responds earlier than the actual announcement of the dividend. CAR was -0.598 for year 2002 and -0.403 for year

2003 and was insignificant. Overall results showed that the impact of the dividend announcement was not strong in

the LSE. (Ariff et al 2000) established the joint linear effect of dividend yield, payout ratio, Leverage, price earnings

ratio, size of the firm and earning per share for the three markets using data of 16 years in Japan, Malaysia and

Singapore. The six variables were appreciably related to share price volatility in the three markets. In Japanese

market, changes in the essential factors explained two-fifth of the variation in share price but it was not same in the

less developing markets of Malaysia and Singapore. The larger portion of price variation was not explained by the

difference in the six variables in the less developing markets. The prices in those markets were more receptive to

macroeconomic factors which were not included in the cross-sectional tests. Investors in such markets were not

pricing the shares on the basis of basic factors, perhaps preferring to price on tentative information.

(Travlos, Trigeorgis and Vafeas (1999) examined “Shareholder Wealth Effects of Dividend Policy Changes in an

Emerging Stock Market”. They also observed the stock market reaction to announcements of cash dividend increases

and bonus issues (stock dividends) in the emerging stock market of Cyprus. Both events elicit significantly positive

abnormal returns, in line with evidence from developed stock markets. This study contends that special characteristics

of the Cyprus stock market delimit applicability of most traditional explanations for cash and stock dividends in favor

of an information signaling explanation. The empirical results are generally inconsistent with these contentions.

(Lipson, Maquieira, and Megginson 1998) examined “dividend initiation and earnings surprises”; the study observed

the performance of newly public firms and compared those firms that initiated dividends with those that did not.

Earnings increases following the dividend initiation and earnings surprises for initiating firms.

(Dasilas2004) examine the reaction of stock prices and trading volume on dividend announcements from the period

of 2000-2004 for Greek stock markets. Greek stock market was measured because dividends in Greece are paid on an

annual basis and no tax is imposed on dividends and capital gains. The sample consists of 350 firms listed on Athens

stock exchange. There were 216 dividends announcements, 118 were dividend increases and 57 dividend decreases

and 41 stable dividend announcements. Standard event study methodology was used. Naive model was used to

calculate dividend changes .Market model, market adjusted model and raw return model was used to calculate

irregular returns. The results showed that dividend increases result in rise in stock price, dividend decreases result in

decline in stock price, while steady dividend announcement brings about statistically insignificant response to

dividend announcements. (Chen, Firth and Gao1997)investigated the stock market reaction to the information content

of earnings and dividends announcements made by companies listed on Chinese stock exchange. In China dividends

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and earnings are announced at the same time and there is variability in cash dividend payments. The announcement

period was from 1994-1997.As the stock prices in China took some time to show the impact of dividend and earnings

announcements so the stock prices of 7 days before the announcement and 7 days after the announcements were

taken. There were 1232 announcements. The results showed that earnings and dividend announcements brought

information to the stock market and there was positive relationship between changes in earnings and stock prices.

Stock dividend announcements confirm the signal from earnings. Increase in earnings that were followed by

increases in stock dividend had the largest regression coefficient while the increase in earnings followed by a

decrease in stock dividend had smaller regression coefficient. Cash dividends had no important relationship with the

stock prices as there was greater variability in cash dividend payments in China.

(Naceur, Goaied and Belanes 2002) examine two aspects: first they study whether the Tunisian firms follow constant

dividend policies, second they tried to found out whether dividend yield differs vary across industries and to found

out the factors that influence dividend policy making. They analyze data from 1996 to 2002 of 48 Tunisian financial,

industrial, commercial and service companies. The results showed that Tunisian firms used both current earnings and

past dividends and any change in the earnings of the firms is directly reflected in the level of dividends. The dividend

policy varied across financial and non-financial industries and payout ratio of 16% and 27% was for non-financial

and financial firms. The results also showed that stocks with high dividend yields earned excess returns after

adjusting for market performance and risk. By using a fully developed model they determined factors that influence

the dividend policy that were that high risk firms with high financial influence paid less dividends and had lower

dividend yield ,the highly profitable firms paid more dividends. However, larger investment opportunities restrict

firms from higher dividends. (Yoonand Starks1995) examined “Signaling, Investment Opportunities, and Dividend

Announcements”. The study examined potential explanations for the wealth effects surrounding dividend change

announcements. New information concerning managers' investment policies is not revealed at the time of the

dividend announcement. Dividend increases (decreases) are associated with subsequent significant increases

(decreases) in capital expenditures over the three years following the dividend change, and that dividend change

announcements are associated with revisions in analysts' forecasts of current earnings. These results are consistent

with the cash flow signaling hypothesis rather than the free cash flow hypothesis as an explanation for the observed

stock price reactions to dividend change announcements. (Dhillon and Johnson 1994) examined stock price and bond

price reactions to dividend announcements. The sample comprised of announcements of dividend increases and

decreases of firms whose stocks and bonds were traded on New York stock exchange (NYSE). The announcement

period for dividend changes was from January 1978 – December 1987. The study use the mean adjusted returns

method to analyze bond and stock returns. The results showed that bond prices decline when dividend increases and

bond prices rise when dividend decreases. While the stock prices increases with the increase in dividend and vice

versa.

The remainder of this paper is organized as follows. Section 3 discusses the methodology. Emperical results and their

discussion are presented in section 4. A brief summary, conclusion and recommendation are the subject of the final

section.

3. METHODOLOGY: 3.1 Theoretical Framework:

Theoretical framework is an entity related diagram that shows the relationship between dependent and independent

variable. In this research study the dependent variable is stock price (per share of the selected company) and

independent variable is dividend announcement.

(Chen and firth 1997), (Dasilasa (2004) used the given model to investigate the impact of dividend announcement on

stock price in Chinese and Greek stock market.

Dividend Announcement announcements

Stock Price

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3.2 Hypothesis: As this study will investigate the impact of dividend announcement on stock price the following null and alternate hypothesis is formulated for the stated purpose:

H0: There is no increase/decrease in stock price after dividend announcement. H1: There is an increase/decrease in stock price after dividend announcement.

3.3 Sample and sampling Technique:

As sample is the sub set of whole population, the given study selects two sectors as sample i.e. oil sector (five

companies) and textile sector (five companies) from all sectors listed on Karachi Stock Exchange of Pakistan.

Purposive sampling technique has been used. The selected companies fully meet the requirements of research as they

announce and pay cash dividends on regular basis.

3.4 Data Collection

Secondary Data has been used for this research collected from annual reports of five oil and textile companies

enlisted in Karachi Stock Exchange of Pakistan. The study covered tenure of four years from 2007 – 2011. The

selected oil companies are National Refinery, Pakistan State Oil, Sui northern Gas Pipeline, Sui Sothern Gas and

Pakistan Oilfield.The selected textile companies are Gull Ahmed Textile, Din Textile, Kohat textile, Nishat textile,

and Kohinoor textile Mills.

3.5 Research Instrument

Data had been analyzed and interpreted by carrying ratio analysis.Five different types of ratios have been used as

variable to study the impact of dividend announcement on stock price. These variables are drives from the earlier

studies conducted by (Gordon 1959), (Lintner 1962), (Fama and French 1988), (Baskin 1989), (Nishat 1992), (Allen

and Rachim 1996) etc.Information has been interpreted in the form of tables and graphs for easy understanding of

readers. These are listed and explained below:

3.5.1 Dividend Payout Ratio

The dividend payout ratio determines the percentage of company earnings that is paid out to shareholders in cash.

Dividend Payout Ratio = Annual cash dividend paid *100

Net Earnings after tax- P/S dividend

3.5.2 Dividend Yield

Dividend yield shows the relationship between dividend per share and market price per share. It explains the variation

in share prices.

Dividend Yield = Dividend per share * 100

Market price per share

3.5.3 Price Earnings Ratio

Price earnings ratio shows the relationship between market price of share and earnings per share. It shows investors

expectations regarding future earnings. The P/E ratio gives reasonable idea of how a company’s share price compares

to its earnings.

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Price Earnings Ratio = Market price per share

Earnings per share

3.5.4 Earnings Per Share

Earnings per share are the profit that the company made per share on the last quarter. It is net income expressed on

per share basis. This is the most important factor for deciding the performance of any company and it manipulate the

buying behavior in the market resulting in an increase in the price of that particular stock.

Earnings per share = Net earnings after tax – P/S dividend

Number of shares outstanding

3.5.5 Dividend Cover

Dividend cover measures the extent of earnings that are being paid out in the form of dividends i.e. how many times

the dividends paid are covered by earnings.

Dividend Cover = Earnings per share

Dividend per share

4. RESULTS AND DISCUSSION:

4.1 Analysis of Dividend Payout Ratio

The impact of dividend announcement on stock price had been studied by using tool of dividend payout ratio,

dividend yield, earnings per share, price earnings ratio and dividend cover. All five ratios were calculated for five

companies of two sector, i.e textile and oil sector.The result are presented in table and graph and their interpretation is

given below.

Table 4.1 Dividend Payout Ratio of Oil and Textile Sector

Dividend Payout Ratio

Sector/Year 2011 2010 2009 2008 2007

Oil Sector 2.48% 3.97% 51.28% 2.34% 7.02%

Textile Sector -41.90% 0.05% -55.23% -8.24% 0.00%

According to this table the oil sector of Pakistan show positive results of dividend payout as compared to textile

sector. In 2007 oil sector dividend reached at 7.02% that decrease in 2008 and show tremendous increase in 2009 that

is 51.28%. Where after 2009 it start declining from 3.97% to 2.48% in 2011.but in textile sector results are negative

zero percent dividend payout calculated in 2007 and after that it start moving downward as -8.24% to -55.23% in

2010 it reach at 0.05% but next year 2011 it reached at-41.90%. These calculation shows hopeless condition of textile

sector.

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Figure 4.1 Dividend Payout Ratio of Oil and Textile Sector from 2007-2011

This line graph shows graphical representation of the calculations. That clearly show that although there is continuous

fluctuation in oil sector but their dividend payout are above then textile sector.

4.2 Analysis of Dividend Yield:

Table 4.2 Dividend Yield of Oil and Textile Sector

Dividend Yield

Sector/Year 2011 2010 2009 2008 2007

Oil Sector 32.65% 44.03% 747.75% 32.20% 49.09%

Textile Sector 82.21% 270.90% -2777.78% 60.48% 147.15%

The above calculation shows the relation of dividend per share and market price per share. In oil sector of Pakistan

results were within 30% to 50% except in 2009 where it reached up to 747.75%.and it is recorded as the highest

dividend yield in these five year data analysis. In textile sector the dividend yield was quite opposite to oil sector the

reason was the crisis that they face due to energy crisis in Pakistan and other economic and political instability. From

2007 to 2008 and 2010 to 2011, its shows positive result but in 2009 it reduce and negatively effect and reached -

2777.78%.

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Figure 4.2 Dividend Yield of Oil and Textile Sector from 2007-2011

The graph of dividend yield shows that in 2007 to 2008 the graph of textile sector move above to the oil sector of

Pakistan which decrease rapidly ratio in 2009 and touch the negative figure of -2777.78% but at this time dividend

yield of oil sector also effected and increased to 747.75%. Again in 2010 and 2011 the graphs of textile move above

to oil sector.

4.3 Analysis of Earning Per Share

Table 4.3 Earning Per Share of Oil and Textile Sector

Earnings Per Share

Sector/Year 2011 2010 2009 2008 2007

oil sector 1999.76% 1161.64% 82.45% 1642.75% 983.00%

textile sector 802.80% 193.80% -14.40% 859.80% 339.80%

Result that are generated after the calculation shows that, the earning per share of oil sector is high then the textile

sector of Pakistan. From 2007 to 2011 the earning per share in oil sector was increasing except 2009 it shows reduce

value of earning per share that is 82.45% recorded as low value in the define time period. In textile sector changes in

earning per share were analyzed but in 2009 it show negative figure of-14.40%.

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Figure 4.3 Earning Per Share of Oil and Textile Sector from 2007-2011

This graph shows the graphical representation of earning per share the graph of textile sector move below the oil

sector of Pakistan in 2009 both sector face low earning per share but the earning of textile sector diminished rapidly

than oil sector.

4.4 Analysis of Price Earnings Ratio:

Table 4.4 Price Earnings Ratio of Oil and Textile Sector

Price Earnings Ratio

Sector/Year 2011 2010 2009 2008 2007

Oil Sector 225.15% 222.23% 115.17% 241.14% 235.16%

Textile Sector 0.39% -217.12% 0.36% 2.43% 0.70%

This table shows the price earnings ratio, in oil sector it gave positive results all values are around 200% to 250%.

Although in 2009 it show 115.17% that was low but still it was better than textile sector. Where as in textile sector

the calculated result was totally opposite to oil sector. In 2007 it was just 0.70% in 2008 it was 2.43%, 2009 0.36 %

in 2010 it was-217.12%.that was too low, next year it rise up to 0.39%. That clearly shows the worst conditions of

textile sector.

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Figure 4.4 Price Earnings Ratio of Oil and Textile Sector from 2007-2011

The graph of price earnings ratio of oil and textile sector clearly describe that oil sector of Pakistan shows a stable

condition but textile sectors was in not in good conditions, due to this investors shows less interest towards textile

sector.

4.5 Analysis of Dividend Cover Ratio:

Table 4.5 Dividend Cover Ratioof Oil and Textile Sector

Dividend Cover Ratio

Sector/Year 2011 2010 2009 2008 2007

Oil Sector 306.29% 227.11% 13.37% 310.52% 203.71%

Textile Sector 82.21% 270.90% -2777.78% 60.48% 147.15%

The dividend cover ratio of oil sector shows satisfactory results in all specific years but only in 2009 it was 13.37%

which was low as compared to remaining years. But the textile sector shows totally different results. Abnormal

fluctuation was observed in textile sector that reached -2777.78% in 2009.then again it was 270.90% in 2010 and next

year reduces and recorded as 82.21% in2011.

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Figure 4.5 Dividend Cover Ratioof Oil and Textile Sector from 2007-2011

The graphical representation clearly shows the difference of oil sector and textile sector of Pakistan. Variation

occurred in oil sector and the value of dividend cover reduces in 2009 but did not touches the negative figure where

as textile sector are below to oil sector and in 2009 its dividend cover ratio decreases and reached the minimum point

of -2777.78% and then in 2010 and 2011 move up at 270.90% and then decline to 82.21%.

5. CONCLUSION:

This research attempted to explore the impact of dividend announcements on stock price of companies listed on

Karachi stock exchange of Pakistan. Findings derived from sample of the present study clearly show that dividend

announcement have significant impact on stock price. Announcement of increase in dividend payments results into

rise in stock price and announcement of decrease in dividend payments accounts for decline in stock price around the

time of the dividend announcement. The findings of the study comprehend the research work done by the renowned

scholars whose references are given at the end on the said topic.

As Pakistan is an underdevelopment country and it faces many economic, political problems that badly affects the

economy of Pakistan as well as its stock prices and performance of many industries. Due to energy crisis our textile

industry are in worst condition they need huge investment to run their textile companies, many textile mills are shut

down because they are not able to run their business in current scenario where other are move to Bangladesh to

continue their business. This is because of our government negligence towards textile sector. Whereas oil sector is

consider as most develop sector of Pakistan, although in this a lot of price fluctuation, and political economical

factors also affect it, but still they are able to perform their business effectively.Thishelp to make compassion

between these two sectors. From the above analysis it is concluded that there is positive relationship exist between

dividend annocement and stock prices. And accept H1 hypothesis according to which there is an increase/decrease in

stock price after dividend announcement.oil sector of Pakistan is stable sector they are announced high dividend to

their share holders that ultimately increase the price of the stock. And textile sector of Pakistan is badly affected and

they announced low dividends due to this stock price also decreaseand lessinvestor are interested to this sector.

Government of Pakistan shoult takes initiative to restructure and develop the textile sector. And maintain their

economy as well as political conditions.

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References:

Ariff, M., Shamsher M., and Annuar, M. N. (1994). Finding the Factors Associated with Stock Price Volatility: A

comparative Study of Developed and Developing Share Markets. Managerial Finance in the Corporate Economy,

Routlege, London, UK.

Chen and Firth (1997).The Information Content of Concurrently Announced Earnings, Cash Dividends, and Stock

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