TEL  Vol.4 No.8 , October 2014
Solving the Puzzle of Relative Importance of Dividends and Retained Earnings in Stock Valuation: A Case of Karachi Stock Exchange
ABSTRACT
Despite the growing debate on the stock price valuation, it has become a complex puzzle. Various theories, models and explanations have been provided to solve this confusing riddle. This study contributes to this debate by determining the relative importance of stock dividends and retained earnings regarding stock price valuation in Karachi Stock Exchange. Data for the analysis of this study were collected from the 66 nonfinancial companies that were included in KSE-100 index for a period from 2007 to 2010. This study found the evidence that dividends are more important variable than the retained earning regarding the explanatory power of stock prices in Karachi Stock Exchange. Practical implications are also provided in the study.

Cite this paper
Tariq, A. , Kharal, M. , Abrar, M. , Ahkam, A. and Khan, M. (2014) Solving the Puzzle of Relative Importance of Dividends and Retained Earnings in Stock Valuation: A Case of Karachi Stock Exchange. Theoretical Economics Letters, 4, 681-690. doi: 10.4236/tel.2014.48086.
References
[1]   Williams, J.B. (1938) The Theory of Investment Value. Harvard University Press, Cambridge, MA.

[2]   Walter, J.E. (1956) Dividend Policies and Common Stock Prices. The Journal of Finance, 11, 29-41. http://dx.doi.org/10.1111/j.1540-6261.1956.tb00684.x

[3]   Lintner, J. (1956) Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes. The American Economic Review, 46, 97-113.

[4]   Friend, I. and Puckett, M. (1964) Dividends and Stock Prices. The American Economic Review, 54, 656-682.

[5]   Miller, M.H. and Modigliani, F. (1961) Dividend Policy, Growth, and the Valuation of Shares. The Journal of Business, 34, 411-433. http://dx.doi.org/10.1086/294442

[6]   Khan, M.S. (2011) Stock Price Puzzle. Lambert Academic Publishing, Saarbrücken, Germany.

[7]   Jensen, M.C. and Meckling, W.H. (1976) Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics, 3, 305-360. http://dx.doi.org/10.1086/294442

[8]   Miller, M.H. and Rock, K. (1985) Dividend Policy under Asymmetric Information. The Journal of Finance, 40, 1031-1051. http://dx.doi.org/10.1111/j.1540-6261.1985.tb02362.x

[9]   Pardhan, R.S. (2003) Effects of Dividends on Common Stock Prices: The Nepalese Evidence. Research in Nepalese Finance, Buddha Academics, Kathmandu, 1-13.

[10]   Harkavy, O. (1953) The Relation between Retained Earnings and Common Stock Prices for Large, Listed Corporations. The Journal of Finance, 8, 283-297.

[11]   Durand, D. (1957) Bank Stock Prices and the Bank Capital Problem. National Bureau of Economic Research.

[12]   Gordon, M.J. (1959) Dividends, Earnings, and Stock Prices. The Review of Economics and Statistics, 41, 99-105. http://dx.doi.org/10.2307/1927792

[13]   Gordon, M.J. (1963) Optimal Investment and Financing Policy. The Journal of Finance, 18, 264-272.

[14]   Lintner, J. (1962) Dividends, Earnings, Leverage, Stock Prices and the Supply of Capital to Corporations. The Review of Economics and Statistics, 44, 243-269.
http://dx.doi.org/10.2307/1927792

[15]   Azhagaiah, R. and Priya, N.S. (2008) The Impact of Dividend Policy on Shareholders’ Wealth. International Research Journal of Finance and Economics, 20, 180-187.

[16]   Khan, S.H. (2009) Determinants of Share Price Movements in Bangladesh. Unpublished Master Thesis, Blekinge Institute of Technology, Sweden.

[17]   Kumar, S. and Mohan, M. (1975) Determinants of Share Prices in India. The Indian Economic Journal, 23, 23-27.

[18]   Nishat, M. (1995) Share Prices, Dividend & Share Retained Earnings Behaviour in Pakistan Stock Market. The Indian Economic Journal, 40, 56-95.

[19]   Gujarati, D.N. and Sangeetha (2007) Basic Econometrics. Tata McGraw-Hill, New Dehli.

[20]   Nirmala, P.S., Sanju, P.S. and Ramachandran, M. (2011) Determinants of Share Prices in India. Journal of Emerging Trends in Economics and Management Sciences, 2, 124-130.

 
 
Top