Academic journal article International Management Review

The Impact of the Dividend Policies on the Value of the Stock of Public Shareholding Companies in the Jordanian Industrial Sector

Academic journal article International Management Review

The Impact of the Dividend Policies on the Value of the Stock of Public Shareholding Companies in the Jordanian Industrial Sector

Article excerpt

Introduction

The dividend policy indicates a company's policy, which determines the amount of dividends and the retained profits to be reinvested in new projects. This is related to the dividends policy, which is divided between paying the shareholders and reinvesting in new investments opportunities. The decision of whether the company must pay the shareholders or invest in new opportunities is one of the most important issues to the management of companies.

The dividend policy is related to the size of assets, the income, and the debt ratio. Each year may require a different policy according to the different equity capital structure. Since both the equity capital structure and the dividend policy may affect shareholders' wealth and the equity capital structure, the decision to pay dividends is a complicated issue. Therefore, it has been one of the most common research subjects among financial researchers for more than 50 years. A variety of researchers tried to relate the dividend policy to the company's stock price, but the results were and still conflicting; there isn't any consensus among the researchers on the effect of the dividend policy the stock price.

Profits present the reflection of an organization's situation in front of its shareholders; in its wake, the organization's work and activity in the future is built, and its value in the market is specified. This is the issue that made organization management take care of how to deal with profits, managing them and making suitable decisions by following suitable financial policies. Both Lintner (1956) and Gordon (1959) think that the ordinary shareholders prefer immediate profits over future profits, which decreases danger and increases profits. Therefore, it affects stock prices positively, whereas Miller and Modigliani (1961) found that there is a relation between dividends and changes of the stock price according to the theory of zero taxes.

The Bird-in-the-Hand Theory of Dividend Policy

Both Lintner (1962) and Gordon (1963), who have different opinions regarding the profits theory, assumed that shareholders prefer immediate profit rather than the increase of equity capital in the future, and it has the greatest effect on the price; however, the price decreases to the aimed income ratio when expecting dividends, the danger decreases, as well. The theory of dividends is considered one of the most important financial management theories according to its direct relationship with the shareholders and to its reflection of the stock prices in the financial market. It is considered as one of the controversial issues in the field of financial management and investment.

Dividend policy is considered as one of the policies that receives an organization's management's attention for its great effect on the organization and its stock price in the financial market. The research problem was caused by the lack of studies that addressed this vital subject in the Jordanian industrial sector; one of the biggest and most effecting sectors on the economy and development lies in the answer of the major research question:

What is the effect of the cash and stock dividend policies and repurchasing stocks policy on the public shareholding companies' stock value in the Jordanian industrial sector?

The following minor questions are derived from the major research question:

1. What is the effect of cash dividend as a dividend policy on the company's stock value?

2. What is the effect of stock dividends as a dividend policy on the company's stock value?

3. What is the effect of stock repurchasing as a dividend policy on the company's stock value?

Many researchers have studied the relationship between stock price volatility and dividend policy where the fluctuation of regular stocks price presents the benchmark for risk measuring. All of the organizations are interested in raising their market value and in motivating the investor to demand the stock from the market. …

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