The Relationship between Dividend Policy and Market Risk during the Financial Crisis

by

ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

Signed __________________ Date _________________

ABSTRACT

In this study, the researcher tries to explore the concept of Dividend Policy and market risk. The main focus of the research is to determine the relationship between dividend policy and market risk during recession the research also analyzes many aspects of financial crisis and tries to gauge its effect on Dividend policy and market risk. The most important objective of any company is to promote economic and social welfare through appropriate capital investment to those investments which deliver the best performance. All companies, whether public or private, to carry out their activities require financial resources (money), either to develop or expand their existing roles and the initiation of new projects involving investments. Companies are liable to pay dividend but financial crisis have created problems for them. .

Table of Contents

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Background of the Study1

Purpose of the Study3

Significance of the Study4

Aims and Objectives5

Theoretical Framework5

Research Hypothesis7

Ethical Concerns7

Appraisal Limitations7

CHAPTER 2: LITERATURE REVIEW9

Relationship Between Dividend Payouts And Systematic Risk9

Financial Crisis17

Financial Decisions27

Investment Decision28

Funding Decision29

Impact of Financial Crisis on firms Dividend Policies30

Stock prices during Recession32

Profitability Ratio32

Risk Management in Financial Crisis33

The Stock Market Panic34

Relationship of Dividend policies and Market risk during Financial Crisis34

Economic and Financial Structure of the Company35

Overview of the Causes and the International Context36

Market Liquidity37

Market Risk39

CHAPTER 3: METHODOLOGY42

Research Design42

Literature Search42

Keywords43

CHAPTER 4: DISCUSSION44

Companies Higher Dividend Payout Policies Perform Better than companies with lower dividend payout polices during the financial crisis48

Factors providing dividend momentum54

Catch-up from the crisis54

More liquid and less levered balance sheets55

Open and robust credit markets56

Growth opportunities declining and limited56

Investors seeking yield57

Factors weighing upon dividend policy59

Economic uncertainty59

Regulatory uncertainty60

Shifting dividend taxes60

Trapped cash61

Advantages of buybacks61

CHAPTER 5: CONCLUSION63

BIBLIOGRAPHY76

CHAPTER 1: INTRODUCTION

Background of the Study

In markets with trading friction, stocks that pay cash dividends allow investors to satisfy their liquidity needs with little or no trading in the stock and thus enable them to avoid trading friction. Nearly 50 years after Miller and Modigliani's (1961) famous dividend irrelevance theorem, academics and practitioners still have little understanding of dividend policy and its effect on firm value. Indeed, Black (1976) observed, “The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don't fit together”. In this paper, we develop a dividend signaling model that attempts to analyze the various factors that affect dividend policy and firm value.

According to Miller and Modigliani's (1961) theorem, the value of the firm is unaffected by its dividend policy in a world of perfect market conditions. Two major assumptions driving the MM irrelevance theorem were that:

A firm's management is purely interested ...