Abstract relationship between stock price and these two
Corporate sector of
Pakistan is adversely facing competition due to economic downturn in the world
and making efforts to survive in a competitive and uncertain economic
environment. This study will help to determine the effect of dividend yield
and interest rate on stock prices in Pakistan. A sample
of fifty companies listed at KSE-100 Index will be taken. The purpose of this paper to understand
the effect of dividend yield and interest rate on stock price. Many previous studies
around the globe examine the relationship between stock price and these two terms.
of this study is predicated on that there is positive relationship
between dividend yield and stock price and there is negative relationship
between interest rate and stock price. This paper further shows that
those corporations who manage their dividends well have high stock returns.
If we look into Pakistan economy
we can spot out that Pakistan has a one of complex economy which include
different sectors such as agriculture cement textile steel oil & gas sugar
financial services provider such as banks telecommunication etc. Iram (2015)
(2004) split stock into two main categories, that as ordinary stock and
preferred stock. He also explained that everything has some outcome some end benefit
so dividend are the outcome of investment. Ordinary stocks are an ownership
claim against real or productive asset (Higgins, 1995), but he also explain
that if something good happens in term of profit, stockholders are the one who
are benefited more from it , but if company do goes in loss, they are the main losers
here as well. According to Smith (1988) the stock is among one of the most
favorable thing for investors. Investors buy stocks for so many reasons: there
are some investors who buy low priced stock for long term purpose they think
that in future the price of these stock will substantially goes up. Another
reason he proposed that companies with good reputation and having high market
share stockholder think that share growth will be constant in long (Smith,1988).
Payment of dividend or
not, is one of the most debatable topic nowadays
among managers, policy makers and researchers. Every firm that run their
operation in some kind of industry have some kind of dividend payment patterns,
which shows how that particular organization is going in term of performance. (Al Masum, 2014).Some analyst
believed that dividend payment patterns can also have some effect on their
stock price. The most important argument that they bring into the discussion is
that the organization can increase its stock price by increasing the payout
ratio. Because stockholders prefer dollar in a hand rather than dollar of
capital gain, because bird in hand worth more than bird in bush (Black &
Scholes, 1974).There is has been substantial dispute about the effect of
dividend yield on common stock price. They think that whether there is positive
relationship between ordinary share price and dividend yield. There is a
positive and non-linear relationship between common stock return and expected
dividend yield (Litzenberger & Ramaswamy 1992).
One of the
most important macroeconomic variable is interest rate, which effect economic
growth directly. Generally, interest rate is considered as the cost of capital,
means the price paid for the use of money for a period of time. From the point
of view of a borrower, interest rate is the cost of borrowing money (borrowing
rate). From a lender’s point of view, interest rate is the fee charged for
lending money (lending rate) (Alam 2009).
Most of the peoples will
try to invest in efficient market because in inefficient some investor can
generate large amount of money which can lead to lack of trust on market. If
the interest goes up people will shift their money from stock market to banks
(Alam 2009). One of the most important information that comes to stock market
is fluctuation of interest rate. By looking into the theory, we may find out
that there is negative correlation between interest rate and stock price. Which
is that the rise in interest rate will fall down the present value of future
dividend income which may fall the stock price. When the interest rate is low
the so the cost of borrowing the money is low so people may prefer it which
will cause the stock price low (Gupta, chevalier & sayekt 2000).
The significance of this
research is to find out the relationship between interest rate dividend and
stock price and how they can affect stock price.
study the effect of Dividend yield and interest on stock price.
understand the effect of dividend yield on stock price.
understand the effect of interest on stock price.
There is positive relationship between dividend yield and stock price.
There is Negative relationship between interest rate and stock price.
According to Pradhan (2003) he said that there is somehow positive
relation between stock price if they want to increase the share price.
According to Uddin (2009) he said that there is negative relationship with
interest and stock price.
Variables to be studied:
According to Iqbal, Ahmad, Ullah & Abbas (2014) they said that
dividend is the periodic issuance of
money to its stockholders. Dividend
yield shows that how much corporations pays dividend in relation to its stock
price. It is calculated as a fraction of annual dividends paid by the company
upon its stock price. Earnings per share is the amount of money per share
received by any shareholder and it is calculated by divide net income on no of
common share outstanding. Dividend yield is considered an important variable which
significantly explaining the effect of dividend policy on stock market prices.
All these researchers found positive relation between dividend yield and stock
price. (Duke, Ikenna
& Nkamare 2015)
that the price of any share can be increase in two way one is that either
because of demand and supply of that particular share or it may because of
dividend. the price of share can also increase by trust on management
capabilities that we can see.
According to pani (2008) he said that Retention Ratio is opposite to dividend pay-out ratio and is
calculated by subtracting Total Dividend from Total Earnings and then dividing
the resulting amount by Earnings. Dividend to Retention Ratio to see its effect
on Stock Prices and found positive relation between them.
Uddin (2009) in nowadays interest rate is one of the most crucial macroeconomic
variable which can strongly effect the economic development. The proportion of a loan that is charged as
interest to the borrower, typically expressed as an annual percentage of the
loan outstanding. Interest rate is considered as
the cost of capital, means the price paid for the use of money for a period of
time. According to Michlian (2014) an investor may not consume in present he
will postpone his current for some money which make him to consume more in
later .as we can see that interest rate is very important not only to monitor its
development but to manage it properly to ensure long term growth.
Market price is taken as
dependent variable which is calculated by taking the average of high and low
market prices of the portions while in the anterior studied researchers. They use
price as a dependent variable to optically discern the effect of dividend
policy on stock market prices (Hamid, & Suleman 2011, Hussainey, K.,
Mgbame, C.O, & chijoke-Mgbame, A.M. 2011).
Source of information:
Data will be collected
from the annual reports and these annual reports will be downloads from
companies own websites, Karachi stock exchange, State bank of Pakistan and for
post data we will use open doors Pakistan as well.
Sampling technique and procedure
Simple size will be to
study 50 companies listed in Karachi stock exchange.
As the study
uses secondary data for analysis and intends to study all the listed companies
in Karachi stock exchange, i.e total population, thus no sampling technique is
going to be used.
of data collection:
mentioned in source of information that annual reports will be used for data collection.
analysis will be used to get the possible outcomes.
study may shows that
is positive relationship between dividend yield and stock price.
is positive relationship between investor investment and dividend yield.
corporations who manage their dividends well have high stock returns.
is Negative relationship between interest rate and stock price.
The objective of this
study is to determine the effect of dividend yield and interest rate stock
price in Pakistan. A sample of 50 listed companies in Karachi Stock Exchange is
examined. Although the dividend yield
and interest rate affect the stock prices as above discussed that dividend yield
has positive relationship of stock prices while interest rate is negative relationship
of stock prices.
Al Masum, A. (2014). Dividend Policy and Its Impact on
Stock Price – A Study on Commercial Banks Listed in Dhaka Stock Exchange.
Black f. & Scholes, M. (1974). The effect of
dividend yield and dividend policy on common stock price and return.
Duke, S., Ikenna D., N., & S. E, N. (n.d.). 2015.
Impact of Dividend Policy on share price valuation in Nigeria banks.
Iram, F. (2014). The impact of dividend Policy on
Gitman and Chad J. Zutter (Dec 7, 2011).Principles of
Gupta, J., Chevalier, A., & Sayekt, F. (2000). The
Causality between interest rate stock, exchange rate and stock price in
emerging markets: The case of Jakarta Stock exchange. Jakarta.
Higgins, (1995).Dividend changes and
future profitability: The Journal of Finance, vol. 56, no. 6, pp. 2111-33
Iqbal, N., Ahmad, N., Ullah, H., & Abbas, A.
(2014). Effect of dividend announcement on stock prices in banking industry of
Michlian, S. (2014). The Impact of short term Interest
rate on Stock Price.
Pradhan, R.S. (2003). Effects of Dividends
on Common Stock Prices: The Nepalese Evidence.Research in Nepalese Finance.
Kathmandu: Buddha Academics
Smith. (1988). Dividend policy, growth,
and the valuation of shares: The Journal of
Uddin, M. (2009). Relationship between Interest Rate
and Stock Price: Empirical Evidence from Developed and Developing Countries.