Introduction

Dividend policy determines the proportion of an organization’s earnings that is distributed to the shareholders in form of dividends and the proportion that is ploughed back for
purposes of reinvestment. According to Al- Hasan, Asaduzzaman & Rashed (2013) dividend decision is a vital financial decision to any corporate firm yet has remained controversial and debatable over the years. It is clear that there are extensive literatures, models and theories that
have been presented by academicians/researchers to facilitate the dividend decisions (Naser,
Nuseibeh & Rashed, 2013). Braouezec & Lehalle (2010) have also pointed out that the finance
world is continually receiving new models or expansion of the existing models to further explain
the approaches that can be taken in making dividend decisions. Majority of the theoretical work
have focused on whether 100% dividend retention or 100% dividend payout or a mixture of the
dividend retention and payout is an optimal dividend policy that is best for a corporate firm. As
much as the theoretical work have been devoted to determine the dividend policy that seems
optimal for a firm, their basis for ascertaining that the policy is suitable is not clearly presented
(Lemmon & Nguyen, 2015). Uwuigbe, Jafaru & Ajayi (2012) have reported that a suitable and
an appropriate dividend policy must have positive effects on the market value of the
organization. It is therefore important that the effects of any policy adopted on the market value
of the organization be determined to ascertain its suitability. As much as theories such as
dividend relevance and dividend irrelevance theories have provided explanation on the expected
effects of the dividend policy on the share prices, they have provided contradicting information
on the same making the issue to remain a debatable matter and requiring further researcher
(Naser, Nuseibeh & Rashed, 2013). The proposed study will determine the effects of the
dividend policy on the share prices taking the case of the commercial banks that are listed on the
London stock exchange. The study will look at the different kinds of the dividend policies that
the selected banks have adopted and determine their influence on the share prices within a
specified period.
Background Information
Dividend policy has remained an issue of interest in the financial literature. According to
Asem & Tian (2010) dividend policy is a basically a set of guidelines that a corporate firms uses
to decide on how much of its earnings are paid to the shareholders. Braouezec & Lehalle (2010)
have also indicated that a dividend policy is a deliberate financial policy that suggests on

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whether to increase or maintain dividends with the overall goal of sustaining the share prices on
the stock exchange. It is therefore clear that an organization should focus on maintaining or
improving its stock prices when making decision on the kind of dividend policy to adopt.
The capital markets are imperfect in nature making the decisions on dividend policy to be
very difficult if the stock prices are to be sustained. Anwar, Singh & Jain (2015) have indicated
that there are different kinds of dividend policy that can be adopted by an organization. This
includes the residual dividend policy, dividend stability policy and hybrid dividend policy.
Organizations that adopt the residual dividend policy use the internally generated equity for
further investments. As such, the dividend payments are generated from the leftover equity or the
residual capital only after the capital requirements for investment have been met (Hashemijoo,
Mahdavi, Ardekani & Younesi, 2012). It is also reported that these organizations tend to
maintain their debt/equity ratio within certain levels prior to paying out any dividends. Ranaldo
& Reynard (2013) have however indicated that as much as the residual policy supports a higher
level of investment, the policy creates volatility in the payment of the dividend that is
undesirable for majority of the investors.
Under the stability dividend policy, quarterly dividends to be given to the shareholders
are set at a certain fraction of the overall yearly earnings. As opposed to the residual dividend
policy that is prone to some uncertainties, the stability policy has gained some extent of stability
in the provision of dividends to the shareholders (Hashemijoo, Mahdavi, Ardekani & Younesi,
2012). Braouezec & Lehalle (2010) have also pointed out that the stability dividend policy is
capable of reducing if not eliminating the uncertainty for investors and offers them an
opportunity to obtain higher incomes. Organizations that adopt the residual policy focus on
sharing their earnings with the shareholders other than investing in additional projects at the
expense of the shareholders.
A hybrid dividend policy is a mixture of the stability and the residual policy. It is
reported that the organizations that adopt this kind of policy tend to focus on the debt/equity ratio
as a long term rather than a short term goal. As such, they are likely to pay dividend that is set as
a small portion of the yearly earnings (Hashemijoo, Mahdavi, Ardekani & Younesi, 2012). In
addition to this kind of dividend, the organization offers additional dividend to the shareholders
only when the income exceeds what is normally collected.

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There are different kinds of commercial banks that are listed on the London stock
exchange. These firms differs in ownership structure and sizes, as such they are likely to have
different dividend decisions. According to Naser, Nuseibeh & Rashed (2013) there are certain
important factors that must be of consideration to come up with an optimal dividend decision.
The firms ought to consider the shareholders’ return, the value of the firm as well as its growth
prior to deciding on the most appropriate dividend policy to adopt. Selection of an appropriate
and a suitable dividend policy is a vital decision for the commercial banks. The flexibility to
invest in additional and future projects is dependent on the amount of the dividends paid out to
the shareholders. On the other hand, borrowers are always interested on the amount of dividends
declared by an organization, in case that more amount is given out in form of dividends, there
will be less amount available to declared as dividends hence there is a dying need to balance the
two (Al- Hasan, Asaduzzaman & Rashed, 2013). It is therefore important that the management
decide and adopt the most appropriate dividend policy that is to provide a higher market value as
well as meet the shareholders’ interest. The proposed study will determine the relationship
between the dividend policy and the share prices to ascertain the kind of policy that is most
appropriate for the commercial banks.
Problem Statement and Justification
A number of literatures that have focused on the relationship between dividend policy
and share prices have presented different kinds of results. Some have reported that the current
dividend payments reduce the uncertainty of the investors leading to them discounting the firm’s
earnings at a lower rate of return (Al- Hasan, Asaduzzaman & Rashed, 2013). On the other hand,
some scholars have indicated that reducing the dividend payments increases the investors’
uncertainty thus raising the needed rates of return (Ghosh & Woolridge, 2008). Whatever, the
results that have been attained by the aforementioned scholars, it is clear that the dividend policy
adopted by an organization have effects on the share prices. It is also observed that dividend
policy is relevant to an organization as far as the market price per share is concerned (Mokaya,
Nyang’ara & Jame, 2013). However, there is no literature that has prevented the effects of
particular dividend policies on the share value. This triggers the need for the proposed study that
will look at the different kinds of dividend policy that have been adopted by the commercial
banks listed on the London stock exchange, and determine their effects on the share prices. The

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findings of the proposed study will be important in availing information on the kind of dividend
policy that can be adopted to ensure that maximum value of the share price is obtained.
Research Aims and Objectives
Main Objective
The principal objective of the proposed study will be to determine the effects of the dividend
policy on the share price of the commercial banks listed on the London stock exchange
Specific Objective
 To highlight the dividend policy adopted by each bank
 To determine the relationship between the dividend per share and share price
 To examine the relationship between retained earnings and share price

Literature Review

Empirical review of literature
Several studies have been conducted to avail information on the relationship between the
dividend policy and the firm share price. For instance, Ghosh & Woolridge (2008) study
examined the reaction of the share price to the announcement of the changes in the regular paid
dividends. The study covered a period of 10 years and involved the companies that were listed
on the New York Index. The researcher classified the firms into five groups based on the kind of
the cash dividend policy that they adopted. The investment portfolios of the companies were also
determined and this compared with the cash dividends that they reported. These researches did
not obtain any significant relationship between the cash dividends paid out and the portfolios
return.
Anwar, Singh & Jain (2015) in a different study opposed the findings obtained by the
aforementioned researchers. Anwar, Singh & Jain (2015) indicated that their findings were
distorted since it was affected by the increase in cash dividends or lack of information. Anwar,
Singh & Jain (2015) in their study therefore excluded the organizations that announced their
profits in the same period. This was to mitigate the influence of the dividend announcement. The
findings of the researchers indicated that the portfolio earnings are directly related to the cash
dividends. Another study by Waithaka et al (2012) also indicated that the dividend policy
adopted by an organization has effects on the firm’s value. The study focused on the
organizations listed in the Nairobi Stock exchange and indicated that paying dividends reduces a
number of risks to the company and thus has significant influence on the stock prices. Ranaldo &

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Reynard (2013) also reported that there are a number of reasons why firms make dividend
payments and that the payment of the dividends has direct effects on the company’s share prices.
It is therefore evident that the dividend policy adopted by an organization has significant effects
on its share price.
Apart from just ascertaining that there is a form of relationship between the dividend
policy and the share price, Kenyoru, Kundu & Kibiwott (2013) have gone ahead to determine the
nature of the relationship observed between the two. In their study, they obtained that dividend
policy has significant positive influence on the stock prices. The dividend policy in this case
referred to the dividend paying firms. According to them, dividend paying firms are likely to
have a more liquid market for their stocks. Moreover, the cumulative excess returns for the
dividend paying firms are likely to be positive for not less than 30 days from the day of
announcement (Kenyoru, Kundu & Kibiwott, 2013). On the other hand, the cumulative excess
returns for dividend omitting firms are likely to be negative within the same period. As such
dividend paying firms are likely to have higher share prices within the 30 day period as opposed
to the dividend omitting firms.
From another perspective Mokaya, Nyang’ara & Jame (2013) have indicated that the
number of dividend paying firms have been decreasing significantly over the years. This is due
to the fact that only the larger firms, with higher profitability, and the firms with low growth
opportunities have a higher propensity of paying dividends. In addition, Hashemijoo, Mahdavi
Ardekani & Younesi (2012) stock market evidence shows that dividend paying firms have lower
momentum profits as opposed to the non-paying counter parts. This explains why a number of
firms are likely to disengage in dividend payments. As much as paying out dividends may have
negative implications on the firm profitability, Lemmon & Nguyen (2015) have pointed out that
dividend payment also enhances the firms value and overall performance. Dividend increase is
highly welcomed by the investors contributing positively towards the overall performance of the
firm.
Theoretical framework
Dividend relevance theory
The proposed study will be based on the dividend relevance theory that asserts that the
dividend policy adopted by a firm have significant effects on the firm’s value. The choice of the
dividend policy must therefore be done based on its possible implications on the value of the

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firm. Apart from the effects on the firm’s value, this theory also asserts that the dividend policy
has significant effects on the value of share (Suwanna, 2012).The policy has impacts on the share
price even when the cost of capital is equal to the return. As opposed to the dividend irrelevance
theory that asserts that dividend decisions are not important since the dividend policy do not
affect the firms value or the values of its stock, this theory asserts that the dividend decision is
very critical to a firm since it as effects on its share prices and overall value (Mokaya, Nyang’ara
& Jame, 2013). The dividend relevance theory therefore forms the basis of the proposed study.
Hypothesis
According to Bryman & Bell (2015) hypothesis is a statement that indicates the inferred
relationship between different variable involved in a study. The relationship between the
variables is established based on the theoretical basis of the study as well as the available
literature. As per the literature indicated above and the theoretical basis of the proposed study it
is hypothesized that the dividend policy have significant effects on the share price
H 1 Dividend policy have significant effects on the share price
H A There is a significant effect of dividend policy on share price
H 0 There is no significant effect of dividend policy on share price

Methodology

Research Design
Quantitative or qualitative are the two kinds of research designs that can be adopted in a
particular study. According to Creswell (2013) qualitative approach is subjective in nature and
makes use of views and ideas of the study respondents to answer the research questions of the
study. On the other hand, the quantitative design is objective in nature and makes use of
numerical data to respond to the research questions developed. Creswell (2013) has indicated
that the quantitative design is mainly adopted in cases where the data can be quantified and in
situations where maximum level of accuracy is needed. The proposed study will be based on the
quantitative research design since the data desired can be quantified. Moreover, this kind of
study requires a higher level of accuracy making the design the most appropriate.
Study Variables
The proposed study will determine the effects of the dividend policy on the share prices
of the commercial banks listed on the London Stock Exchange. As such the independent

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variables will be the dividend policy while the dependent variable will be the share price. The
dividend policy variables will be measured by the value of dividend per share and the value of
the retained earnings per share. On the other hand, the share price will be determined by the
value of the market price per share. The variables for the proposed study are highlighted below
Dependent variable-market share per price
Independent variables-dividend per share and retained earnings per share
Data Collection Technique
The proposed study will be based on secondary data. As such review of literature will be
the main method of data collection. The study will involve the commercial banks that are listed
in the London stock exchange. The number of the companies to include in the study will be
based on the availability of the relevant data and information needed to conduct the research.
Vital information on the dividend policy adopted by the organization as well as their share prices
will be obtained from the companies’ annual reports. The study will be conducted for the period
between 2005 and 2015. The information on the dividend per share and retained earnings as well
as market share per price for the companies included in the study within the period between 2005
and 2015 will therefore be drawn from the companies report annual reports.
Data analysis
The data collected will be analyzed using SPSS software. Correlation analysis and linear
regression will be used to analyze the dependent and the independent variables identified in the
study. Statistical tools such as F-test and regression analysis will be used to interpret and assess
the data. The correlation analysis will be conducted to determine whether there is any
relationship observed between the study variables identified. On the other hand, the regression
analysis will be conducted to analyze the nature of the relationship observed between the
dividend policy variables and the share prices. The F-test will be conducted to test the statistical
significance of the relationships observed at 1% significance level.
Suggested regression model
Multiple regressions will be adopted to determine the effects of the dividend policy on
the share price. The least square estimation method will be adopted in carrying out the multiple
regressions. The least square estimation is based on various assumptions such as the relationship
between the independent variables and the dependent variable is linear. Moreover, the residual

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term have a constant variance and is not correlated with the independent variables. The
regression model is indicated below
MPPS = �� + �� 1 �������� + �� 2 ������ + ��…
Where MPPS is the market price per share
REPS is the retained earnings per share
DPS is the dividend per share
�� is the coefficient of the model
�� is the constant term for the model
�� is the error term

Conclusion

The proposed will determine the effects of dividend policy on the share price of the
commercial banks listed on the London Stock Exchange. The dividend policy will be measured
based on the value of dividend per share and the retained earnings per share reported by the
companies. The value of market share will be measured as the market price per share. The study
will mainly be based on secondary data hence the information for the above variables will be
drawn from the companies’ reports. The study will be conducted over a 10 year period that is
between the year 2005 and 2015.
The data collected will be analyzed using the SPSS software where correlation and
regression analysis will be conducted to determine the relationship between the dependent and
the independent variables. Moreover, F-test will also be conducted to evaluate the significance of
the relationship observed between the study variables. The findings of the proposed study will be
important to the banking sector since it will avail information on the effects of the dividend
policy on the share prices that will consequently enable the organizations make suitable dividend
decisions.