Examining The Relationship Between Stock Prices And Dividend Payments Finance Essay - Free Essay Example

Sample details Pages: 5 Words: 1380 Downloads: 10 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? This research investigates whether there exists a relationship between share prices and dividend payments of world stock indices during January 1977 to December 2009 time period. Majority of financial books point out that in a well functioning capital market these two variables should be related (Brealey and Meyers 1986); the present value of the share should be equal to the dividend stream discounted by the return earned on securities of a comparable risk.footnote Furthermore stock market studies indicate that share prices increase respond to dividend news; dividend increases tend to be associated with share price increases while dividend cuts are usually associated with share price falls (Petit,1972; Ahrony and Sway, 1980). Don’t waste time! Our writers will create an original "Examining The Relationship Between Stock Prices And Dividend Payments Finance Essay" essay for you Create order In determining whether stock prices and dividends are co integrated, a large amount of empirical research have used co integration techniques . This research paper investigates if a long run relationship exists between share price and dividend of 11 global market indices. Talk about world stock indices Using the above empirical framework, this research will test Ho: No long run relationship between stock prices and dividends H1 : Long run relationship. As per outline estimation method,research wil fail to reject the null if is non ststionary and reject null if it is stationary . In case of rejection of the null hypothesis we can conclude that there exists a long run relationship between hare price and their dividend payments. The use of the cointegration technique has become widely used to test present value models for stock prices. According to this model, stock prices are fundamentally determined by the discounted value of their future dividends, which derive their value from future expected earning (Campbell, Lo Mackinlay, 1997) . LITERATURE REVIEW 3. METHODOLOGY 4. DATA DESCRIPTION AND COUNTRY INFORMATION There are eight countries with their major stock indices included in this sample, of which there are 5 European countries and their major stock index (United Kingdom FTSE100, Belgium BEL 20, Netherlands AEX Index, Spain IBEX 35 and Germany DAX 30), one Asian country and its stock index (Hong Kong Hang Seng Index) and two countries from the Americas, namely United States of America and its 4 stock indices (SP 500, DJIA 30, NASDAQ 100 and SP 100), the other country being Canada with its stock index ( SP/ TSX 60). Other world stock indices according to the Datastream database in August 2010 where considered for this research, but because Datastream did not have complete dividend payments , only 11 world stock indices which had complete stock price information and dividend data were considered for the study. We analyse the monthly data for 2 variables, the stock price index (Pt) and Dividend payments (Dt) taken from DataStream, with each index having a varying time period or time range. This sample of data is biased towards developed countries, since with stock indices, dividend data can be easily acquired to study the long run relationship between stock prices and dividends by analysing the worlds major stock indices, other than just analysing one index or stock. For each stock index, the annual stock price and dividend payment information was obtained from DataStream, The stock price indices and dividends were deflated by the consumer price index (CPI) and this data was then analysed to determine if a long run relationship exists between real stock prices and real stock dividends using the PANEL COINTEGRATION methodology for a panel data set. each index has a varying sample period as shown in table 1 below:- The countries and their respective stock market indices in the sample were selected primarily on the basis of data availability, in terms stock prices and dividend payments Table 1 shows: ÂÂ   DATA INFORMATION ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   ÂÂ   Continent Country Stock Index Sample Range Period (Years) America USA SP 500 January 1977 December 2007 30 Years ÂÂ   ÂÂ   DJIA 30 March 1978 December 2007 29 Years ÂÂ   ÂÂ   NASDAQ 100 October 1985 -December 2007 22 Years ÂÂ   ÂÂ   SP 100 April 1999 December 2009 10 Years Europe UK FTSE 100 January 1986 December 2007 21 Years Europe BELGIUM BEL 20 May 1991 December 2009 18 Years N.America CANADA SP/TSX60 February 2002 December 2009 7 Years Europe NETHERLANDS AEX INDEX February 1992 December 2007 15 Years Europe SPAIN IBEX 35 December1990 December 2007 17 Years Asia HONG KONG HANGSENG December 1986 December 2007 21 Years Europe GERMANY DAX 30 November 1990 December 2007 17 Years Table .1 provides summary information for the stock price index , the empirical analysis focuses on the stock indices mentioned above. 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Journal of Industry Economics ,106, 109-143. Fig .2 . This shows the line graph representation of the closing stock prices of the DJIA index. It shows that from 1994 the prices of the DJIA index stocks have been steadily rising, showing a continuous trend in the year 2000. Fig.3 Fig.3 . This shows the histogram representation of the closing stock prices of the DJIA index, it shows the mean 7329.240, kurtosis 1.563437 and the Jarque Bera test 152.5889. Returns of the DJIA INDEX. Fig.4 Fig. 4 shows the line graph, showing stationarity in the returns of the DJIA index .