Impact of Inflation on Dividend Policy: Synchronization of Capital Gain and Interest Rate

Muhammad Irfan Khan Khan, Muhammad Ayub Khan Mehar Meher and Syed Muhammad Kashif Syed
Authors registered in the RePEc Author Service: Muhammad Irfan Khan

MPRA Paper from University Library of Munich, Germany

Abstract: The study evaluates the impact of consumer’s buying power regarded as overall CPI on the dividend policy of firms. Dividend yield is used as a proxy of dividend policy. There are two separate equations to explain the phenomenon. The predicted values of capital gain yield against inflation and other supporting variables were first estimated and these predicted values along with interest rate were then put to check the dependency of dividend policy. Its theoretical background is related to classical discussion among financial researchers about the inflation-hedging capabilities of stock investment in short to medium-run. Study is carried out on stocks listed at Karachi Stock Exchange to see the overall behavior of Pakistani Stock Market. Sample of KSE-30 index for six financial years from 2007 to 2011 for the study is used. Following the 2-stage least square regression, the empirical results of the study illustrate that capital gain is affected by inflation levels prevailing for the year and its relationship is of inverse in nature. The market is following the global trend in this perspective. On the other hand, dividend yield is also not independent with inflationary effect. Interest rate is found to be positively related with dividend yield. This behavior of interest rate in the market is astonishing. It may be deduced that in the context of Pakistan, moneary policy and business activities improve simultaneously.

Keywords: Stock Return; Inflation; Dividend Yield; Monetary Policy; Debt to Equity Ratio; 2-Stage Least Square Regression (search for similar items in EconPapers)
JEL-codes: E31 G00 G12 G3 (search for similar items in EconPapers)
Date: 2013-11-20, Revised 2013-11-04
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Pensee Journal 11.75(2013): pp. 384-393

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