Dynamics of Earnings, Dividends, and Stock Prices: A Study on Dhaka Stock Exchange

Abstract

The corporate dividend policy should have a relatively direct
bearing on cyclical fluctuations and longer term growth trends in the
economy. Investors more frequently use dividends plus retained earnings than
dividends plus capital gains approximating future expected income for
portfolio selection. Since corporate earnings paid out to common
shareholders are not available for financing new investments, the corporate
dividend decision is intertwined with corporate financial policy. This paper
critically investigates the effects of dividend signalling and smoothing on the
corporate dividends, earnings, and common stock prices and explores
whether there is any relationship among the corporate earnings, dividends
and the stock prices of the companies associated with Dhaka Stock Exchange
(henceforth DSE), an emerging capital market of Bangladesh. As dividends,
earnings, and prices data series are not co-integrated, a vector
autoregressive model and is applied to show the relationship among
dividends, earnings, and stock prices and their implications for dividend
policy. The results of the empirical analysis evidence that there exists
dynamic relationship among earnings, dividends, and common stock prices of
DSE listed firms.