Document Type : Research Paper
Authors
1 M.Sc. in Economics. Sharif University of Technology, Tehran, Iran
2 Associate Professor, Graduate School of Management and Economics, Sharif University of Technology, Tehran, Iran
3 Visiting Professor, Graduate School of Management and Economics, Sharif University of Technology, Tehran, Iran
Abstract
Abstract
This study examined the relationship between dividend policy (measured by dividend yield and dividend payout ratio) and stock price volatility in the Tehran Stock Exchange. Using fixed effects and random effects regression models developed by Baskin (1989) and Allen and Rachim (1996), the study analyzed the data of 200 public firms listed on the TSE that consistently paid dividends from 2010 to 2020. The results indicated a significantly negative relationship between dividend policy and stock price volatility. Additionally, firm size was negatively correlated with stock price volatility, with this relationship proving statistically significant. Consequently, managers can partly control the stock risk and influence investors’ decisions through a firm’s dividend policies. Stock price volatility in emerging markets, particularly the Tehran Stock Exchange, is substantially influenced by macroeconomic fluctuations, so considering these factors notably affects the coefficient sizes.
Introduction
Dividend policy has long been a central focus in financial research, especially concerning its impact on stock price volatility. As a form of return to shareholders, dividend payments play a significant role in shaping investment decisions. In this respect, the present study aimed to investigate the effect of dividend policy—measured through the dividend payout ratio and dividend yield—on stock price volatility in the Tehran Stock Exchange (TSE), using the data of 200 firms over the period from 2010 to 2019. The research aimed to address the following questions: How does the dividend payout ratio affect stock price volatility in the TSE? What is the impact of dividend yield on stock price volatility in the TSE? How do seasoned offerings and macroeconomic factors influence the relationship between dividend policy (dividend payout ratio and dividend yield) and stock price volatility?
Materials and Methods
The research used a sample of 200 firms listed on the TSE from 2010 to 2020 in order to examine the effect of dividend policy on stock price volatility. Using panel regression analysis, the study evaluated the effects of the dividend payout ratio and dividend yield, with control variables such as firm size, earnings volatility, debt ratio, and growth. The data was sourced from Codal (www.codal.ir) and TSETMC (www.tsetmc.com). Stock price volatility was measured through the Parkinson estimator, which calculates volatility based on weekly high and low prices, thereby minimizing distortions from daily price limits on the exchange.
Results and Discussion
The empirical results revealed a statistically inverse relationship between dividend yield and stock price volatility, supporting the duration effect hypothesis. Higher dividend yields contribute to more stable prices, as stocks with larger dividends are less sensitive to changes in the discount rate. This finding is consistent with earlier studies by Baskin (1989), Hussainy (2011), and Mingli et al. (2016). The relationship remains robust across different model specifications. However, no significant relationship was found between the payout ratio and stock price volatility when both dividend yield and payout ratio were included, which is likely due to multicollinearity. When dividend yield was excluded, the payout ratio became significant at the 10% level, showing an inverse relationship with volatility (Table 1). Control variables such as firm size and growth significantly influenced volatility, with higher growth correlated with higher volatility. Debt levels, initially insignificant, became significant when total debt was considered. Adjusting for seasoned equity offerings reduced the effect of dividend yield on volatility but still maintained its significance. Macroeconomic volatility, measured by TEDPIX fluctuations, had the largest impact on stock price volatility, highlighting the sensitivity of TSE to Iran's unstable macroeconomic environment.
Table 1. Multicollinearity of Payout Ratio and Dividend Yield, and Its Effect on Regression Results
(5)
(4)
(3)
Variable
-0.094***
(0.032)
-0.088***
(0.034)
DivYield
-0.0046*
(0.0028)
0.0015-
(0.0024)
PayoutRatio
0.019
(0.070)
0.023
(0.071)
0.023
(0.070)
EarningVol
-0.015**
(0.0065)
-0.015***
(0.0063)
-0.015***
(0.0061)
Size
0.020***
(0.0070)
0.021***
(0.0069)
0.021***
(0.0070)
Growth
-0.035
(0.053)
-0.026
(0.053)
-0.026
(0.053)
DebtRatio
0.650***
(0.178)
0.652***
(0.178)
0.526***
(0.083)
Constant
Yes
Yes
Yes
Time Fixed Effect
Yes
Yes
Yes
Industry Fixed Effect
1692
1692
1801
Num of Observation
0.489
0.589
1692
R2
Source: Research results
Table 1 shows the results of assessing the effect of dividend policy on stock price volatility, taking into account the multicollinearity between dividend yield and payout ratio. In Specification (3), where all explanatory variables are included, a significant negative relationship is found between dividend yield and stock price volatility, while the payout ratio remains insignificant. Specification (4), which excludes the payout ratio, shows that the dividend yield remains significantly negative. In Specification (5), when dividend yield is excluded, the payout ratio becomes significant at the 10% level, suggesting the presence of multicollinearity between the two variables. The dependent variable is stock price volatility, measured using Parkinson’s method, with the models controlling for firm size, growth, debt ratio, and fixed effects.
Conclusion
This research examined the effect of dividend policy on stock price volatility in the TSE, using dividend yield and payout ratio as key indicators. A sample of 200 public firms listed that consistently paid dividends from 2010 to 2020 was selected, and a panel regression analysis was conducted to assess the effect of the indicators. The results revealed a significantly negative relationship between dividend yield and stock price volatility, while the payout ratio was not significant due to multicollinearity. However, when dividend yield was excluded, the payout ratio became significant at the 10% level, also showing a negative relationship with volatility. The findings support the duration, rate of return, and signaling effects, and are consistent with prior studies by Baskin (1989), Hussainy (2011), and Mingley et al. (2016). Among the control variables, firm size and growth were significant, and redefining the debt ratio to include total debt made it significant at the 10% level. The results from alternative specifications using net dividend yield and payout ratio were consistent, offering valuable insights for investors and managers in predicting and managing stock price volatility.
Keywords
Main Subjects
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