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Can dividend payouts and future earnings be predicted based on stock market liquidity and capital structure?: Nordic IT Companies’ dividend policy analysis
Umeå University, Faculty of Social Sciences, Umeå School of Business. (Master Thesis)
2010 (English)Independent thesis Advanced level (degree of Master (One Year)), 15 credits / 22,5 HE creditsStudent thesis
Abstract [en]

Dividend policy has significant impact on the company's capital market, in particular the dynamics of the price of its shares. Dividends represent cash income of shareholders and to some extent, signal them about success of the firm they have invested. From that point of view dividend policy has crucial impact on investment decisions.

Numbers of valuation models based on dividend payouts exist in the financial theory and they imply importance of dividends in making investment decisions. Alternatively some authors argue that role of the dividends is overestimated, as investors do not separate dividends and capital earnings. I believe that dividend policy has broad influence not only on share valuation, but also on capital structure of the company and its stock market liquidity.

Study intended to discover if dividend payouts and future earnings can be predicted based on stock market liquidity and capital structure. I have analysed 72 companies associated with Nordic information technologies market and tried to find main characteristics of dividend policy adopted in those companies. I have divided my research question into three parts and studied hypotheses which are associated with the research question.

I found relationship of dividend policies with future earnings growth power, firm capital structure and market liquidity. As a result of my study I have observed financial statements data and obtained the following outcome: (1) with stable dividend policy, payout ratio is positively related to the future earnings growth rate (2) companies that have less liquid stock markets are more likely to pay dividends (3) companies with low leverage ratios have more probability of paying dividends. Also I have found that historically low payout ratio is harbinger of low or even negative earnings growth rates.

I believe that based on findings mentioned above, effective investment policy could be created. For the investor who favours to invest in company with high earnings growth perspectives and receive high dividends in the future, results of the study could be interesting. According to the results of the research, for “dividend preferring” investor, funds should be invested in the company with constantly high payout ratio, low stock market liquidity and debt-to-equity ratio below 1. In that case the probability of meeting investment expectations would be much higher.

Place, publisher, year, edition, pages
2010. , 43 p.
Keyword [en]
dividend policy, stock market liquidity, capital structure, earnings, Miller and Modigliani, dividend signalling theory, Nordic IT Market, dividend payout.
National Category
Business Administration
URN: urn:nbn:se:umu:diva-34477OAI: diva2:322339
Social and Behavioural Science, Law
Available from: 2010-06-07 Created: 2010-06-04 Last updated: 2010-06-07Bibliographically approved

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Mirzabekov, Aziz
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