A STUDY ON RELATIONSHIP BETWEEN DIVIDEND POLICY AND THE VALUE OF THE FIRM

One of the main objective of a business enterprise is to maximize shareholders’ wealth. Maximization of wealth happens when the returns of the shareholders is maximized. Shareholders’ wealth is represented in the market price of the company’s common stock, which, in turn, is the function of the company’s investment, financing and dividend decision. The optimal dividend policy is the one that maximizes the company's stock price, which leads to maximization of shareholders' wealth, thereby ensures more rapid economic growth, and enhances firm’s value. Lintner’s’ study about relevance of dividends shows that the firms set long-term target dividend payout ratios. Establishing relevance or irrelevance of dividend is a subject of debate. Some economists propounded relevance of dividends (Gordon and Walter) and some irrelevance of dividends (Modigliani and Miller). However, the impact of a firm’s dividend policy on its shareholders’ wealth is still unresolved. The present study is intended to study how far the dividend payout has impact on shareholders' wealth in general; and in particular to study the relationship between the shareholders' wealth and the dividend payout and to analyze whether the level of dividend payout affects the value of the firm by taking into consideration companies selected from 5 different sectors listed on Bombay Stock exchange (BSE). From the study we can infer that there is no significant relation between Dividend payout ratio and shareholders wealth and thereby value of the firm.