The dividend policy is one of the very important issue of advance corporate finance as well as for the capital market. It is also very interesting issue in the advance corporate finance and still keeps its prominent place. The purpose of the thesis is to determines the price volatility in Oil & Gas sector of Pakistan. Oil is the major source of energy. Oil flows from natural springs in many localities. It plays a vital role in the life of every individual in the world. The oil prices are rising in the world from the last few years. Oil prices are also increased in Pakistan.
In Pakistan, oil is the major source of energy. The economy of Pakistan rely on this resource. The high prices of oil left bad impact on general public and their transportation budget. There is no increment in the salaries of general public by the Government. Therefore, the general public is very much affected by rising oil prices. Mostly researches has been conducted by the well known researchers and provided the theories and empirical evidences regarding the dividend policy on stock price. But the issue is still unresolved. Dividend policy, the payout policy that managers follow in deciding the size and pattern of cash distribution to shareholders over time. Many of the financial practitioners and many academics greeted that conclusion with surprise. The conventional wisdom suggested properly management in dividend policy and this has created an impact on share prices and shareholder wealth. As long as the number of factors identified in the literature are much important to be considered in making dividend decisions. Thus, extensive studies were being carried out to find out various factors affecting price volatility of a firm. The setting of corporate dividend policy remains a controversial issue and involves ocean deep judgment by decision makers. The market in Pakistan is going to enter into the emerging markets soon. In fact, many researchers have almost focused on the private sector. Therefore it is clear to say that incomplete picture of dividend policy is available in many capital market.
1.1 History
Fifteen years back, the prices of oil and gas sector in Pakistan and world wide had dramatically changed because the different markets factor effecting demand are as usual similar to the world wide markets. The different policies have impact of significantly across the nation. The Government policies and their regulation, domestics' corporate taxation sector, investment, different environmental factor and some laws were affecting various alternative financial structures, operating and investment policies.
1.2 Environment of Pakistan Industry
Pakistan is moving towards the development and improving the economy position in the world since the 1980. The economic growth and revolution has been identified by many researchers. Pakistan economy is suffering with the GDP per capital income of only US$680. Pakistan's economy was 56.8% free, according to the assessment of 2008. The capital markets of Pakistan are much developed than before. Many studies conclude that firms are likely to pay stable dividend during the high growth period. So it will be important to find that how dividend policy is determined in growing economy like Pakistan. Secondly, the level of the corporate governance in Pakistan is not like developed countries, Securities Exchange Commission of Pakistan took several measures to improve the corporate governance. Due to weak corporate governance the ownership structure of Pakistani firms was often characterized by the dominance of one primary owner who manages a large number of affiliated firms with just a small amount of shares or investment.
1.3 Compare with Foreign Market
The tax environment in Pakistan is totally different as compared to United States. There is no capital gain tax on stocks in Pakistan because the Government has given the extension till 2010. So before the 2010 no capital gain tax has been collected on stocks in Pakistan. While 10% withholding tax will be charged on dividend incomes. It is important to mention here that if the firms earned the profit and not announced the dividend, 35% of the income tax will be charged by the Government of Pakistan. The Pakistan's capital market faced many critical issues and outdated regulatory framework. An inefficient, non transparent and stagnant stock market, a poorly regulated and publicly owned mutual fund industry and a nascent insurance industry that contributed little to capital market development. There is tremendous increase in market capitalization with a soaring stock market index. Many major investors were still disagreed with dividends and consider stock prices appreciation as the major component of stock returns.
1.4: Problem Statement
Oil sector industries profitability was highly volatile because it was highly influence from external factor. Some of the major issues are as follow:
International Market
Government Policy
Oil Supply
Political issue
1.5: Objective
The objective of the thesis is to test empirically the impact of different independent variables (Dividend yield, earning volatility, payout ratio, and the size of firm) on the dependent variable (price volatility) by using the sample of 12 Oil & Gas firms of Karachi Stock Exchange listed firms from the period of 2005 to 2009.
1.6: Research Scope and Limitation
The scope of the study provides valuable different environmental factors that affects the share prices and give impact on dividend policy .The research covers the Oil & Gas Sector operating in Pakistan only.
The sample size consists of Oil & Gas sector in Pakistan.
1.7: Research Structure
The research structure based on the following chapters:
Introduction about industry, history of oil and gas sectors, the environment of Pakistan industries and their role in the economy.
The literature review provides theoretical background of the research and cites author that have previously researched on the dividend policy & stock price volatility.
The methodology chapter includes adopted data sources, collection and interpretation.
The conclusion and recommendation section provides the final logical analysis.
CHAPTER TWO
LITERETURE REVIEW
Campbell, Shiller (1987) the future dividend with respect to dividend price ratio with different factors like size, growth rates, and discount rates through linear regression analysis. According to Campbell, Shiller (1987), the variation in the dividend price ratio of different stock markets through different factor. The dividend increase /decrease to reflect the slow growth of price ratio that was to study the different term structure of aggregate stock price. The dividend ratio reflects the long term return which reflects the variation in dividend prices. The dividend price through the beginning period on the basis of the actual dividend paid during the period. The observation is base on the dividend price and monthly stock prices that give the actual result .Through the previous movement of the stock prices, dividend and alternative discount rates reflect the stock return. The dividend ratio model of stock portfolio calculates the begging period of dividend through the relationship log dividend and log prices that are constant. The data shows that the price was the average ratio of the stock price and dividend. The Gordon model was exact model for the dividend ratio when the discount rates and growth rates are constants through the variation of time. According to the model of Gordon to find the level of mean and price ratio that give us the free constant term that mean the model reject only dividend ratio but not mean level. The level of significant was not in the position to accepting the dividend ratio. But on the other side the dividend ratio model has unique advantage when compared other empirical model. Data use for the purpose Standard and Poorest composite stock price index 1871-1986 through the different above methods. The correlation was high and the short term discount rate, short term interest rate, growth, and volatility of the stock were rejected to explain the stock price movement. Log dividend was not in the position to explain the variation .According to the Dickey-Fuller (1891) the regression in the variable change and constant in time and price variation. The null hypothesis that had the root and there was no explanatory power but the change in the variables. The result shows that the null hypothesis was among the unit root the acceptance level of price and dividend. The correlation of dividend ratio and prices was .985 that period its mean the highly positive correlation that mean the investor and large movement in the price and dividend. When the correlation was positive that mean the dividend ratio has the positive effect on the stock price and return. It means the dividend ratio was mostly high when the prices were low, that reflect on the return.
Kumar, Bong, (2001) the signaling effect on dividend policy and earning adjustment that reflect the substantial variation in the earning firm. Firm dividend policy shows the manager set the policy and makes some changes under the condition of financial economics. According to Kumar, Bong, (2001), the dividend was equilibrium level but some time unchanged for some period but adjusted through permanent earning was continuous. The development was the empirical model the relationship between dividend adjustment and permanent earning. The model suggests that the smooth dividend policy change through signaling information to reflect the high/low smoothing in equilibrium. There was internally consistent fashion to find out the empirical point that appears in this model. The empirical model showed that the higher risk factors affect the investor demand to the firm, the share price, volatility, earning volatility, to show the smoothing dividend policy. Allen and Michael (1995) highlight the point in their survey regarding dividend behavior for different available variable. For example the unexpected dividend change and price volatility had motivated the empirical model to choose the investor inside change in dividend for the earning purpose. .Linter's (1956), works on dividend policy the adjustment continue with respect to variation in the earning volatility that reflects the dividend were high for small size firm. Harvey and Whaley (1992) they suggested the reason of poor performance of option model for pay out ratio was the poor budgeting ability of the firm. The poor performance of dividend that predicts the poor earning but the high variation in the dividend earning effected the stock price. The empirical model performance was highly significant to explain the changes in the dividend instead of level goes backward. The empirical method shows that the horse race in two time that were weak performance of insensitive relationship between dividend and earning volatility. The data use for purpose dividend and earning volatility of NYSE Amex firm from 1972-1995. The observation was the dividend and earning volatility that was available, but mostly firm's dividend was zero. The missing value dropped and takes only pay out ratio that was meaningful for the firms. The result show that the perfect performance for dividend and earning volatility was absolute to the prediction level that mean highly positive relationship between dividend and earning volatility.
During the period of 1987 the stock prices were fluctuate, According to the William (1980 that why the stock prices was increase/drop in 1987 the people was wondering the situation of stock price volatility. There was a huge problem remedies fix. The other objective was whether the current policy was absolute to defend the crises of stock prices volatility. According to the William (1980), there was little bit high stock prices due to high trading and
high volatility that reflect highly information receive. Because the innovative technology introduced the stock markets that bring two major things, which one was a large investor comes in markets with huge incentives with important information and secondly the signaling information was spread very quickly so the stock prices change with respect information.
Standard Deviation was used to measure the stock prices during the period 1834-1989 to find the extreme value of stock return. , It was 4 % per month that mean the monthly stock return was 8 % - negative side. In 1982 the fast growth of advance technology to rise up the stock return to boost the investor position. The corporate leverage had dramatically effect the stock prices and return the standard deviation was equal to the assets. On the other side if the firm issues the debt that was increase the volatility return. In 1987 the short term volatility was dropped due to the crashes in stock prices. The trading volatility and stock volatility relationship reflect through the people information receive during the period. The result shows that volatility markets were decline in1989 but it was high in 1987 due to the more information and huge investors back to the stock markets.
Keynes (1964), variation in the dividend ratio, earning volatility, and cash flow (dividend) to reflect the changes in the varialles.According to Keynes (1964) the investor expectation was change the averages basis. The variation in the stock prices was due to the information increased cash flows that reflect the dividend, earning volatility. LeRoy and Porter (1981), they develop hypothesis the market efficiency impact on stock price volatility. The restriction of the volatility on the stock prices, and earning volatility was actually efficient market so the stock prices the rejection position. Marsh and Merton (1986), the dividend was not in the position to represent the cash flow. Kleidon (1986), the smoothing dividend for central companies that explain the excess earning volatility. Data use for the purposes Toronto Stock exchange 1950-1991 to analyze the monthly basis dividend that was over charge volatile.
Merger and acquisition the same test was perform to generate the cash dividend through repurchases. The available information in the efficient markets that impact on price volatility. Sheller,(1981) Leroy,(1981) and Porter (1981), focused on the price/earning volatility compare the real stock price the upper level Through volatility the cash flow (dividend) perform the discounted rates.TSE provide the related information to the cash flow (dividend) and outstanding share of merger and acquisition firms on the basis of narrowly changes on the monthly market capitalization with respect to stock price. Shoves (1986) estimate the repurchases on monthly opening and closing basis it shows that excess repurchases to compare with capital stock and secondly there was no significant existence. The total share amount paid to the acquisition share holder on the basis of share price and outstanding share of closing month. It shows the price effect on acquisition was fully impounded the time of announcement. The result of the variation and narrowly that was consistent with the market. The relationship of the variation and cash dividend when calculated one sided that result had significant violation when the dividend was broadly the variation was not found in the violation. In the cash flow (dividend) the estimated statistics value was positive and the variation in the price was not rejected. The other side when the available data was unique difference with includes the dividend we don't accept the hypothesis that mean the share price reflect the actual cash flows. The data annually basis gives the negative result to null hypothesis the innovation of stock prices.
The study was conducted by the Nam, John, (2002) the volatility of stock price returns and test the manager sensitivity according to the stock return and stock prices. In the corporate sector the manager has significant for the wealth invested, they reduce the firm risk than for shareholder point of view. According to the Larcker, Verrecchia (1991), there was major two effects on the manager incentive. The first one was stock price volatility with effect to payoff structure, the value of manager portfolio increase with effect to variation in the stock. The other one was sensitivity of the prices due to direct link between payout ratio and variation in the stock. So the manager bears risk decreasing the stock risk averse. The use of the managerial portfolio and stock prices volatility through the no financial activity to reduce risk. Gay and Nam (1998), they find the highly positive relationship between stock prices and hedging, the hedging activity very positive with the stock prices. But their relationship was non significant that means the hypothesis is rejected. Rajgopal and Shevlin (2000), they find the relationship the manager portfolio with the oil and gas sector. The result shows that there was negatively correlation between manager portfolio and stock price volatility. The test variable use for that study measure the sensitivity wealth regarding the stock price volatility, their finding how much the variable contribute in the study. To estimate the stock price volatility and sensitivity they use Core and Guay (1999) methodology to find out the different variables like Lvolsen, LPRICESEN, the 1 5 change in the portfolio that was reflect to the change in stock prices. The control variable in the study the wealth of the outside manager and some different constraints and also the firm size to find the relationship between portfolio and stock prices volatility. The firm sizes the sum of the firm debt, preferred stock and the market value of the firm. The data use for that purpose of the S& P 500 that was 64 financial institutions in 1996, their major focus on the non-financial sector due to the their minimum trading, they focus of their CEO incentive so their result was more related their study .For the purpose of the derivation information they use the SWAP database to collect the annually basis reports of the year 1996.Their was some firms the reports do not give complete information for their derivation position. They also use the method COMPUSTAT to collect the financial data through handling and CRSP, for stock purpose, the final data consist of 260 industries, 146 derivations user, and 114nonusers. The result shows that log for the different variable and the portfolio sensitivity and firm size was same. The correlation between Lvolsen and LPRICESEN, 0.277 to 0.427. It mean the significant 0.361 one percent level between the two sensitivity measure so the degree of correlation between these two significant multivariate specification, to capture the different incentive effect. But the other side the hedging activity they construct the two variables that is Loptnum and Laption are the similar. Their measure of stock price and portfolio was the same with the theory. The coefficient of Loptnum and Laption both was highly positive and highly significant, it mean there was highly positive correlation between the sensitivity and stock price volatility. Table III the specification the sensitivity was more powerful between the managerial incentive and hedging activity.
The highly trading regarding to the price volatility that the positive variation in the trading sectors it mean there was excess volatility in the trading. According to the Edwards (1988), there was declining position in the trading sector but sbuconsistent to the equity future trading. When active trading market increase or decrease through the equity volatility to reflect the coefficient trading that decline in the future. Samuelson (1965), suggest that prices increases with respect future contract maturity that was near. He fined that why the equity or price volatility was little bit high when its expiration date was near. In section II they use the method to find out the relationship between the future trading activity and share price/ equity volatility. But in section III to reduce the equity volatility and increase the future trading with some evidence section IV future trading there was some variation but in the volatility there are no change. Clark (1973), Harris (1982), the new information reflects the movement of the stock price volatility and trading volume increased for the period. According to the Epps (1976), the change in the trading prices and change in the volume to violate the new information. In the study there were two major things there was important evidence for the future trading volatility through empirical analysis. Secondly there was heterogeneous impact on the future trading and volatility. The effected volatility was uniformly was smaller than the future trading. Stein (1987, the poorly information of the trading market destabilize of the spot industries. The very important implication for stabilization of the opening trading markets, but some sector there was negatively new information was lower the trading price. Schwartz (1990) introduced the relationship between the future trading and equity, price volatility, there was some unbiased of the daily standard deviation to find out the observable variable through pair correlation. Schwert and Seguin (1990) through the daily return the test of normality was unbiased, lagged standard deviation and lagged raw residual estimates persistence and volatility in the stock. Kyle (1985) the informative trader can be increase through the trading volume to reflect the price reaction. The data use for the daily return of S& P 500 1978-1989 to find the market volatility. In the table I the variable there was positive correlation. The hypothesis indicate that the informative trading markets relationship with the component of future trading that greater than 0.5. It means the correlation between the expected component and the average 100 daily return was highly positive. But the correlation between the unexpected component and future trading volume of S& P 500 was positive and significant. The result shows that there was positive correlation between the each component that reflect the highly positive correlation in the volatility and the future trading stock. It mean that the environmental changes did not change that was impact on the volatility.
The variation of the stock price volatility during the period of 1987; it was dramatically jumped over 29,000 days observation by -21.4 %.It was the highest drop between 1885-1988 in the last week 1987 stock prices up and down by huge amounts. Next the prices was up in 1933 by 16.6% due to banking holiday After 1987 the stock prices was smoothly rise up but its unusual form previous period. During 1929-1934 the stock prices was fluctuate different variation but in the 1937-1938 their was depression but in the 1973-1974 their was recession due to OPEC. According to the Officer (1973) there was variation in the stock prices during a huge depression it was same before the depression and later on. Benston (1973) predict that the stock price volatility of single firm and the volatility was uncorrelated to the market variation. According to the Schwert (1989) the monthly variation in the stock during the recession period to affect the banking sector was in crises during 1834-1986. Stambaugh (1987) that was highly correlated and unexpected increased in the stock prices volatility to the negative stock return, and to predict that there was also weak correlation that was positive to the stock prices volatility. During the period of 1885-1988 there are 25 increases and decreases in the daily stock return, through the weighted averages return method. In 1929-1934 the monthly return was same and there was positive .Negative returns for the next months.Autoaggressive model first to predict the increase the stock prices. Secondly the volatility prices increase after the fall and third the variation in the volatility during economics recession period. Through the auto aggressive method the weighted least square for the stock volatility that was consistent with the previous period. One day activity it was 1.11 % and other intercept by positive. It means the auto aggressive last two week positive by estimating the lag. The two hypotheses develop the negative relation, First the firm have financial leverages they drop the stock prices and increase the stock bonds. Parkinson (1980) develops the efficient estimator variation for the stock prices that was the based on the variation in the prices high-low. The result shows that there was difficult to find the volatility through the auto aggressions. The large drop of stock prices during the October 1987 to predict the coming volatility was much better. So the coefficient of stock volatility was negative with -.359 it mean that volatility was lower than the previous period. After the 1987 there was positive correlation in the stock prices volatility.
According to the Asquith and Mullins (1983) the strong highly positive stock prices reaction that affects the initial cash dividend. Its mean the investor are happy for that information was impact their future cash dividend, another dividend signaling information that effect the earning announcement. When the stock volatility decreases through the initiation dividend. They develop the hypothesis the average information reflect the earning volatility in the predividend than the post dividend period. Their was two possible the investor was more flexible than on earning announcement but the other way there was two different way of information. The averages stock prices impact on the earning announcement are smaller in the postdividend period. In the postdevident period there were larger changes in the stock prices but in the volatility there were lower changes. The finding about the changes in the earning volatility information that reflect the stock volatility reaction was weak correlation in the exchange effects. According to the Marsh and Merton (1987), the firm did not change the dividend through signaling information changes but actually change partially. Kane, Lee, and Marcus (1984) the effect of announcement whether the increase in the dividend or rather more reliable one of them it indicate these two information was not perfect to convey the right information. The data use for that purpose of the CRSP 1972-83 to find the quarterly dividend paid, after that collects the data of earning announcement and cash dividend paid of 14 quarter. Than the daily return of quarterly basis 3 year succeeding initial cash dividend, the earning announcement data to find per share earning the particular period. Their main objective was to find whether the earning announcement information change the initial level of dividend for specific firm. There were three reactions to represent the prices reaction, which one was average stock price reaction n the predividend period and the postdivident prices reaction for the preceding dividend. The result shows that there was cross-sectional distribution of the average information for the earning volatility in the post dividend period. It means the medium of the post dividend period was smaller, and whether the earning announcement precedes the dividend announcement, but in the table II there was less cross-sectional distribution in the post dividend period. The section III the prices reaction on the averages basis smaller in the post-dividend period. According to the Healy and Palepu (1988) the share prices were responsible for the earning announcement were smaller in the post-dividend period. They suggest that the reduction level in the initial dividend was significant during the period.
According to the Edwards (1988) the stock market fluctuates when the new information hit the high stock volatility. The current trading impact on the stock price volatility in the short-term period, but there was issue the long-term threats on stock market stability. Edwards investigates why the volatility rises through risk premium that was demanded from the investor both the interest rate and cost of capital. The investor argue that whether the great opportunity of volatility that lead the higher risk which mean there was greater threaten. But when the stock market rises than the investor sees their assts rapidly high. According to the perception of general people increase in stock volatility was bad to impact on the economics factors. There was some argument related to future trading was impact on the volatility with cash market that was more reliable and less volatile. But the perception was remain same because the greater volatility that was transmitted to the cash market arbitrageur. But on the other side the future prices were more reliable than the cash prices. Table III shows that daily basis closes price changes to the future changes, its mean the future prices were more significant than the cash prices. Edwards (1988) determine the asset impact on the future trading activity for both before and after future trading. The data S& P 500 index in 1979-1982 to calculate the future trading before and after basis, the effect of the future contracts on the cash markets through the monetary policy. Thus there was significant relation was greater before and after trading. There was no evidence the future trading long-term effect on the stock prices volatility. According to the Parkinson under the more restrictive assumption its more reliable predictor than the colossi ended variation. The result shows that there was no clear evidence for the current stock prices rises until the future trading; the regression analysis was more predict result the measure volatility for the exact prices for the stock markets. It means there was highly positive significant relation between the future trading volatility and price movement.
The reaction of the stock and bond price on dividend changes. According to the Dillon, Herb (1994), the stock and bond price reaction to dividend changes through information content and wealth redistribution. Although these hypotheses was consistent with a positive stock reaction to a dividend increase and also the predicted bond price reaction was different. Jayaraman , Shastri (1978), find insignificantly negative bond price reaction to special dividend announcement. They use the several independent samples of stock and bond prices to examines these two hypotheses. They use the standardized mean for bond and stock returns the infrequent trading problem and changes. The Standardized mean based on normality and also independent with no normality. Data use for the study of NYSE 1970-1988. The price reaction to dividend increase due to stock return was significant positive and bond return was negative. But when price reaction to dividend decrease the bond become insignificant. The result can be positive and may be negative. At last they paid more attention towards the wealth transfer mechanism.
The analysis of financial decision have effect on the firm values and securities. According to the Woolridge (1983), that the financial decision may have at least two distinct effects on the distribution of total firm value of securities. Woolridge (1983), examines the effect of unexpected dividend changes on the value of common stock preferred stock and bonds. He finds the two potential effects that are wealth transfer effect and signaling effect. It was possible that one effect snaps the other. Woolridge (1983), that the impact of dividend announcement on common stock prices has received much more attention in the financial decision. Because the attributed to the information content of dividends. Dann, Vermaclen (1981), they analyzed the return of various security announcement of common stock repurchase, The financial decision was very similar to a dividend increase, These hypotheses that the security value around to stock repurchase influenced by one or more effect. He select the data of NYSE 1970-77, How ever he obtain an accurate measure of market reaction to dividend announcement. For several purpose refinements were required, to control for influence the other factor on security prices, So the daily return (average return), for common stock security prices and also expected return CAPM Approach. He find the signaling aspect of dividend, and they were consistent with wealth transfer that unexpected dividend increase with positive debt, preferred stock returns. The signaling effect was the primary factor influence security prices.
According to the Campbell, William 1955 the stock prices drop off during the period. They assumed among stock holder and brokers that the stock price drop on ex-dividend dates. The average stock price drop off on the ex-dividend date by 90 % of the amount of the dividend. When the stock market was stable, 90 % average price drop off it means that the advantage for a tax investor buy after the ex-dividend date. They obtain that the measure of stock price behavior on ex-dividend dates. And also make two test for the study, One using dates falling between Oct, 1949- 1950 and second covering the last three month of 1953. Jones (1953), find the average did not exceed by 25 %. The test shows that the median price drop off by 92%. There was two evidence that the stock ex-dividend practice of marketing down open bids the full amount of dividend was a significant factor in the prices drop. The two main factor trades 85 % tax braket. The suggest that a fully rational market might make the drop off between 65 %- 75 % of the dividend.. The result shows that there was positive signaling effect on the stock prices.
