When thinking about the stock market, the first thing that hits our minds is its volatile nature. By volatility we mean the rate at which the price of a security moves up and down. In financial terms, volatility entails the extent to which the price of a commodity, security or market falls and rises within a short period of time. Many researchers and academics believe that an increase in volatility can lead to a rebound. Therefore, high volatility is associated with a rapid increase or decrease of the stock over short periods of time.
Volatility of a stock goes hand in hand with the dividend policy. By dividends, we are referring to the portion of a company’s profits which is owed to the shareholders. The profits are usually revealed in a formal statement during a firm’s yearly general meeting. Every company has its own extent to which they allocate their dividends. However, the power to state and allocate dividends will have to be authorized by the company’s memorandum of understanding.
The behaviour of dividend policy is one of the most important issues affecting the Indian stock market at the moment. This issue has been debated for a couple of years now yet it still keeps its prominent place. Many researchers try to cover the issues concerning dividend policy and the dividend behavior of volatility yet they have not been able to get what they want. One of the constantly investigated dividend behavior is the smoothing of a company’s dividends in the form of earnings and growth.
There are quite a number of reasons as to why researchers carefully examine the behavior of dividend policy in Indian companies. These reasons include:
- Different perceptions on the spread of Indian stock prices.
- Frequent and wide stock market variations which cause reluctance on the value of an asset and its impact on the sureness of an investor.
- To have an easier comparison of the Indian equity market with other developing and established markets. The volatility of other markets may also shed some light on the developing nature of India’s Stock Market.
- To check whether any change in stock market structure can have a positive or negative impact on volatility patterns and international comparisons.
Larger firms in India seem to enjoy a huge chunk of the market thanks to better management and adequate finances. They are therefore able to withstand any competition from other firms in and outside India. This is quite the opposite for small scale firms since they do not have the financial muscle needed to compete with established firms in the industry. Small scale firms will therefore find it hard and costly when it comes to paying their own dividends as opposed to large firms. This action explains the correlation that exists between the size of a firm and its likelihood to be a dividend payer. Fortunately, the Indian stock market has undergone transformation ever since its inception with listed firms now doing better than before. Finally anybody want to know the
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