IMPACT OF DIVIDEND POLICY ON STOCK PRICES BEFORE AND AFTER CAPITAL GAIN TAX IMPOSITION: THE CASE OF MANUFACTURING SECTOR OF PAKISTAN

The aim of the study is to find the impact of dividend policy on stock prices before the capital gains tax imposition (2006-2010) and after the capital gains tax imposition (2011-2015). This study uses Descriptive statistics, Correlation, and Panel Regression Analysis to investigate the impact of Dividend Policy on Stock Prices. The study is covering 10 years’ time period from 2006-15. This study investigated that before the imposition of capital gain tax there is no effect of Dividend Policy on Stock Prices. The reason whythe benefit in the said time period is greater is that there was no tax on capital gains. Investors were buying shares at low price and sell it at a higher price to earn capital gains. The first theory which is a dividend irrelevance theory supports the results of before capital gain tax imposition and the theory were presented by Miller and Modigliani (1961). The study also investigated thatafter the imposition of capital gain tax, Dividend Policy became the main tool of fluctuation in the prices of shares. The reason why people were unbiased to capital gains is that the tax on capital gains became higher than the tax imposed on dividend. So stockholders started to opt for those shares which yield a high dividend. This result of after capital gain tax imposition period is supported by “Bird in Hand” were presented by Lintner (1962) and Gorden (1963). The management of firms needs to follow a stable dividend policy to gain the confidence of investors for a long period of time. Investors may prefer stocks of those firms, which yield high dividend. Because high dividend payout ratio may indicate that the future of the firm is bright and its earnings may rise in the future. For the investor’s point of view, this research work recommends that investors need to opt for shares of those firms which pay high and stable dividend payout ratio. Because the stock prices of those firms affect much which follow a fluctuating dividend payout.