Dividend rate and variation in share prices: an exploration into their inter-relationship

Abstract

Return and risk are the two acknowledged characteristics affecting investment decision of investors in securities market. The literature on the relationship between these two characteristics provides ample evidence about the interdependencies between them. The present study takes a view that risk should not be considered a one dimensional variable. An attempt has therefore been made in the present paper to decompose this characteristic into risk in dividend and uncertainty in capital gains. Two alternative explanations for the nature of their interdependencies have been proposed. The study uses a sample of 269 companies and provides cross-section - one period analysis of dividend and share price variables. The empirical evidence supports the hypothesized relationships between the two dimensions of risk.