Nonlinear relationship of Dividend Policy on P/E Ratio in Tehran Stock Exchange Industries

Subject Areas : Investments

Moslem  peymany ¹ (Finance and Banking / Management and Accounting / Allameh Tabatabai / Tehran / Iran)
Mohammad Hassan  Ebrahimi Sarvolia ² (Finance and Banking / Management and Accounting / Allameh Tabatabai / Tehran / Iran)
Mahsa  Goodarzi ³ (finance and banking/ Allame Tabatabaie/ Tehran/Iran)

Received: 2021-03-13 Accepted : 2021-08-01 Published : 2021-03-21

Keywords: P/E ratio, Dividend Payout Policy, Nonlinear relationship.Conditional Effect,

Abstract :

Considering the importance of the stock valuation models, the comprehensive study of these models can lead investors to use them correctly and make the right decisions in capital market. Therefore, in this research, one of the most widely used models, the P/E ratio model with nonlinear perspective, has been investigated and compared with linear model. For this purpose, by performing panel regression for the information of 182 companies in the form of 28 industries in Tehran stock exchange during the years 2009 to 2016, we find that the ratio of dividend payment has a nonlinear impact on P/E ratio and the relationship between price to earning ration and dividend payment ratio has convexity and its degree of convexity is conditional on the relationship of return on equity and shareholders required rate of return. Also, based on results of this study, the explanatory power of the nonlinear model is greater than the linear model. It is recommended that investors pay attention to the nonlinear model along with the linear model to achieve a better result.

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Yin,Y., Peasnell, K. ,Lubberink, M. and Hunt, H.G. (2014), “Determinants of Analysts’           Target P/E Multiples”, The Journal of Investing, 23 (3), 35-42.

Alford, A.W. (1992), “The Effect of the Set of Comparable Firms on the Accuracy of the 

      Price Earning Valuation Method”, Journal of Accounting Research, 30 (1), 94-108.

Anderson K. Brook C. (2006), “Decomposing the Price Earnings Ratio”, Journal of Asset

      Management, 6 (6), 456-469.

Boonlert Jitmaneeroj. (2017), “The Impact of Dividend Policy on Price Earnings Ratio:

         The Role of Conditional and Nonlinear Relationship”, Review of Accounting and

          Finance, 16 (1), 125 140.

Cho, J.Y. (1994), “Determinants of Earning Price Ratios: A Reexamination”, Review of 

      Financial Economics، spring، 105-120.

Chua, A., DeLisle, R.J., Feng, S.S. and Lee, B.S. (2015), “Price-to-earnings ratios and

      option prices”, Journal of Future Markets, 35 (8), 738-752.

Krishnan  and Yifei Chen  (2017) , “The Relationship between Dividend Payout and Price

       to Earnings”,  SSRN Electronic Journal · August 2017.

Copeland, T. Weston, J and Shastri, K. (2005), “Financial Theory and Corporate Policy”,

       Pearson.

Huang, A.G. and Wirjanto, T.S. (2012), “Is China’s P/E ratio too low? Examining the role

       of earnings volatility”, Pacific-Basin Finance Journal, 20 (1), 41-61.

Johnson, L. and Hurley, W.J, (1995), A Note on the Measurement of Equity Duration and

        Convexity, Financial Analyst Journal, 51 (3), 77-79.

Johnson, L.D. (1990), “Convexity for Equity Securities: Does Curvature Matter?”,

         Financial Analyst Journal, 46(5), 70-73.

Kumar Debasis Dutta*, Mallika Saha**, Dibakar Chandra Das,  (2018) , “Determinants

         of P/E Ratio: An Empirical Study on Listed Manufacturing Companies in DSE”

         International Journal of Scientific and Research Publications, 8(4), April2018. 

Ramcharan, H., (2002), “An Empirical Analysis of Determinants if the P/E Ratio in

         Emerging Markets”، Emerging Markets Review, 3, 165-187.

Ross S.، Water Field, RW، Jaff, JF, (1991). “Corporate Finance”, Toppan Co. Ltd.

Shamsuddin, .A.F, Hillier, J.F، (2004)، “Fundamental Determinants of the Australian Price

         Earning Multiple” ،Pacific-Bassin Finance Journal، 12, 565-576.

Sum, V. (2014), “Dynamic Effect of Tobin’s Q on Price to Earnings Ratio”, Managerial

          Finance, 40 (6), 634-643.

Yin,Y., Peasnell, K. ,Lubberink, M. and Hunt, H.G. (2014), “Determinants of Analysts’

          Target P/E Multiples”, The Journal of Investing, 23 (3), 35-42.