Dividend policy refers to the decision whether a firm decides to distribute some of its earnings as dividends to shareholders or not. Two significant variables are related to it: dividend yield and payout ratio. The former indicates how much a firm pays out in dividends each year relative to its share price, whereas the latter refers to the percentage of earnings paid to shareholders in dividends. Dividend policy is seen as one indicator of share price volatility, which measures the dispersion of returns and price changes for a certain security.
The purpose of this study is to analyze these two dividend -related variables together with share price volatility and examine if there is any correlation between them. If a correlation is found, what kind of a correlation is it? The study only examines Finnish public companies listed on OMX Helsinki. The approach used is quantitative because of the numerical material gathered. The needed variables are gathered from different sources, mainly from Kauppalehti’s and Mornigstar’s website, but also official financial statements of the firms are used to retrieve information. The Pearson Correlation Coefficient is used in SPSS to measure and determine the correlation of the three variables.
The results of the research clearly show that there is a negative correlation between dividend policy measures (yield & ratio) and share price volatility among the examined companies. The correlation of -0,508 between share price volatility and dividend yield, as well as the correlation of -0,185 among share price volatility and dividend payout ratio tell us that as one variable increases, the other tends to decrease, and vice versa. In addition to the negative correlation found, the author also found a positive correlation of 0,232 within the relationship between dividend yield and dividend payout ratio.
All in all, the study aims to give its reader a comprehensive view about the effects of dividend policy on share price volatility in the Finnish markets by examining the relationship between the three formerly mentioned variables
