3.

Methodology

3.1 Introduction

In earlier corporate finance, the dividend strategy applied to the preference of a company to
either pay a cash dividend to its owners or retain its profits. It discussed the duration (whether
monthly, semi-annually or quarterly) of those payments and how much the organization can
spend if it wishes to do so. In today's companies, dividend strategy has moved beyond this scope
to cover topics such as whether to allocate capital through the repurchase of shares or specially-
authorized rather than daily dividends. Other challenges addressed include how to reconcile the
interests of heavily taxable and comparatively untaxed investors, how to retain and maximize the
worth of their market stock exchanges.

Several observational experiments have analyzed the association between average stock market
volatility and dividend policy. The regression model developed links market fluctuations to the
two prime dividend policy measures: dividend yield and dividend expenditure ratio. Several
control variables are used in compliance with the Baskin (1989) guidelines to account for such
conditions affecting dividend policy and stock price fluctuations-growth, earnings volatility, and
company size. The theoretical significance and empirical data for each variable, as well as the
various proxies used to calculate each variable, will be given in this section. Also, in the model,
we will describe the hypothesis of each relationship implied.

3.2. Used Sample

This research explores the outcome of the dividend strategy on the share prices volatility for
UAE-listed banks during 2005-2019. All data is collected from the Dubai and Abu Dhabi Stock
Exchanges. We should not consider non-financial companies due to their particular manner of
financial reporting. Our survey, thus, contains only banks. Moreover, to resolve the missing data
problem, we exclude banks that do not have full observation between 2005 and 2019.

Consequently, over a period of 15 years, our sample consists of a balanced panel of 14 banks. To
produce definite comparisons of our observations with previous observational research, the
variables used in the analysis and their equivalents are commonly adapted from current literature.
Therefore, volatility share price is our dependent variable, and dividend return, dividend
expenses, rise, scale, control, and volatility incomes are our independent variables. In the
following section, the proxies for independent variables are already discussed.

3.3 Designing Models

3.3.1 Variable Dependent

Share Volatility in Price

The volatility of stock prices represents a variation of stock rates over time. Instability,
unpredictability, and threats are a cause of it. This impacts the interests of investors and tends to
variations in purchasing and sales rates, which means that risk control plays a vital role in
investing (stock price fluctuations) (Beg & Anwar, 2012)

The volatility of the share price is built on the yearly accustomed stock price variety received
from the stock exchange, then distributed by the average of the low and high rates acquired
annually and then squared for each year. For all possible years, this was multiplied, and a square
root transformation was performed to produce a variable equivalent to a standard deviation
(1989-Baskin). It was intentional to use the indicator for share price fluctuations rather than the
standard deviation. This is essential because extreme values could impact standard deviation.
Again, our approach is consistent with that of Baskin (1989), whose theoretical thesis shapes the
systematic analysis of this report.

3.3.2 Independent Variables

3.3.2.1 Dividend Yield

Many studies examined the relationship between dividend policy and share price volatility. An
example from Australia Allen and Rachim (1996), in Pakistan the study of Nazir et al. (2010),
the study of Hussainey et al. (2011) in UK. They found out significant negative relationship
between dividend policy and stock price volatility. Rashid and Rahman (2008) examined the
relationship also between the dividend yield and share price volatility and found out that there is
a positive but insignificant relationship between them. In Karachi stock exchange, Asghar et al.
(2011) found out that the relationship between dividend policy and share price volatility is a
significant positive relationship. On the other hand, there are some studies shows that the
dividend yield is not related to stock price volatility such as the study of Baskin (1989). Based
on the results of the researches above, we assume that there is a relationship between dividend
yield and stock price volatility.

3.3.2.2 Dividend Payout

The payout ratio for dividends related to the dividend strategy. A dividend decision was the
payout ratio of which the amount of earnings was paid out as dividends. The other independent
variable was payout ratio, which was determined by calculating the earnings per share by the
dividend per share. (Baskin,1989), clarified the negative influence of the dividend payment on
the volatility of the stock price depending on the amount of return and the effect of details. He
concluded that dividend payouts should be used as an indicator for future growth and investment
opportunities so that their share price is less volatile for companies with higher dividend payouts.
He also clarified that it is possible to view high dividend payouts as a firm’s stability and
decrease the variation in the company’s share price. The binary -choice model may explain the
process of decision making with relation to the dividend payment policy. (Kim and Jang ,2010)
emphasize that the decision to pay dividends and the decision on the exact payment amount are
separate process influencing the decision.

3.3.2.3 Size

Size (SZ) is one of the control variables that can be measured by using the natural logarithm of
the total assets. The size of a firm is important for businesses to succeed due to the phenomenon
of economies of scale. Companies try to reduce production costs and increase their market share
to increase their size to get a competitive edge over their competitors. Bigger companies can
manufacture their products at much lower costs than smaller firms. Size has an influence on firm
values, a firm’s size can affect performance because larger firms tend to enjoy economies of
scale, that might positively affect the financial results. so, it is expected to have a positive
relationship between a firm’s size and financial performance.

3.3.2.4 Earnings Volatility

Dichev & Tang (2009) state that to calculate the earnings volatility you take the standard
deviation of the earnings for the last previous five years for each year, the same as taking the
standard deviation of the deflated earnings for the last five years. The survey evidence indicates
that earnings volatility is related to earnings predictability negatively. Moreover, the existing
research proposes that the earnings volatility determined by the economic, accounting factors,
and both factors reduce earnings predictability. Also, the consideration of the earnings volatility
brings substantial improvements in the prediction of short earnings & long-term earnings.
Conditioning on volatility information allows individuals to identify systematic mistakes in
analyst forecasts, which implies that the analysts do not understand completely the implications
of the earnings volatility for earnings predictability.

3.3.2.5 Leverage

Debt ratio (DR) is determined as the ratio of total debt to total assets and is used to represent
leverage (Debt ratio = Total debt / Total assets). [ CITATION Kha16 \l 1033 ] explained firms with
high debt have a high growth rate that means firms use debt to increase their size. The impact of
leverage has positive and significant impact on stock price volatility.

3.3.2.6 Growth

Growth in assets is calculated by taking the ratio of the change in total assets at the end of the
year to the level of total assets at the beginning of the year. [ CITATION Kha16 \l 1033 ] found there
is a positive and significant correlation between asset growth and leverage.

3.4 The Model

Based on the previous segment, we were able to build a model for the period 2005-2019 to
examine the outcome of the policy of dividend on share volatility price in UAE banks. Though
we have a panel data format that contains both the cross-section and the time dimension, we will
use the panel regression as analysis of econometrics. Thus, the primary model's empirical
representation is as in the (1) equation. In the model, the firm corresponds to ''i" and the year
corresponds to ''t'':

Share Price Volatility i,t = α0 + α1 DivY + α2 DivPay + α3 Size + α4 Growth + α5 EarV + α6 Lev+
ξi,t (1)
3.5 Conclusion

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