Abstract
The dividend decision is an integral part of corporate financial decision making. Despite this, studies have shown a lack of in-depth understanding and agreement on the optimal dividend policy; this is often referred to as the “dividend puzzle”. Ample research has been done on what the potential optimal dividend policy could be in developed nations, however, research on the optimal dividend policy in emerging economies remains lacking, particularly research on South African companies. As a means of closing the knowledge gap and providing clarity and guidance to investors and financial managers of South African companies, this study aims to determine the effect of dividend policy on a market level in South Africa, determining the extent to which dividend policy plays a role in bringing stakeholders closer to determining the optimal dividend policy to improve performance and further create shareholder wealth. The three objectives are as follows: firstly, to determine if a long-run relationship exists between dividends and the market index price through a cointegration test; secondly, to determine if dividends have a statistically significant effect on market index price through an autoregressive distributed lag model (ARDL); thirdly, to determine if dividends have a statically significant effect on market index price in the short run through an error correction model (ECM). An ARDL was used to achieve these objectives because of its built-in cointegration test, and an ECM. The variables applied in this model were: the Johannesburg Stock Exchange (JSE) All Shares Index (ALSI) price, which served as the dependent variable, while dividend per share was the main independent variable, followed by interest rate and exchange rate as the control variables. The model showed that dividends do have a long-run relationship with index price. In the long run, dividends were also found to have a significant effect on index price. This was also the case in the short run, and hence it was concluded that dividend policy does influence the South African market.
Keywords: Dividend; Policy; Index value; JSE.