Yarmouk University

Faculty of Economics and Administrative Sciences

Department of Banking and Finance

Research Title
Determinants of stock price volatility: An
empirical study on manufacturing firms listed
on the Amman Stock Exchange (ASE)

:

Prepared by:
Abdo Abuzant
Supervised by: Dr. Mishiel Suwaidan

December, 2015

Introduction
The change in share price is considered one of the most important
issues in modern corporate finance. Therefore, it is important
issue for firms, stock holders, consumers, and the financial
markets.
The volatility of a share prices is affected by many factors, which
they have effect on share prices. Many developed theories have
been focused on the behavior of changing in share prices at stock
exchange. The objective of corporation in modern corporate
finance is to maximize the shareholders wealth.
In the context of volatility of share prices, many theories have
been mentioned that the dividend policy is one of the main
causes, which has an effect on share prices volatility.
On the other hand, Modigliani and Miller theory (1961) indicated
that the dividend policy doesnt have an effect on share prices
volatility whether the firm increases the dividends or retained
them. Therefore, the shareholders wealth is measured by
investment decisions and the power of earnings.

In the line of dividend policy, MM (1963) developed the theory to

be more realistic, which indicated that the firm can use the
dividends to send a signal to investors whether telling them about
the performance of firm or the earnings power. Therefore, the
dividend signal can reduce the asymmetric information problem
that faces many firms in modern corporate finance.
Moreover, the dividend policy is still a controversial issue that
hasnt been solved yet, Brealy et al., (2006). And it is one of the
most important issue in modern corporate finance because it has
an effect on share price when the firm increases dividends that
may lead the share price to increase and vice versa ( Pettit,
1972).
The capital structure plays an important role in changing of share
prices. According to Modigliani and Miller theory (1958) who
illustrated that the value of firm, which they assumed that the
market share price is unaffected by the capital structure in case of
the firm and investor can borrow at the same interest rate , no
default risk, no transaction cost and

no tax. Otherwise, many

researchers and financial analysts argued against MM (1961)

theory that based on the perfect capital market.
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Research Importance
The importance of this study comes from the fact that the issue of share price
volatility and the factors that help curbing it are still under continuous discussion
and debate among practitioners and academics. Thus, this study contributes to the
literature, especially that literature covering Jordan, in a number of ways. First, it
provides empirical evidence, based on the most recent available information, on
the extent to which share price volatility is reduced by manufacturing companies
listed on the ASE. Second, the study adds to the studies that have been conducted
in Jordan by examining (Dividend yield, payout ratio, leverage, assets growth,
earnings volatility, firm size) on the share price volatility.

The Research Objectives

The objective of the study is to examine the impact of dividend
policy on share prices volatility at Amman stock exchange. Other
objectives include:
1- investigating the determinants of share price volatility
2- examining the determinants dividend policy and their effects on
share price volatility

3- Provide a number of recommendations to investors and firms at

Amman stock exchange.

The Research Problem

The Amman stock exchange has been growing for more than 5
years and it includes more than 4 sectors with some firms that
have a high market value but it ranks as an emerging stock
exchange, Ramadan (2013).
The study seeks to link the share price volatility with dividend
policy and other variables which may have effect on share prices
volatility at ASE. Therefore, the study can ask the following
questions:

123456-

Is there a relationship between Dividend yield and price volatility?

Is there a relationship between Payout ratio and price volatility?
Is there a relationship between Leverage and price volatility?
Is there a relationship between Assets growth and price volatility?
Is there a relationship between Earnings volatility and price volatility?
Is there a relationship between Size of the firm and price volatility?
Literature Review

This section provides a sample of previous studies that have been

examined the determinants of share prices volatility
Lashgari & Ahmadi (2014). The Impact of Dividend Policy
on Stock Price Volatility in The Tehran Stock Exchange
The purpose of this study is to examine the impact of dividend
policy on share price volatility in Tehran Stock Exchange for the
sample of (470) companies in Tehran Stock Exchange for the
years (2007-2012). The statistical model used was multivariable
regression model and for testing compound data, panel data were
used. Select panel data in pooling data and the fixed effects
model was chosen. The result indicated at the error level on 5%,
Dividend payout ratio has a significantly negative effect on stock
price volatility and asset growth rate has a significantly positive
effect on stock price volatility. Also variables leverage, earning
volatility and company size on stock price volatility is not
significant effect.

Ilaboya and Aggreh,(2013),

"Dividend Policy and Share

Price Volatility."

This study is aimed to examine the relationship between dividend

policy and share price volatility across companies listed in the
Nigerian Stock Exchange Market. (26) sampled firms across a
number of sectors were selected through simple random sampling
technique over a period (2004 2011). The model captured share
price volatility as the dependent variable, while dividend yield and
dividend payout ratio were the independent variable; firm size
long-term debt, earnings volatility and asset growth rate were the
control variables. The regression analysis was conducted using
the pooled OLS and Panel EGLS. The finding indicated that
dividend yield exerts a positive and significant influence on share
price volatility of firms while dividend payout exerts a negative
and insignificant influence on share price volatility. The study
recommends that companies should be consciously in their
thoughts on efficient approach to maximizing the wealth of
shareholders and in the same time meeting the companys needs
to finance its investments.

Profilet and Bacon, (2013), Dividend Policy and Stock

Price Volatility in the US Equity Capital Market
This study addressed the effect of factors on the volatility of a
stocks price over time for the years (2009-2012). Using Ordinary
Least Squares (OLS) Regression, this study tests the effects of
financial variables on stock price volatility (as measured by the
stocks standard deviation) for a sample of 599 firms screened
from the Value Line Investment Survey database. By analyzing
these selected financial factors on a large sample of firms, this
study identifies those financial variables that have proven
historically significant in explaining stock price volatility. The
results support the idea that large dividend paying stocks are in
fact less risky to own as an investment.

Habib et al., (2012), Dividend Policy and Share Price

Volatility: Evidence from Pakistan
The purpose of this study is to examine the relationship between
dividend policy and share price volatility in Pakistani stock market
for the year (2010).The cross sectional regression is used to
analyze the relationship of share price with dividend yield and
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payout ratio. The findings of this study are that payout ratio and
price volatility is significantly positively related. The size and debt
are negatively related with share price volatility. The dividend
yield and share prices are positively related. This study suggest
that dividend policy is effect the share price volatility in Pakistan
and this study also supposed that signaling effect is also relevant
in determining the share price volatility.

Hussainey et al.,(2011), "Dividend policy and share price

volatility: UK evidence
The purpose of this study is to examine the relation between
dividend policy (dividend yield and dividend payout) and share
price changes in the UK stock market. This was done for a period
of ten years (1998 through 2007). It was based on a sample of
publicly quoted companies in the UK. It also examined the
relationship between stock price volatility and other variables,
such as size, growth, earnings volatility and debt. Multiple
regression analyses are used to explore the association between
share price changes and both dividend yield and dividend payout
ratio. The study found a positive relation between dividend yield
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and stock price changes, and a negative relation between

dividend payout ratio and stock price changes. In addition, a
firms growth rate, debt level, size and earnings explain stock
price changes.

Nazir et al., (2010), Determinants of stock price volatility

in karachi stock exchange: The mediating role of corporate
dividend policy
This study aims to investigate the role of corporate dividend
policy in determining the volatility in the stock prices in Pakistan.
A sample of (73) firms has been selected from Karachi Stock
Exchange (KSE) for the period of (2003-2008). fixed effect and
random effect models have been applied on the panel data. The
results found that dividend policy has a strong significant
relationship with the stock price volatility in KSE. The findings
suggest that price volatility may be reduced by employing an
effect corporate dividend policy.

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Data and Methodology

1. Data and sample
The data that will be used in this study considered as secondary
data, which will be collected from yearly financial reports for
financial and non financial firms that are traded at Amman stock
exchange for a period (2012-2015).
The sample of this study should be met the following criteria:
1- Firms that have all available financial reports on their website
2- Firms that distributed cash dividends

Hypotheses of the study

Depending on previous studies that examined the impact of
dividend policy on share price volatility, the study therefore
developed the hypotheses relying on previous studies.
The following hypotheses that are developed:
H1: Dividend yield has a statistical significant relationship with
share price volatility
H2: Dividend payout ratio has a statistical significant relationship
with share price volatility

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H3: Leverage has a statistical significant relationship with share

price volatility.
H4: Assets growth has a statistical significant relationship with
share price volatility.
H5: Earnings volatility has a statistical significant relationship
with share price volatility.
H6: Firm size has a statistical significant relationship with share
price volatility.

The Methodology of the study

To examine the hypotheses, the panel of multiple regression
analysis will be used to investigate the determinants of share
prices

volatility.

According

on

previous

studies,

the

study

therefore employed this model to test the hypotheses. The

variables are derived from Baskin ( 1989 ) and Allen and Rachim
( 1996 ) .
The following Regression Equation that is used to achieve the
objective of the study:
PVt = a + a1DYt + a2PORt + b3LEVt + a4ASGt +a5EVt +a6SZt +
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Where:
Intercept

a:

Price volatility

PV:

Dividend yield

Dy:

Payout ratio POR:

Leverage LEV:
Assets growth ASG:
Earnings Volatility
SZ:

Firm Size

Error term

Organization of the study

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EV:

This study consists of six chapters as follows:

Chapter One: introduction, statement of the problem, importance,

objectives, hypotheses of the study.
Chapter Two: Theoretical background of the study.
Chapter Three: Literature review and development of study
hypotheses.
Chapter Four: Analysis of data and hypothesis testing.
Chapter Five: Discussion of results.
Chapter Six: Summary and conclusions.

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References:
Allen, D. E., & Rachim, V. S. (1996). Dividend policy and
stock price volatility: Australian evidence. Applied Financial
Economics, 6(2), 175-188.
Baskin, J. (1989). Dividend policy and the volatility of
common stocks. The journal of portfolio management. 15(3),
19-25.
Brealey, R. A., Myers, S. C., & Allen, F. (2006). Corporate
finance, 8. Auflage, New York.
Habib, Z. I. K., & Khan, M. A. (2012). Dividend Policy and
Share Price Volatility: Evidence from Pakistan. Global Journal
of Management and Business Research, 12(5).
Hussainey, K., Oscar Mgbame, C., & Chijoke-Mgbame, A. M.
(2011). Dividend policy and share price volatility: UK
evidence. the journal of risk finance, 12(1), 57-68.
Ilaboya, O. J., & Aggreh, M. (2013). Dividend Policy and Share
Price Volatility.Journal of Asian Development.
Lashgari, Z., & Ahmadi, M. (2014). The Impact of Dividend
Policy

on

Stock

Price

Volatility

in

The

Tehran

Stock

Exchange. Kuwait Chapter of the Arabian Journal of Business

and Management Review, 3(10), 273.

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 Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth,

and the valuation of shares. the Journal of Business, 34(4),
411-433.
Modigliani, F., & Miller, M. H. (1958). The cost of capital,
corporation finance and the theory of investment. The
American economic review, 261-297.
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes
and the cost of capital: a correction. The American economic
review, 433-443.
Nazir, M. S., Nawaz, M. M., Anwar, W., & Ahmed, F. (2010).
Determinants of stock price volatility in karachi stock
exchange:

The

mediating

policy. International

role

Research

of

corporate

Journal

of

dividend

Finance

and

Economics, 55, 100-107.

Pettit, R. R. (1972). Dividend announcements, security
performance,

and

capital

market

efficiency. Journal

of

Finance, 993-1007.
Profilet, K. A., & Bacon, F. W. (2013). Dividend Policy and
Stock Price Volatility in the US Equity Capital Market. Journal
of Business and Behavior Sciences, 25(2), 63.

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