Do Liquidity and Financial Leverage Constrain the Impact of Firm Size and Dividend Payouts on Share Price in Emerging Economy
This study investigates the influence of liquidity position and financial leverage on the relationship of share price with firm size and dividend payouts in Pakistan by using the annual panel data of 356 non-financial firms listed on Karachi stock exchange from the period of 1999 to 2013. Pedroni panel cointegration approach confirms the valid long run relationship between considered variables. Results indicate that firm size and dividend payout have significant positive relationship with the firms' stock prices in long run. Results of causality test show the bidirectional causal relationship of firm size and dividend payout with stock prices in non-financial firms of Pakistan. The findings also support the dividend relevance theory, which means dividend payout have significantly impact on stock price, stock returns and firms' value. It is suggested that investors should invest in stock of those firms who pay higher dividend and having large firm size in order to get higher returns on their investments. On the other hand, results also suggest that the coefficient of dividend payout is more than coefficient of firm size. In the light of these findings management of firms should focus more on dividend payout than retained earnings to increase the firms' value in the market.