Dividend, an essential portion of a firm’s finances, is the amount of the profit paid back to the shareholders. This

show a strong positive correlation between Earnings Per Share (EPS), Dividend Per Share (DPS), and Market

Price (MPS). The values obtained act as a strong driver of valuation and help lay the foundation to validate the

Dividend Signaling Theory. The findings showed that the Bank of Baroda and Union Bank had an earnings-led

turnaround while SBI was found to have the most stable growth trajectory. Capital gains were the primary source

of shareholder wealth in this study and dividends formulated an essential part of the total returns. The Internal

Growth Rate suggested that most public sector banks tend to balance the relationship between retention and

profitability. Hence, dividend policy in this research appeared to be a signaling and confidence mechanism in

the Indian banking ecosystem and not a mere tool for wealth maximization.

Keywords: Dividend, Wealth Maximization, Shareholders, Public Sector Banks

critically evaluate dividend policy decisions. In the current scenario, many organizations' profitability is gauged

not just by their regulatory requirements but also by their dividend decisions and ability to deal with systemic

risk. Public Sector Banks (PSBs) in India historically emphasized on the need for preservation of capital. Over

the years, they have started giving importance to shareholder distributions as well. This shift in emphasis was

due to increase in non-performing assets (NPAs) and regulatory interventions observed particularly during the

pre-covid period. Post 2020, the Indian banks observed a structural inflection point. It included numerous

mergers and changes in governmental reforms, post which PSBs found recovery phases between FY 2020–21

and FY 2024–25. During this period, there was a shift in dividend behavior. Hence, the need to evaluate the role

of dividends gained significant importance. Previous research carried out was observed to be for a shorter

significant for better management of banks and investors and can promote balanced capital adequacy and

shareholder wealth maximization.

Dividend policy serves as a key factor in the financial domain especially in the valuation of a firm and

shareholder wealth. The academic foundation for this was placed by Modigliani and Miller (1961) that

emphasized that under a perfect capital market, dividend decisions are irrelevant. They also stated that the wealth

of the shareholders was purely based on the investments made by a firm. Pragmatically, in an everyday situation ,

shareholders' wealth is influenced by various factors such as taxes, costs, and regulatory constraints. Dividend

irrelevance theory was first challenged by Dividend Signaling Theory (Bhattacharya, 1979) pointing out that

dividends can depict private information about a firm’s future earnings. It stressed that many managers made

relevant in emerging markets where income stability is highly valued. The agency theory on the other hand

highlighted that dividends help to reduce conflicts by enhancing the value of shareholders' investments and by

controlling the amount that has to be used for managerial decision-making. Baker and Powell (1999) emphasized

that dividends were highly considered by managers since it helps influence investors confidence and better the

valuation of a firm. Al-Malkawi, Rafferty, and Pillai (2010) suggested elsewhere that dividends were context-

specific. They also highlighted that the wealth of shareholders was a combined effort of multiple frameworks

such as market structure, ownership patterns, and institutional frameworks. While the role of dividend is

multifold across various sectors, the banking sector has a different outlook altogether due to its regulatory

framework, and systemic risk exposure. Research focusing on understanding the relationship between dividend

decisions and wealth maximization often hinted that dividends are signs of balance between the earning strength

Previous studies in India have been greatly inclined towards manufacturing firms where mixed evidence has

been observed on the role of dividends (Linter, 1962; Narasimhan & Vijayalakshmi, 2014). Pinto

and Rastogi (2019) in their study showed that there is a difference in dividend determinants across the varied

sectors of the economy. Studies on Indian banks have shown that dividend decisions in this sector are a result

of regulatory interference and quality cycles. Zafar et al. (2015) pinpointed the existence of a significantly

positive relationship between dividend policy and shareholder wealth while examining selected Indian banks.

Over the years, dividend payouts have become more frequent and help in increasing the profitability while

reducing the non-performing assets. Rawal and Gopalkrishnan (2024) further demonstrated that financial distress

and limitation of capital can greatly influence the dividend decisions among Indian banks. This also showcased

the residual nature of dividend policy during its healing period. Many of the current studies have been

long-term wealth creation for investors who are income-oriented.The post recovery evidence from the Indian

variables and are focused on very short time horizons. There is also a dire need to formulate a clear research gap

that looks at the role of dividend policy and its interaction with earnings recovery and internal growth. This

research endeavour seeks to address the gap by providing an extensive post-recovery analysis of dividend policy

decisions and shareholder wealth creation in major Indian Public Sector Banks, thereby contributing to dividend

policy theory and emerging market banking literature.

Objectives of the Study

1. To explore the relationship between retained earnings and shareholder wealth when market valuation is

considered.

2. To determine the role of dividend policy on shareholder wealth and market price.

3. To assess the total influence of dividend payout and retained earnings on firm value and wealth creation.

situations of capital impediments and regulatory compliances.

be empirically focussed on dividend behavior during financial stresses. PSBs have shown an upward trend from

residual payout to a steep increase in the dividends. These dividends have helped in wealth creation over time.

But, there is limited evidence to show whether these activities are relevant or not. Current research also ignores

the bifurcation between dividend signals and payout proportions. The banking sector is unlike any other sector

due to its internal growth and capital adequacy patterns.

The present study is directed towards understanding various instruments such as DPS, payout behavior, and

earnings retention, all individually. This study also emphasises on the Total Shareholder Return (TSR) and the

intersection between retained earnings, equity returns, and internal growth rate. This study aims to provide a

comprehensive, post-recovery analysis of whether dividend policy decisions are related to shareholders wealth

in leading Indian public sector banks.

paper is confined to trend analysis, CAGR, TSR and correlation analysis. This study is further carried out using

theoretical frameworks such as Dividend Signaling Theory, residual dividend policy, and internal growth theory.

generalizability of the findings.

This study makes use of a quantitative method wherein data has been collected from secondary sources. The

secondary data has been collected from audited annual reports, NSE/BSE website as well as RBI statistical tables

on banks in India..

The study employs statistical tests such as time-series trend analysis, Pearson correlation coefficient analysis

and Sustainable Growth Rate (SGR) modeling. The current study is primarily inclined towards descriptive and

correlation analysis. Also, Earnings Per Share (EPS), P/E ratio, Dividend Per Share (DPS), Market Price per

Table 3: Total Shareholder Return

this period. SBI was found to have the highest wealth creation of around ₹626.65 per share. It can also be

Table 5: Internal Growth Rate (IGR) and Capital Retention Analysis

unseen circumstances.

The current study is an empirical one highlighting the role of dividend policy on shareholder wealth. The study

considered prominent PSU banks in India for FY 2020–21 to FY 2024–25. Earnings Per Share (EPS) was found

to be the primary driver of market valuation among these banks. A strong positive relationship existed between

EPS and MPS. This relationship showed the re-rating of these stocks which came into the picture because of

increase in profitability. The findings of the study need to be carefully interpreted since the analysis is based on

observed associations rather than causal relationships.Dividends have been found to act as a signal to the