Dividend Policy Decisions and Shareholder Wealth: Evidence from Indian Banking Sector

Dividend policy plays an essential role in corporate finance. It helps investors understand a firm’s valuation. Dividend, an essential portion of a firm’s finances, is the amount of the profit paid back to the shareholders. This study focuses on understanding dividend policy decisions on the wealth of the shareholders. Furthermore, this study focuses on the five leading Indian public sector banks and includes State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), Canara Bank, and Union Bank. The analysis has been carried out for 5 years i.e. FY 2021-25 and focuses on two major attributes i.e. capital gains and dividend, that compose an integral part of the Total Shareholder Return (TSR). Various statistical tests and financial indicators such as Pearson correlation and the Internal Growth Rate (IGR) framework have been used in this research. The tests 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.

Dividend, Wealth Maximization, Shareholders, Public Sector Banks

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