Page 1 of 11
Journal for Studies in Management and Planning
Available at http://internationaljournalofresearch.org/index.php/JSMaP
e-ISSN: 2395-0463
Volume 01 Issue 10
November 2015
Available online: http://internationaljournalofresearch.org/ P a g e | 539
Effect of Financing Methods on Earning Per Share and
Dividend per Share of the Companies Listed on KSE 100 Index
Ghulam Mustafa ; Muhammad Tariq ; Ranjeet Kumar
1-2
Institute of Business and Technology, Karachi
3
Iqra University, Karachi
Abstract
This study is aimed at evaluating the effects of different
financing methods such as debt and stock issuance and
retained earnings on firms’ earning per share and
dividend per share of the companies listed on KSE 100
index. To achieve this objective, the panel data for the
(EPS) Earnings per Share, (DPS) Dividend per Share
(Dependent Variables), Stock Issuance, Debt Issuance
and Retained Earnings (Independent variables) of the
companies listed on KSE have been taken for the
period of nine (09) years from 2004 to 2012. The
annual data have been taken for the study. As a sample
size, 47 companies have been selected from different
non-financial sectors such as Textile, Oil and Gas,
Food Producers, Chemical and Cement. Total 423
research observations have been taken for this study.
The data is collected from the annual reports of the
companies listed in Karachi Stock Exchange (KSE)
100 index from the above mentioned non financial
sectors. For the purpose of analysis, Panel Least
Square (PLS) statistical technique has been applied to
test the study hypothesis. The Panel Least Square
(PLS) technique had been applied by using EVIEWS
software. The study found that there is no significant
impact of debt and stock (equity) financing on firms’
EPS and DPS. On the other hand, this study found that
there is a significant impact of financing through
retained earnings on firm’s EPS and DPS in the future.
This study will help individuals and business firms that
how different financing methods such as debt issuance,
stock issuance and retained earnings affect firm’s EPS
and DPS.
Keywords: Dividend per share, Earnings per share,
Stock issuance, Debt issuance, Retained earnings
I. Introduction
Overview
A major part of research is to find the effect of
different financing methods on EPS and DPS of the
companies. It shows the change in cost of capital
structure on the companies’ earnings and its dividends.
Stock exchange is a capital market where different
companies of shares and bonds are traded. In stock
exchange; Investors are either interested in capital gain
or dividend yield means the EPS and DPS of the
company’s share. In this thesis we examine the cross- sectional relationship between different financing
methods on earning per share and dividend per share.
There are two main sources of financing in companies
either internal and external resource. In internal sources
are cash flows, sales of assets and retain earnings.
External sources are mostly relay on the company’s
position; some companies need a fund to operate their
functional units to run the organization business. In
external sources, bonds and preferred stock are useful
functions by which the organizations can provide long- term financial services.
The impact of capital structure change on return and
risk is done in the framework of financial leverage
degree and EBIT analysis. Financial leverage aims at
establishing optimal balance between risk probability
and companies return (Earnings Before Interest and
Taxes (EBIT) and Earning per Share (EPS) (Asgari,
Zadeh & Mohammadi, 2012).
Sometimes debt financing forced the sale of common
stock for the payment of debt which cause the increase
of cost of capital. Internal financing like companies
who retained their profit is good source for attaining
capital in small firms (Fu, Mei-Chu, & Huang, 2012).
In this research paper we examine the effects of
different financing methods on companies EPS and
DPS. So we use to determine the impact of financing
methods on EPS (Earnings per Share) and DPS
(Dividend per Share).
Background, Objectives and Significance of the
study
Eugene, Fama and French (1998) studied the impact of
dividend and debt to the firm value. It measures how
the firms tax dividend and debt effects on the firm
value. The study examines three variables dividend,
taxes and financial debt. The results of the study
Page 2 of 11
Journal for Studies in Management and Planning
Available at http://internationaljournalofresearch.org/index.php/JSMaP
e-ISSN: 2395-0463
Volume 01 Issue 10
November 2015
Available online: http://internationaljournalofresearch.org/ P a g e | 540
founded that the dividend and financial debt of the
organizations create impact on firm’s value but there is
no impact of tax on the pricing of dividends.
MW's study examines convertible debt bonds referred
as COCOs to use them to manipulate diluted earnings
per share. The main reason of adding debt bonds in to
the capital structure for financial reporting purpose
because these bonds have high dilution than non
COCOs which is a debt instrument to finance the
company. The Convertible Bonds have not made any
disparity in yields, the fees of the investment banking
or reactions of the market which is general
characteristics of conditional features.
Winker (1998) studied that the firm age and size on the
factors of the financing constraints. Furthermore, there
is an impact on research and development
expenditures. The firms which are smaller in size and
in the regions of the country there constraints of
financing are on equity bases. While as a big firms
using the both financing methods which are equity and
debts capital methods because they allocate more
money on investment of research and development for
the growth of the organization as compare to smaller
firms. The fundamental objective of this study is to
examine the impact of different financing methods on
Earning per Share and Dividend per Share. The study
help in enlightening the impact of issuance of share
capital, increase/decrease in debt capital and retain
earning into the earning per share and dividend per
share. This study was significant for individuals and
firms who want to know the effect of financing
methods on EPS and DPS for the purpose of
maximizing their profit and wealth.
Objective of the study
The fundamental aim of this study is to examine the
impact of different financing method on Earning Per
Share and Dividend Per Share. The study will help in
enlightening the impact of issuance of share capital,
increase/decrease in debt capital and retain earning into
the earning per share and dividend per share.
Research Hypotheses
The following hypotheses have been developed for this
study:
H1: There is significant impact of debt financing on
EPS.
H2: There is significant impact of financing through
stock issuance on EPS.
H3: There is significant impact of financing through
retained earnings on EPS.
H4: There is significant impact of debt financing on
DPS.
H5: There is significant impact of financing through
Stock Issuance on DPS.
H6: There is significant impact of financing through
retained earnings on DPS.
II. Literature Review
Companies are striving to know which financing
method is best suit to their firms that can maximize the
value of the firm. The research study was conducted by
Asgari, Zadeh and Mohammadi (2012) to examine the
impact of financing methods on EPS and DPS for the
firms that are listed on Tehran Stock Exchange (TSE).
Their research provided the actions of different
financing methods on EPS and DPS. This study found
that the debt and stock issuance have significant effect
on earnings and dividend per share but retain earnings
does not create any impact on EPS (earnings per share)
and DPS (dividend per share).
The debt financing increases in the capital more than
30%, which shows that the firm working into the
international activity makes them to change the Cost of
Capital but does not create the impact of its earnings.
Debt financing increasing usually conducted as market
capitalization rather as financial profits. Debt capital
ratio indicates the international activities of the firm
with the debt financing participation in the cost of
capital. This study indicates that domestic firms have
low debt financing as compare to international firms
who involve in international activities (Sattar, & Reeb,
2002)
MW's study examines convertible debt bonds refer as
COCOs to use them to manipulate diluted earnings per
share. The main reason of adding debt bonds into the
capital structure for financial reporting purpose
because these bonds have high dilution than non
COCOs which is a debt instrument to finance the
company. The Convertible Bonds have not made any
disparity in yields, the fees of the investment banking
or reactions of the market which is general
characteristics of conditional features.
(Patricia C. O' Brien) argued that earnings of the
company can be managed through transaction
mechanism, diluted earnings per share (DEPS) and
contingent convertible debts. Stock issuance is usually
used for the capital gain or increase in the share holder
equity forms in the financial reports of the companies
and Parent companies used it for tax shield. The impact
of stock issuance on the earning per share is temporary
basis. They analyze the difference in issuance of shares
Page 3 of 11
Journal for Studies in Management and Planning
Available at http://internationaljournalofresearch.org/index.php/JSMaP
e-ISSN: 2395-0463
Volume 01 Issue 10
November 2015
Available online: http://internationaljournalofresearch.org/ P a g e | 541
btw parent company or subsidiary company but the
conclusion is similar in many prospects.
This study examines the impact of debt financing on
companies strategic and financial performance in the
Indian manufacturing industries. This study shows that
short term debt is more effective for strategic
performance and the marketing of the companies’
products while as long term debt take a long time for
performing its benefit in the marketing and strategic of
the companies but both long term and short term debt
doesn’t create any valuable impact on the financial
performance of the companies. So this study proves
that debt financing is used for the marketing of the
companies’ products then the financial performance.
The study suggested that the investors are supposed to
be rational, who looks for higher return and hence
investors invest in a company which pays higher
return. Brealey (2008) concluded that investors’
decision related to investment was largely influenced
by the dividend payouts; therefore study suggested that
dividend acts as a motivator for investment decision.
Baker and Powell (1999) stated that from the
perspective of companies the policy related to dividend
payouts is one of most important aspect as it is related
with companies’ financial management and capital
structure. The study discusses the dividend policy in
very detail and the effect of dividend policy was
compared with capital market results. The study found
that selection of the company to modify the amount of
dividend is recognized by the premium on dividends
imposed by the capital market.
“Robert and Taggart (1985) studied the impact of too
much debt in the non financial companies in US. In
1984 45% of total capital for U.S non financial
corporation is financed by debt. It reveals the increase
of short term debts financing to for the availability of
the internal funds. It indicates the relation of internal
funds to the short term debts. Its further shows the
decrease in equity financing trend by re-purchasing the
company shares from the market so it will not affect
the total fund but it change the percentage of different
financing methods in the capital structure.
The study has been conducted on the firm age and size
on the factors of the financing constraints.
Furthermore, there is an impact on research and
development expenditures. The firms which are
smaller in size and in the regions of the country there
constraints of financing are on equity bases. While as a
big firms using the both financing methods which are
equity and debts capital methods because they allocate
more money on investment of research and
development for the growth of the organization as
compare to smaller firms (Winker, 1998).
Kracaw and Zenner (1996) studied the impact of
financing announcements of high leverage transaction
on the share price of the banks. It shows that those
financial announcements create increase in capital for
the lending banks. Similarly it also examines those
banks have loan announcements create decrease in the
banks wealth. These studies suggest that high leverage
transactions increase in share holder equity but it not
increase due to wealth transfer between the banks.
Kim (1998) examined the impact of those
organizations capital before and after the initial public
offer in the Korean market. These firms use the cash
for the availability of the internal funds for the running
operations of the organizations. The result shows initial
public offer is the big advantage for the smaller firms
but for the larger firms its not so effective.
Eugene, Fama and French (1998) study the impact of
dividend and debt to the firm value. It measures how
the firms tax dividend and debt effects on the firm
value. This research study examines three variables
dividend, taxes and financial debt and the result shows
that the dividend and financial debt of the
organizations create impact on firm’s value but there is
no impact of tax on the pricing of dividends.
Pringle (1973) analyzes the choice of debt and equity
which effect the firm price earnings ratio of the
companies it shows that the company core business for
investment which cause the increase in market value
similarly increase in the price earnings ratio of the
companies. While as the companies are in financing
there price earnings ratio is lower.
A considerable amount of literature has examined
particular financial methods and their potential
association with EPS (earnings per share) and DPS
(dividend per share). It may be expected that firms with
unfavorable financial characteristics may resort to
manage the earnings activities of the company so as to
enhance their image in the market. Moreover,
significant financial measures such as profitability and
growth may provide substantial evidence concerning
earnings management activity. The companies which
amend their earnings are less profitable, highly
leveraged, low growth and smaller as compared to
other rival companies in the industry (Sun & Rath,
2008).
Consistent with Beaver (1968), high growth firms are
more vulnerable to increased risk and cost of capital
consequently, factors that could lead to earnings
management activity. Additionally, these firms seem
more susceptible in meeting earnings benchmarks
provided by the financial analysts’ forecasts in order to
facilitate their growth prospects (Bartov, Givoly &
Hayn, 2002).
