I just learned that cash dividend above 10% will cause a price adjustment of the share. Can someone please explain this and the reason for it too

6 thoughts on “I just learned that cash dividend above 10% will cause a price adjustment of the share. Can someone please explain this and the reason for it too”

2. Okay here is an in-depth answer.

   A person owning a stock is a shareholder of a company. Shareholders have partial claim on assets, or in other words the remaining portion of assets after liabilities have been paid off belongs to shareholders.

   Cash of a company is an asset. Hence when a company pays cash dividend, the claims shareholders had on that asset has been given back to the shareholders. Hence to reflect this, the shareholders equity side should reduce and to reflect this in the market price of share the price is adjusted.

   Now why > 10%? There actually is no logic to establish a barrier like 10% or any other figure for that matter. In developed markets, the price of a share usually automatically falls after any % of cash dividend is paid out because the market participants are rational and educated and know that the shareholders general claim on assets has reduced ( as a result of cash balance decreasing)so there is no point in paying the current market price or premium for that particular stock.

   10% is usually an arbitrary number used to account for everything said above due to lack of rationality of market participants

   Edit : the company whose stock you were buying for at 200rs per share yesterday just distributed 20rs in cash dividend. It doesn’t make sense for you to pay 200rs per share again today, when the claims you would have had on the company’s assets have been reduced by 20rs already. If you didn’t get this edited part, then that’s exactly the reason why 10% is used to reflect everything I have said because majority the market participants are irrational and don’t understand finance.

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3. Never happened in history of Nepse

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4. https://thehimalayantimes.com/business/stock-market-adjust-share-price-cash-dividend-10-per-cent

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5. only if the cash dividend is more than 10% of the market value which is very very rare

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6. To avoid unjustified gains to sellers and losses to the buyers 

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7. I think it’s 10% of LTP and not face value. So, it’s rare. Not sure about the reasoning though.

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