Dividend Decision and Share Price Volatility: Linking Financial Theories with Event-Based Incidences from Indian Stock Market

Dividend decisions have long been central to financial management and shareholder value creation. The relationship between dividend decisions and share price volatility is influenced by firm fundamentals, investor psychology, and macroeconomic events. This study provides a theoretical and event-based analysis of how dividend declarations influence share prices in the Indian stock market. Drawing upon signaling hypothesis, agency theory, Walter model, bird-in-hand hypothesis, and Modigliani–Miller (MM) irrelevance theorem, the paper explores the behavioral and structural mechanisms through which dividend announcements affect investor sentiment and price volatility. It synthesizes evidence from major Indian corporate events and policy changesincluding liberalization (1991), the global financial crisis (2008), dividend distribution tax (DDT) reforms (2016), the COVID-19 pandemic (2020), and the DDT abolition (2021) to demonstrate that dividend decisions act as both informational and psychological signals. While theory suggests neutrality, empirical patterns reveal that dividends in India continue to shape price reactions due to market imperfections and behavioral biases.