The effect of dividend policy and financial performance on the P/E ratio : A study to investigate the ef ect of dividend and financial ratios on the P/E ratio of stocksin the Swedish stock market

Abstract: This master's thesis investigates the connection between profit margin, return on assets, long-term debt, and price-to-earnings (P/E) ratio and they relate to dividend. The study examines whether companies with increasing dividends and companies with decreasing and constant dividends have significantly different effects on the P/E ratio. The results show that profit margin has a positive and statistically significant impact on the P/E ratio in companies with increasing dividends, demonstrating the significance of profitability in affecting investor valuation. Long-term debt and return on assets, however, do not appear to be significantly correlated with the P/E ratio in this group. In contrast, none of the financial performance variables have a major impact on the P/E ratio in companies with decreasing and constant dividends. The research highlights that it is important to take dividend distribution into account as a differentiating element when examining the connection between financial performance and the P/E ratio. However, the study cannot accept or reject the null hypothesis entirely as the results lack statistical significance.