Elsewhere dividends are a pleasant surprise. In Nepal they are the whole point. While global investors argue over growth versus value, Nepali shareholders appear to have reached a silent consensus: profits should be distributed, not reinvested. Lofty projections be damned, cash is king.
A 2019 study by Rabindra Joshi, an academic at Tribhuvan University, helps explain why. Using audited financial statements from 163 firms listed on the Nepal Stock Exchange (Nepse)—117 banks and 46 non-financial companies—Mr Joshi tested what drives market valuations. He found that dividends per share (DPS) are by far the strongest predictor of stock prices. Retained earnings, on the other hand, barely nudge them.
That may sound banal in theory but is revealing in practice. Investors in a developing economy, where unmet capital needs abound and financial literacy remains weak, behave less like backers of future growth and more like collectors of current yield. The market rewards cheques, instead of strategies.
Mr Joshi’s approach is methodical. He builds three regression models of increasing complexity, incorporating DPS, retained earnings, lagged price-to-earnings (P/E) ratios and past market prices. In every scenario, dividends dominate. On average each additional rupee paid out lifts a firm’s stock price by Rs12.5. For banks, the figure is even higher: Rs22.7. Retained earnings trail far behind, with a price impact closer to Rs3.0 per rupee.
This distinction matters. Banks, which dominate Nepse in market capitalisation, are not only more profitable but also more liberal with payouts. Their shares function as quasi-bonds—low volatility, predictable income. Investors prize them less for expansion than for the comfort of steady returns.
The preference is not uniquely Nepali. Globally, investors have long treated regular dividends as a proxy for sound management and reliable cash flow. Reinvested profits, by contrast, can vanish into vanity projects. In markets with weak corporate governance, a dividend received is simply more trustworthy than a promise made.
Nepal fits that mould. Corporate disclosures are weak and boards are rarely independent. Many firms are tightly held, sometimes by politically connected families or syndicates. In such a context investors behave rationally when they demand returns they can touch. A dividend cannot be misreported, misspent or conveniently delayed. It lands in one’s bank account. That certainty carries a premium.
The study also uncovers a second force: momentum. Last year’s share price is an even better predictor of this year’s than current earnings. That implies a market driven more by trend-following than fundamentals. Prices move in waves and investors appear more interested in chasing patterns than parsing reports. Yet even after controlling for this inertia, dividends retain their explanatory power. In other words, cash still beats confidence.
This has policy implications. Companies hoping to boost valuations need not invest in innovation or communicate a strategic vision. They can simply raise their payout ratios. But this creates a macroeconomic tension. In a capital-poor country, a culture of high dividends diverts profits from productive reinvestment. It favours incumbents with stable earnings and limited ambition, and punishes younger, cash-hungry firms that might actually generate growth.
The risk is structural sclerosis. Nepal’s stock market—like its economy—could ossify into a low-growth equilibrium: profitable firms keep paying; investors keep collecting; but little capital flows to new ideas or sectors. At best the market becomes a savings vehicle. At worst it becomes a casino with a dividend lobby.
That may already be happening. Financial-sector firms account for more than 50% of Nepse’s market capitalisation. Non-bank listings such as tech, manufacturing and infrastructure sectors that typically absorb capital and drive productivity are underrepresented. In a sense, the market reflects the economy: formal but shallow and risk-averse.
There are mitigating factors. In Nepal, where formal savings rates are low and inflation corrodes deposits, dividend-paying equities offer a rare blend of liquidity and yield. Property is illiquid, gold is inert and government bonds barely outpace price rises. For many retail investors, a bank share that pays a 6% cash dividend and a 10% stock bonus is as good as it gets. This structural context helps explain the obsession with payouts.
Still, regulators and financial educators face a dilemma. Dividend-chasing is at least based on arithmetic. But it encourages short-termism and limits market depth. A more mature equity market would reward long-term value creation, not only immediate extraction. That means stronger corporate governance, better disclosures and investor education focused on cash flows, strategic alignment and capital efficiency. In other words, less attention to how much firms pay and more to why they invest.
The transition will not be easy. Dividends are not merely a financial preference for Nepali investors: they are a behavioural hedge against opacity and a vote of no confidence in institutions. In this country where governments rise and fall in months, perhaps investors are right to prefer the firm that pays today over the one that promises tomorrow. ■
