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This study is carried out to investigate the relationship between dividend yields and stock returns in different market conditions of bull and bear markets. The sample includes 60 companies which are part of Kuala Lumpur Composite Index (KLCI) for the period of January 2000 until June 2005. From the theoretical perspective and based on the evidences from developed countries, there should be a positive correlation between dividend yields and stock return in bear markets and a negative correlation between dividend yields and stock return during the bull markets. However, the relationship between dividend yield and stock return in Malaysia reveals that the results are contradicts with the theories. There is a positive relation between dividend yield and stock returns in both bull and bear markets. One possible reason for this inconsistency is the difference in taxation system between developed countries and Malaysia. Whereas in Malaysia dividends are tax exempted, so, there is a preference for higher dividends in Malaysia.

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Meysam Safari, MBA: Studied Finance at Graduate School of Management, University Putra Malaysia. Yayasan Khazanah Scholar, Malaysia

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