Abstract:
Purpose: This study investigates the role of dividend policy in determining the impact of
dividend policy on the stock prices of the non-financial companies listed on the Colombo
Stock Exchange in Sri Lanka during the period from 2017 to 2021, using panel data
analysis. The research aims to explore the varies aspects of dividend policy that affect
market prices in the Sri Lankan context.
Design/Methodology/Approach: A sample of 90 non-financial firms, resulting in 450
observations, was selected for this study. To analyze the relationship between the
independent variables namely dividend per share, dividend payout ratio and dividend yield
and the dependent variable of market price per share, the study used pooled OLS, fixed
and random effect models. After chow, Hausman, and LM tests, fixed effect model is
selected as the best model for the study.
Findings: These results indicate a positive and significant relationship between dividend
per share, dividend payout ratio and share price supporting signaling theory, and dividend
relevance theory. Conversely, the study finds a significant negative relationship between
dividend yield and stock prices, suggesting that higher dividend yields may limit a firm’s
growth prospects by reducing reinvestment opportunities.
Originality: This study contributes to the literature by applying panel data techniques to
assess the influence of dividend policy on stock prices in an emerging market like Sri
Lanka. It provides empirical evidence to support the relevance of dividend policy in
shaping market perceptions and stock valuation.
Theoretical and Policy Implications: The findings offer insights for academicians,
corporate managers, investors, and policymakers. By understanding the importance of
dividend policy and its impact on the market value of shares, stakeholders can make more
informed decisions related to dividend distribution, market strategies, and corporate
growth planning.
Research limitations/ Future research directions: Future research could extend this study
by exploring the effects of dividend policy on stock prices during pre and post financial
crisis periods or by examining the moderating role of other financial variables such as
leverage and earnings growth.