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Informational Value of Dividend Initiations: Impact of Cash Dividends on Share Prices of Manufacturing Companies in Sri Lanka

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  • Charith, Krishnamoorthy
  • Davydenko, Andrey

Abstract

The shareholder wealth consists of dividends and capital gains. The former is considered to be risk averse, whereas the latter is perceived to be risky. The risk return trade off in these two returns drives the investor preference. The objective of a for profit organization is to maximize shareholders’ wealth, however, disbursing dividends may not always be in the best interest of shareholders. Theoretically, retained earnings increase share prices as firms have more funds to be invested. The objective of the study is to measure the stimulus of cash dividends on share prices. We conduct empirical analysis based on data relating to companies listed on the Colombo Stock Exchange (CSE) under the manufacturing sector. As we show in our literature review, in order to reduce the risk of obtaining spurious results, this analysis requires the use of advanced modelling techniques allowing to model non stationarity of time series, as well the presence of control variables and lagged variables. The novelty of our study is in the use of advanced modelling and data visualisation techniques (including the ‘xdPlot’ dataviz framework recently proposed by the authors), especially in application to CSE data. We conduct a thorough exploratory data analysis (EDA) aiming to spot data anomalies and initiate appropriate data transformations. Given the results of EDA and the nature of the data available, we select the Arellano Bond estimator as the most adequate method for regression analysis. Market Price per share (MPS) termed as the dependent variable, whereas Dividend per Share (DPS) is viewed as the independent variable. The results validated theoretical literature such as signaling effect and bird in hand theory, but questioned some previous empirical studies. The study validated cash dividends as stimulus to investors given the positive relationship between DPS and MPS. /// Copyrights: This is an open access article distributed under the terms and conditions of the Creative Commons Attribution license (http://creativecommons.org/licenses/by/4.0/).

Suggested Citation

  • Charith, Krishnamoorthy & Davydenko, Andrey, 2021. "Informational Value of Dividend Initiations: Impact of Cash Dividends on Share Prices of Manufacturing Companies in Sri Lanka," SocArXiv jqnt4, Center for Open Science.
    • Handle: RePEc:osf:socarx:jqnt4
    DOI: 10.31219/osf.io/jqnt4
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    References listed on IDEAS

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    1. Croissant, Yves & Millo, Giovanni, 2008. "Panel Data Econometrics in R: The plm Package," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 27(i02).
    2. Krishnamoorthy Charith & Andrey Davydenko, 2021. "Informational Value of Dividend Initiations: Impact of Cash Dividends on Share Prices of Manufacturing Companies in Sri Lanka," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(3), pages 1-13, March.
    3. repec:bla:obuest:v:61:y:1999:i:0:p:631-52 is not listed on IDEAS
    4. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    5. C J Auret & J U de Villiers, 2000. "A Comparison of Earnings Per Share and Dividends Per Share as Explanatory Variables for Share Price," Studies in Economics and Econometrics, Taylor & Francis Journals, vol. 24(1), pages 39-53, March.
    6. Khadija Farrukh & Sadia Irshad & Maria Shams Khakwani & Sadia Ishaque & Nabeel Younus Ansari, 2017. "Impact of dividend policy on shareholders wealth and firm performance in Pakistan," Cogent Business & Management, Taylor & Francis Journals, vol. 4(1), pages 1408208-140, January.
    7. Asquith, Paul & Mullins, David W, Jr, 1983. "The Impact of Initiating Dividend Payments on Shareholders' Wealth," The Journal of Business, University of Chicago Press, vol. 56(1), pages 77-96, January.
    8. Dimitrios I. Maditinos & Zeljko Sevic & Nikolaos G. Theriou & Alexandra V. Tsinani, 2007. "Individual investors' perceptions towards dividends: the case of Greece," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 1(1), pages 18-31.
    9. G. S. Maddala & Shaowen Wu, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 631-652, November.
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    Cited by:

    1. Andrey Davydenko & Krishnamoorthy Charith, 2021. "Informationswert von Dividendenausschüttungen: Einfluss von Bardividenden auf die Aktienkurse von produzierenden Unternehmen in Sri Lanka [Informational value of dividend initiations: Impact of cas," Post-Print hal-03359177, HAL.

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