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

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/).