Abstract:
Shareholder wealth consists of dividends and capital gain. The risk-return trade-off in
these two returns drives the investor preference. The former is considered to be riskaverse whereas the latter is perceived to be risky. From one extreme dividend is a return
for common stock to another a source of funding for public limited Companies. The
objective of a for-profit organization is to maximize shareholder wealth, but disbursing
dividends may not always in the best interest of shareholders. Theoretically retaining
dividends may also increase share prices. The objective of the study was to measure the
stimulus of cash dividends on share prices of 22 companies from 2011 to 2019, for 198
observations, listed on the Colombo Stock Exchange under the manufacturing sector. The
novelty of this study is the use of advanced modeling and visualization techniques which
eventually helped choose statistical methods with the most adequate assumptions. The
Arellano Bond estimator is specifically selected given the nature of data properties and
lagged variables. Market Price per Share (MPS) termed as the dependent variable whereas
Dividend per Share (DPS), Dividend Payout Ratio (DPR), lagged MPS termed
independent variables. The log of sales selected as a control variable through the forward
selection criterion. The stationary tests performed, subject to log transformations and first
differences revealed none of the variables are I (2). The results validated theoretical
literature such as signaling effect and bird in hand theory but questioned previous
empirical hypothesis. The study further validated cash dividends as a stimulus to investors
given the strong positive relationship between DPS and MPS. The Granger Causality test
reflected a short-term bidirectional relationship between MPS and DPS. This study sets a
guideline for investors making the right investment choices and companies to keep the
right balance between dividend policy and reinvestment strategies given the stimulus
contained in dividends.
Keywords: Panel data, Dividends, Share price, Arellano bond estimator, Shareholder
wealth
