Impact of Dividend Announcement on Share Price: with Special Reference to Listed Manufacturing Companies in Sri Lanka

This purpose of this study is to investigate the impact of dividend announcement on share price of listed manufacturing companies in srilanka and for the period of 2013 to 2017. Data collected for this study was concerned from 10 listed manufacturing companies in srilanka as sample for this study. The event study methodology is used to analysis the share price reaction on dividend announcements. The event study methodology and regression analysis use to analyse the collected data. This study examines the impact of dividend announcements on stock prices by evaluating the share returns such as actual share return, expected share return and abnormal return on selected listed manufacturing companies in CSE (Colombo Stock Exchange)This study produces important details for the investors and other stakeholders. This information will be supportive to develop the stock market and economy.

Keywords: Abnormal Return, Dividend Announcement, Event Study, Stock Prices

This study is focused on the dividend announcements and its impact on stock prices in Sri Lankan share market. In Sri Lankan context, it is very important to investigate the impact of dividend announcement on stock prices. Investors who are involved in buying shares basically considers the factors such as stock prices, risk, dividend of companies, leverages, profitability and other factors.Share price is conceded as the price of sellers and buyers are agreed. Generally, the prices of shares are changing frequently. There are several reasons affect to change prices of shares such as dividend announcements, bonus issue, right issue and etc. Not only that but also the economic stability of country, political situations, internal situation of companies and etc. There are number of research that are investigate to the idea of above mention factors are affect to the share price. Therefore, dividend announcement is one of key element can be effect on investors decision making.

According to Linter (1956), investors response to the dividend announcements. It explains that there is a relationship between dividend policy and shareholders’ wealth. Companies issue shares to increase funds from investors with the purpose of finance and grow business wealth. Dividends are return for shares. When listed companies in CSE decide to pay dividend to shareholders. They announce it to public as corporate announcements. There are two ways for pay dividend They are interim and final dividend. Times of per year paying dividend different from company to company. However, each and every company listed in CSE announce about their dividend payments to the public in a way of corporate announcements. Companies expect to rise the market value of the firm through dividend announcements. Brown, Finn and Hancock (1977, hereafter BFH) found that the dividend announcements have an informational effect on the share prices. In CSE, price of share is main factor, it plays a vital role. This studies are aimed to identify impact of dividend announcement on share price in Colombo stock exchange in dynamic context of srilanka.

According to the srilankan circumstance, it is most valuable to study about the impact of dividend announcement on share price. Because, Investors who are interested in trade shares basically studies significant factors. (Velnampy, Nimalthasan, & Kalaiaras, 2014) points outthat dividend policy affect on firm performance. Therefore, dividend announcement is one of significant factor can be affected on investors expectation. The previous studies provide debatable ideas on the relationship between dividend announcements and share price. “The most debated issue in the field of finance is over the effect of dividend policy on market price per share”. (Md. Abdulla Al Hasan, Md Asaduzzaman, Rashed Al Karim, 2013) and most previous studies related to this topic were done based on stock markets in western countries. Michaely et al. (1995) explore the announcements of 561 dividend initiations and 887 dividend omissions of US listed firms over 1964-1988. Also there are only few studies had done regarding the dividend announcement on stock prices related with Sri Lankan context. In context of Sri Lankan stock market, Bandara (2001) investigated regarding the dividend announcement. He found that the market reacted positively to announcement of dividend increase and market negatively react to announcement of dividend decrease. “Dividend announcement usually are considered as the positive signal to the shareholders and its positive impact on share price ”(Mehndiratta & Gupta, 2010). Those findings are most useful to investors, listed companies and whoattention in stock market behaviour. It assists the make successful investment decisions. The dividend policy will not affect the firm ‘s market value (Black & Scholes, 1974; Conroy, Eades, & Harris, 2000). This means that the market share price not respond on dividend announcement and also according to Miller and Modigliani (1961), they argue that there is no relationship between firm’s dividend policy and shareholders’ wealth. Other studies are not validated those two findings also. But still there is a issue regarding the previous findings. Therefore, it is essential to do further studies regarding dividend announcements and share prices.

Research Problem, Research Question and Objectives

There is an impact of dividend announcement to decision of investors. When making decisions, investors face difficulties. Therefore, this study investigation about how the dividend announcement effect on the share price. The existing literature provides conflicting ideas on the relationship between dividend announcements in Sri Lankan context. In foreign context, there are different results found in different studies on the subject of dividend announcements and stock prices. And also there are some debatable findings. “The most debated issue in the field of finance is over the effect of dividend policy on market price per share”. (Md. Abdulla Al Hasan, Md Asaduzzaman, Rashed Al Karim, 2013). Also there are only small number of researches had done regarding the dividend announcement on stock prices. related with Sri Lankan Stock Exchange. Therefore, this research investigates on impact of dividend announcement on stock prices. These researches were done in different countries further culture, business environment, policies of government were different. Moreover different business sectors ware based to those researches and results of the researches were completely different. Therefore findings of these researches cannot be applied to the Sri Lankan context as it is and it is difficult to assess the effect of leverage on firm growth of manufacturing companies in Colombo stock exchange (CSE) based on previous researches knowledge. The purpose of this study is to fill this knowledge gap.

This research tries to answer following sub questions;Does the dividend announcement impact on the share price

a) To identify the nature of the dividend announcement in listed manufacturing companies in Sri Lanka.

b) To analyse the relationship between the dividend announcement and the stock price in listed manufacturing companies in Sri Lanka.

Significance of the studies. This study is aimed to identify whether impact of dividend announcement on share price.

a) Investor can identify what are the effect of dividend announcement on investment decision.

b) This research will help to investors and many peoples are interested to study in this field. Therefore, this study will assist to fill the research gap on this subject of srilnka stock market. c) CSE is the only stock market in srilnka. Therefore, each and every transaction are directly affect with economic development of country. So it’s important to further investigate the factors that can influence to share price to determine the economic development.

Limitations of the Study

a) The study is limited to 10 listed manufacturing companies in srilanka. So can’t be consider all manufacturing companies in srilnka.

b) This study investigates only considering the dividend announcement. However, there can be many other factors affect the share price.

c) In this study, the time period considered as test period is not sufficient.

d) The accuracy of the information depending on the CSE data.

Literature Review

The study of the effect of dividend announcement on share price with reference to the listed manufacturing companies in CSE is done in a background where there are number of previous researches related to the dividend policy and share price. There is strong relationship between dividend announcements and share prices. But some are argued that there is no relationship between dividend announcements and stock prices. However, there is still no one standard opinion regarding this matter. According to previous studies related with foreign share markets has found that there is some relationship between dividend announcements and stock prices. They have found that there is positive relationship between dividend announcements and stock prices. Numerous past studies suggest that with a company’s increased dividend announcement goes a positive signal about the firm’s future, thereby significantly increasing the firm’s stock price. Likewise, the positive signal implies that the firm now attracts a new breed of investors, thus driving up demand for the firm’s stock. (Laabs Douglas, S and Bacon Frank, W, 2013)Subsequently, Asquith and Mullins (1983) did a study on market response to both initial and subsequent announcements of dividend in US market; the study analyzed a sample of 168 companies that initiate a dividend to equity shareholders. They found large, significantly positive two-day abnormal returns (the average abnormal return increased by (3. 7%) in response to dividend initiation announcements.

In addition, they found that the average market response to initiation was larger than the average effect of large subsequent dividend increases analyzed here. The results in this study also supported the semi- strong form efficient market hypothesis. Brickley (1983) tested a sample of 165 specially designated dividends announcements of stocks traded on US stock markets covering the year 1969 to 1979. He found that 2. 1% of positive average abnormal returns due to announcements of specially designated dividends on US Market. In a subsequent study, Scott and Keith (1996) examined the differential share price reaction to dividend increase, decrease announcements with respect to bull, and bear market phase. They found that market phase had a significant impact on abnormal returns around the announcement, and it appeared that more information was conveyed by dividend change announcements that run counter to market phase. Finally, they concluded that these results were consistent with the information content of dividends hypothesis. Miller & Modigliani (1961), firstly, studied the impact of dividend policy on firm value. Their study shows that, under certain limited conditions, the firm’s dividend policy has no effect on the value of its stock Research made by Gurgul, Majdosz and Mestel (2006) was focused on investigating impact of dividend announcement change on stock price and turnover changeon German capital market. Positive and negative dividend change had a statisticallysignificant influence on price change in the same direction as the announcement Dividend increase announcements are greeted positively by investors, while there are some evidences suggesting investors react negatively prior to dividend decrease announcements (Jais, Karim, Funaoka, & Abidin, 2009). The bird- in- hand theory received the highest support ( Naser, Nuseibeh & Rashed,2013).

According to(Lonie, Abeyratna, Power, & Sinclair, 1996) we found that current earnings constituted the dominate signal to the capital market and the dividend announcement a partial and often inferior, substitute signaling mechanism for mangers to convey to investors their views about the future performance of the firm. According to previous studies regarding stock prices and corporate announcements there is strong relationship between dividend announcements and share prices. We consider CATV for short term event period instead of AR as a dependent variable, and investigate: (1) which changes have more impact on investors’ behaviour; and (2) whether the announcement conveys new information to investors which, in turn, influences their trading. In other words, we examine if the investors react based on their own interpretations of the announcements. Our results show that dividends news contains information, whereas, the earnings change does not provide explanatory power to the variation of TV reaction to the announcement. From our findings we recommend policymakers to use trading volume side to side to share price to reflect the investors’ behavior. (Felimban, Floros, & Nguyen, 2018)The market reaction is greater the larger the change in the dividend.

There is no significant difference in our results using a dividend expectations model based on analysts’ predictions, and our results are robust to the possible confounding effects when dividend and earnings announcements occur close together. (Pettit, 1972)In the context of Sri Lankan capital market, Bandara (2001) investigated the informational content of dividend announcements with a sample of 123 events relating to 37 companies, from 1993 to 1998, using the Standard Event Study Methodology in Colombo Stock Exchange (CSE). He found that the market reacted positively to announcement of dividend increase and negatively to announcement of dividend decrease. For constant announcements, it did not show any significant reaction in CSE When considering the above literature reviews related to dividend announcement and sahre price, most foreign countries studies have been found the impact the credit risk on bank profitability, in Sri Lankan banking system could not be found. Thus, the objective of this study is to assess the effect of credit risk on profitability in Sri Lankan commercial banks. Therefore, this study is adding value for fill the knowledge gap.

There are various findings regarding same matter. So, this study is an attempt fulfils the research gap in Sri Lankan Context5 MethodologyThis research examines the impact of dividend announcement on share price in Sri Lankan Listed manufacturing companies over the period of 1st January of 2013 to 31st December 2017. There are forty-one listed manufacturing firms in Colombo stock exchange. According to that the population of the study is forty-one companies. Expected sample size is 10 manufacturing firms out of forty-one manufacturing companies which are made at least one dividend announcement annually. This sample is randomly selected by analysing the dividend announcement made by each companies. This study is done by using secondary data to analysis the impact of dividend announcements on stock prices. Data was collected through the published annual reports and Colombo Stock Exchange(CSE) data of the selected manufacturing companies. This study examines the impact of dividend announcements on stock prices by evaluating the share returns such as actual share return, expected share return and abnormal return on selected listed manufacturing companies in CSE. The event study methodology is used to determine the Stock market reactions. Eventually, the impact of dividend announcement on share price is analysed using descriptive statistics and multiple regression analysis. Following conceptual framework represent the relationship between dividend announcement and share price.