Abstract:
The impact of dividend announcements on share prices has become a contentious issue in
the extant literature over the years since it has not been sufficiently investigated. Further, it
is evident that different results have been found in different studies. Hence, the objective of
this research is to investigate the impact of dividend announcement on share prices and the
informational content of dividend announcement pertaining to the listed companies in Sri
Lanka. A sample of 15 companies from ASPI was selected on purposive sampling method
for the study. The daily closing stock prices and published first and final dividend
announcements data for the period from 2014 to 2018 were used as the dependent variables
and independent variables respectively. The standard event study method was employed as
the methodology. The Ordinary Least Square Regression Model was used to ascertain alpha
(α) and beta (β) of sample companies for event window for the years of 2014-2018.
Subsequently, the Market Model was applied to compute the Excess Returns, Abnormal
Returns, and t-values surrounding the testing period. The findings confirmed that t- values
of Average Abnormal Returns on days for year of 2014-2017 were statistically significant
at 5% except for the AARs on days in 2018. Finally, the dividend announcement also
showed a substantial impact on share prices based on the descriptive analysis of overall
years from 2014 to 2018. Thus, the conclusion of the study reveals that the dividend
announcement leads to a positive market reaction by supporting the signaling theory.
Furthermore, the results show that dividend announcement has informational content
whereas dividend announcement is perceived as favorable news by the investors. This study
may specially be useful to prospective investors to make decisions aligning with the
dividend announcement pertaining to the listed corporate firms in Sri Lanka. Finally, this
study recommends expanding event window or time period pertaining to further studies.
