Dividend policy and stock return of the non-financial companies: empirical evidence from Colombo Stock Exchange

Abstract

Dividend policy is company’s policy of distributing income to shareholders from earnings. Dividend policy is measured by dividend per share, dividend yield and dividend payout. Linkages between dividend policy and stock return is still obscure, notably in non-financial companies. The objective of the study is to analyze the impact of dividend policy on stock return of the non-financial companies listed in Colombo Stock Exchange. The Purposive Sample comprises of 36 non-financial companies from six sectors of Colombo Stock Exchange covering a time span from year 2014 to 2018. Non-financial sectors selected for this study include Beverage Food and Tobacco, Manufacturing, Chemicals and Pharmaceuticals, Health care, Power and Energy and Motors. Data have been collected from annual reports of companies. Statistical Package Stata 15.0 has been used to analyze and evaluate panel data using descriptive statistics, Fixed and Random Effect. Finally, Hausman test was used to select the appropriate model to explore the impact of dividend policy on stock return. This study follows the fixed effect model. In order to explore the impact of independent variables on stock return, three hypotheses have been developed and tested. Results reveal that a positive impact is found for dividend per share, while there is a negative relationship between dividend yield and stock return. The impact of dividend payout is deemed to be insignificant. In addition, it is shown that firm size, asset growth and long-term debts explain changes to stock return. It is concluded that dividend policy is relevant with stock return for the non-financial companies listed in Colombo Stock Exchange. Findings provide new insights for investors, company management and policy makers to enhance the performance in stock market.