Dividend policy and share price volatility: evidence from Colombo stock market

Abstract

The objective of this study is to examine the relationship between share price volatility (SPV) and firm's dividend policy on the Sri Lankan stock market. Data used for analyses are collected among the listed non-financial companies in Colombo stock exchange for the period 2009-2013. The relationship between SPV and dividend policy is analysed using multi-regression models. First it is regressed between SPV and dividend payout ratio (DPR) and dividend yield (DY). Second, the relationship between SPV and dividend policy is analysed by incorporating control variables such as size, growth and leverage. A 82.13% of the variation changes in the share price is explained by the model. The volatility of the share price of the non-financial is 6.75%. Regression results indicate that there is a significant positive relationship between SPV and the DY of a firm in both models. DPR is insignificant but positively related to the movement of stock prices. Further, size is significantly negatively related with price volatility, suggesting that the larger the firm, the less volatile the stock price. Growth is weakly significantly but positively associated with SPV. Long-term debt is insignificantly related with price volatility. Hence, the dividend policy is relevant in determining share price changes in the Colombo stock market. Further, since both management and investors are concerned about the volatility of stock price, this research provides a light on the pathway in discovering what moves stock prices and important factors to be considered by investors before making investment decisions, and management in formulating dividend policies for their firms.