Abstract:
Dividends are considered an important source of information for
investors, and studies by scholars have tested the information content of
dividends in many instances, but relatively less in emerging markets,
and in particular, Sri Lanka. The significance of this study would be the
inclusion of a measure for the signaling effects of interim dividends as
well, which were not previously examined in the Srilankan context. The
primary objective of this research is to examine the response of the share
market to overall dividend announcements, while the secondary
objectives included the examination of the share market response to
dividend initiations, interim dividends and final dividend in the case of
dividend increases, dividend decreases and dividend no change. The
average abnormal returns generated by stocks were used as the means to
measure the market response. The abnormal return was determined as
the difference between the actual return and the expected return on the
stock where the market model was used in estimating the expected
return. The findings based on the data collected for the period from 2004
to 2009 reveal that there are significant positive abnormal returns
predominantly evident in the overall sample and most sub samples
during the period leading up to the announcement and on the
announcement date, and negative abnormal returns during the period
following the announcements. Although findings of this study is not
perfectly consistent with the conventional dividend hypothesis that
perceives dividend increase as ' good news' that should result in positive
abnormal returns and vice versa, they do exhibit information content in
dividend announcements.
