The study investigates payout policy of firms listed in the Colombo Stock Exchange. Balanced panel data of 82 firms for years are used, from 2006 to 2010. The study employs Generalized Method of Moments estimator, Dynamic Panel Data analysis. The results indicate a significant negative influence of lagged dividend on the payout behavior of firms. The firms do not pay dividends according to a target payout ratio; use dividends as a signaling device and mollify the market. Level of earnings negatively related to the probability of a dividend distribution; the dividend payments do not reflect the earnings volatility. The financial leverage is insignificant in explaining payout, and the size of the firm has no control over payout policy. Institutional shareholding is a key determinant, affects positively on payout. Results also indicate a negative relationship between dividends and Managerial ownership. The powerful principals are able to impose the firm for desired payout. These findings are consistent with agency models in which dividends reduce the problems associated with information asymmetry.
How to Cite:
Gunathilaka, C., (2014). What drives the payout policy? evidence from Sri Lanka: a Dynamic Panel Data analysis. Wayamba Journal of Management. 3(2), pp.1–16. DOI: http://doi.org/10.4038/wjm.v3i2.7439