Chapter I INTRODUCTION

1.1 Background of the research Share trading in Sri Lanka instigate a century ago in 1896. The Colombo brokers Association commence the trading of share in limited liability companies, which were involved in the opening up of plantation in the country. The year 1985 witnessed a landmark element in the history of share trading in Sri Lanka with the founding of a formal stock exchange. The Colombo Securities Exchange Limited as it was then recognized as incorporated in 1985 and it take over the operations of stock market from the Colombo Share Brokers Association. In 1990 the name changed from Colombo Securities Exchange (GTE) Limited to Colombo Stock Exchange (CSE). The CSE is a company limited by assurance established under the Company Act No 17 of 1982 and is licensed by the Security Exchange Commission (SEC) to operate as a stock exchange in Sri Lanka. The main functions of CSE is to operate an efficient market to rise capital for listed companies and to provide a forum for orderly trading of securities including shares, corporate bonds and government stock. Further the purpose of a stock market is to bring together those people have to invest with those who need fund to undertake investment. Companies seeking to rise equity are asking investors for a permanent investment as equity shares, normally called as a ordinary shares or common stock which have no redemption date. Investor may not be encouraged to invest on these terms unless they can be convinced that they will be able to realize their investment at fair price at any time in the future. For this to happen, stock market must price share efficiently. Efficient price means incorporating in to the shares price all information that could possible affect it. In an efficient market investor can buy and sell shares at fair price and companies can raise funds at a cost, which reflects the risk of the investment they are seeking to undertake.

A significant body of finance theory has been built on the hypothesis is that in an efficient market, prices fully and instantaneously reflect all available information. The efficient market hypothesis is therefore concern with information and pricing efficiency. There are three levels of efficiency have been defined. These are depending on the amount of information available to the participant in the market. The three level of efficiency are weak form, semi weak form and strong form. On the other hand investor will buy shares to obtain an income from dividend and to make capital gain from an increase in share prices. The market price of shares will depend on the return that investor expect to get from it. If the purpose of the investing is to provide a satisfactory dividend in relation to their market value. Investment in shares, which occurs day to day on a stock means that an investor can improve his return by buying at right time. Similarly the prediction of share price movements may help an investor to maximize his capital gain from buying and selling shares. Share should be bought when prices are at their lowers and sold when theyre highest. Since stock brokers and investment advisor give advice to their clients about when to buy and sell shares, they need a method of foretelling which way share price will move, up or down and when. It is therefore useful to consider the extent to which share prices movements can be predicted.

1.2 Research problem and hypothesis The CSE regards timely disclosure of material information to be of prime importance in the operation of an efficient market. Timely disclosure must be made of information, which may affect the share price or influence investment decision. The corporate Announcement include Bonus issue announcement Dividend announcement Right issue announcement Interim financial statement Mergers

If the market is efficient share price should vary in a rational way to corporate announcement. Accordingly if the relationship between these announcements and the share price can be established then it will provide mechanism for the investor, stockbrokers, students, fund managers to predict the possible movement in share prices. Therefore this research tries to investigate the Impact of dividend announcement on share price of CSE In order to investigate the impact of dividend announcement on share price the researcher assumed the following null hypothesis. H1: There is a positive relationship between dividend and share price

1.3 Significance of the study Management of the firm should act in such a manner, so that the current value of the stock should be appreciated through the market mechanism. Accordingly this principle encompasses all kid of management decisions that have bearing on the market price of the share. In this respect of determination of dividend announcement as well as dividend decision taken by the company from time to time would have significant impact on the share price both ways that investors interpret and understand dividend decision and how they would respond to it, could influence the price of the share.

1.4 Objectives of the study The objectives of this study are. I. II. To find out whether there is a relationship between dividend policy and share To find out the sector which significantly influence the CSE. price.

1.5 Scope of the study There are numerous factors that affect the share price of quoted companies. These factors include global and domestic economic environment, political stability in the country, investor confidence and expectation and corporate announcement etc

However this study will focus only on the impact of dividend policy and interim financial statement on share price of CSE. Further the influence of dividend policy will be analyzed based on the dividend policy of Milanka companies since it is impossible to analyze the dividend policies of all quoted companies and will commence on overall market as an when it is important. Further the influence of interim financial statement will be analyzed using the quarterly profit and loss of all listed companies.

1.6. Research methodology This research covers four year sample period beginning from 2002 to 2005. The data used in this study is the market index Milanka Share Price (MPI). To investigate market response to dividend announcement and change in the stock price the correlation model is employed.

1.7 Limitation of the study The researcher has faced some difficulties when conducting this research. First there are 255 public companies, which have been listed on CSE, whereas this study focuses on 20 Milanka companies for the analysis of dividend announcement and share price. Secondly factors affecting share price other than corporate announcement are ignored. Third, only the ordinary shares are considered other stock such as corporate bonds, preference shares etc are ignored. Fourth, only 1-4 years data will be analyzed as per necessary. Fifth finding of this research is subject to highly sensitive stock market behavior. Sixth conclusion drawn up from the analysis of primary data is subject to the accuracy and reliability of markets statistics obtained from data library of CSE. Finally the study will conclude on the overall market; however the individual companies share may behave differently from the market as whole. 1.8 Outline of the research report This research has been organized with five chapters. The first chapter is the introduction to the research which explains the background of the research, research problem and hypothesis development, significant of the research, objectives, scope of the research and limitation on the research. 4

Second chapter is the literature review which explains the related theory and previous research findings related to this research such as theory of dividend policy, types of dividend policy, the relationship between macro economics factor and dividend policy, kinds of security evaluation, the factor influence on share price and dividend announcement on share price. Third chapter is the methodology that is developed to explain the methodology going to be used in this study. Therefore this chapter focuses on different data, methods and sample design selected. For this research, development of hypothesis and the model to be used for analyzing the data in this research. Fourth chapter consists of data presentation and analysis of the research. In general almost all profit making listed companies declare dividend each year, since the dividend policy significantly influence the share price of a profit making companies. Fifth chapter consists of research finding and overall conclusions of this research.

Chapter II LITERATURE SURVEY

2.1 Introduction In this chapter the research is going to describe the related theory and previous research findings related to this research. It is indeed very important and critical to review and understand the articles, findings and theories of leading authors in respect of 5

the factors which influence the share prices of quoted public companies. Further when you look at the performance of the stock market at the end of a trading day it can be hard to work out why shares have either rise fallen in value. Broadly speaking, share prices are influenced by new information or news. The information or news which influences the share prices can be broadly divided in to two such as internal information and External information. Internal information is, (those type of information which comes it) the market by way of corporate announcements such as. dividend announcement, rights issue announcements, quarterly financial statements, bonus issues, takeovers or mergers announcements etc.. On the other hand the external information is coming to market from the external environmental factors such as political, economical, social, and technological factors (PEST). Therefore new data on employment, manufacturing, management's decisions, and performance of the company, directors' dealings, political events, economic conditions or even the weather, all kinds of news can influence the movements in Share prices. 2.2 Theory of dividend policies Dividend policy is one of a company's financing decisions. How should a company divide its earnings between payments to shareholders and retention for future investments if the aim is to increase the market value of the firm? Using internally generated funds is often though to be a 'free' form of finance. This is of course not the case, and it is important to remember that these funds do have a cost,. an opportunity cost, normally taken as the weighted average cost of capital.

2.2.1 Factor influencing dividend policies There are various factors influencing the dividend policies the first factor is liquidity. Liquidity is the ability of meeting payments on time. In order to pay dividends, a company will require access to cash. Even very profitable companies might sometimes have difficulty paying dividends if resources are tied up in other forms of asset, especially if bank overdraft facilities are not available. Repayment of 6

debt is the second factors. Dividend payout may be made difficult if debt is scheduled for repayment and this is not financed by a further issue of funds. Third one is Restrictive convents. The Articles of Association may contain agreed amount of dividend payments or the rate of growth which restrictions on dividends. In addition, some forms of debt may have restrictive covenants limiting the applies to them. Rate of expansion is the fourth factor the funds may be needed to avoid overtrading. The fifth factor is Stability of profits. Other things being equal, a company with stable profits is more likely to be able to pay out a higher percentage of earnings than a company with fluctuating profits. Control is the other factor the use of retained earnings to finance new projects preserves the company's ownership arid control. This can be advantageous in firms where the present disposition of shareholding is of importance. Next factor is the Policy of competitors. Dividend policies of competitors may influence corporate dividend policy. It may be difficult, for example, to reduce a dividend for the sake of further investment, when competitors follow a policy of higher distributions. Signaling effect is the final factor influencing dividend policy. This is the information content of dividends. Dividends are seen as signals from the company to the financial markets and shareholders. Investors perceive dividend policy is assuming increasing importance, and there have been numerous instances reported in the press where companies have paid an increased dividend when financial prudence suggests that they should be paying no dividend at all. Having taken into account the above factors, companies will formulate standard dividend policies, there of which are discussed below.

2.3 Types of dividend policies There are number of dividend policies as follows 2.3.1 Constant payout ratio There are important links between dividends and profits. In company law, for instance, the prohibition of paying dividends other than out of profits is seen as an important protection for creditors (including lenders, who may well specify a maximum proportion of profits which can be declared as dividends while their loans remain in force). This is reinforced by the accounting concept which defines profit as what you

could afford to distribute, and still be as well as you were. Such links encourage a backward-looking approach to dividend policy, with some boards of directors publishing an objective to maintain a certain dividend cover, i.e. to declare dividends which represent a constant percentage of profits after tax.In a stable state, one would expect some symmetry in the figures, e.g. a company whose profits after tax represented a 10 per cent per annum growth in its profits (and earning per share) and hence dividends. This forms the basis of the idea that the value of a company is a multiple of its past profits. The reality, however, is not one of a stable stale. One very specific shock to the system has been the instability of the unit of measure (money). Should dividends be related to the profits calculated under the historical cost convention, or after making an adjustment to exclude the inflationary element? Ought they to be influenced by translation gains and losses (usually taken direct to the reserves figure on the balance .sheet)? (tear in mind that 'well-of mess' is measured by reference to the cost of unconcerned tangible assets. Nil allowance is made for the intangible assets (such as quality, reputation and pace of innovation) which arc so crucial to survival in a rapidly changing environment. Intriguingly, what the accountant calls an asset, e.g. an old fashioned piece of plant, can actually be a strategic liability.

2.3.2 Stable Policy with 'Moderate' Payout Other boards of directors think not in terms of maintaining dividend cover, but in terms of maintaining dividend cover, but in terms of maintaining a trend in the absolute level of payout. Their starting point for deciding this year's dividend is what was paid last year, what rate of increase it represented on the previous year, and whether they feel that this rate can be repeated, taking into account considerations of liquidity. Rightly or wrongly, the dividend decision is seen as a powerful signal to the market of the directors' confidence in the future of the enterprise, and this does appear to be supported by evidence that unexpected dividend cuts have been followed by reduction in share prices. The danger, of course, is that this can become a game, in which directors seek to give the signal they think will have the most favorable effect on the share price. Some even argue that the aim must not be to surprise the market, which leads to the suggestion that the dividend should be what the analysis are predicting. As 8

analysis base their predictions on confidential briefings by directors, however, such an incestuous approach is clearly irrational. In UK the last few years have seen a significant increase in the proportion of corporate profits being declared as dividends. Dividend cover (the ratio of profits after tax to dividends) was over 2.5 in the 1970s and 80s, but fell to below 2.0 in the early 1990s. In pure economic terms this is to be applauded, in the sense that it puts the funds in the hands of those with the widest choice, and forces the directors to "make a case' if they wish to raise capital to fund expansion. Conversely, the dividend controls which have been applied at various times in the past (usually to signal fairness, vis--vis wages and price controls) have a stultifying effect on the economy - preventing funds from following their natural course. The practice of maintaining a particular rate (sometimes real, sometimes nominal) of growth of dividends has been very popular, and seemed to work well as long as things were stable, cyclical or at least predictable enough being 'squirreled away' in the good years to pay for the bad. As the rate of change has speeded up, however, its limitations have become more obvious and more serious. In particular, the unexpectedly severs downturn in the early 1990s presented such boards with a dilemma: given sharply reduced profits, what should be preserved dividend growth or dividend cover? Some fund managers made it clear that they preferred dividends to retentions. Some boards responded, to the point of declaring dividends in excess of their profits after tax. One chairman talked about the need to 'reward shareholders for their loyalty'. As a general rule, however, financial journalists took the opposite view, based on their perception of dividends as just another outlay, like wages or advertising or plant and machinery. Companies in financial difficulties, they argued, should cut dividends and increase investment. Such comments give the impression that their authors mistakenly see financial management as being about trade-offs within one time-fame (i.e. the short terms). The reality is that it is about trade-between different time-frames: the investments financed by reduced dividends could well amount to a total waste of money. 2.3.3 Residual dividend policy

Strategic financial management does focus on the creation of value and, as we have seen, is principally concerned with forecast cash flows. The question is what cash is needed, not for some irrelevant aim of maintaining a quantum of assets evaluated at unconsumed historical cost, but for the strategies which are in place. Those strategies will have been evaluated by discounting the said cash flows at the cost of capital, and the dividend decision should, logically, be subject to the same discipline. To the extent, that is that the company has opportunities to invest for a return in excess of the cost of capital, it should retain funds within the business. If, on the other hand, it has funds in excess of its identifiable viable investment opportunities, it should return them to its shareholders for investment elsewhere. This would mean much more volatile levels of dividend, of course, but that was what equity capital was originally meant to be about. The idea of a share being more like a bond, i.e. carrying an entitlement to a steady, or steadily increasing, stream of dividends is relatively new. It may be coincidence, but it has come to prominence as the proportion of share owned by institutions has grown. In the 1950s two-thirds of UK listed company shares were owned by individuals; by 1990, two-thirds were owned by institutions. At this stage, it is worth nothing that, rather than transferring wealth the company to the shareholders in the from of dividends, it is possible to return capital to them by 'buying back shares', i.e. the company makes an offer to all members, or goes out into the market to buy its own shares. This does not happen very often but does allow shareholders to choose: they can take the cash, or have a larger interest in the company. The effect on the entity is the same as paying a dividend, but the tax situation may make it possible to benefit (at least some)n shareholders at the expense of the tax authorities. 2.3.4 Theory of dividend irrelevance To appreciate the theory advanced by Modigliani and Miller (MM) in 1961 regarding dividend policy and the hypothesis of dividend irrelevance, we need to understand MM's fundamental principal of valuation: 'that the price of each share must be such that the rate of return (dividends plus capital gains per dollar investment) on

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ever share will be the same throughout the market over any given interval of time. This principle is supported by three basic assumptions: Firstly, in 'perfect' capital markets no buyer, seller or issue of securities is large enough for their transactions to significantly affect the current ruling price. Information regarding the ruling price is available to all without cost, and no brokerage fees, transfer taxes or other transaction costs are incurred in the trading of securities. In addition, no tax differentials exist either between dividends or retentions of profit or between dividends and capital gains. Secondly, All investors will behave 'rationally' in that they will prefer more wealth to less, and they are indifferent as to whether any given increment of their holding (capital gains) and thirdly Perfect certainty' carries the implication of complete assurance on the part of ever investors as to the future investment programme and future profits of every company. With this assurance there is, among other things, no need to distinguish between stocks and bonds as sources of funds for this analysis, which is itself based on an analytical framework set up to examine the effects of differences in dividend policy on the current price of share in an ideal economy, characterized by the three assumptions of perfect capital markets, rational behavior and perfect and perfect certainty 2.3.5 Bird in the hand theory: Gorden and Lintner argue that investors are not indifferent between dividends and capital gains. Investors can be surer of receiving dividend payments than capital gains. Therefore, investors will bid up the pricing of common stocks of companies that pay generous dividends relative to similar companies that pay smaller dividends. They argue that the rationale behind this preference for dividend is that the high dividend bearing stock tends to have lower risk. Companies paying lower dividends tend to be riskier investment. The market discounts the earnings of low dividend companies more heavily (Hess, 1992) 2.3.6 Tax preference theory In an economy where effective tax rate of capital gains is lower than the rate of dividends Black and Scholes argue that the value of the stock which pays low dividends is higher. If there were no taxes, investor would have no incentive to prefer one particular group of stock. 11

2.3.7

Signaling theory Miller pointed out in their original paper that investors have very low response

to dividend announcements. They view change in dividend policy is conveying information about the future earnings. Since the management has better information than investors they would use this indirect method to convey information to investors instead of direct disclosures. Dividend changes can thus be thought of as management forecasts of future earnings changes substantiated by cash. In addition to the credibility of cash signals, dividend announcement are also highly visible compared with other forms of announcements.

2.3.8 Clientele effect Different groups of investors prefer different dividend payout policies. One is the high dividend clientele who requires current income and prefers high payout the other is the low dividend clientele which prefers low payout and more investments. If the firm change their dividend policies investors have to switch. Since switching is costly, the management might be reluctant to change the policy.

2.4 The Relationship between macro economics factors and dividend policy
The literature relating to dividend policy points to a number of factors that would affect the dividend of firms. These factors can be categorized under two main heading visa company-specific factors and macroeconomics factors. Company-specific factor vary from one company to another, whereas macroeconomic factors affect all companies in varying degrees. The main difference between these two factors is controllability. The company specific factors can be controlled by the management of the company and macroeconomic factors cannot be controlled. Because those factors arise due to the environment, or the economy, or the country in which the company operates. The macro economic factors are discussed below.

2.4.1. GDP growth

GDP is the value of the total output produced in the whole economic over some period, usually a year. An increase in the real GDP, indicates an increase in the real output of the economy. This is an indicator of the well being of the economy. If the

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economy performs better, the individual firms in the economy also would perform better, which leads to an increase in their profitability. Consequently, it would increase the companys dividends. Therefore, there must be a positive relationship between GDP growth and dividend policies. 2.4.2 Money supply Money Supply is the total amount of money available in the economy. If the money supply increases, the total amount of money supply available in the economy would increase. As a result, companies may be compelled to pay higher dividends. Then, there will be a positive relationship between money supply and dividend policies. 2.4.3 Inflation Inflation refers to an increase in the general price level. This does not mean that all prices are necessarily rising. Even during periods of acute inflation, some prices are relatively constant while others fall. The level of inflation is important for individual firms in the economy. A rise in the inflation level may lead to an increase or decrease of the firms selling prices, or cost of input, which leads to changes in the profitability. Based on the level of profitability, they may change their dividend policy. Therefore, dividend policy is expected to be positively correlated with the inflation.

2.4.4 Interest rates Interest is the amount paid each year on a loan, usually expressed as a percentage. The major influence in determining interest rates in the money market in the Treasury Bill market. Treasury bill yields are related to dividend because, they represent the risk-free which is a part of stock return while dividend represent a part of the return for the investment in common stock. Hence, we can expect to find a positive relationship between dividend policy and interest rates. 2.5 Kinds of security evaluations methods

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The schools of thoughts are normally categorized in to three groups on the matter of security price evaluation. Advocates are normally classified as fundamentalists, technician and efficient market advocates 2.5.1 The fundamental analyst Focuses on the intrinsic value of the stock. This intrinsic value depends on the earnings potential of the security. Fundamentalists would buy the stock, if its market price is below its theoretical value or sell stock, if the price exceeds underlying value. For fundamentalists such matters as earnings, dividends, asset values and management are the basic ingredients in determining underling security values. 2.5.2 Technical analysis On the other hand, takes an alternative approach to predict stock price behavior. The technical analyst believes that the forces of supply and demand are reflected in patterns of price and volume of trading. Technical analysts believe that all innumerable fundamental factors, considered in fundamental analysis are summarized and represented by the market prices of stocks. Volume changes are believed by most technicians to be prerequisite to any change in price.

2.5.3 The Efficient Market Hypothesis (EMH)

The third theory to stock price behavior, which has voluminous body of literature, is called the theory of efficient market. It accepts that a stock should have an intrinsic price depend on fortunes of the company and expectations of investors. The key feature of efficient market theory is that although stock prices will be treated as new information becomes available. Famas study was designed to measure the degree of randomness with stock prices fluctuated. He thought that financial information arrived randomly and assuming that prices responded efficiently to the new information hypothesized that the price should fluctuate randomly too. Fama delineated three levels of market efficiency namely the weak form, the semi-strong form and the strong form of the efficient market hypothesis. 2.5.3.1. The Weak Form of the Efficient Market Hypothesis (EMH)

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This weak form of EMH says that current prices of shares already fully reflect all information that is contained in the historical sequence of Price. The findings of early researches conducted in developed stock markets such as USA andUK tends to confirm that the share prices follow a random walk. These tests addressed two questions: First one is, do prices over time have sufficient serial dependence to allow investors to predict future price movements by studying trends? And, second one is can trading strategies based on price movements provide opportunities for abnormal profits? For example, the study by Kendall (1953) tried to observe whether mechanical rules based on historical share price information could be used to predict future stock price in an attempt to earn profit inExcess of the average market return. King (1966) did a study on the 63US companies and Cootner (1962) used 45 us stocks in his tests of weak form of efficient market Hypothesis. All these studies provided supportive evidence to EMH concluding that US stocks follow a random walk. Niarchos (1972) did a study on the Greece stock market using15 companies, preatz (1969) on 16 indices and 20 companies Of Australia, jennergren (1975) tested on 15 Norwegian stocks and Young (1990) tested on 170 stocks traded in MalaysianStock exchange. These studies provide a form of efficiency of some of the worlds newest stock markets. The findings of these studies were mixed, but most studies concluded that non-US markets do deviate from the weak from of the EMH. Abeyratna and power (1995) tested weak-form efficiency for the Sri Lankan market using share price data from the companies traded on Colombo stock exchange. They found that the behavior of the series of price changes were inconsistent with the weak form of the efficient market hypothesis. 2.5.3.2. The semi-strong form of the efficient market hypothesis This form says that current prices of shares not only reflect all informational content of historical prices but also reflect all publicly available know ledge about the companies being studied. Furthermore, the semi-strong form says that efforts by analysts and investors to that effort by analysts public information will not yield consistently superior returns to the analyst. If security prices seem to reflect the superficial view of the action and not the rational one, it would imply that the market was not efficient in the semi-strong form to lack of knowledge or information of investors. Fama, fisher, Jensen and Roll (1969) made a major contribution to the semi15

strong form of the efficient market hypothesis by analyzing share price reactions to the announcement of new information. The result of this study is consistent with the semistrong form of market efficiency. Ball and Brown (1968) conducted another study by analyzing the stock markets ability to absorb informational content of reported annual earnings per share information. They explored the relationship between security price changes and earnings changes. They found a significant association between the sign of the price changes and the sign of the earnings changes. One of the influential studies on market price adjustments following new security issue announcements is the study conducted by Asquith and Mullins (1986). 2.5.3.3 The strong form of the efficient market hypothesis This theory maintains that not only is publicly available information to the investors or analysts but also all information that is available, be it public or inside, cannot be used to consistently earn superior investment returns. A useful form of the hypothesis is that The weak form of efficiency is where share prices reflect all historical information and The semi-strong form of efficiency is where pieces reflect all publicly available information; The strong form of efficiency is where share prices reflect all information (public and internal) and is the perfect information environment.Research has identified that the CSE is in the semi-strong form. Gains may be made from what is called insider dealing, where an investor obtains internal information about the company and purchases or sells shares based on that information. Insider dealing is an offence in the Sri Lanka in order to protect the stability of the capital markets In some countries (e.g. Japan), however, insider dealing is not illegal and is considered to be a useful contributor to an informational efficient market. Although there are some dissidents, the majority of observers would appear to be satisfied that the random pattern of share price movements is consistent with the semi-strong from i.e. that shares reflect all published information. Given that insider dealing is illegal, they say, that is good enough: the market can be presumed to be efficient. However, whichever form of the hypothesis is assumed, the discussion in the previous section concerning short-terms must still be taken into account. No matter 16

what information is made available to the market at a particular point in time, it will still be influenced by the volume of trading at that point. The question must always be asked as to the underlying causes of a significant market movement in a share - for example, what special information has the market received and how reliable is it? Rumor plays a significant part in market activity, but it must never be dismissed lightly or out of hand, bearing in mind that market analysts and commentators act generally in a trustworthy manner: the deliberate dissemination of false information generally does no good, either to the giver or to the receiver. Rumor may indeed lead to deeper probing and stronger information becoming available to the market generally. In addition, the internet is nowadays leading to an altogether different category of information: one can see a movement from the semi-strong to the strong form of the EMH becoming more applicable. The rapidly developing influence of the internet is creating vast volumes of information, and its interpretation pushes share analysis much closer to the strong form of the hypothesis. Of course there are times when, sadly, in an extended but! market, investors tend to act collectively in an irrational manner, to a large extent allowing greed to overcome information, when the heavily inflated balloon of market. Market prices continue to be blown up until it bursts. The only defiance against such catastrophic events is for the investor to take extra care. Nevertheless, EMU is indeed still valid in these rapidly changing days, provided that the investor is prepared to dig deeply enough to discover the underlying causes of the movements to which the information so provided is pointing. 2.6 The factor influence on share price Some factors are influence on share price as follows 2.6.1 The economy The health of the domestic and global economy has a fundamental influence on share prices because it is ultimately responsible for driving company profits. Broadly speaking, if the economy is growing, company profits improve .and shares will become more highly valued. If the economy is weakening, company profits will fall and share prices will go down. 17

Investors look at a vast amount of data Jo try and work out what is going to happen to the economy and shift their portfolios before the events occur. This is why you will often see markets move well ahead of an actual event occurring. You may, for example, get little reaction from the stock market when interest rates rise. This is because investors have already anticipated the shift months in advance and adjusted their portfolios beforehand. You can usually assume that the stock market will anticipate moves in the economy by around six to nine months. So if you want to stay ahead of the game you will need to follow economic data as closely as the professionals. Lanka shares as what happens in these economies will have an impact on our own to a grater or lesser extent. . When looking at economic data, you need to think not only how the wider economy will be affected but whether certain areas will be more affected than others. A rise in interest rates is, for example, often bad news for house builders as people feel less confident about taking on debt. Retailers are often badly affected too as people spend less. Pharmaceutical companies are, however, usually unaffected as people's demand for drugs is not influenced by the state of the economy. Companies whose profits are closely tied to the health of the economy are known as 'cyclical' stocks. Those businesses that aren't too affected by the economy are called 'defensive' stocks. If economic conditions deteriorate you will often see investors shift from cyclical stocks to defensives Company News. The way investors interpret news corning out of companies is also a major influence on share prices. If, for example, a company puts out a warning that business conditions are tough, shares will often drop in value. If, however, a director buys shares in the firm, it may be a signal that the company's prospects are improving. Companies put out a great deal of news and most of the major announcements are covered by the financial press. But some announcements not regarded as so important and sometimes, particularly among smaller firms that are monitored less by investors and financial journalists, indicators of the company's health can be missed. 18

You can stay one step ahead of the game by looking carefully at all the information sent out by companies you own, their competitors and other companies you are interested in. This information is usually available on companies' websites and other publications Investors and annalists UK to think laterally about the information you are getting. If, for example, a competitor to a company you have shares in produces a revolutionary new product, it will probably hit profits at the company you own. Also think about the impact it will have on suppliers to that business. An increase in sales of mobile phones with cameras in them will not only be good for the phone company but the firms that supply the technology in the phones. Takeovers or even rumors of takeovers also have a big influence on prices. This is because investors expect the bidder to pay a premium to shareholders. 2.6.2 Analysts reports Reports produced by independent analysts also influence share prices. If an analyst changes their recommendation from 'sell' to 'buy', for example, the shares will often rise in value. Analysts' reports are produced primarily by investment banks for professional investors, although some stockbrokers will make their research available to private investors. You may find summaries of some reports published on financial news websites or in newspapers and magazines. Some investment banks also publish their reports on their websites for free. You should remember that the recommendation an analyst puts on a company will affect its share price very quickly and can become irrelevant within hours. This is because the analyst will usually say a stock is a 'buy' within a particular price range. If the price moves above their targets the improvements the analyst expects may be 'priced in' and so The shares not worth buying. But analysts' reports are always worth reading, even if the recommendation is out of date. The reports usually contain a great deal of useful information on the company and how it business is developing. They also often look at how the company rates against its competitors. Press recommendations.

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The financial pages of most national newspapers and investment magazines usually contain share tips. Like analysts' reports these tips can have a major influence on share prices. If a journalist recommends a share, the price will usually rise and if they write a negative story the price will fall. These moves usually happen very quickly so if you are going to follow the recommendation it often makes sense to do so as soon as possible. 2.6.3 Sentiment Investor sentiment is almost impossible to predict and can be infuriating if, for example, you have bought shares in a company that you think is a good 'buy' but the price remains. Investor sentiment is influenced by a wide variety of factors. Share prices can, for example, be flat during the summer simply because so many major investors are on holiday or attending major sporting events such as, a cricket match hence the adage 'sell in a month and go away'. Investor sentiment can lead to irrational buying or selling of shares and result in bull and bear markets. A bull market is when share prices rise while a bear market is when they fall. In the technology boom of the late 1990s in UK, for example, investors paid extremely high prices for shares and ignored traditional valuation measures, such as P/B ratios. This carried on until 2000 when investors belatedly realized these shares has risen too far and resulted in a three year bear market in shares. 2.6.4 Technical influences Share prices can rise and fall for a variety of technical reasons that may have nothing to do with the actual outlook for an individual company or the outlook for the market. It is, for example, a common occurrence for share prices to drop back after a strong rally. This happens because investors take profits on some of the shares that have risen in value, protecting their gains just in case the shares start to slip back. Investors often refer to this as market consolidation. Another technical reason for share prices to rise or fall is the quarterly adjustment in the Milanka index. Shares that are expected to enter the Milanka may

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experience a sharper rise than one would expect in the weeks beforehand while shares that leave the index can fall more sharply. This happens because funds that simply track the index have to match the composition of the index. Some professional fund managers who hold the affected stocks also adjust their portfolios as they do not want their holding to be too far above or below the company's weighting in the index. Share prices can also be affected by investors who use technical analysis to drive their investment techniques. Technical analysis, also known as Chartism, is simply the study of past share price movements and stock market index trends, which are then used to forecast how shares and stock markets will behave in future. Market makers can also influence prices. If they, for example, do not own enough shares to balance their books they will have to buy more. Market makers also influence prices if the market is looking flat, reducing prices to attract buyers. 2.7 Dividend announcement and share prices Dividend policy remains a source of controversy despite years of theoretical and empirical research, including one aspect of dividend policy: the linkage between dividend policy and stock price risk (Alien and Rcichirn, 1996). Paying large dividends reduces risk and thus influence stock price (Gordon, 1963) and is a proxy for the future earnings (Buskin, 1989). A number of theoretical mechanisms have been suggested that cause dividend yield and payout ratios to vary inversely with common stock volatility. These are duration effect, rate of return effect, arbitrage pricing effect and information effect. Duration effect implies that high dividend yield provides more near term cash flow. If Dividend policy is stable high dividend stocks will have a shorter duration. Gordon Growth Model can be used to predict that high- dividend will be less sensitive to fluctuations in discount rates and thus ought to display lower price volatility. Agency cost argument, as developed by Jensen and Meckling (1976) proposed that dividend payments reduce costs and increase cash flow, that is payment of dividends motivates managers to disgorge cash rather than investing at below the cost of capital or wasting it on organizational inefficiencies (Rozeff, 1982 and Easterbrook 1984). Some authors have stressed the importance of information content of dividend (Asquith and Mullin, 1983: Born, Moser and officer 1983). Miller and Rock (1985) suggested that dividend announcements provide the missing pieces of information about the firm and allows the market to estimate the firm's current earnings. Investors 21

may have greater confidence that reported earnings reflect economic profits when announcements are accompanied by ample dividends. If investors are more certain in their opinions, they may react less to questionable sources of information and their expectation of value may be insulated from irrational influence. Rate of return effect, as discussed by Gordon (1963), is that a firm with low payout and low dividend yield may tend to be valued more in terms of future investment opportunities (Donaldson, 1961). Consequently, its stock price may be more sensitive to changing estimates of rates of return over distant time periods. Thus expandingfirms. Although may have lower payout ratio and dividend yield, exhibit price stability. This may be because dividend yields and payout ratio serves as proxies for the amount of projected growth opportunities. If forecasts of profits from growth opportunities are less reliable than forecasts of returns on assets in place, firms with low payout and low dividend yield may have greater price volatility. According to duration effect and arbitrage effect, the dividend yield and not the payout ratio is the relevant measure. The rate of return effect implies that both dividend yield and payout ratio matters. Dividend policy may serve as a proxy for growth and investment opportunities. Both the duration effect and the rate of return effect assume differentials in the timing of the underlying cash flow of the business. If the relationship between risk and dividend policy remains After controlling for growth, this would suggest evidence of either the arbitrage or information effect. Empirical studies have examined cross-sectional variation in dividend payout ratios and CAPM beta coefficients. Beaver etc. al. (1970) estimated CAPM betas for 307 US firms and obtained significant correlation between beta and dividend payout. Rozeff (1982) found a high correlation between value line CAPM and betas and dividend payout for 1000 US firms. Fama (1991) and Fama and French (1992) focus on dividends and other cash flow variables such as accounting earnings, investment, industrial production etc to explain stock returns. Baskin (1989) takes a slightly different approach and examines the influence of dividend policy on stock price volatility, as opposed to returns. The difficulty in any empirical work examining the linkage between dividend policy and stock volatility or returns lies in the setting up of 22

adequate controls for the other factors. For example, the accounting system generates information on several relationships that are considered by many to be measures of risk. Baskin (1989) suggests the use of the following control variables in testing the significance of the relationship between dividend yield and price volatility: operating earnings, size of the firm, level of debt financing, payout ratio and level of growth. These variables have a clear impact on stock returns but also impact on dividend yield. According to Abdul Rauf in his Market Response to Behavior of Cash Dividend in Colombo Stock Exchange has found that sudden changes in dividend behavior have higher significant impact on share price than the constant level of dividend behavior. Since the result of this study indicates that the CSE is informational inefficient so it has important implication for the investor, management of the companies and stock market regulatory agencies. The investors could make use of delayed reaction of cash dividend announcement information to make decision with regard to changes they have to make their portfolio in order to make profits or avoid potential losses. SEC of Srilanka could increase its monitoring activities on the stock market to ensure that listed companies disseminate important information such as cash dividend timely and regularly. (2003 Colombo Stock Exchange (CSE) is an important emerging market of the region among the developing countries. But no significant work has been done to explore the influence of dividend policy on share prices. It is also important to study its role in the Sri Lankan context after the introduction of reforms during 1990s, which emphasized more towards openness to foreign investor, and competition, which led to, increased volatility in the market.. The objective of this study is to find the role of dividend policy measures. dividend yield on share price changes in the long run. It also attempts to assess the pattern of relationship during 1995 to 2005 period. 2.8. Conclusion

This chapter has been discussed fundamentalist, technicians and efficient market analysis of share market. Fundamental analysts target on intrinsic value of stock. Technical analyst believes that the forces of supply and demand are reflected in

23

patterns of price and volume of trading. Efficient market accepts that a stock should have an intrinsic price dependent on the fortunes of the company and expectations of investor. The next chapter leads for the methodology.

Chapter III METHODOLOGY

3.1 Introduction This research is aimed to investigate the dividend announcement and the stock price behavior of CSE. For this purpose, this chapter is developed to explain the methodology going to be used in this study. Therefore this chapter focuses on different data, methods and sample design selected. For this research, development of hypothesis and the model to be used for analyzing the data in this research. 3.2 Data This empirical analysis the study uses daily share price of the Colombo Stock Exchange for the period of 2002 to 2005, comprise 100 observations. The data of daily price indices is the Milanka Share Price Index are collected from the data library of

24

CSE. And the dividend announcement data and dividend amount of Milanka companies have been collected from the annual reports of those companies. 3.3 Sample Period The sample included period of four years starting from 2002 to 2005. 3.4 Sample Size The sample included price indices (Milanka Price Index) for four years. This total sample has been divided as year wise and company wise analysis. The companies which are listed under Milanka price index were taken for the analysis (See appendix1) 3.5 The Variable The daily market price is used as an individual time series variable. Market price the (MPI) which represent all the listed companies under Milanka companies at CSE.

Figure 3.1 The frame work for the variable Dividend Announcement MPI

3.6 Statement of hypothesis There are many factors affecting the share price, therefore it is important to study about the share price and trend in share price movement and also find out these factors, which have major influence on the share price. In this sense, various ways. This study covers impact of dividend of the factors influence on share price. Therefore the researcher assume the following hypothesis H1 - there is a positive relationship between dividend announcement and share price. 3.7 The Model

25

The pattern of relationship between variables could be show in model. The correlation coefficient model is used for this study. 3.7.1 Correlation Analyze Correlation means the relationship between two variables. It was used to find out closeness of the relationship between variables in this study. Those are 1. Pearsons Correlation Coefficient as overall solution over last four years from 2002 to 2005 of Milanka Companies. 2. Pearsons Correlation Coefficient as individual wise over last four years from 2002 to 2005 of Milanka Companies.(see Appendix 1) There are different measures of this closeness, but the most generally used is one called the Pearson Product- moment coefficient of correlation (r). It is calculated by using the following formula. Rp = nxy xy [nx2 (x)2] [ny2 ( y)2] Where rp Correlation coefficient, variables The relationship between companys dividend announcement and share price of the firm is analyzed with the help of statistical computer programming package called SPSS; The Bivariate Correlations procedure computes Pearsons correlation, Spearmans RHO, and Kendalls tau-b with their significance levels. Correlations measure how variables or rank order are related. Before calculating a correlation coefficient, all data are screened for outliers (which can cause misleading results) and evidence of a linear relationship. Pearsons correlation coefficient is a measure of linear. Two variables can be perfectly related, but if the relationship is not linear, Pearsons correlation coefficient is not an appropriate statistic for measuring their association. Pearsons correlation coefficient assumes that each pair of variables is bivariate normal. n - Number of pairs of data, x - Value of the independent

26

The bivariate correlations are obtained by selecting two variables such as actual and estimate (Revenues, Expenditure) on the SPSS sheet. The following options have been followed, Correlation coefficients: for quantitative, normally distributed variables,

choosing the Pearsons correlation coefficient. Correlation coefficient is range in value from -1 (a perfect negative relationship) and +1 (a perfect positive relationship). A value of 0 indicates no linear relationship. 3.8 Conclusion This chapter stated the data set to be used. The sample period of source data and hypothesis to be tested. The methodology to be used to test the hypothesis and the bases of the analysis also explained the sources of data also stated. Based on the explanation giving in this chapter the data will be analaysized using the specified model to test the developed hypothesis. The result of the analysis is also presented in the next chapter.

Chapter IV DATA PRESENTATION AND ANALYSIS

4.1 Introduction This chapter consists of data presentation and analysis of the research. In general almost all profit making listed companies declare dividend each year, since the dividend policy significantly influence the share price of a profit making companies. However as this analysis focuses mainly on the Milanka companies, since these companies are the major companies which drive the market the four years profit record of Milanka companies have obtained for this research 4.2 Background information of milanka company. Background information of Milanka Companies are given in the table Table 4.1 Table 4.1 Background information

27

Companies name
Asia Capital Limited

Establish ment date 1991

Quoted date 1994

Financial year end 31st March

Capital Rs.10 each

Authorized Million 2000

Issued Mill 1100

Central Finance Limited

1991

1994 1970 1956 1971 1982 1993 2000 1987 1989 1987 1983 1983 1953 1986

31st March 31st December 31st March 31st December 31st December 31st December 31st December 31st December 31st December 31st December 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31-Mar 31st March 31st March 31st December

Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each Rs.10 each

2,000 2,000 5,000 1,000 1,000 2,000 1,000 1,450 3,500 3,500 500, 750, 500 300, 1000 2,000 1500 500 750 100000

1,100 906 423.55 550 237.6 537.5 500 442.84 435.6 435,6 299.98 268.15 450 187.64 384.33 1396, 600 235.55 553.94 18049

Commercial Bank of 1969 Ceylon Limited DFCC Bank 1955 Hatton National Bank Limited Lanka Oryx Leading Company limited National Development bank Nation Trust Bank Sampath Bank Limited Seylan Bank Limited Distilleries Company of Srilanka Limited Lanka Milk Foods Limited Aitken Spence and Company Limited Hayleys Limited John Keels Limited 1970 1980 1979 1999 1986 1987 1987 1981 1952 1952 1979

Aitken Spence Hotel 1978 1980 Holding Limited Taj Lanka Hotels 1980 1982 Limited Caltex Lubricants 1992 1996 Lanka Limited Richard Pieris & 1951 1983 Company Limited. Royal Ceramic Lanka 1990 1991 Limited Sri Lanka Telecom 1996 2000 Limited (Source: Guide to Milanka Company 2005)

28

Table 4.1 shows that the companies taken for this research purposes. These companies have some common features that their par value of the shares is Rs 10 and mostly their financial year end is 31st march. All the authorized capital was not issued and Sri Lanka Telecom Limited and Sampath bank Limited were recently quoted to Colomo Stock Exchange 4.3 Dividend announcements In this section details of dividend announcement of each company is presented

4.3.1 Asia Capital Limited Table 4.2 Asia Capital Limited dividend announcement Rates Announcement date 5% First& 30-Apr-00 Date of Ex dividend 21-May00 2-Jun-00 Payment Cum price 9.50 Ex price 9.50 DPS dividend dividend 0.50

Final (Source: Guide to Milanka Company 2005) Table 4.2 indicates that dividend announcement of Asia Capital Limited but once this company announced their dividend and its par value is Rs 10 but Cum dividend price was reduced to Rs 9.5. 4.3.2Central Finance Limited Table 4.3 Central Finance Limited dividend announcement Rates Announcement date 10% 8-Mar-02 Date of Ex dividend 16-Mar02 25-Jul-02 13-Oct-02 28-Mar02 4-Aug-02 Payment Cum price 149 120 Ex price 150 120 50 DPS dividend dividend 3.6 3.6 3.6

1stinterim 10% 2nd 18-Jul-02 Interim 8% 3rd & 20-Sep-02 final

25-Oct-02 52

29

5%

1st 13-Mar-03

16-Mar03 6-Aug-03 16-Oct-03 11-Mar04 18-Jul-04 27-Sep-04 21-Mar05 21-Jul-05

28-Mar03 16-Aug-

32 27.75

32 26.5 35 51 59.25 95 100 162

1.5 1.5 1.5 1.5 1.75 1.75 1.75 3

Interim 5% 2nd 1-Aug-03 Interim 5% Final 5% Interim 5% 20-Sep-03 7-Mar-04

03 26-Oct-03 35.25 22-Mar50.5 04 31-Jul-04 9-Oct-04 2-Apr-05 31-Jul-05 59.75 95 98 161.25

2nd 10-Jul-04

Interim 7.5% 1st 4-Sep-04 interim 7,5% 1st 19-Mar-05 interim 10% 2nd 14-Jul-05 Interim 12.5% Final 7.5% 28-Aug-05 1st 20-Nov-05

16-Sep-05 1-Dec-05

26-Sep-05 219 12-Dec255.5

215 249.75

3 3

Interim 05 (Source: Guide to Milanka Company 2005) Table 4.3 mentioned that dividend announcement of Central Finance Limited. During the beginning but gradually their Cum dividend price and DPS were reduced and in 2005 they received sudden increase in their Cum dividend and DPS due to prevailing peaceful situation.

4.3.3 Commercial Bank of Ceylon Limited Table 4.4 Commercial Bank of Ceylon Limited dividend announcement Rates Announcement date 28% Final 14% Interim 31% Final 14%Interim 31%Final 14%Interim 1-Feb-02 4-Dec-02 29-Jan-03 3-Dec-03 29-Jan-04 2-Dec-04 Date of Ex dividend 21-Mar-02 12-Dec-02 19-Mar-03 11-Dec-03 15-Mar-04 10-Dec-04 31-Mar-02 22-Dec-02 29-Mar-03 21-Dec-03 27-Mar-04 23-Dec-04 Payment Cum dividen d price 106.50 86.00 98.00 145.00 150.00 200.00 Ex dividen d price 105.00 90.00 95.00 140.00 148.00 200.00 4.82 4.82 4.82 4.82 5.29 5.29 DPS

30

32%Final 6-Feb-05 17-Mar-04 18%Interim 1-Dec-05 11-Dec-05 (Source: Guide to Milanka Company 2005)

28-Mar-05 23-Dec-05

174.00 150.75

174.75 145.00

6.02 6.02

Table 4.4 indicates that dividend announcements of Commercial Bank Of Ceylon Limited. In this table DPS is increasing year to year but there are increasing and some times decreasing trend in Cum dividend price. Here DPS is not influenced to the movement of their Cum dividend price. Mostly when they announce the interim dividend that influence on share price of this company to some extent. This company has good DPS in 2005 so that, it has the first rank among other companies 4.3.4 DFCC Bank Table 4.5 DFCC Bank dividend announcement Rates Announce ment date Date of Ex dividend 6-Jul-02 9-Jul-03 4-Jul-04 4-Jul-05 Payment Cum dividen d price 105.00 88.00 180.00 300.75 Ex dividen d price 104.00 67.00 177.00 300.00 4.00 4.50 3.75 5.50 DPS

40% Final 15-May-02 26-Jun-02 45% Final 25-May-03 15-Jun-03 50% Final 6-Jun-04 21-Jun-04 55% Final 9-Jun-05 24-Jun-05 (Source: Guide to Milanka Company 2005)

Table 4.5 shows that dividend records of DFCC Bank. In this table DPS influence of share price of this company. When they introduce the high dividend per share they rear high share price of their share. Sudden change in DPS has reduced their share price and not only has the commercial bank in Sri Lanka had good dividend per share. Here there is positive relationship between the DPS and Cum dividend prices. 4.3.5 Hatton National Bank Limited Table 4.6 Hatton National Bank Limited dividend announcement Rates Announce ment date 20% Final 20% Interim 20% Final 22-Feb-02 1-Dec-02 23-Feb-03 Date of Ex dividend 8-Mar-02 13-Dec-02 7-Mar-03 6-Apr-02 27-Dec-02 6-Apr-03 Payment Cum dividen d price 85.00 48.00 43.75 Ex dividend price 84.00 48.00 41.00 5.20 5.20 5.20 DPS

31

10% Interim 4-Jan-03 23-Jan-04 10% Interim 4-Jan-04 23-Jan-04 10% Interim 4-Jan-04 23-Jan-04 5% Final 25-Feb-04 8-Mar-04 5% Final 25-Feb-04 8-Mar-04 15% Interim 29-Nov-05 9-Dec-04 15% Final 26-Mar-05 24-Apr-05 20% Interim 27-Nov-05 9-Dec-05 (Source: Guide to Milanka Company 2005)

6-Feb-04 6-Feb-04 6-Feb-04 5-Apr-04 5-Apr-04 20-Dec-04 7-May-05 19-Dec-05

44.00 44.00 44.00 46.00 46.00 77.50 80.25 76.25

44.00 44.00 44.00 44.00 44.00 75.50 79.75 77.00

5.20 1.50 1.50 1.50 1.50 1.50 1.50 1.50

In this table 4.6 shows that sudden dividend drop in 2004 but there is no response in share price but in 2005 DPS is the same and share price has increased. So there is no relationship between DPS and share price. The investors invest in this company to reap the capital gain. The prices depend on fortune of the company and expectation of investors. 4.3.6 Lanka Orix Leasing Company limited Table 4.7 Lanka Orix Leasing Company limited dividend announcement Rates Announce ment date 10% Interim 12.5% Final 15% Interim 10% 2nd 27-Jan-02 16-May-02 19-Sep-02 28-Feb-03 Date of Ex dividend 11-Feb-02 20-Jun-02 26-Sep-02 5-Mar-03 15-Jun-03 30-Oct-03 6-Feb-04 23-Feb-02 30-Jun-02 6-Oct-02 16-Mar-03 27-Jun-03 12-Nov-03 18-Feb-04 Payment Cum dividen d price 30.00 33.00 65.00 21.00 30.50 44.00 51.50 64.00 75.00 71.00 103.25 55.50 Ex dividend price 29.50 32.00 66.00 21.00 35.00 45.00 51.50 63.00 70.00 62.25 55.50 57.00 2.25 2.25 2.25 3.00 3.00 3.00 3.00 3.25 3.25 1.75 1.75 1.75 DPS

Interim 12.5% Final 10-May-03 7.5% Interim 25-Oct-03 10% 2nd 29-Jan-04

Interim 15% Final 16-May-04 17-Jun-04 28-Jun-04 7.5% Interim 26-Sep-04 7-Oct-04 17-Oct-04 10% Interim 23-Jan-05 28-Jan-05 10-Feb-05 15% Final 24-Apr-05 18-Jun-05 30-Jun-05 3.75% Intrim 25-Sep-05 6-Oct-05 17-Oct-05 (Source: Guide to Milanka Company 2005)

32

In this table 4.7 shows that in 2003 the company has announced the dividend of 3.00 more than earlier but share price also increase. In suddenly they have reduced their dividend at 05 and share price also decreases 4.3.7 National Development bank Table 4.8 National Development bank dividend announcement Rates Announce ment date Date of Ex dividend 31-Mar-02 5-Apr-03 16-Jul-03 5-Apr-04 23-Apr-05 Payment Cum dividen d price 77.50 43.00 36.50 76.00 88.00 Ex dividend price 73.00 36.50 34.00 74.00 81.00 4.50 4.50 4.50 8.50 8.50 DPS

45% Final 2-Feb-02 21-Mar-02 45% Final 2-Feb-03 26-Mar-03 40% Final 26-Jun-03 3-Jun-03 45% Final 1-Feb-04 22-Mar-04 55% Final 6-Feb-05 7-Apr-05 (Source: Guide to Milanka Company 2005)

In this table indicate that according to the dividend announcement of this company their share price also reflects.

4.3.8 Nation Trust Bank Table 4.9 Nation Trust Bank dividend announcement Rates Announcement date Date of Ex Payment Cum dividend price 15.00 15.50 Ex dividend price 15.00 15.00 0.50 0.50 DPS

dividend 5% Final 5-Mar-04 22-Mar-04 4-Apr-04 10% Final 4-Mar-05 25-Mar-05 4-Apr-05 (Source: Guide to Milanka Company 2005)

Table 4.9 indicates that Nation Trust Bank does not has good dividend records because there was quoted recently but their Cum dividend price has been increasing.

4.3.9 Sampath Bank Limited Table 4.10 Sampath Bank Limited dividend announcement

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Rates

Announce ment date

Date of Ex dividend

Payment

Cum divide nd price 45.25 60.00 36.75 61.00 68.00 115.50

Ex dividend price 45.25 60.25 35.00 62.00 66.50 115.00

DPS

17.5% Final 4-Jan-02 24-Jan-02 3-Feb-02 17.5% Final 28-Apr-02 27-Jun-02 7-Jul-02 17.5% Final 1-Jun-03 13-Jun-03 9-Jul-03 17.5% Final 4-Mar-04 7-Mar-04 4-Apr-04 20% Final 6-Mar-05 12-Mar-05 7-Apr-05 15% Final 21-Oct-05 23-Oct-05 5-Nov-05 (Source: Guide to Milanka Company 2005)

1.75 1.75 1.75 1.75 2.00 2.00

Table 4.10 says that good dividend records of Sampath Bank Limited. Mostly dividend per share influence of their Cum dividend prices. When they announce the high dividend per share the investor demand their share so there is positive relationship between the Cum dividend price and Dividend per shares. 4.3.10 Seylan Bank Limited Table 4.11 Seylan Bank Limited dividend announcement Rates Announce ment date Date of Ex dividend 10% Final 12% Final 27-Mar-02 5-Mar-03 5-May-02 18-Apr-03 19-May-02 30-Apr-03 5-Apr-04 31-Mar-05 Payment Cum divide nd price 25.00 18.50 24.00 46.00 Ex dividend price 25.00 17.50 24.50 45.00 1.20 1.20 1.26 1.63 DPS

12.5% Final 19-Feb-04 22-Mar-04 15% Final 19-Feb-05 19-Mar-05 (Source: Guide to Milanka Company 2005)

Table 4.11 indicates that recently they have good performance in their dividend records. Cum dividend price reflects according to Dividend per shares. If DPS increase Cum dividend price also increase and vice verse.In dividend announcement the banking sectors have positive relationship between DPS and Cum dividend price. Because of that the banking sector dominant in the Share market of Sri Lanka.

4.3.11 Distilleries Company of Sri Lanka Limited 34

Table 4.12 Distilleries Company of Sri Lanka Limited dividend announcement Rates Announce ment date Date of Ex dividend Payment Cum divide nd 40% Final 20-Sep-02 25-Oct-02 42.5% Final 24-Sep-03 23-Oct-03 45% Final 30-Sep-04 10-Oct-04 45% Final 14-Oct-05 15-Oct-05 (Source: Guide to Milanka Company 2005) 15-Nov-02 13-Nov-03 30-Oct-04 27-Oct-05 price 4.50 5.50 10.00 29.00 Ex dividend price 4.25 5.00 9.25 28.75 0.40 0.43 0.45 0.45 DPS

In this table explains that according to the dividend announcement share price reflect but their share price are less than their par value

4.3.12 Lanka Milk Foods Limited Table 4.13 Lanka Milk Foods Limited dividend announcement Rates Announce ment date Date of Ex dividend Payment Cum divide nd 12.5% Final 28-Sep-02 6-Oct-02 05% Final 21-Sep-03 24-Oct-03 10% Final 25-Sep-04 31-Oct-04 15% Final 26-Sep-05 20-Oct-05 (Source: Guide to Milanka Company 2005) positive. 4.3.13 Aitken Spence and Company Limited Table 4.14 Aitken Spence and Company Limited dividend announcement Rates Announce ment date Date of Ex dividend Payment Cum divide nd 15% Interim 18-Feb-02 3-Mar-02 15-Mar-02 price 121.00 Ex dividend price 121.00 3.50 DPS 30-Oct-02 19-Nov-03 13-Nov-04 6-Nov-05 price 8.50 7.50 12.25 36.00 Ex dividend price 6.75 7.00 10.75 32.75 1.25 0.50 1.00 1.50 DPS

Table 4.13 describes that movement of dividend announcement and share is

35

20% Final 27-Apr-02 14-Jun-02 15% Interim 27-Feb-03 13-Mar-03 25% Final 02-May-03 19-Jun-03 15% Interim 05-Mar-04 15-Mar-04 25% Final 15-May-04 17-Jun-04 25% Interim 10-Feb-05 27-Feb-05 25% Final 28-Apr-05 18-Jun-03 (Source: Guide to Milanka Company 2005)

28-Jun-02 23-Mar-03 29-Jun-03 27-Mar-04 28-Jun-04 11-Mar-05 30-Jun-05

110.25 80.00 78.00 90.00 120.00 130.00 195.00

110.25 78.00 78.00 94.00 119.75 130.00 199.75

3.50 4.00 4.00 4.00 4.00 2.00 2.00

In this table explains that sudden interment of dividend announcement does not affect the share price. But conversely low dividend announcement price of share is increasing 4.3.14 Hayleys Limited Table 4.15 Hayleys Limited dividend announcement Rates Announce ment date Date of Ex dividend 15% Interim 25-Apr-02 28-Apr-02 11-May-02 15% Final 22-May-02 20-Jun-02 30-Jun-02 15% Interim 9-Apr-03 18-Apr-03 30-Apr-03 20% Final 18-May-03 18-Jun-03 28-Jun-03 17.5% Interim 23-Apr-04 29-Apr-04 10-May-04 17.5% Final 17-May-04 17-Jun-04 28-Jun-04 17.5% Interim 22-Apr-05 28-Apr-05 9-May-05 17.5% Final 19-May-05 17-Jun-05 27-Jun-05 (Source: Guide to Milanka Company 2005) Payment Cum divide nd price 87.00 90.00 78.75 75.00 121.25 142.75 150.00 187.25 Ex dividend price 87.00 90.00 78.50 75.00 121.50 144.00 150.00 190.00 3.00 3.00 3.50 3.50 3.50 3.50 3.50 3.50 DPS

In this table clearly shows that share price gradually increasing even though not change in dividend announcement. Investor demand to this share to get capital gain on selling.

4.3.15 John Keels Limited Table 4.16 John Keels Limited dividend announcement Rates Announcement date 10%interim 2/14/20023 Date of Ex dividend 23-Feb36 10-Mar-02 Payment Cum dividen d price 250 Ex dividen d price 150 2.76 DPS

20%Final 2-May-02 10%interim 20-Feb-03 10%Final 6-Jun-03

02 9-Jun-02 26-Feb03 12-Jun03 5-Mar-04 11-Jun04 10-Feb-

30-Jun-02 8-Mar-03 29-Jun-03 22-Mar-04 28-Jun-04 7-Mar-05

108 36.5 33.5 56 68.75 72 100.75

107 35.5 32.5 56.25 65.5 71 83

2.76 1.93 1.93 1.79 1.79 1.65 1.65

10%interim 28-Feb-04 10%Final 22-May-04 10%interim 10-Feb-05

04 10%Final 3-Jun-05 3-Jun-05 27-Jun-05 (Source: Guide to Milanka Company 2005)

In this table describes that dividend announcement of this company is gradually reducing but share price is increasing. Here they purchase this share to receive the capital gain 4.3.16 Aitken Spence Hotel Holding Limited Table 4.17 Aitken Spence Hotel Holding Limited dividend announcement Rates Announcement date 10%Final 12%Final 7.5%Final 7.5%Final 10%Interim 9-May-02 25-May-03 16-May-04 17-May-04 2-Jun-05 Date of Ex dividend 14-Jun-02 19-Jun-03 17-Jun-04 18-Jun-04 18-Jun-05 28-Jun-02 29-Jun-03 28-Jun-04 29-Jun-04 18-Mar05 Payment Cum price 30 18 36.25 36.25 59.75 Ex price 30 18 36.25 36.25 62 DPS dividend dividend 1 1.2 0.75 0.75 1

(Source: Guide to Milanka Company 2005)

This table 4.17 shows that sudden increment of dividend reflect more than constant level dividend. 4.3.17 Caltex Lubricants Lanka Limited Table 4.18 Caltex Lubricants Lanka Limited dividend announcement Rates Announceme Date of Payment Cum Ex DPS

37

nt date 41.5% Final 11.5% Interim 11.5% Interim 11.5% Interim 41.5% Final 11.5% Interim 11.5% Interim 11.5% Interim 41.5% Final 11.5% Interim 11.5% Interim 11.5% Interim 50% 3rd 15-Dec-01 7-Mar-02 28-Jun-02 29-Sep-02 27-Dec-02 23-Mar-03 9-Jul-03 11-Oct-03 19-Dec-03 12-Feb-04 4-Jun-04 6-Sep-04 2-Jan-05

Ex dividend 27-Dec-01 21-Mar-02 4-Jul-02 9-Oct-02 3-Jan-03 29-Mar-03 12-Jul-03 16-Oct-03 28-Dec-03 4-Mar-04 11-Jun-04 16-Sep-04 10-Jan-05 7-Jan-02 31-Mar-02 14-Jul-02 20-Oct-02 17-Jan-03 10-Apr-03 24-Jul-03 26-Oct-03 10-Jan-04 14-Mar-04 21-Jun-04 27-Sep-04 24-Jan-05 31-Mar-05 12-Nov-05 31-Dec-05

dividend dividend price 73.75 62.00 61.00 61.00 50.00 47.00 51.00 64.00 78.00 76.50 108.00 118.75 122.50 107.75 110.00 74.75 price 68.00 62.00 60.00 61.00 45.75 46.00 51.00 61.00 74.00 77.00 102.00 119.00 120.00 103.00 102.00 70.25 7.60 7.60 7.60 7.60 7.60 7.60 7.60 7.60 7.60 7.60 7.60 7.60 7.30 7.30 7.30 7.30

Interim 50% Final 14-Mar-05 19-Mar-05 60% Intrim 22-Oct-05 31-Oct-05 30% Intrim 16-Dec-05 15-Dec-05 (Source: Guide to Milanka Company 2005)

Table 4.18 shows that positive relationship between the DPS and Cum dividend price. Their Cum dividend price and DPS continuously increasing. In 2005 DPS is the same but Cum dividend pricing is reducing due to political condition of Sri Lanka

4.3.18 Richard Pieris & Company Limited Table 4.19 Richard Pieris & Company Limited Dividend Announcement Rates Announcement date 27% Final 15% Final 18% Interim 7% Final 20% 16-May-02 17-May-03 5-Mar-04 15-May-04 20-May-05 Date of Ex dividend 20-Jun-02 19-Jun-03 14-Mar-04 17-Jun-04 17-Jun-05 30-Jun-02 29-Jun-03 26-Mar04 28-Jun-04 27-Jun-05 Payment Cum price 50 65 105 115.5 96 Ex price 52 65 90 115.5 96 DPS dividend dividend 2.7 3 2.5 2.5 0

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Final (Source: Guide to Milanka Company 2005) Table 4.19 indicates that Cum dividend not influence the DPS of this company. But this Cum dividend may depend on the reputation of the company because in 0 DPS investors are paying 96 to shares of this company. 4.3.19 Royal Ceramic Lanka Limited Table 4.20 Royal Ceramic Lanka Limited dividend announcement Rates Announcement date 15% Final 15% Interim 35% Final 10% 7-Feb-02 11-Sep-02 27-Feb-03 25-Sep-03 Date of Ex dividend 14-Feb-02 10-Oct-02 14-Mar-03 12-Nov-03 1-Apr-04 17-Sep-04 24-Feb-02 23-Oct-02 Payment Cum dividen d price 16 17.75 Ex dividen d price 14.5 16.75 14.25 20 15.75 18.25 19 3 3 5 5 5 2 1 DPS

16-Mar-03 16 22-Nov-03 24.75 11-Apr-04 30-Sep-04 23-Jun-05 17 19.25 20.25

Interim 10% 2nd 25-Mar-04 Interim 10% 1st 24-Jul-04

Interim 10% Final 29-May-05 11-Jun-05 (Source: Guide to Milanka Company 2005)

4.3.20 Sri Lanka Telecom Limited Table 4.21 Sri Lanka Telecom Limited dividend announcement Rates Announcement date 3% 10-Jan-05 Date of Ex dividend 29-Jan-05 39 11-FebPayment Cum price 13.25 Ex price 12.75 DPS dividend dividend 0.3

Interim 3% Final

05 29-Apr-05 22-May-05 05 03-Jun- 13.25 13 0.3

(Source: Guide to Milanka Company 2005)

Table 4.20 shows that Sri Lanka Telecom Limited has not have good divined records because of recently quoted to CSE.

4.4 Movement of Milanka Price Index (Quarterly Basis)

The increase or decrease in dividend per share of Milanka Companies for last four years can be analyzed as follows. Table 4.21 Change in MPI & DPS Year Quarter Total Dividend per Share 2002 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 46.48 38.4 23.1 17.62 48.72 29.08 18.93 24.99 44.94 29 12.8 7.79 36.15 21.7 8.2 28.12 -17.38 -39.84 -23.72 176.50 -40.31 -34.90 32.01 79.83 -35.47 -55.86 -39.14 364.06 -39.97 -62.21 242.93 796.1 853.9 859.3 698.5 645.1 641.1 607.4 1031 1006.7 1222 1463.9 1374.6 1259.6 2062.5 2394.8 1897.8 7.26 0.63 -18.71 -7.64 -0.62 -5.26 69.74 -2.36 21.39 19.80 -6.10 -8.37 63.74 16.11 -20.75 %Change MPI % Change

2003

2004

2005

Table 4.22 describes the movement of total dividend per share most of the time it is in reducing trend. In first Quarter they announce higher dividend and next quarter low dividend. In first quarter they introduce higer dividend to attract investors. Share price movement in response to dividend announcement in first quarter is positive and high but in the next quarter is negative except in the fourth quarter of 2003. 4.5 Analysis 40

With the aid of the SPSS 12.0 version: the Pearsons correlation coefficient (r) is calculated to determine the relationship between dividend per share and share price of the firm. Both of which have been measured at the interval level that four years. For the purpose of analysis and testing significant of association between two variables the output consists Pearsons correlation coefficient is significant at two-tailed at the 0.05 and 0.01 levels. Table 4.5.1 MPI & Total DPS Pearsons Correlation Coefficient DPS DPS MPI Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 1.000 . 16 -.473 .064 16 MPI -.473 .064 16 1.000 . 16

In MPI & Total DPS, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is (.473). Where the test of significant on two-tailed is 0.028 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 13 times. The Pearsons correlation Output indicates between 0.6 and 1.0. Table 4.5.2 Central Finance Limited Pearsons Correlation Coefficient Ex Dividend Ex Dividend Pearson Correlation 1.000 Sig. (2-tailed) . N 13 DPS Pearson Correlation .608 Sig. (2-tailed) .028 N 13 Correlation is significant at the 0.05 level (2-tailed). DPS .608 .028 13 1.000 . 13

In Central Finance Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is 0.608. Where the test of significant on two-tailed is 0.028 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 13 times. The Pearsons correlation Output indicates between 0.6 and 1.0.

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Table 4.5.3 Commercial Bank Limited Pearsons Correlation Coefficient Ex Dividend DPS Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Ex Dividend 1.000 . 8 .623 .099 8 DPS .623 .099 8 1.000 . 8

In Commercial Bank of Ceylon Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is 0.623. Where the test of significant on two-tailed is 0.099 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 08 times. The Pearsons correlation Output indicates between 0.6 and 1.0. Table 4.5.4 DFCC Bank Pearsons Correlation Coefficient Ex Dividend Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Ex Dividend 1.000 . 4 .653 .347 4 DPS .653 .347 4 1.000 . 4

DPS

In DFCC Bank, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is 0.653. Where the test of significant on two-tailed is 0.347 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 04 times. The Pearsons correlation Output indicates between 0.6 and 1.0. Table 4.5.5 Hatton National Bank Limited Pearsons Correlation Coefficient Ex Dividend DPS Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Ex Dividend 1.000 . 11 -.115 .736 11 DPS -.115 .736 11 1.000 . 11

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In Hatton National Bank Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is (.115). Where the test of significant on two-tailed is 0.736 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 11 times. The Pearsons correlation Output indicates between 0.6 and 1.0. Table 4.5.6 Lanka Orix Leasing Company Pearsons Correlation Ex Dividend DPS Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Ex Dividend 1.000 . 12 -.107 .741 12 DPS -.107 .741 12 1.000 . 12

In Lanka Orix Leasing Company, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is (.107). Where the test of significant on two-tailed is 0.741 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 12 times. The Pearsons correlation Output indicates between 0.6 and 1.0. Table 4.5.7 National Development bank Pearsons Correlation Coefficient Ex Dividend DPS Ex Dividend Pearson Correlation 1.000 .721 Sig. (2-tailed) . .170 N 5 5 DPS Pearson Correlation .721 1.000 Sig. (2-tailed) .170 . N 5 5 In National Development bank, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is .721. Where the test of significant on two-tailed is 0.170 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 05 times. The Pearsons correlation Output indicates between 0.6 and 1.0. Table 4.5.8 Sampath Bank Limited Pearsons Correlation Coefficient Ex Dividend Pearson Correlation Sig. (2-tailed) N Ex Dividend 1.000 . 6 DPS .750 .086 6

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DPS

Pearson Correlation Sig. (2-tailed) N

.750 .086 6

1.000 . 6

In Sampath Bank Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is .750. Where the test of significant on two-tailed is 0.086 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 06 times. The Pearsons correlation Output indicates between 0.6 and 1.0. Table 4.5.9 Seylan Bank Limited Pearsons Correlation Coefficient Ex Dividend Ex Dividend Pearson Correlation 1.000 Sig. (2-tailed) . N 4 DPS Pearson Correlation .966 Sig. (2-tailed) .034 N 4 * Correlation is significant at the 0.05 level (2-tailed). DPS .966 .034 4 1.000 . 4

In Seylan Bank Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is .966. Where the test of significant on two-tailed is 0.034 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 04 times. The Pearsons correlation Output indicates between 0.6 and 1.0. Table 4.5.10 Distilleries Company Limited Pearsons Correlation Ex Dividend Ex Dividend Pearson Correlation 1.000 Sig. (2-tailed) . N 4 DPS Pearson Correlation .631 Sig. (2-tailed) .369 N 4

DPS .631 .369 4 1.000 . 4

In Distilleries Company of Sri Lanka Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is .631. Where the test of significant on two-tailed is 0.369 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 04 times. The Pearsons correlation Output indicates between 0.6 and 1.0. 44

Table 4.5.11 Aitken Spence and Company Limited Pearsons Correlation Ex Dividend Pearson Correlation 1.000 Sig. (2-tailed) . N 8 DPS Pearson Correlation -.808 Sig. (2-tailed) .015 N 8 * Correlation is significant at the 0.05 level (2-tailed). Ex Dividend DPS -.808 .015 8 1.000 . 8

In Aitken Spence and Company Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is (.808) Where the test of significant on two-tailed is 0.015 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 08 times. The Pearsons correlation Output indicates between 0.6 and 1.0.

Table 4.5.12 Hayleys Limited Pearsons Correlation Coefficient Ex Dividend DPS Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Ex Dividend 1.000 . 8 .424 .295 8 DPS .424 .295 8 1.000 . 8

In Hayleys Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is .424. Where the test of significant on two-tailed is 0.295 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 08 times. The Pearsons correlation Output indicates between 0.6 and 1.0.

Table 4.5.13 John Keels Limited Pearsons Correlation Coefficient Ex Dividend Ex Dividend Pearson Correlation 1.000 Sig. (2-tailed) . N 7 DPS Pearson Correlation .485 Sig. (2-tailed) .270

DPS .485 .270 7 1.000 .

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In John Keels Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is .485. Where the test of significant on two-tailed is 0.270 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 07 times. The Pearsons correlation Output indicates between 0.6 and 1.0. Table 4.5.14 Aitken Spence Hotel Holding Limited Pearsons Correlation Ex Dividend DPS Ex Dividend Pearson Correlation 1.000 -.290 Sig. (2-tailed) . .636 N 5 5 DPS Pearson Correlation -.290 1.000 Sig. (2-tailed) .636 . N 5 5 In Aitken Spence Hotel Holding Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is (.290). Where the test of significant on two-tailed is 0.636 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 05 times. The Pearsons correlation Output indicates between 0.6 and 1.0. Table 4.5.15 Caltex Lubricants Lanka Limited Pearsons Correlation Ex Dividend Ex Dividend Pearson Correlation 1.000 Sig. (2-tailed) . N 15 DPS Pearson Correlation -.532 Sig. (2-tailed) .041 N 15 * Correlation is significant at the 0.05 level (2-tailed). DPS -.532 .041 15 1.000 . 15

In Caltex Lubricants Lanka Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is (.532) Where the test of significant on two-tailed is 0.041 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 15 times. The Pearsons correlation Output indicates between 0.6 and 1.0. Table 4.5.16 Richard Pieris & Company Limited Pearsons Correlation Ex Dividend DPS

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Ex Dividend DPS

Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N

1.000 . 6 -.467 .350 6

-.467 .350 6 1.000 . 6

In Richard Pieris & Company Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is (.467) Where the test of significant on two-tailed is 0.350 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 6 times. The Pearsons correlation Output indicates between 0.6 and 1.0.

Table 4.5.17 Royal Ceramic Lanka Limited Pearsons Correlation Ex Dividend DPS Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Ex Dividend 1.000 . 7 -.324 .478 7 DPS -.324 .478 7 1.000 . 7

In Royal Ceramic Lanka Limited, the output indicates on the above table with the help of the SPSS: that the Pearsons correlation coefficient is (.324). Where the test of significant on two-tailed is 0.478 at the flag of significant level 0.05. In this sector also consists four years data but dividend announcement is 6 times. The Pearsons correlation Output indicates between 0.6 and 1.0. 4.6 Hypothesis testing Now researcher can test hypothesis of this study one by one according to the above the analysis of the Pearsons correlation Output. it was calculated by using SPSS 12.0 Version packing function programme.The following is the hypothesis is developed in chapter three.

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There is a positive relationship between dividend announcement and share price. These companies have positive relationship between dividend announcement and share price that are Central Finance Company Limited, Commercial Bank of Ceylon Limited, DFFC Bank, National Development Bank, Sampath Bank, Seylon Bank, Distilleries Company of Sri Lanka,, Hayleys Limited, Jhon Kells Holding Limited. Therefore the hypothesis can be accepted at this place for these companies. Other companies have negative relationships between share price and dividend announcement. Therefore, the researcher rejects the hypothesis for these companies and accepting the alternative hypothesis that there is negative relationship between dividend announcement and share price Hatton National Bank, Lanka Orix Leasing Company Limited, Caltex Lubricants Lanka Limited, Aitken Spence and Company Limited. 4.7 Conclusions This chapter explained data presentation and analysis of the research. In general almost all profit making listed companies declare dividend each year, since the dividend policy significantly influence the share price of a profit making companies.

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Chapter v FINDINGS, CONCLUSION AND RECOMMENDATIONS 5.1. Introduction

This chapter is the final part of this research which is consists of what findings and conclusions have found in data presentation and analyzing chapter, explain the relationship between the dividend and share price and recommendation to be forwarded.

5.2. Findings
In this research there are sudden dividend increases, sudden dividend drop and constant level of dividend behaviors. The sudden increase DPS has highest positive significant price effect on stock price. However sudden drop DPS positive impact on stock price and constant level DPS shows significant response on share price. Sudden changes have more effect on stock price than constant level of DPS and banking sectors have higher price rather than other sectors.

5.3 Conclusions

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The conclusion of research is very important, because the main objective of a research is to find out solutions for the problem. Therefore the based on the previous chapters from introduction to the data analysis following conclusions have been arrived at... According to this research it is concluded that dividend announcement of quoted companies of CSE dont not have a significant influence on share prices of the companies. The hypotheses are taken and tested. The final result is there are positive correlations among the variables of some companies such as According to the findings the when the dividend per share increases the share prices (MPI) decreases .However this will not happen in a rational market. Because a rational investors objective is to maximize their return. Further it must be noted that the research has mainly focused on Milanka Companies and some of these did not have good dividend records in the past. Further most of the companies in the Milanka are newly entered companies such as Srilanka Telecom, NDB Bank, Nation Trust bank, Asia Capital and Ceylon Hospital Corporation etc. these companies have not made any dividend announcement but share price of these companies significantly moved due to the future earnings potential. According these companies had high PE ratios. However the companies which had very good dividend records over the past few years are positively correlated dividend per share and the share prices, some companies are negative correlated and overall these companies are negative impact on between them. this indicates that the share price are heavily influenced by other factors such as economic conditions of the country, political stability, peace process, future growth and earnings potential companies and interest rate etc other than short term dividend. Further in CSE the most investors rely on the recommendation of the stock brokers when dealing with securities. Therefore the brokers might advise on long term growth prospectus of the company rather than short term dividend. Therefore the share price might have already absorbed the expected dividend of companies. Therefore it can be concluded that the share prices of CSE are not significantly influenced by the dividend policy.

5.3 Recommendations
Based on the conclusions of this research following recommendations are made

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The factors other than announcement such as economical condition and other market condition also have impact on share prices. Therefore if the future researches are interrelated with the economical, market and regional environment the results would be more accurate, information could be obtained. Security Exchange Commission of Sri Lanka should increase its monitoring activities on the stock market to ensure that listed companies publish important information timely and regularly. This study can be done using Event study to find the efficient reaction of the investors and that tell to investor the market efficient. Further the most investors are preferred to make capital gain rather than short term dividend. Further the influence of dividend announcement on share prices was analyzed using Milanka Companies. However further analysis can be done using non Milanka Companies, which may give a different conclusions.

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