Relationship Between Dividend Payout and Firm Performance

This dissertation investigates the relationship between dividend payout and firm performance of listed banks in Sri Lanka. The research, conducted by K.K.N. Dilhari, utilizes data from the annual reports of five banks listed on the Colombo Stock Exchange (CSE) from 2008 to 2012. The study employs a correlation research design and regression analysis to examine the impact of dividend payout on firm performance, measured by return on equity (ROE) and return on assets (ROA). The dissertation includes a literature review on dividend policies and firm performance, methodology, data analysis, and conclusions. The findings suggest a significant and positive relationship between firm performance and dividend payout, emphasizing the importance of dividend policy in enhancing shareholder value. The study also identifies key factors influencing this relationship and provides recommendations for financial managers. The dissertation is a valuable resource for understanding the dynamics of dividend policies in the Sri Lankan banking sector.

THE RELATIONSHIP BETWEEN DIVIDEND
PAY OUT AND FIRM PERFORMANCE
Listed banks in Sri Lanka
By
K, K, N, Dilhari
MF/2009/2528
Department of Accounting and Finance
February 2014
Dissertation Presented to the Faculty of Management and Finance
Of University of Ruhuna
In Partial Fulfillment of the Requirements for the Degree of
Bachelor of Business Administration

i
Acknowledgement
My dissertation is ―Relationship between dividend payout and firm performance in
listed bank Sri Lanka‖.It is the result of enthusiastic effort of my undergraduate level.
Thuse I present my dissertation to my dissertation supervisor
Mr. H.V.D.I.Abeywickrama and Mr.Manjula K.Wanniarachchithe Head of the
Department of Accounting and Finance and all lecture panel of the department of
Accounting and Finance.
Thank them for their guidelines. Especially I thank to my dissertations supervisor
Mr.H.V.D.I.Abeywickrama for providing vital guiding to do success my desecration
from beginning to end.
I wish I could not mention by names. Which all have helped me. So thank you all. My
dissertation is presented for yours.

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Table of Contents
Acknowledgement ...................................................................................................... i
List of Tables............................................................................................................ iv
List of Figures ........................................................................................................... v
List of Acronyms ...................................................................................................... vi
Declaration .............................................................................................................. vii
Certification ........................................................................................................... viii
Abstract .................................................................................................................... ix
CHAPTER 01 ............................................................................................................ 1
INTRODUCTION ..................................................................................................... 1
1.1 Research Background ...................................................................................... 1
1.2 Research problem ............................................................................................ 3
1.3Research question and objectives ...................................................................... 4
1.3.1Research questions ..................................................................................... 4
1.3.2 Research objectives ................................................................................... 4
1.4 Methodology .................................................................................................... 5
1.4.1 Research design ........................................................................................ 5
1.4.2 Research population and sampling ............................................................ 5
1.4.3 Data collection .......................................................................................... 5
1.4.4 Data analysis ............................................................................................ 5
1.5 Significance of the study. ................................................................................. 6
1.6 Limitation of the study. .................................................................................... 7
CHAPTER 02 ............................................................................................................ 8
LITERATURE REVIEW .......................................................................................... 8
2.1 Introduction ......................................................................................................... 8
2.2 Introduction of Dividends. ................................................................................... 8
2.2.1 Definitions of dividends ............................................................................. 8
2.2.2 Dividend payout ...................................................................................... 11
2.2.3 Dividend pay out ratio ............................................................................. 14
2.3 Introduction of Performance........................................................................... 16
2.3.1Definitions of Performance ...................................................................... 16
2.3.2 Various type of Firm Performance .......................................................... 16
2.3.3 Measures of analyzing Firm Performance ............................................... 17

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2.4 Dividend Payout and Profitability .................................................................. 20
2.5 Relationship between Dividend Payout and Firm Performance ....................... 22
CHAPTER 03 .......................................................................................................... 24
METHODOLOGY .................................................................................................. 24
3.1 Introduction ................................................................................................... 24
3.2 Research Design ............................................................................................ 24
3.2 Target population and sampling procedure ..................................................... 24
3.3 Data Collection. ............................................................................................. 25
3.4 Data Analysis and Presentation. ..................................................................... 25
3.4.1Regression analysis .................................................................................. 25
3.5 Conceptual framework ................................................................................... 26
3.6 Research Organizations .................................................................................. 28
3.6.1. Commercial Bank of Ceylon PLC ........................................................... 28
3.6.2. DFCC Vardhana Bank PLC ................................................................... 29
CHAPTER 04 .......................................................................................................... 30
DATA ANALYSIS ................................................................................................. 30
4.1 Introduction ....................................................................................................... 30
4.1Return on equity .......................................................................................... 31
4.2Return on assts. ........................................................................................... 32
4.3 Dividend Cover .......................................................................................... 32
CHAPTER 05 .......................................................................................................... 36
CONCLUSION ....................................................................................................... 36
5.1Introduction .................................................................................................... 36
5.2.1 Relationship between dividend cover with Return on assts and Return on
equity. .............................................................................................................. 36
5.2.2 Relationship between dividend pay out ratio with Return on assts and
Return on equity. .............................................................................................. 37
5.3 Conclusion of the research finding ................................................................. 38
5.4 Recommendations .......................................................................................... 38
References ............................................................................................................... 39

iv
List of Tables
Page No
3.1 Research Organizations…………………………………………………...28
4.1-Summary of Descriptive Analysis Results……………………………......30
4.2- Summary of Regression analysis Results………………………………...33
4.3-Summary of Regression Analysis Results………………………………...34
4.4-Summary of Regression Analysis Results…………………………………34
4.5-Summary of Regression Analysis Results………………………………....35

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List of Figures
Page No
3.1 Conceptual Frameworks.....................................................................26
4.1Return on equity……………………………………….…………..31
4.2Return on assts…………………………………………………….32
4.3 Dividend Cover……………………………………………………32
4.4Dividend pay out ratio……………………………………………..33

vi
List of Acronyms
ROA-Return on assts
ROE-Return on equity
ROI-Return on investment
MM-TheoryofMillerandModigliani

vii
Declaration
I hereby declare that this dissertation is my own work and effort and that, to the best
of my knowledge and belief, it contains no material previously published or written
by another person nor material which has been accepted for the award of any other
degree or diploma of the university or other institute of higher learning, except where
due acknowledgment has been made in the text.
Signature of the student: __ __
Name of the student: ___K.K.N.Dilhari__
Registration number of the student: __MF/2009/2528_
Date: _10.02.2014_

viii
Certification
This is to certify that this dissertation submitted by K.K.N.Dilhari(Mf/2009/2528 in
partial fulfillment of the requirement for the Degree of Bachelor of Business
Administration in Accounting at the Faculty of Management and Finance of the
University of Ruhuna is a record of the own work carried out by the student under my
supervision. This dissertation has been submitted with my approval.
____________________________
Supervisor
H.V.D.I.Abeywickrama
Department of Accounting and Finance
Faculty of management and Finance
University of Ruhuna
____________________________
Head, Department of Accounting and Finance
Faculty of management and Finance
University of Ruhuna

ix
Abstract
Several theories have been documented on the relevance and irrelevance of firm
performance. Many authors continue to come up with different findings from their
studies on the relevance of firm performance. This research sought to establish the
relationship between dividend payout and firm performance of listed banks in the
Colombo stock exchange of Sri Lanka.
Regression analysis was carried out to establish the relationship between
dividend payout and firm performance. The findings that firm performance was a
major factor affecting dividend payout. Their relationship was also strong and
positive. This therefore showed that firm performance was relevant. It can be
concluded, based on the findings of this research that firm performance is relevant and
that mangers should devote adequate time in designing a dividend policy that will
enhance the shareholders‘ value.
Key words: Dividend, earnings, payout policy,

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CHAPTER 01
INTRODUCTION
1.1 Research Background
In Sri Lanka, 289 companies are listed in the Colombo Stock Exchange (CSE),which
is the only stock exchange firm in the country.(Colombo Stock Exchange,2013) The
Colombo Stock Exchange (CSE) classified these companies into 20 business sectors
and eleven banks are listed in the Colombo Stock Exchange (CSE2013)
Enhancing shareholders‘ wealth and profit making are among the major
objectives of a firm (pandey, 2005).Shareholder‘s wealth is mainly influenced by
growth in sales, improvement in profit margin, capital investment decisions and
capital structure decision (Azhagaiah & Priya, 2008).Firm performance in this case
can be viewed as how well a firm enhances its shareholders; wealth and the capability
of a firm to generate earnings from the capital invested by shareholders. Dividend
policy can affect the value of the firm and in turn, the wealth of shareholders (Baker
et al.2001), Among the requirements that companies that want to be listed in the
Colombo Stock Exchange must fulfill, is that they should have a clear future dividend
policy (CSE 2013).This makes dividend policy worthy of serious management
attention.
The issues regarding dividend policies have been examined by many
researchers Linter (1956), Baker, Farrely and Edelman 1985) examined what factors
managers consider when determining the amount of dividend from the interview
survey of U.S firms. The results show that managers tend to consider future expected
profit, past dividend payment, and the availability of free cash flow when determining
current dividend, while the expenditure on investment is not considered. Rozeff
(1981) finds a negative relationship between dividend payout ratio and the factors
such as the growth rate of sales, insider ownership, and the beta of the firm. Crutchley
and Hansen (1989) find that the greater the size of the firm, the greater the risk of the
firm‘s operation, and the lower the costs of capital, the greater the dividend payout
ratio the firm has. Jensen, Solberg and Zorn (1992) find that the lower the level of

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insider ownership, the greater the level of profit, the lower the growth rate, and the
lower the level of investment, the greater the level of payout ratio the firm has.
This research examines relationship between dividend payout and firm
performance of Sri Lankan banks. From the annual reports data of Sri Lankan listed
banks during 2008-2012, Consistent with the general findings of the previous
research, the banks with higher profitability or performance pay more dividends. Find
more importantly, very strong, significant, and consistent evidences that the safer
banks pay more dividends. In the test for the partitioned sample, the tendency of the
banks with higher safety and profitability to pay more dividends is observed more
strongly and transparently. Considering that banks are subject to monitoring and
surveillance of regulator about their operation and riskiness in addition to the pressure
form capital market, dividend policy of banks would be more closely associated with
their riskiness than other types of industries. (Seok weon Lee, 2009)
Researchers have different views abut whether dividend payout materially
affects the long term share prices.Dhanani, (2005) who used a survey approach to
capture managerial views and attitudes of corporate managers regarding dividend
policy found that dividend policy serves to enhance corporate market value.
However,Farsio et al,(2004) argues that empirical studies that conclude a casual
relationship exists between earnings and dividends are based on short periods of time
and are therefore misleading to potential investors.
Therefore, dividends have no explanatory power to predict future earnings.
This research therefore tries to establish whether a relationship exists between
dividend payout and firm performance in Sri Lankan bank industry.