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 ...Read More

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

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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

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

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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_

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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

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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.

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1.2 Research problem
Despite the numerous studies (Arnott & Asness 2003; Farsio et al 2004 and Nissim &
Ziv 2001) that have been done, dividend policy remains an unresolved issue in
corporate finance. Several theories have been proposed to explain the relevance of
dividend policy and whether it affects firm value ,but there has not been a universal
agreement(Stulz,2000;Pandy ,2003;DeAngelo et al.,2006)Researchers Amidu
(2007),Lie (2005),Zhou & Ruland(2006),Howatt et al.(2009),continue to come up
with different findings about the relationship between dividend payout and firm
performance. A study by Amidu(2007) revealed that dividend policy affects firm
performance as measured by its profitability .The results showed a positive and
significant relationship between return on assets, return on equity, growth in sales and
dividend policy.Howatt et al.(2009) also concluded that positive changes in dividends
are associated with positive future changes in earnings per share .In contrast
,Lie(2005)argues that there is limited evidence that dividend paying firms experience
subsequent performance improvements.
A number of studies (Arnott & Asness 2003; Farsio et al 2004 and Nissim &
Ziv 2001) have been done with regard to dividend policy and firm performance,
especially in developed economies. Can the findings of those studies (Aivazian et al
2001 and AI –Haddad, et al., 2011) be replicated in emerging economies or infant
capital markets? In Sri Lanka few empirical studies have been done to establish the
relationship between dividend payout and firm performance. This study therefore
comes in to fill the void by establishing whether there is a relationship between
dividend payout and firm performance among listed banks in Sri Lanka.

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1.3Research question and objectives
1.3.1Research questions
The research is guided by the following research questions;
1. What relationship exists between dividend payout and firm performance among
listed organizations in Sri Lanka?
2. What are the main effected factors to take favorable decisions based on the
relationship between dividend payout and firm performance among listed
organizations in Sri Lanka?
3. What is the extent of the relationship between dividend payout and firm
performance among listed organizations in Sri Lanka?
1.3.2 Research objectives
The research is also guided by the following specific research objectives;
1. To study the relationship between dividend payout and firm performance among
listed organizations in Sri Lanka.
2. To understand main effected factors to take favorable decisions based on the
relationship between dividend payout and firm performance among listed
organization in Sri Lanka.
3. To analyses the extent of the relationship between dividend payout and firm
performance among listed organization in Sri Lanka.

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1.4 Methodology
1.4.1 Research design
The research design is correlation since it is seek to identify the relationship between
dividend payout and firm performance. The data use in this research is obtained from
the annual report of five banks listed in the Colombo Stock Exchange (CSE) for five
year period that is, from 2008 to 2012.
1.4.2 Research population and sampling
The population for this research consisted of the 11 banks listed on the Colombo
Stock Exchange (CSE). The sample is five banks listed in the Colombo Stock
Exchange (CSE). These are Commercial Bank of Ceylon PLC, DFCC Vardhana Bank
PLC, Hatton National Bank PLC, Pan Asia Banking Corporation PLC and Sampath
Bank PLC.
1.4.3 Data collection
This study makes use of secondary data. Secondary data is obtained from the five
banker‘s annual reports from the year 2008 to 2012.The data mainly comprised the
financial statements.
1.4.4 Data analysis
The result of the research is presented in tables by using calculations of profit
measurement ratios and SPSS data analysis package. The independent variables are
Return on assets (ROA) and return on equity (ROE) while the dividend payout ratio
and dividend cover is the dependent variable

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1.5 Significance of the study.
This study is significant to various parties. Especially bank investors and bank
managers can evaluate their future dividend decision based on this research.
Considering relationship between dividend payout and firm performance, they can
adopt suitable dividend policy.
After analyzing relationship between dividend payout and firm performance, if
bank exist positive relationship between dividend payout and firm performance, Bank
managers can maintain and develop their dividend policy to offer maximum value for
shareholders and bank investors can take decision that investment to suitable banks.
And if bank exits negative relationship between dividend payout and firm
performance, bank managers can take decision to adopt other favorable dividend
policy to offer maximum value for shareholders and bank investors can take decision
that investment to other investment options
Other hand, this study is important economically. Because eleven listed banks
act as a wide economical character in Sri Lankan listed bank industry. After studying
relationship between dividend payout and firm performance in our Sri Lankan listed
bank industry, Understand opportunities and threats of economical background in
bank industry. And also can take economical decision based on this study.
Further this research is help giving literature review for future research to do
continue their relevant research of this area.

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1.6 Limitation of the study.
1. As the study is purely based on banking industry among the other listed
companies, so the results of the study are only indicative and not conclusive.
2. Data representing the period of five years and only five banks are used for the
study.
3. As results of study, inflation may be affected badly to take a future decision.
4. The data use in this research is obtained from annual report of listed bank and
can not obtain internal information of bank
1.7 Review of the chapters.
Introduction chapter focuses on mainly background of the research. It introduces
knowledge gap, aims and research questions .Especially discusses about methods that
follow to do success the research, importance and limitation of this research.
Literature review chapter focuses on previous studies done by various authors
in relation to dividend policy and firm performance. The chapter is divided into four
sections. The first section gives a definition for dividends; dividend payout and
dividend pay out ratio. The second section discusses the key theoretical considerations
from previous studies, definitions of performance, various types of firm performance
and measure of analyzing firm performance. The third section gives definitions of
dividend payout and profitability. Final section represents definition of relationship
between dividend payout and firm performance used by previous studies.
Research methodology chapter gives a description of the research
methodology employed in achieving the objectives of this study. The chapter presents
the research design, target population and sampling procedure, data collection
procedures and data analysis.
Presentation of research findings chapter presents the findings and analysis of
data. The study will be done for five bankers listed in Colombo Stock Exchange
(CSE) the data for regression analysis will be drawn from the annual reports for five
year period that is 2008 to 2012.
Conclusion chapter presents fulfill knowledge gap based on findings and
analysis of research data.

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CHAPTER 02
LITERATURE REVIEW
2.1 Introduction
This chapter focuses on previous studies done by various authors and websites in
relation to definitions for dividends and dividend policy, dividend payout ratio, firm
performance, and relationship between dividend payout and firm performance.
2.2 Introduction of Dividends.
2.2.1 Definitions of dividends
A taxable payment declared by a company‘s board of directors and given to its
shareholders out of the company‘s current or retained earnings. Usually quarterly,
dividends are usually given as cash (cash dividend).but there can also take the form of
stock (stock dividend) or other property. Dividends provide an incentive to own stock
in stable companies, even if they are not experiencing much growth. Companies are
not required to pay dividends. The companies that offer dividends are most often
companies that have progressed beyond the growth phase, and no longer benefit
sufficiently by reinvesting their profits. So they usually choose to pay them out to
their shareholders also called payout (investor words-biggest best investing glossary)
A distribution of a portion of company‘s earnings is decided by the board of directors,
to a class of its shareholders. The dividends is most often quoted in term of the dollar
amount each share receives (dividend per share).It can also be quoted in term of a
percent of the current market price, referred to as dividend yield. Also referred to as
‗‘dividend per share)‖ (www.philstockworld.com)
Dividend may be in the form of cash, stock or property. Most secure and
stable companies offer dividends to their stockholders. Their shares prices might not
more much. But the dividend attempts to make up for these high growth companies
rarely offer dividends. Because all of their profits are reinvested to help sustain higher
than average growth. Mutual funds pay out interest and dividend income received
from their portfolio‘s holding as dividends to fund shareholders.
In addition, realized capital gains from the portfolios trading activities are
generally paid out (capital gains distribution) as a year end dividend. The theoretical
principles underlying the dividend policy and its impact on firms can be described

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either in terms of dividend irrelevance or dividend relevance theory. Miller and
Modigliani (1961) irrelevance theory forms the foundational bedrock of modern
corporate finance theory.
Miller and Modigliani argued that dividend policy is irrelevant for the cost of
capital and the value of the firms in a world without taxes or transaction cost. They
showed that when investors can create any income pattern by selling and buying
shares, the expected return required to induce them to hold firm‘s shares will be
invariant to the way the firm packages its dividend payments and new issues of
shares. Since the firm‘s assets, investments opportunities, expected future net cash
flows and cost of capital are not affected by the choices of dividend policy, its market
value is unaffected by any change in the firm‘s payout pattern. Thus, dividend policy
is irrelevant and firm can choose any payout pattern without affecting their value.
MM theory implies that dividend payout will fluctuate as a by-product of the firm‘s
investments and financing decisions. These will not exhibit a systematic pattern over
time.
Miller and Modigliani (1961) argued that the firm‘s value is determined only
by its basic earning power and its business risk. The clientele effect also provides an
alternative argument for the irrelevance of dividend policy, at least when it comes to
valuation.
In summary, if investors migrate to firms that pay the dividends that most
closely match their needs, no firm‘s value should be affected by its dividend policy.
Thus, a firm that pays no or low dividends should not be penalized for doing so,
because its Investment investors do not want dividends. Conversely, a firm that pays
high dividends should not have a lower value, since its investors like dividends. This
argument assumes that there are enough investors in each dividend clientele to allow
firms to be fairly valued, no matter what their dividend policy is. Various authors on
the effects of dividend policy on share price have criticized the irrelevance theory of
Miller and Modigliani (MM) (1961). They argued that in an imperfect market, those
assumptions outlined by MM do not work.
For instance, companies do incur floatation cost in their bid to raise additional
capital whereas investors incur transaction cost whenever they are selling or buying
shares. In Ghana, companies pay brokerage fees or underwriting cost when issuing
new shares. Again, investors pay income tax on the dividend income they receive.
Also in Ghana, dividends are subject to 10% withholding tax while capital gains are

10
exempt from taxes. Furthermore, the insiders have more access to information than
the outsiders, thus the market does not fully reflect all available information. Clearly,
these show that dividend policy has tremendous effect on share prices valuation in an
imperfect market like Ghana Stock Exchange.
A number of factors have been identified in previous empirical studies about
the relevance of dividend policy of firms including transaction cost, uncertainty
resolution, tax, accounting manipulation behavioral finance, cash flow, agency cost
and signaling (see Allen and Michaely, 2002; Gordon, 1961, 1962;Bhattacharya,
1979; Shefrin and Statman, 1984; Easterbrook, 1984; Amidu and Abor, 2006).
A rational argument in favor of dividends consists of transaction cost. An investor
who wants to receive a regular income from her security holdings has a choice
between buying dividend-paying stocks and cashing in the dividends, and buying non-
dividend paying stocks and regularly selling part of her portfolio. For a small
individual investor the transaction costs of cashing in the dividends may be
significantly smaller than the transaction costs associated with selling a part of the
stocks (Allen and Michaely, 2002).
Litzen berger and Ramaswamy (1979) in their Tax Preference theory argued
that investors want companies to retain earnings and thus provide returns in the form
of lower-taxed capital gains rather than heavily taxed dividends. In other words, low
dividend pay out ratio lowers the required rate of return and increases the market
value of the firm‘s shares.Brennan (1970) on the other hand extends Farrar and
Selwyn‘s results by considering how the prices of stocks might be affected by
different dividend policies. He assumed that the market prices of stocks would adjust
in such a way that the after tax rate of return received by holders of a company‘s stock
would be the same no matter what dividend policy the company adopts.
In Brennan‘s model, buyers and sellers of the stock would require the same after tax
return from the stock even if the company adopts a different dividend policy. This
means that if a firm adopts a high dividend payout policy, and if shareholders have to
pay higher taxes as a result, the firm‘s stock will have a lower price in order to
maintain the same after tax rate of return that shareholders require.
An important reason for companies to pay dividends may be that companies
that pay healthy dividends are perceived as being relatively honest and less subject to
accounting manipulations. Firms are generally free to select the level of dividend they
wish to pay to holders of ordinary shares, although factors such as legal requirements,

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debt covenants and the availability of cash resources impose some limitations on this
decision. It is thus not surprising that the empirical literature has recorded systematic
variations in dividend behavior across firms, countries, time and type of dividend.
Fama and French (2001) bring evidence to show that dividend paying firms tend to be
large and profitable, while non-payers are typically small, less profitable but with high
investment opportunities.
2.2.2 Dividend payout
The amount of cash that a company sends to its shareholders in the form of dividends.
The company can decide to send all profits back to its inventors, or could keep a
portion of it as retained earnings.
There are many reasons as to why companies should pay or not to pay
dividends. For example, the dividend payout is important for investors because i)
dividends provide certainty about the company‘s financial well-being, ii) dividends
are attractive for investors looking to secure current income, and iii) dividends help
maintain market price of the share. Companies that have a long-standing history of
stable dividend payouts would be negatively affected by lowering or omitting
dividend distributions. These companies would be positively affected by increasing
dividend payouts or making additional payouts of the same dividends. Furthermore,
companies without a dividend history are generally viewed favorably when they
declare new dividends
Over the past 50 years a great attention was given to determine the factors
influencing dividend payout policy. A vast literature is available in this regard,
however, the puzzle is still unresolved and open for further discussion. As Black
(1976) raises the question, ―Why do firms Pay dividends?‖ further he raises a second
question, ―Why do investors pay attention to dividends?‖ although, the answers may
appear clears, but Black concludes that they are not. As we try to explain the fact, the
more it seems like a puzzle, with pieces that just do not fit together. Various factors
can be considered as the determinants of dividend payout policy and a number of
logics for dividend payout policy have been declared in the literature,

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However, the researchers are not agreed on a single point Miller and
Modigliani (1961) considered as the pioneer in this field. Their irrelevance theorem
claimed that the firm‘s dividend policy is unrelated to its current market value. A
number of researchers however do not agree with them due to their assumption of
perfect capital market. By paying a sufficient amount of dividend firms can prevent
from the agency problem. The dividend payouts are helpful to keep firms in the
market, where monitoring of managers is available at low cost. The managers make
financial policy trade-offs to control agency cost in an Effective way [Easterbrook
(1984); Crutchley and Hansen (1989); Naceur et al. (2005); Al-Malkawi (2007)]. A
free cash flow is helpful for a firm to share it with stockholders as dividends and pay
the debt in order to reduce the possibility of these funds being wasted on unprofitable
projects [Jensen (1986); Amidu and Abor (2006)]
Firms‘ investment policies have a significant impact on its dividend payout
policy; the firms with less investment plans has greater amount to distribute as
dividends. Due to the higher investment opportunities firms deprive from higher
dividends to lower. So the investment opportunities has a negative relationship to the
dividend payouts [Smith and Watts (1992); Glen et al. (1995); Fama and French
(2002); Naceur et al. (2005); Naeem and Nasr (2007)]. Another factor affecting the
dividend policy is the ownership of firm; state owned firms follow a smooth dividend
pattern as compare to family owned firms. The family owned firms are uneager to pay
dividends; whereas the state owned firms are more reluctant to diminish the dividend
amount. The insider ownership also play a significant role in dividend policy [Nishat
and Bilgrami (1994); Gugler (2003); Al-Malkawi (2007); Chen and Dhiensiri (2009)].
The dividend policy is quite different in emerging markets as compare to
developed economies, and seems to be affected by a number of factors [Al-Kuwari
(2009); Glen et al. (1995)].Due to several reasons like taxes pay procedure, stock
market volatility and certain asymmetry information the dividend payout pattern is
different in emerging markets as compare to developed nations.
Another reason is that in emerging markets the firms focus on dividend payout
ratios as compare to the level of dividends paid (Glen et al. (1995)). Contrary to Al-
Kuwari (2009) and Glen et al. (1995) the Aivazian et al. (2003) found dividend
pattern of firms in emerging market same as U.Sfirms. Higher the earnings of a firm,
greater the size and firms with foreign ownership prefer to distribute higher and

13
constant amount in dividend payouts according to their earnings and size [Nishat and
Bilgrami (1994); Eriotis (2005); Al-Malkawi (2007)].
The liquidity of the firm leaves a negative impact on the firms ‘dividend
payout decision. The stock market liquidity and dividend are substitutes in the sight of
investors, so the firm‘s dividend policy is associated to the liquidity of its common
stock. As a result firm‘s with more liquid common stock, distribute less cash dividend
[Naeem and Nasr (2007); Banerjee et al. (2007)]. La Porta et al., (2000) who studied
the dividend policies of over 4000 firms from 33 countries around the world. It is
found that dividend policies vary across legal regimes in a way that is consistent with
the idea that dividend payment is the outcome of effective pressure by minority
shareholders to limit agency behavior. Thus firms in common law countries with good
legal protection of investors tend to have higher payout ratios compared with firms in
countries with weaker legal protection.
In other view, Lintner (1956) laid the foundation for the modern understanding
of dividend policy. He interviewed managers from 28 companies and concluded that
dividends are sticky, tied to long term sustainable earnings paid by mature companies,
smoothed from year to year, and that manager's target a long-term payout ratio when
determining dividend policy.
Kouki and Guizani (2009) find that there is a significantly negative correlation
between the institutional ownership and dividend per share. They also found the
ownership of the five largest shareholders, the higher the dividend payment.Wiberg
(2007) investigates the link between institutional ownership and dividend policy.
Utilizing a dividend payout model, which accounts for earnings trends and partial
adjustments, a positive relation, is found between institutional ownership and
dividends .Kumar (2003) studies examine the payout behavior of dividends and the
association of ownership structure for Indian corporate firms over the period 1994-
2000. He finds Institutional ownership has inverse effect on dividends in comparison
to corporate ownership. Using pooled cross-sectional observations from the top 50
listed Egyptian firms between 2003 and 2005,
Abdelsalam, El-Masry, and Elsegini (2008) examined the effect of board of
director composition and ownership structure on dividend policies in Egypt. It is
found that there is a significant positive association between institutional ownership
and firm performance, and both dividend decision and payout ratio. The results

14
confirm that firms with a higher return on equity and a higher institutional ownership
distribute higher levels of dividend.
By the construction of cash dividend decision model based on the protection
of stockholders interest, Li and Huang (2004) use the data of Chinese manufacturing
listed companies from 2001 to 2003 find that in China listed companies, institutional
ownership has positive relation with the payout of cash dividends and this paper
pointed that an effective way to deal with the current low cash dividend policy of
China listed companies is to develop institutional investors and increase their
stockholdings percentage.
Grinstein and Michaely (2003) examined the relation between institutional
holdings and payout policy in U.S.public firms between 1980 and 1996. They find
payout policy affects institutional holdings. Institutions avoid firms that do not pay
any dividends. But among dividend paying firms, they prefer firms that pay fewer
dividends. Their evidence indicates that institutions prefer firms that repurchase
shares. They did not find that higher institutional holdings or a concentration of
holdings causes firms to increase their dividends, their repurchases, or their total
payout. Their results did not support models that predict that high dividend attack
institutional clientele, or models that predict that institutions cause firms to increase
payout.
2.2.3 Dividend pay out ratio
Dividend paid divided by company earnings over some period of time, expressed as a
percentage, also called payout ratio. (Investor words)
Dividend payout ratios are affected by the reported accounting depreciation.
Based on the different nature of service and manufacturing industries, the results
related to dividend payout ratios are expected to be different. For example, investment
in machinery and equipment is almost non existent in the service industry. Dividend
payout has been a subject of debate in financial literature.
The earnings that appear in the denominator of the Service sector is a more
human intensive sector and do not require huge capital asset base like manufacturing
companies for their operations. The major asset of this sector is manpower. Therefore

15
the funds required for recruitment and retention of manpower is comparatively less
than funds required for purchasing capital assets.
So these firms can easily release funds for payment of dividends. Thus, it can
be concluded that service firms have high liquidity and it is an important determinant
of dividend payout ratio. Since the profitability of the companies is also high so even
if there is year to year variability in the earnings of the firms, they can easily pay huge
dividends. The depreciation allowance, however, is higher in the manufacturing
industries than the service industry which, in turn, can impact on dividend payout
ratios. In the present study, therefore, the depreciation was added back into the net
income in order to net out the impact of depreciation on the dividend payout ratios. In
addition, we used the market price of the share from the beginning of the year instead
of current share price.
Since Miller and Modigliani‘s study, researchers have relaxed the assumption
of perfect capital markets and offered theories about how dividend affects the firm
value and how managers should formulate dividend policy decisions.
Over time, the number of factors identified in the literature as being important to be
considered in making dividend decisions increased substantially. Thus, extensive
studies have been done to find out various factors affecting dividend payout ratio of a
firm.
A variety of variables that might potentially be associated or ‗responsible‘ for
the dividend payout in the manufacturing firms can be found in the literature.
In this study, the selection of explanatory variables is based on alternative
theories related to dividend payout and previous variables that were studied in
reported empirical work. The choice is sometimes limited, however, due to lack of
relevant data. As a result, the final set of proxy variables includes nine factors:
profitability, cash flow, corporate tax, sales growth, market-book value ratio, debt-to-
equity ratio, dividend payout ratios (standard dividend payout ratio and adjusted
dividend payout ratio) of the firm, and industry. Previous studies conducted by
different authors did not test the impact of depreciation on the dividend payout ratios.

16
2.3 Introduction of Performance
2.3.1Definitions of Performance
In a simple way performance means ―doing something successfully ―mainly by using
the available resousers.Performance can be elusive concept. It deals with the
outcomes, results and accomplishments achieved by a person, group or organization
(william.J.Rothwel, Carolyn K.Hohne & Stephen B.King 2007).
In many cases people do define performance based on financial aspects of the
business. Focusing only on financial matters does not tell us what should we do and
how to do in order to be successful.‖Performance is the definition and progressive
achievement of tangible, specific, measurable, worth will and personally meaningful
goals. (Darrey D. Enos 2007)
We get a clear point in this definition that organization should have well
defined, specific and measurable goals. This serves as the first requisite in assessing
the organization‘s performance. Having vague and general goals without proper
measurement.
2.3.2 Various type of Firm Performance
The performance frameworks identified display a number of key characteristics that
help an organization to identify an appropriate set of criteria against which to assess
and manage their performance
The work of Kaplan and Norton (1992); and Keegan et al. (1989) emphasizes
the fact that the set of measures used by an organization has to provide a "balanced"
picture of the business. The set of measures should reflect financial and non-financial
measures; internal and external measures; and efficiency and effectiveness measures.
The populated framework of measures should provide a succinct overview of
the organization‘s performance. For example, the simplicity and intuitive logic of the
Balanced Scorecard has been a major contributor to its widespread adoption as it is
easily understood by users and applied to their organization. Each framework
demonstrates the need for organizations to implement a set of performance measures
that is multi dimensional. This reflects the need to measure all the areas of
performance that are important to the organization‘s success. However there is no
consensus over what the dimensions of performance are. The EFQM model provides
the broadest indication of dimensions of performance to be measured.

17
The Performance Measurement Matrix (PMM) provides comprehensiveness It is
possible to map all possible measures of an organization‘s performance onto the
framework and identify where there are omissions or where there is a need for greater
focus. However, the PMM provides little indication of the different dimensions of
performance that should be measured.
The Tableau de Bord, along with the work of Bititci et al. (1998), explicitly
demonstrates the fact that performance measures should be integrated both across the
organization‘s functions and through its hierarchy, encouraging congruence of goals
and actions.
The Tableau de Bord and the work of Fitzgerld et al. (1991) explicitly, and the
Balanced Scorecard and Performance Pyramid implicitly, explain how results are a
function of determinates.
This demonstrates the need to measure results and drivers of them so that the
performance measurement system can provide data for monitoring past performance
and planning future performance. This demonstrates the way in which measures
contribute to an organization‘s planning (feed forward) and control (feedback) system
(Ballantine and Brignall, 1994).
2.3.3 Measures of analyzing Firm Performance
Richard et al. (2009) identify three broad groups of measures of organizational
performance: accounting, market and hybrid measures.
-Accounting Measures
Accounting measures have existed since the 17th century and remain the most
commonly used metrics to evaluate business performance (Richard et al., 2009). We
identify six main accounting measures: return on assets (ROA), return on sales (ROS),
return on equity (ROE), return on investment (ROI), return on capital employed
(ROCE) and sales growth (SG).
Accounting measures have several strengths. They are widely available
because governments require firms to publish accounting data and the fact that they
are subject to internal controls within firms enhances their reliability (Richard et al.,
2009). In addition, accounting measures are relatively easy to calculate and they
integrate the results of complex organizational entities into coherent and reasonably
understandable metrics (Verbeeten and Bonds, 2009). Most importantly, accounting

18
measures are used by leaders and managers to monitor and assess the firm‘s
performance and to make strategic and operational decisions (Rowe and Morrow,
1999).
However, accounting measures are considered to have several well-documented
limitations. First, they focus on historical performance and do not attempt to
anticipate future results. Second, accounting measures do not provide information on
whether a company is increasing its long-term value, as they only provide a measure
of short-term performance (CIMA, 2004). Third, accounting measures can be
distorted by a variety of factors including government policy, inconsistency in the
rules on the accounting systems based on Generally Accepted Accounting Principles
(Richard et al., 2009), and deliberate misrepresentation. Fourth, certain measures such
as net income and sales vary significantly among companies and industries.
For example, Lehman Brothers‘ sales in August 2008 were much higher than
those of BT. However, BT‘s performance was better because it was able to survive
during that period of economic turmoil. Finally, and perhaps most critically,
accounting measures do not include the opportunity cost of the equity capital invested
by shareholders, that is, what investors could have earned if they had invested
somewhere else (Kimball, 1998). This omission means that it is possible for firms to
appear to be making a positive return, when the underlying economic reality can be a
negative return as the investor could have made other higher returns.
-Market Measures
We identify two groups of market measures: shareholder-value measures and
competition-based measures.
-Shareholder-Value Measures
Economic theory proposes that organizations should optimize the use of investment
capital and, therefore, maximize the returns that are gained from this investment both
in the short-and the long term. This has led to the creation of shareholder-valued
based financial measures of firm performance that incorporate both debt and equity
capital. This trend has been reinforced by the shareholders of firms who are naturally
keen to understand the results they are achieving—a pressure that has been strongest
in ―Anglo-Saxon‖ countries (primarily the U.S. and UK) where shareholder return
tends to be considered the fundamental goal of businesses.

19
However, shareholder-value measures have limitations. First, they are mainly
based on stock prices, which may change due to external factors that are not related to
the performance of the company (such as oil price shocks or macroeconomic
fluctuations). Additionally, the relationship between stock prices and financial
performance may differ among countries depending on the efficiency of the financial
markets. Third, market measures are based on the assumption that the firm is an
―investment instrument‖ for the shareholder (Richard et al., 2009); therefore, using
market measures in countries with non-efficient financial markets and where the
shareholder return is not the first objective could give misleading conclusions.
Finally, although shareholder value measures should provide good prospects about
future profitability, they can be untrustworthy, as evidenced in the dotcom speculative
bubble between 1995 and 2001 (Yip et al., 2008).
-Competition-Based Measures
Economic theory also suggests that when an organization becomes more efficient and
is able to lower its prices due to improved technology, it can increase its sales, and
therefore, overcome its competitors (Chang and Sing, 2002). Several competition
measures have been proposed to compare how a firm is performing relative to its
competitors. We discuss three of them: market share, labor productivity and sales per
employee. Market share is the proportion of the total available market that is being
served by an organization Labor productivity is discussed in two ways. Caves (1974),
Globerman (1979) and Kokko (2006) use labor productivity to compare efficiency
among organizations in a specific industry. They define labor productivity as the total
output divided by the number of employees. Patterson et al. (1997) propose the use of
an alternative measure of labor productivity. They define labor productivity as the
ratio of sales over employment in the firm, divided by the ratio of sales over
employment in the entire industry Sales per employee ratio evaluate a company‘s
sales in relation to its number of employees
However, competition-based measures are relatively less-used in the literature than
accounting or shareholder value measures, and they are not comparable across
industries.

20
-Hybrid Measures
Richard et al. (2009) and Devinney et al. (2010) suggest the use of hybrid measures
that are able to overcome the drawbacks and keep the advantages of accounting and
market measures. We identify three hybrid measures: the Tobin‘s q, the Altman‘s Z
score and economic value added. Wassermann et al. (2001) and McGahan and Porter
(1999) suggest the use of the Tobin‘s q.
The Tobin‘s q, developed by James Tobin (1969), measures a company‘s
market value in relation to its total assets value. Alternatively, Short et al. (2007)
propose the use of the Altman‘s Z-score. The Altman‘s Z-score, created by Edward
Altman (1968), is an index composed of five different financial ratios that indicate the
likelihood of bankruptcy. Although the Tobin‘s q and the Altman‘s Z score provide
information about the risk and future contingencies that may arise in an organization,
they may be very volatile across periods.
2.4 Dividend Payout and Profitability
Firm performance can be measured by the earnings generated by the company in
terms of profitability. There is substantial literature on the relationship between
dividend policy and profitability. Dividends are important to shareholders and
potential investors in showing the earnings that a company is generating. Healthy
dividends payouts thus indicate that companies are generating real earnings rather
than cooking books (Barron, 2002). A study by Zhou & Ruland (2006) revealed that
high dividend payout firms tend to experience strong future earnings but relatively
low past earnings growth despite market observers having a contradicting view. The
findings of another study done by Arnott & Asness (2003) also revealed that future
earnings growth is associated with high rather than low dividend payout.
However, Farsio et al. (2004) argue that no significant relationship between
dividends and earnings hold in the long run and studies that support this relationship
are based on short periods and therefore misleading to investors. They proposed three
scenarios that would render the long-term relationship of dividends and future
earnings insignificant.
First, they point out that an increase in dividends may lead to a decline in
funds that are to be reinvested by the firm. Firms that pay high dividends without

21
considering investment needs may therefore experience lower future earnings (Farsio
et al., 2004). There is thus a negative relationship between dividend payout and future
earnings. Secondly, an increase in dividends in a quarter may be the result of the
management‘s policy to keep investors satisfied and prevent them from selling the
stock at times when future earnings are expected to decline or current losses are
expected to continue (Farsio et al., 2004). This is a case of rising dividends followed
by declining earnings. Lastly, an increase in dividends may be the result of good
performance in previous periods which may continue into the future (Farsio et al.,
2004). This supports the view of a positive causal relationship between current
dividends and future earnings.
From these scenarios, they argue that the overall long-term relationship is
insignificant since there is a positive relationship between dividends and future
earnings in some periods and a negative relationship in other periods. Nissim & Ziv
(2001) showed that dividend increases were directly related to future increases in
earnings in each of the two years after the dividend change. What therefore happens
when there is a steady increase in dividends for a given number of years? Nissim &
Ziv (2001) found that dividend increases and decreases are not symmetric. Dividend
increases are associated with future profitability for at least two years after the
dividend change, whereas dividend decreases are not related to future profitability
after controlling for current and expected profitability. They propose that this lack of
association can be explained by accounting conservatism. They therefore conclude
that there is a positive relationship between dividend payout and future earnings but
the relationship is stronger for future abnormal earnings.
In a study that examines whether dividend policy influences firm performance
in the Ghana Stock Exchange, Amidu (2007) found that dividend policy affects firm
performance especially the profitability measured by the return on assets. The results
showed a positive and significant relationship between return on assets, return on
equity, growth in sales and dividend policy. This showed that when a firm has a
policy to pay dividends, its profitability is influenced. The results also showed a
statistically significant relationship between profitability and dividend payout ratio. A
study by how at et al. (2009) also concluded that positive changes in dividends are
associated with positive future changes in mean real earnings per share. Lie (2005)
argues that firms that increase payouts have excess financial flexibility and exhibit
positive concurrent income shocks and decreases in income volatility, but there is

22
limited evidence of subsequent performance improvements. His study revealed that
firms that increase payouts have lower past volatility of operating income than other
firms. The volatility decreases even further. This can be explained by the fact that
managers increase the firm‘s payout when they believe that the probability of
sustaining the current level of income is high. Firms that decrease dividends on the
other hand, have higher past volatility than other firms, and this volatility is on the
rise.
2.5 Relationship between Dividend Payout and Firm Performance
Higgins argued that payout ratio is negatively related to a firm‘s need for funds to
finance growth opportunities. Amidu and Abor found a positive relationship between
corporate profitability and dividend payout ratios. Anil and Kapoor indicated that
profitability has always been considered as a primary indicator of dividend payout
ratio. Higgins shows that there is direct link between growth and financing needs of a
firm. Rapidly growing firms require external financing because working capital needs
normally exceed the incremental cash flows from new sales. Alli, et al. Khan,
Ramirez argues that dividend payments depend more on cash flows, which reflect the
company‘s ability to pay dividends, than on current earnings, which are less heavily
influenced by accounting practices. They claim that current earnings do not really
reflect the firm‘s ability to pay dividends .According to the information content of
dividends or signaling theory, firms, despite the distortion of investment decisions to
capital gains, may pay dividends to signal their future prospects.
A study by Dhanani (2005) revealed that dividend policy is important in
maximizing shareholder value. A firm's dividend policy can influence one or more of
imperfections in the real world such as information asymmetry between managers and
shareholders; agency problems between managers and shareholders; taxes and
transaction costs and in turn, enhance the firm's value to shareholders (Dhanani,
2005). In an imperfect market setting, dividend can influence shareholders‘ wealth by
providing information to investors or through wealth redistribution among
shareholders (Travlos et al., 2001; Adesola & Okwong, 2009.
A firm‘s dividend policy can take into consideration the different
circumstances of its shareholders and in turn, enhance the firm‘s value to these

23
shareholders (Dhanani, 2005). Depending on the preferences of shareholders, firms
can formulate a dividend policy that meets the needs of its shareholders. In this case,
dividends themselves do not provide information about future earnings, but rather
create a clientele that are drawn to firms with their preferred dividend policy.
Malcolm and Wurgler (2004) demonstrate that firms design dividend policy in
response to shareholders‘ preference for dividends. Certain shareholders may have a
preference for cash dividends, others for dividend stability and others would prefer
capital gains earned through reinvestment of dividends and thus no cash dividends.
This may be explained by the bird in hand fallacy as investors may deem dividends a
more current and certain return than capital gains (Amidu, 2007 & Howatt et al.,
2009). Individual investors‘ tax preferences may also influence their dividend
preferences. Investors afraid of higher taxes are likely to prefer low or no dividend
payouts in an attempt to reduce their taxable income thus preferring capital gains
(Howatt et al., 2009). In Kenya dividends are taxed at 5% as a final tax for individuals
while capital gains tax are tax exempt (Income Tax Act, 2010). Firms that meet the
needs of individual investors are more likely to be able to command a higher share
price premium and thus an enhanced firm value. However, Amidu (2007) argues that,
if investors migrate to firms that pay the dividends that most closely match their
needs, no firm‘s value should be affected by its dividend policy.
A firm‘s value and performance is therefore enhanced through higher returns
from optimal investments. Dividend payments force firms to raise funds externally for
new investments, which in turn increases the level of external monitoring of corporate
activities by the capital market regulator (Jiraporn et al. 2011). There is thus improved
corporate governance which has a positive effect in the firm‘s performance.
A large number of academic papers find that share buy-backs are especially
useful to signal that the stock price of the company that buys back its shares is
undervalued. A number of studies, including Comment and Jarrell (1991) and
Ikenberry, Lakonishok, and Vermaelen (1995, 2000) find that share buy-back
announcements are associated with significantly positive abnormal returns. Ikenberry,
Lakonishok, and Vermaelen (1995, 2000) have also analyzed the long-run
performance of US and Canadian companies after share buy-backs. In those studies a
significantly long-run positive abnormal return is found.

24
CHAPTER 03
METHODOLOGY
3.1 Introduction
Research methodology chapter gives a description of the research methodology
employed in achieving the objectives of this study. The chapter presents the research
design, target population and sampling procedure, data collection procedures and data
analysis.
3.2 Research Design
This study use descriptive survey research design which relate with regression and
correlation analysis method. It is sought to identify the relationship between dividend
payout and bank performance. The data use in this research is obtained from the
annual report of five banks listed in the Colombo Stock Exchange (CSE) for five year
period that is, from 2008 to 2012.
Quantitative methods are used in this study. Dividend payout is measured by
the actual dividend paid out and dividend cover. Firm performance is measured by the
net profit after tax and is calculated ratios about Return on assets (ROA)/ return on
investment (ROI) and return on equity (ROE),
3.2 Target population and sampling procedure
The population for this research consisted of the eleven banks listed on the Colombo
Stock Exchange (CSE). The sample is five banks listed in the Colombo Stock
Exchange (CSE).These are Commercial Bank of Ceylon PLC, DFCC Vardhana Bank
PLC, Hatton National Bank PLC, Pan Asia Banking Corporation PLC and Sampath
Bank PLC.
The secondary data for regression analysis is gathered from five banks listed
in the Colombo Stock Exchange (CSE).The banks are selected based on the
availability of information. Banks suspended from the Colombo Stock Exchange
(CSE) are also studied since they have the relevant data.

25
3.3 Data Collection.
This study makes use of secondary data. Secondary data is obtained from the five
banker‘s annual reports and other most of which are publicly available. This study for
five year period, that is, from the year 2008 to 2012.The data mainly comprised the
financial statements.
3.4 Data Analysis and Presentation.
The result of the research is presented in tables by using calculations of profit
measurement ratios and SPSS version 14 is used to analyze the data collected.. The
bank‘s performance is measured by the net profit after tax which indicates
profitability. Regression analysis is used in this study to determine the relationship
between dividend payout and firm performance.
Return on assets (ROA)/return on investment (ROI) and return on equity
(ROE) are the independent variables while the dividend payout ratio is the dependent
variable.
3.4.1Regression analysis
The regression equation is:
DP = βo +β1ROA+β2ROS+έi
Where: DP = Dividend pay out
βo = Constant
β1 =Return on assets
β2 =Return on equity
έi = the error term
The dependent variable for the regression equation is dividend pay out and it
is calculated by pay out ratio and dividend cover. While the independent variables are
return on assts and return on equity.

26
3.5 Conceptual framework
Figure 3.1 Conceptual Frameworks
The conceptual frame work represents about dependent and independent variables
about relationship between dividend payout and firm performance of listed banks in
Sri Lanka .Independed variables are Return on assets (ROA), /return on investment
(ROI) measures how much profit the bank assts can generate and return on equity
(ROE) measure s how much profit the banks can generate from shareholders
investment which are the ratios of measurement on bank‘s performance. Dependent
variable is dividend pay out and dividend cover of listed banks in Sri Lanka.
ROA/ROI
ROE
Sub Independent
Variables
Bank’s
performanc
e
Dividend
payout of
banks-Depend
variable
 Dividend
payout
ratio
 Dividend
cover

27
Independent variables calculations as follows:
ROA/ROI = Net profit after interest and tax *100%
Total assts (or average total assts)
ROE= Net profit (after tax)-Preference dividends
Average ordinary shareholder‘s equity
Dependent variables calculations as follows
Dividend pay-out ratio=Dividend per ordinary share
*100%
Earning per share
Dividend cover = Earning per share
Dividend per share

28
3.6 Research Organizations
Table3.1 Research Organizations
Company Name CSE
symbol
Issued
Quantity
(Mn)
Market
Capitalization
Commercial Bank of Ceylon PLC COMB.N000 794,535,71 100,667,675,5
DFCC Vardhana Bank PLC DFCC.N000 265,097,68 39,791,162,96
Hatton National Bank PLC HNB.N0000 319,353,82 49,212,425,04
Pan Asia Banking Corporation PLC PABC.N000 295,041,08 4,956,690,245
Sampath Bank PLC SAMP.N000 167,787,605 29,564,176,00
Source: CSE website
3.6.1. Commercial Bank of Ceylon PLC
Commercial bank has over 90 years of unparalleled growth and achievement, having
made a distinctive mark in Sri Lankan banking history. Commercial bank of Ceylon
plc is a licensed commercial bank and a public limited liability company and its
ordinary shares are listed on the Colombo Stock Exchange.
The bank had the largest market capitalization among all listed banking
institutions in Sri Lanka and was ranked at no 05 among all listed entities as at end of
2012.Commercial bank is the only Sri Lankan bank represented in the top 1000 banks
in the world for two consecutive years 2011 and 2012.

29
3.6.2. DFCC Vardhana Bank PLC
The DFCC bank incorporated by an act of parliament in 1955 is the country‘s first
specialized development bank.DFCC Varhana Bank is a fast growing institution in
term of the business volumes and physical expansion through distribution
outlets.DFCC bank added five new branches expanding the branch banking network
to 59 banking outlets in 2012. The branch banking network consists of 56 Branches, 3
Extension Offices and 70 Sri Lanka Post Banking (SLP) Units.
3.6.3 Hatton National Bank PLC
Hatton National Bank is an established in 1988. HNB is a premier private sector
commercial bank in SL and has been acknowledgment globally by The Asian Banker
as the Best Retail Bank in Sri Lanka for six consecutive years for it performance from
the year 2007 to 2012.HNB provide services for individual, business and
internationally.
3.6.4. Pan Asia Banking Corporation PLC
Pan Asia bank has been in operation for 18 years with a comprehensive portfolio of
corporate, retail and SME banking products and services. Now one of the fastest
growing banks in the industry. Pan Asia bank opened 9 branches in 2012.growing to
73 by the end of 2013.
3.6.5. Sampath Bank PLC.
Sampath bank celebrates silver jubilee marking 25 great year of service to the nation
in 2012.Sampath bank has made a significant contribution to the banking and
financial service industry of Sri Lanka. Sampath branches never been satisfied with
‗‘good enough‘‘.From pioneering cutting –edge banking technology to creating the
island‘s biggest ATM net work and winning a host of industry awards.Sampath bank
has 209 branches and 264 ATMs.
Source: Bank Annual reports

30
CHAPTER 04
DATA ANALYSIS
4.1 Introduction
Presentation of research findings chapter presents the findings and analysis of data.
The study was be done for five bankers listed in Colombo Stock Exchange (CSE) The
data for descriptive analysis and regression analysis was be drawn from the annual
reports for five year period that is 2008 to 2012.
4.2 Data presentation and Data analysis
Table 4.1-Summary of Descriptive Analysis Results
N Minimum Maximum Mean Mode Median Std. deviation
ROA 25 1.20 3.40 1.8800 1.60 1.6000 .58381
ROE 25 9.60 25.50 17.6200 11.30(a) 17.4000 4.35909
Dividend 25 2 8 3.55 2(a) 2.70 17.27
Cover
Dividend 25 10.27 28.46 20.2940 16.60 20.5000 4.55705
Pay
Out ratio
Valid N 25
(List wise)
Source: Bank annual reports 2008-2012
(a)Multiple modes exist. The smallest value is shown
The purpose of descriptive analysis is identifying behavior of variables. According to
the descriptive statistics table shows values of mean, mode, median and stand

31
deviation of Return of assts, Return on equity Dividend Cover and Dividend Payout
ratios. Mode is the value appears most often in a set of variables. Mean represents
average of Return in assets, Return of equity, dividend cover and Dividend payout of
five banks during five periods, Median is the middle value of the Return of assts,
Return on equity, dividend pay out ratio and dividend cover. Standard deviation
shows how much variation or dispersion from the average variables. A low standard
deviation indicates that the data points tend to be very close to the mean. Return of
assts and Dividend cover variables have low standard deviation. A high standard
deviation indicates that the data points are spread out over a large range of values.
Returns on equity and Dividend pay out ratio have high standard deviation.
The following graphical presentation displays that distribution of the frequency
values. It presents behavior of Return of assets, Return on equity, Dividend pay out
ratio and Dividend cover.
4.1Return on equity
Source: Bank annual reports 2008-2012
27.0024.0021.0018.0015.0012.009.00
ROE
7
6
5
4
3
2
1
0
Frequency
ROE
Mean = 17.62
Std.Dev. =4.35909

32
4.2Return on assts.
Source: Bank annual reports 2008-2012
4.3 Dividend Cover
Source: Bank annual reports 2008-2012
3.503.002.502.001.501.00
Roa
6
5
4
3
2
1
0
Frequency
Mean = 1.88
Std. Dev. = 0.58381
N = 25
r
87654321
12
10
8
6
4
2
0
Frequency
Mean = 1.88
Std.Dev. = 0.58381
Mean=3.55
St, dev=1.727

33
4.4Dividend pay out ratio
Source: Bank annual reports 2008-2012
Table 4.2- Summary of Regression analysis Results.
Model B/coef Std.error t significant
Constant 5.250 1.508 3.481 .002
ROA .967* .527 1.834 .008
ROE -.200** .071 -2.828 .010
Source: Banks reports 2008-2012
Note: Dependent Variable; Dividend Cover
The symbol (*) and (**) indicate statically significant at 1% level.
The regression equation showed that there was a positive relationship between
dividend cover and return on assts as shown by the positive coefficient in table 4.2
But there was negative relationship between dividend cover and return on equity as
shown by the negative coefficient in the table 4.2.Return on assets was a Strong
significant factor that affected dividend pay out policy as indicated by the regression
equation. The significant value for return on assets was 0.8% depicting that it was
30.0025.0020.0015.0010.00
6
5
4
3
2
1
0
Frequency
Mean=20.294
St, dev= 4.55705

34
highly significant as shown in table4.2.This means that if the return on assts increase
by 1 unit, dividend cover would increase by 0.967 units.
Return on equity was also a significant factor that affected dividend payout policy
negatively as shown by a significant value of 1%.This shown that if the return on
equity increased by 1 unit, dividend cover would decrease by -.200 units.
Table 4.3-Summary of Regression Analysis Results
Model R square Std error of R square change F Change df1 df2 sig.F change
the estimate
.761a 1.493 .515 5.057 2 22 .16
Source: Banks reports 2008-2012
A.Dependnt variable: dividend cover
The results of the regression analysis showed up to 76.1% of the dividend cover was
affected by the Return on assert and Return on equity. This model showed that the
independents variables were strong predictors of the depend variables. The model is
therefore a significant predictor of how Return on assets and Return on equity
affected the dividend payout policy of listed banks in the Sri Lanka stock exchange.
The degree of freedom is 2.
Table 4.4-Summary of Regression Analysis Results
Model B Std.error t Sig
Constant 2.513 4.494 2.785 .11
ROA 1.188* 1.571 .756 .057
ROE .315 ** .210 1.497 .004
Source: Banks reports 2008-2012
Note-Dividend Variable: Dividend payout ratio
The symbol (*) and (**) indicate statically significant at 10% and 1% level
Respectively.

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The regression equation showed that there was a positive relationship between
dividend pay out ratio and return on assts as shown by the positive coefficient in table
4.4. And there was also positive relationship between dividend payout ratio and return
on equity as shown by the positive coefficient in the table 4.4.Return on assets was a
significant factor that affected dividend pay out policy as indicated by the regression
equation. The significant value for return on assets was 5.7% depicting that it was
highly significant as shown in table 4.4.This means that if the return on assts increase
by 1 unit, dividend pay out would increase by 1.188units.
Return on equity was also a strong significant factor that affected dividend
payout policy positively as shown by a significant value of 0.4%.This shown that if
the return on equity increased by 1 unit, dividend cover would increase by
.315units.Reurn on equity indicate that the bank better performance and greater
profitability tend to pay more dividends to the shareholders.
Table 4.5-Summary of Regression Analysis Results
Model R square Std error of R square change F Change df1 df2 sig.F change
the estimate
.347 4.44805 .127 1.595 2 22 .225
Source: Banks reports 2008-2012
A depend variable: Dividend pay out ratio
The results of the regression analysis showed up to 34.7% of the dividend pay out
ratio was affected by the Return on assert and Return on equity. This model showed
that the independents variables were strong predictors of the depend variables. The
model is therefore a strong significant predictor of how Return on assets and Return
on equity affected the dividend payout policy of listed banks in the Sri Lanka stock
exchange.

36
CHAPTER 05
CONCLUSION
5.1Introduction
From the results of the regression analysis of five listed banks annual reports during
2008-2012.Based on the foregoing discussion, the following conclusion can be drawn
from this study.
5.2 Finding research
5.2.1 Relationship between dividend cover with Return on assts and Return on
equity.
According to the research findings, there was strong positive relationship between
dividend cover and Return on assts.The strong relationship was shown by the
significant value of 0.8% and positive coefficient. This indicated that return on assts is
a significant factor in influencing dividend cover of listed banks in Sri Lanka.And
there was a strong and negative relationship between return on equity and dividend
cover as shown by a p value of 1% and a negative coefficient respectively. According
to the results Return of assts of listed banks positive influence to dividend pay out of
listed banks in Sri Lanka.It indicate increase Return of assts is influence to increase
dividend pay out of listed banks in Sri Lanka.But Return on equity of listed banks
negatively influence to dividend pay out policy of listed banks in Sri Lanka.It indicate
increase Return on equity is influence to decrease dividends pay out.
Kouki and Guizani (2009) find that there is a significantly negative correlation
between the institutional ownership and dividend per share. They also found the
ownership of the five largest shareholders, the higher the dividend payment.Wiberg
(2007) investigates the link between institutional ownership and dividend policy.
Utilizing a dividend payout model, which accounts for earnings trends and partial
adjustments, a positive relation, is found between institutional ownership and
dividends .Kumar (2003) studies examine the payout behavior of dividends and the
association of ownership structure for Indian corporate firms over the period 1994-
2000. He finds Institutional ownership has inverse effect on dividends in comparison

37
to corporate ownership. Using pooled cross-sectional observations from the top 50
listed Egyptian firms between 2003 and 2005,
5.2.2 Relationship between dividend pay out ratio with Return on assts and Return
on equity.
According to the research findings, there was weak positive relationship between
dividend pay out and Return on assts.The weak positive relationship was shown by
the significant value of 45.7% and positive coefficient. This indicated that return on
assts is a weak significant factor in influencing dividend pay out of listed banks in Sri
Lanka. And there was a strong and positive relationship between return on equity and
dividend pay out ratio as shown by a p value of 0.4% and a positive coefficient
respectively. According to the results Return of assts of listed banks weak positive
influence to dividend pay out of listed banks in Sri Lanka.But return on equity of
listed banks positively influence to dividend pay out policy of listed banks in Sri
Lanka.It indicate increase Return on equity is influence to increase dividends pay out.
The results confirm that firms with a higher return on equity and a higher institutional
ownership distribute higher levels of dividend of listed banks in Sri Lanka.
Abdelsalam, El-Masry, and Elsegini (2008) examined the effect of board of
director composition and ownership structure on dividend policies in Egypt. It is
found that there is a significant positive association between institutional ownership
and firm performance, and both dividend decision and payout ratio. Amidu (2007)
found that dividend policy affects firm performance especially the profitability
measured by the return on assets. The results showed a positive and significant
relationship between return on assets, return on equity, growth in sales and dividend
policy. This showed that when a firm has a policy to pay dividends, its profitability is
influenced. The results also showed a statistically significant relationship between
profitability and dividend payout ratio.

38
5.3 Conclusion of the research finding
Bank performance affects dividend pay out policy and that this relationship is strong
and positive of return of assts of listed banks. It therefore shows that return on assts is
relevant and therefore affects the dividend policy of listed banks. But Return on
equity is strong and negative effect for dividend cover and Return on equity is strong
and positive effect for dividend payout ratio. The results confirm that firms with a
higher return on equity and a higher institutional ownership distribute higher levels of
dividend of listed banks in Sri Lanka.The findings of this research also showed that
Return on assts was the most commonly used form of effect for dividend policy and
indicate that the banks with better performance tend to pay more dividends to the
shareholders of listed banks in Sri Lanka.
5.4 Recommendations
From the data of listed banks of Sri Lanka 2008-2012, find that, consistent with the
findings of the research, the banks with high profitability or performance pay more
dividends. Results of the research findings showed that strong, significant and
consistent evidences that the safer banks pay more dividends. Return on assts was
strong effect to dividend pay out of listed banks Therefore considering that banks are
subject to monitoring bank‘s assts and minimizing financial liabilities would be
improved bank performance and it effect to high dividend pay out of listed banks.
Return on equity was not strong effect to dividend payout of listed banks. Therefore
considering that banks are subject to examine the effect of board of director
composition and ownership structure on dividend policies The research findings also
show that the major factor that affect the dividend policy of listed firms are;
profitability, pattern of past dividends, legal rules, financial leverage, investment
opportunities and capital structure. Other factors such as ownership structure,
shareholder‘s expectations. Tax position of shareholders can also be considered in
designing a dividend policy though they affect dividend to a moderate extend.

39
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