Identifying the Relationship Between Dividend Policy and Stock Prices in the Banking Sector: Evidence from Colombo Stock Exchange

Abstract

Introduction: The banking industry supports investment activity, minimizes credit availability, and facilitates the flow of funds, making it the foundation of economic growth. This study aims to empirically test to identifying the relationship between dividend policy and stock prices in the banking sector.

Methodology: The study adopts a quantitative approach using a panel dataset spanning 2011–2023 from seven banking companies on the CSE. Secondary data was obtained from the published annual reports. These firms were selected for their consistent dividend declarations over 13 years. Panel data regression models have been utilized to analyze the data as the Hausman test suggest the fixed effect model is the most appropriate for describing the relationship among the variables. EViews 12 analytical software has been used to analyze the data.

Findings: The analysis revealed significant relationships between dividend policy and stock prices. Dividend payout ratios exhibited the most pronounced influence on stock prices, while dividend yields showed mixed results.

Conclusion: Dividend policy serves as a critical determinant of stock price behavior in the banking sector, highlighting its importance as a strategic tool for both investors and corporate decision-makers. The findings emphasize the need for well-formulated dividend policies to enhance shareholder value, improve market perceptions, and provide guidance in volatile market conditions.