THE IMPACT OF DIVIDEND ANNOUNCEMENTS: RECONCILIATION OF SRI LANKAN EVIDENCE OVER LAST TWO DECADES

Purpose of this paper is to further examine the initial work of Bandara (2001) and compare with recent work of Bandara and Perera (2010) in order to understand the possible changes with regard to market response to dividend announcements. The time period of the study is from 1993 to 2008 to study stock price reaction to dividend announcements and to measure informational content of dividend announcements in Sri Lanka. This study deals with the question of; How does the Sri Lankan market respond to announcement of dividends? Standard Event Study Methodology (ESM) established by Brown and Warner (1980, 1985) adopts to compute abnormal returns on the Colombo Stock Exchange (CSE) using secondary data from electronic database of the CSE, annual reports of the sample companies and fact book of the CSE. First study originally used 123 events and the present study uses 264 events for data analysis. The results confirm significant difference between the Sri Lankan market and other developed markets. We find that significant abnormal returns around dividend announcement day. The results show significant characteristics between the two periods. Both overall samples support informational content of dividend hypothesis. This study confirms that the significant anticipatory response to dividend announcements one week before the event and price adjustment process have been enhanced as per the latest study. Further, delayed market response is also significant and it shows the behavior of the market followers due to information asymmetry or lack of access to enjoy with new information. Further delayed response on forgone response would be due to lack of capital market education; or in other words financial literacy. Finally, both studies confirm that overall samples are not consistent with the semi-strong form of the Efficient Market Hypothesis (EMH). Key Words: Dividend Announcements, Colombo Stock Exchange, Efficient Market Hypothesis, Event Study Methodologyfor full paper: fmscresearch@sjp.ac.l