Abstract:
The purpose of this paper is to examine the relationship between dividend policy and stock price
volatility. Two key variables; dividend yield and dividend payout have been taken as the independent
variables after controlling for firm size and growth in assets. The stock price volatility has been taken
as the dependent variable. Data collection was carried out with a sample of 40 companies listed in the
Colombo Stock Exchange, for a period of ten years from 2003 to 2012. The results of cross section
random effect model revealed that there is a significant negative impact from dividend payout, a
significant positive impact from company size and no evidence of significant impact from dividend
yield on stock price volatility. Furthermore, Granger causality tests revealed that there is no short term
impact from dividend payout on stock price volatility and it showed a feedback exist between company
size and stock price volatility in any lag level. It is evident that the dividend yield does granger cause
stock price volatility and reported a unidirectional causality exists from dividend yield to stock price
volatility in any lag level. Therefore, the findings suggest that, high dividend payout would lead to less
volatile stock price, whilst higher dividend yield pave the way towards more volatility in stock price in
the short run. This paper is the first to show that dividend yield has a significant impact on stock price
volatility in the short run and the first to discuss the same phenomenon in the Sri Lankan context, to the
best of the author‟s knowledge.
