The shareholder wealth consists of dividends and capital gains. The former is considered to be risk averse,whereas the latter is perceived to be risky. The risk return trade-off in these two returns drives the investorpreference. The objective of a for-profit organization is to maximize shareholders’ wealth, however, disbursingdividends may not always be in the best interest of shareholders. Theoretically, retained earnings increase shareprices as firms have more funds to be invested. The objective of the study is to measure the stimulus of cashdividends on share prices. We conduct empirical analysis based on data relating to companies listed on theColombo Stock Exchange (CSE) under the manufacturing sector. As we show in our literature review, in order toreduce the risk of obtaining spurious results, this analysis requires the use of advanced modelling techniquesallowing to model non-stationarity of time series, as well the presence of control variables and lagged variables.The novelty of our study is in the use of advanced modelling and data visualisation techniques (including the‘xdPlot’ dataviz framework recently proposed by the authors), especially in application to CSE data. We conducta thorough exploratory data analysis (EDA) aiming to spot data anomalies and initiate appropriate datatransformations. Given the results of EDA and the nature of the data available, we select the Arellano-Bondestimator as the most adequate method for regression analysis. Market Price per share (MPS) termed as thedependent variable, whereas Dividend per Share (DPS) is viewed as the independent variable. The resultsvalidated theoretical literature such as signaling effect and bird in hand theory, but questioned some previousempirical studies. The study validated cash dividends as stimulus to investors given the positive relationshipbetween DPS and MPS.
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