"Does Stock Market Liquidity Affect Firms' Dividend Policy?"

Abstract

“The harder we look at the dividends picture, the more it seems like a puzzle, with pieces that just do not fit together” (Black, 1974). Since the days of Modigliani & Miller (1961), scholars have been studying dividend policy. However, until quite recently, the idea of liquidity has rarely been mentioned. The study examined whether there was a relationship between the firms' dividend policy and any shares' liquidity criteria in the Sri Lankan context. This study represented 100 companies listed on the Colombo Stock Exchange (CSE) and studied the performance throughout 2015-2019. Dividend policy becomes dependent, whereas Amivest liquidity, turnover liquidity, and Gopalan liquidity become explanatory variables. Amivest liquidity and turnover liquidity are stock market liquidity measurements, whereas Gopalan liquidity measures firm liquidity. The relationship between variables was evaluated using a combined linear regression method. The study has determined no meaningful relationship between dividend policy and liquidity measures of Amivest liquidity and turnover liquidity. However, the study detected a significant reverse relationship between dividend policy and Gopalan liquidity. It emphasizes that firm dividend policy is affected by the firm liquidity but not by the stock market liquidity in the Sri Lankan context. Based on the negative relationship between the firm's dividend policy and the Gopalan liquidity, it may be suggested that owners who have invested in high liquid companies are less likely to receive dividends. Management may then skip or reduce the dividend and reinvest further because of the lower propensity to pay. On the other hand, if the company is low in liquid, the expected dividends are higher than the capital gains. And in the case of a company's liquidity, management may have an idea of whether investors want dividends or capital gains. Consequently, investors also can make better investment decisions if they concern firm liquidity in the Sri Lankan context, and they can have better rewards as they prefer.

Keywords: Colombo Stock Exchange, Dividend policy, Stock Market Liquidity