The Influence of Corporate Governance on Dividend Decisions of Listed Firms: Evidence from Sri Lanka

Abstract

This study investigates the role of corporate governance in the dividend decision of 198 non-financial companies listed on the Colombo Stock Exchange of Sri Lanka, over the period from 2009 to 2016. Four corporate governance indicators are used in this study; managerial ownership, the board size, board independence, and CEO duality. Furthermore, this study considers three control variables such as profitability, firm size, and corporate tax. This study employed the Generalized Method of Moments (GMM) model to estimate the regression models on panel data study. The major contribution of this study is exploring the insight into the effect of corporate governance factors on dividend decisions. The results of the study revealed that managerial ownership showed a significant positive impact on the dividend payout ratio. Board size showed a significant positive influence on the dividend payout ratio. Board independence negatively but significantly influenced the dividend payout ratio. CEO duality showed an insignificant negative impact on the dividend payout ratio. In the framework of these CG indicators, Sri Lankan listed firms are recommended to have dispersed ownerships, large Board size and maintain a balance of power and authority by separating the individual who is assuming the position of the CEO from the Chairperson of the Board and maintain at least two independent directors.