Abstract:
This study aims to find the effect of the Deemed Dividend Tax (DDT) on the dividend
payout policy of companies in Sri Lanka. The sample of the study comprises of 100
companies listed on the Colombo Stock Exchange, excluding financial and power and
energy sectors, for the period from2003 to 2014. Further, the study uses the Tobit
regression model to analyse the data. The findings of the study suggest that a large
number of companies have initiated dividend distribution after the introduction of
DDT in 2007 and that dividend payout of companies have increased significantly due
to the introduction of DDT. On the other hand, relaxation of DDT threshold in 2011
has prompted companies to decrease the dividend payout, but to a lesser extent
compared to the impact of introduction. The findings also discover that dividend
income of a company has become a factor that affects dividend policy of a company
significantly, after the introduction of DDT. Additionally, the findings show that
profitability, stability of earnings, leverage and institutional and corporate ownership
affect dividend policy of companies in Sri Lanka significantly. However, it is evident
that liquidity position of companies is not considered in dividend policy decisions in
Sri Lanka, as the companies are more concerned about reducing their tax liability by
avoiding DDT. Moreover, the findings support signalling, catering and tax clientele
hypotheses, but refute the tax effect hypothesis. In conclusion, the DDT has affected
dividend payout policy of companies and has altered the factors that affect dividend
policy in Sri Lanka.
