The Impact of Financial Leverage on Dividend Policy - A Study on Listed Companies of Colombo Stock Exchange (CSE) in Sri Lanka

Abstract: This paper investigates the effects of financial leverage on dividend policy of listed companies on CSE in Sri Lanka. To measure the impact of financial leverage on dividend policy extended model of Linter (1956) was used. The study data has been collected for the period of five years from 2006/2007 to 2010/201I. The debt ratio of the firm, the previous year's dividend yield and change in earnings are as its independent variables. The dividend per share is the dependent variable. The descriptive statistics were calculated for our entire variables and then pearson's correlation coefficient was calculated to identify the preliminary relationship among all the variables. The regression analysis was used to examine the significant effects of this model. The model was fit, on the other hand, financial leverage was found to have a negative impact on dividend policy, indicating less dividend payments by high-debt firms. The findings also further confirmed that changes in earnings has no significant impact on dividend policy in case of listed companies on CSE while the dividend yield has positive impact and dividend policy. Sri Lankan listed companies are recommended to inject the specific amount of equity to improve the capital structure