I am trying to find impact of (Dividends) on (Firm Sales) controlling for the firm characteristics including productivity.

I estimate Productivity by Cobb Douglas:

ln(sales)=a+b1 Labor+ b2 Capital+ residual

Now (residual)=TFP

Then I run my regression:

ln(sales)=a+b1 Dividends+ b2 TFP (residual) + firm control+new_residual

Dividends is significant variable now.


However when I remove TFP (residual) from regression, the impact of Dividends become directly insignificant.

In particular, If I run

ln(sales)=a+b1 Dividend+ firm control+new_residual

Dividends is insignificant variable now.


I have two Questions :

1. Is it any error to include productivity in my regression estimated by TFP? My objective was to control for different productivity.
2. Why Dividends turn significant with productivity (estimated TFP) and insignificant without it?