This project examines the dividend policy as a
determinant of investors interest in firms. The objective of this study is to
ascertain the point at which the dividend policy would be at optimal. In a bid
to carrying out this study, the researcher developed some hypotheses which were
used in carrying out its findings. A research design was drawn up for the study
and the shareholders of UBA was taken to represent the population and due to
time and financial resources, a sample size of 27 was used for effective
result. From the analysis, it was discovered that the major tools that motivate
an investor to invest in a firm is the dividend, which the investors will get
in return for their investment. It was concluded that the board of director
seems to have little or no recognition for dividend, but what they are concern
about is the retain earnings. It was recommended among others that investors
should exhibit some element of caution, they should not only buy shares due to
its cheap price since no quality thing or product sells at the cheapest price.
TABLE OF CONTENTS
Title page i
Table of contents vi
Background to the Study 1
Statement of Problem 7
Research Questions 9
1.4 Objectives of the Study 9
Statement of Hypotheses 10
1.6 Significance of the Study 11
of the Study 13
Limitations of the Study 13
Two: Review of Related Literature
Policy and Agency Problems 17
and Asymmetric Information 19
of Dividend Policy 22
Irrelevance of Dividend Policy: Miller and Modigliani Theory (1961) 27
Relevance of Dividend Policy 29
Literature Base on each of the Relevant Variables of the Model or Theory 32
of Dividend Payment 38
2.9 Types of
Dividend Policy 40
2.10 Factors that Determine Dividend Policy 44
2.11 The Size
and Stability of Earnings 49
2.12 Shareholders view Point on Dividend Policy 52
2.13 Type of
Method and Design
3.2 Research design 56
Description of the Population of the
3.4 Sample Size 57
Sampling Techniques 58
Method of Data Collection 58
Method of data Presentation 59
3.8 Method of Data Analysis 59
Four: Data Presentation,
Analysis and Interpretation
Presentation of Data 61
4.3 Data Analysis 64
Hypothesis Testing 75
Five: Summary of Findings, Conclusion and Recommendations
5.2 Summary of Findings 80
Appendix A 88
Appendix B 89
Background to the Study
are distribution of the earned capital of a corporation to its shareholders.
They are appropriation or distribution of profit that a company gives to its
shareholders after deducting tax and fixed interest on debt capital. According
to Alli, Khan and Ramirez (1993), dividend is seen as return on shareholder
investment for taking risk, in other words, it is the part of earnings that the
corporation is willing to pay out to its shareholders for the capital they
invested in the corporation.
Dividend policy has been an issue of interest in
financial literature since Joint Stock Companies came into existence. Dividends
are commonly defined as the distribution of earnings (past or present) in real
assets among the shareholders of the firm in proportion to their ownership. According
to Frankfurter (2003), dividend policy connotes to the payout policy, which
managers pursue in deciding the size and pattern of cash distribution to
shareholders over time, management’s primary goal is shareholders’ wealth
maximization, which translates into maximizing the value of the company as
measured by the price of the company’s common stock. This goal can be
achieved by giving the shareholders a “fair” payment on their investments.
However, the impact of firm’s dividend policy on shareholders wealth is still
Miller and Modigliani (1961) provided their
irrelevance theory of dividend policy; this theory is based on the assumptions
of perfect markets. They concluded that dividend policy has no effect on either
the price of firm's stock or its cost of capital. Research in the area of
dividend policy has been concerned with relaxing the assumptions of MM model.
Bird-in-the-hand theorem suggests that the relationship between dividend policy
and the firm's value can be explained by investors’ preference for dividend
payments rather than the expected capital gains from stocks.
Under perfect capital markets, Miller and Modigliani’s (1961) conclusion
that dividends are not relevant to the firm’s value is generally held to be valid.
However, real world financial markets do not satisfy the strict conditions of
perfect capital markets. The presence of market imperfections, such as taxes,
asymmetric information, agency costs, and transaction means that we cannot dismiss
the proposition that dividend policy is relevant to the firm’s value. The existence
of market imperfections has led to the development of a number of dividend
theories such as signaling theory, tax clientele theory, agency theory,
residual theory and stability theory of dividends
However, investors have different tax preferences,
which lead them to prefer firms with dividend policies that fit their tax
preferences. This is what is called in the financial literature the “clientele
effect”. Furthermore, the signaling theory reveals the way that investors
receive the signals from firms due to the asymmetric information. It highlights
the problems or the conflicts that might arise because of the information
asymmetry in the market. According to Brealey and Myers (2002), dividend policy
has been kept as the top ten puzzles in finance. Brealey, (1994), the most
pertinent question to be answered here is that how much cash should firms give
back to their shareholders? Should corporations pay their shareholders through
dividends or by repurchasing their shares, which is the least costly form of
payout from tax perspective? Firms must take these important decisions period
after period (some must be repeated and some need to be revaluated each period
on regular basis.)
Dividend policy can be of two types: managed and
residual. In residual dividend policy the amount of dividend is simply the cash
left after the firm makes desirable investments using NPV rule. In this case
the amount of dividend is going to be highly variable and often zero. If the
manager believes dividend policy is important to their investors and it
positively influences share price valuation, they will adopt managed dividend
policy. The optimal dividend policy is the one that maximizes the company’s
stock price, which leads to maximization of shareholders’ wealth. Whether or
not dividend decisions can contribute to the value of firm is a questionable
Firms generally adopt dividend policies
that suit the stage of life cycle they are in. For instance, high- growth firms
with larger cash flows and fewer projects tend to pay more of their earnings
out as dividends. The dividend policies of firms may follow several interesting
patterns adding further to the complexity of such decisions. First, dividends
tend to lag behind earnings, that is, increases in earnings are followed by
increases in dividends and decreases in earnings sometimes by dividend cuts.
Second, dividends are “sticky” because firms are typically reluctant to change dividends;
in particular, firms avoid cutting dividends even when earnings drop. Third,
dividends tend to follow a much smoother path than earnings.
dividends may take the form of cash assets, other than cash or additional
shares of the corporations, stocks. The usual way of distributing dividend is
in the form of cash dividend, the declaration and payment of dividend is at the
discretion of the board of directors. Generally, owners of this corporation
purchase their shares because they know they can count on the regular receipt
of dividends. In most cases they use these regular cash inflows from dividend
as a means of livelihood and for further investment.
policy is the determination of earnings to be distributed to shareholders and
the amount to be retained in the
firm. It can also be seen as the rule that guides the board of directors on the
declaration and payment of dividend. Dividend policy is the third major
decision of a firm. It is the percentage of earning that the corporation is
willing to pay out to its shareholders. Dividend policy is concerned with the
allocation of earnings between dividends and retains earning; hence reduce the
amount to be retained.
policies are of different kind and there are factors that determine the
dividend policy that will guide a corporation. The ultimate responsibility for
dividend policy, rest with the board of directors. The kind of dividend policy
and how much to be retained for growth and expansion of the corporation is also
their responsibility. The idea of not declaring dividend at all or a low
dividend payment will create fear, uncertainty, doubt and loss of interest on
the part of the shareholders and prospective investor while a very high dividend
payment will increase the growth of the firm drastically. Dividend policy is an
indispensable tool in the management of a corporation and also it is the reward
that an investor derives from investing.
corporation that is capable of selling shares to the public is expected to have
a policy that will guide them, when the issue of dividend is raised in Annual
Genera Meeting (AGM).
policy is relevant because it is a guide to the, Board of Directors on how best
to declare and to pay dividend to its investor. On the other hand dividend
policy is irrelevant, because in the long-run equilibrium in the value of two
identical corporations will be the same regardless of their various dividend
Statement of Problem
policy is regarded as a connecting rod between the corporation and investors because
all interactions revolve round a dividend policy network. Dividend policy which
is a determinant of investor’s interest in the corporation should not be
gambled with because it is the main concern of investors in the corporation. The
fact remains that dividend policy differs in terms of payment, in relation to
the amount to be paid, the number of shareholders to be paid, the volume of
profit available for distribution and the need to retain earnings if possible.
Most corporations do not declare dividend and the amount declared if they do is
always very small and also most corporation are not concern about the dividend
of investors, what they are concern about is the retained earnings and another
problem is that most firms do not consider the factor that determine the kind
of dividend policy to operate with.
of the major problems today in dividend is that when dividends are declared and
the shareholders did not claim their dividends, in most cases the firm may
decide to re-invest it, after re-investing it, the profit are not given to the
1.3 Research Questions
following research questions will aid the researcher in carrying out this
i. To what extent does dividend policy have
any impact on investors in the firm?
To what extent does dividend policy in
any way improve investor’s credibility and reliability in investors’ interest
in the firm?
iii. To what extent does dividend policy have
significant influence on the investors in the firm?
1.4 Objectives of the Study
this research, the study of dividend policy is with the view of ascertaining
the interest of investor as a result of a particular dividend policy as it exists
in the firms in Nigeria. A bank may be able to overcome an absorbed capital
shortage caused by the increase in dividend declared by selecting carefully a
dividend policy to adopt. The purpose of this research project includes:
a. To ascertain the point at which the
dividend policy would be at optimal.
b. To examine and establish the significance
of dividend policy as a reward for investment.
c. To discuss the underlying principle this
guides suitable dividend policy.
d. To examine and establish significance of
dividend policy as a reward for investment.
1.5 Statement of Hypotheses
The following are the stated hypotheses for this
is no relationship between the market value of share and dividend policy.
HI: There is relationship
between the market value of share and dividend policy.
HO: Dividend policy does not determines the interest
of investors in a firm.
HI: Dividend policy determines the interest of
investors in a firm.
1.6 Significance of the Study
research work will be so useful to prospective investors and existing
investors, in the sense that it will aid investors in taking appropriate
decision in establishing investment interest. It will also give the banking
sector and other firms the insight of how best to declare and pay dividend,
since it is the major link between the investor and investment.
through past and recent Annual Report of the banking sector, I discovered that
the percentage of profit after tax transfer to reserves or retain earning is
always more than dividend declared thereby increasing retain earning and
reducing dividend declared.
research work is important as it will open new areas research work to student,
the banking sector and others, including the government.
Banking Sector: Dividend policy is of great
importance to the Board of Directors because it will enable them to know, compare
how best to allocate dividend to its existing shareholders.
policy that is favourable would make the interest of investor higher and hence
existing investors will have more interest and it will also attract the
interest of prospective investor.
Government: The government is the closest monitoring
unit as far as the issue of dividend is concerned. The government derives
revenues from dividend declared by banks. The individual investors and
corporate bodies are taxed by the government.
In establishing monetary or fiscal policies of a nation, the Gross National Income
or Net National Income is taking into cognizance of which dividends earned is a
stern post. The government should encourage a stable dividend policy that would
be beneficial to both the firms and the investors because it will encourage and
ensure a better standard of
living through increased Net National Income.
student as a researcher has the opportunity and privilege of contributing or
suggesting to how a good dividend policy can attract investors. The research
work has also enhanced the
knowledge of the researcher.
it is a requirement as a particular fulfillment for the award of an (OND) in
Accountancy. This research work will also serve as information to all students
studying financial management and other related courses.
Scope of the Study
research work is concerned with the dividend policy of the banking sector. It
seeks to identify the reaction of shareholders/investors to dividend declared
by bank whether favourable or not. This study is limited to the application of
the dividends theory to the Nigeria
1.8 Limitations of the Study
are many limitations which often hinder the successful completion of a research
work. In carrying out this research work however, it is design to provide
reasonable assurance but not absolute assurance in regard to dividend policy as
a determinant of investor’s interest on firms and the reliability of financial
information and the compliance with law and regulation.
view of these, there is lack of adequate data on specific areas of
investigation this cause some limitation to the researcher, Unwillingness of
staff to release some vital information due to the overriding duty of secrecy
militated vary low and often at times vague and distorted information.
1.9 Definition of Terms
These are defined as the distribution of earnings (past or present) in real
assets among the shareholders of the firm in proportion to their ownership.
Policy: This is referred to as the payout policy, which
managers pursue in deciding the size and pattern of cash distribution to
shareholders over time.
Dividend: This is a major form of dividend payment which
represent dividend paid in cash out of the firm earnings
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