ABSTRACT
The
efficient and effective financial administration in corporate organization is
sine quad non' to the achievement of the organizational objective.
Dividend
policy is said to be financial policy that is responsible for the determination
of the market price of shares. But there are divergent views on the effect of
dividend policy on the market price of shares. Dividend relevance and dividend
irrelevance theories. The regression analysis performed on the secondary data
collected, using market price of shares as dependent variable, dividend per
share, retained earnings per share and earnings per share as independent
variables, revealed that there is significant relationship between dividend
policy and market price of shares. It was also revealed that dividend affect
market price of share more than retained earnings. It was also concluded that
the belief of the dividend irrelevance theorists is wrong in the real life
situation where forces of demand and supply play a determining role. It was
recommended that financial administrators study and educate the environment in
the formulation of dividend policy. Hence, optimum dividend policy will be achieved
which in tum increases the value of the business firm.
TABLE OF CONTENT
Chapter One: Introduction
1.1 Background
of the Study
1.2 Objective
of the Study
1.3 Statement
of Problem
1.4 Research
Questions
1.5 Research
Hypotheses
l.6 Significance
of the Study
1.7 Scope
and Limitation of the Study
l.8 Plan
of the Study
Chapter Two: Literature Review/Theoretical Framework
2.0 Introduction
2.1 Conceptual
Framework
2.l.1 Argument
in Favour of Retained Earnings
2.1.2 Argument in Favour of Dividend
2.2 Theoretical
Framework
2.2.1 Dividend Relevance
2.2.2 Dividend Irrelevance
2.2.3 Theories based on the in Formativeness
of Dividend Payout
2.2.4 Dividend Announcement and the Market
Price of Shares
2.3 Types
of Dividend
Chapter Three: Research Methodology
3.0 Introduction
3.1 Data
Collection
3.2 Sources
and Nature of Data
3.3 Analytical
Techniques and Instrument
3.4 Model
Specification
3.5 Model
Estimation Techniques
3.6 Re-Statement
of Hypothesis
3.7 Limitations
and Problem Encountered in the Research Work
Chapter Four: Method of Data Analysis
4.0 Data
Analysis and Interpretation
4.1 Presentations
and Interpretation of Result
4.2 Major
Findings and Implications
4.3 Effect
of Dividend Policy on First Bank of Nigeria
Chapter
Five: Summary of Findings, Recommendation and Conclusion
5.0 Summary
5.1 Findings
5.2 Recommendation
5.3 Conclusion
Bibliography
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Efficient
management of the flow of funds within a firm shows that the firm has a goal or
an objective because judgment as to
whether or not financial decision is efficient must be made in the light of
some standard. The objectives of firms are multidimensional; this may range from social, to economics and to finance.
The
social objective holds the view that the firm should socially responsible. This
is because the firm is not operating in a vacuum but within environment,
internal and external environments of the firm. These social responsibilities
include the supply of quality products at low prices to the customers, tarring
of roads maintenance of sound industrial relations, giving a fair deal to
employees and seeking their participation in management and contribution
towards the social overheads through taxes and donations. However, the social
welfare maximization objective is greeted with very may criticism. The economics
objective has profit maximization objective as its own objective and holds the
view that sole objective of any firm should be to maximize profit.
The
objective though considering better than that of social school of thought, also
witness several and serious criticisms. The finance is maximizing the, wealth
of the shareholders or value of the firm. The objective of wealth maximization
would cause financial managers to take decisions, which balance returns and
risk in such a manners as to maximize the benefits, through dividends and enhancement
of share price, to the shareholders.
Dividend
policy is seen to be sine-qua-non to the value of a firm subject to the
position maintained in the above paragraph. The shareholders see dividends as
signals of the firm's ability to generate future income, hence, it is used in
the valuation of the firm. The management of the firm is expected to choose the
capital structure that will be able to give optimum return to the firm.
Hence,
dividend policy "... consist of rules by which the earning are distributed
between retention and dividends to shareholder," Oloyede (2000).
The
form of returns, dividends and retained earning play important role in
maximizing the value of the firm. Infact, in any business organization, the
issues of dividend policy cannot over - emphasized. Dividends policy of an
organization are those policies that determine the amount of earning that the
organization will pay as dividend versus the amount .of earning that will be
retained and reinvested in the organization, Pantalone (1988).
Dividend
decision of the firm is a very important area of financial management. The
financial manager is faced with two conflicting interest vis-a-vis income to
the shareholders in form of dividend and retention to ensure adequate growth
rate. Therefore appropriate balance has to be maintained so as to satisfy the
two conflicting interest.
This
optimal dividend policy, which forms the main focus of dividend policy, ensure
the appropriate balance between the current dividends and adequate growth,
thereby maximizes the values (Market) of the firm's share.
Miller
and Modigliani (1961) opined that the effect of the company's dividend policy
on the value of its shares is a matter of considerable importance not only to
the corporate managers who must set the policy but to investors planning port
folio and to economists seeking to understand and appraise the functions of the
capital market.
The
ability to pay dividends duly and regularly is an important factor in
determining the success and value of such firm. For the vest majority of common
shares, the dividends record and prospects have always been the most important
factor controlling investment quality and value of the stock. The success of
the company is measured by its ability to pay liberal steadily increasing
dividend on the shareholders investment. This is because the true and intrinsic
value of any financial assets is based on the cash flows that the investor
expects to receive in the futures for owning such assets. Dividends tend to be
viewed both by the firms management and by the recipient shareholder as the
equivalent of an interest payment of a loan to creditors, a compensation for
the shareholders delaying consumption, Gordon and Williams (1962).
There
have been theories on the variable that influences the market price of a share
more than the other between dividend rate and retained earnings. Infact, there
are conflicting theories regarding the impact of dividend decision on the
market value of a given form's share. Some theorists even opined that dividends
decision does not have relationship the value of a firm.
1.2 OBJECTIVE OF
THE STUDY
Generally,
the study will examine the effect of dividend policy on the market price of
shares. The study will appraise and evaluate the effectiveness and efficiency
of dividend policy in the determination of the market prices of shares using
First Bank of Nigeria as a case study. The study will also appraise the role of
maximizing the value of corporate organization in the aggregate economic
development. Also, the research work will seek to know whether dividend policy
in its context and application is the only alternative or with some adjustment
that will bring the lasting solution to the problem of fluctuation in the
market prices of shares.
At
the end of the day, useful recommendation will be made on how the firms can
improve the move on the market prices of their shares.
Having
discussed the broad objective of the study, there is needed to specifically
state the specific objectives of this research work. The specific objectives
are as follows:
i. To
examine dividend policy as a financial administration policy.
ii. To examine the relevance
of dividend to stockholders satisfaction and market prices of shares.
iii. To
examine the effect of dividend policy on the market prices of shares.
iv. To
examine the relevance of retained earnings on the growth of the firm and the
consequent effect on the market price of shares.
v.
To examine the variable that mostly
influences the market prices of shares.
vi.
To examine the trend of dividend
payment on the future value of the firm.
vii. To
examine the contribution of corporate business organization in the economic
development.
viii.
To examine the constraints of dividend
payment in practice.
1.3 STATEMENT
OF PROBLEM
The
shareholders are always conscious of what returns they would get from their
investments at the end of the day. At the same time companies always want to exploit
the opportunity of retain earnings as a source of getting fund for the growth
of the company.
The
ability of the company to determine appropriate dividend policy would influence
the prospective investors and even the existing shareholders to be invested in
company stocks or buy additional ones. This will invariably influence the
market price of the companies share at the capital market.
Thus,
there is the problem of being able to strike a balance between growth of the
company and satisfy the shareholders. Thus, this study will proffer solution to
the following research questions.
1.4 RESEARCH
QUESTIONS
i. To what extent bas dividend policy
influence the market share price?
ii.
How efficient is dividend policy in
determining market share price.
iii. Does
the dividend policy maximize shareholders/investors interests?
iv. Is dividend policy sufficient in determining
market price of shares?
v. To
what extent has dividend policy enhances capital formation in the economy?
1.5 RESEARCH
HYPOTHESIS
HYPOTHESIS 1
HI -There is significant
relationship between market prices of share and dividend policy.
Ho
-There is no significant relationship between market price of shares and
dividend policy.
HYPOTHESIS 2
HI -Dividend policy affect
market price of share more than retained earnings.
Ho
- Dividend policy does not affect market price of share more than retained
earnings.
HYPOTHESIS 3
HI - There is a significant
relationship between dividend policy and capital formation in the economy.
Ho
- There is no significant relationship between dividend policy and capital
formation in the economy.
HYPOTHESIS 4
HI
- Dividend policy has a significant relationship with shareholders interest.
Ho
- Dividend policy has no significant relationship with shareholders interest.
1.6 SIGNIFICANCE OF THE STUDY
From
the Marco - economic perspective, it is the investors that help in capital
formation, which is eventually used for possible investment and growth of the
economy.
Dividend
policy therefore will go a long way to influence the capital formation of the
country. So the significance of this study cannot be over emphasized as it will
exposes how dividend policy has encourage or otherwise the capital formation in
the country and hence the economic growth.
From
the micro level, one would see that as a rational being, investors/shareholders
would be attracted to investment that brings about attractive returns. It is
the dividend policy that determines this. So the management of dividend policy
by the business managers goes a long way to attract these investors. It is the
belief of this researcher therefore that results got from this study will go a
long way to influence business managers in designing their dividend policy and
shareholders response to share market price.
1.7 SCOPE AND
LIMITATION OF THE STUDY
I
confine myself for the purpose of this research work to the dividend policy and
its effect on market price of shares as it is applied in financial
administration in content context and concept.
I
limit myself to the available data to be collected at relevant section of
Nigerian stock exchange, security and exchange commission, first bank of
Nigeria, libraries and other research institutes. Sources of information are
from journals, statistical bulletins, periodicals, news abstract, annual
reports of first bank of Nigeria, textbook and other government publications.
In
assessing the effect of dividend policy therefore, both quantitative and qualitative
approach will be employed.
I
cannot, but say that the research work is faced with some limitations. The time
available to carryout this research work is very inadequate. The research work
of this nature normally requires much time and attention, which is very had to
come by in programmes such as that of ours.
Access
to some useful information for the purpose of this research project was denied
due to secret management of information by Nigerian business organizations. The
current data are also seemingly unfeasible in such organization due to poor
management of information in Nigeria. The fund available for the purpose of
this research work is not adequate for it requires a lot of money to put
everything together in the cause of making research.
1.8 PLAN OF THE STUDY
As
chapter one has successfully dealt with the necessary introductory background
of the study, chapter two will be dealing with literature review, conceptual
and theoretical framework. Chapter three will deal with research methodology of
the study, Chapter four will deal with data presentation and analysis. While
chapter five will finally deal with the summary, concluding remark and
recommendation.
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