Abstract
This research examine the impact of dividend policy decision
on corporate performance of listed firms in Nigeria. It aims to ascertain if
there is any significant relationship between dividend yield and share price of
listed firms in Nigeria and determine the impact of retained earnings ratio on
the share price of Nigerian banks. The
cross-sectional research design was adopted in this study in the course of data
collection. This is because the researcher made observations at a particular
point in time and chi-square method was used in analyzing the data gathered.
Based on the findings of the research work, it was revealed that dividend
policy serve as a means of evaluating organizational performance in Nigeria
firms and the study also revealed that dividend policy does not server as a
means for evaluating but also disclose bad practices and weakness in the
internal control system. Finally, it was recommended that organizations should
ensure that they have a good and robust dividend policy in place. This will
enhance their profitability and attract investments to the organizations and
that directors of corporate organizations should be made to update records of
shareholders including their next-of-kin to avoid a deliberate or undue
retention of unclaimed dividend warrants.
TABLE OF CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgements iv
Abstract v
Table of Contents vi
CHAPTER ONE:
INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of Problem 8
1.3 Research Questions 8
1.4 Objective of the Study 9
1.5 Statement of Hypotheses 10
1.6 Significance of the Study 11
1.7 Scope of the Study 12
1.8 Limitations of the Study 12
1.9 Definitions of Terms 13
CHAPTER TWO:
REVIEW OF RELATED LITERATURE
2.1 Introduction 14
2.2 Determinants of Dividend Policy 18
2.3 Legal,
Contractual and Internal Constraints
and
Restrictions 20
2.4 Legal Framework 22
2.5 Theoretical Framework 30
2.6 Empirical Review 35
2.7 Measurement of Corporate Performance 38
CHAPTER THREE:
RESEARCH METHOD AND DESIGN
3.1 Introduction 41
3.2 Research Design 41
3.3 Description of Population of the Study 42
3.4 Sample Size 42
3.5 Sampling Technique 42
3.6 Sources of Data Collection 43
3.7 Method of Data Presentation 43
3.8 Method of Data Analysis 44
CHAPTER FOUR:
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Introduction 46
4.2 Data Presentation 46
4.3 Data Analysis 47
4.4 Hypotheses Testing 56
CHAPTER FIVE:
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction 62
5.2 Summary of Findings 63
5.3 Conclusion
63
5.4 Recommendations 64
References 66
Appendices 68
CHAPTER ONE
INTRODUCTION
1.1 Background
to the Study
So many factors affect the performance
of corporate organization and one of those factors is dividend policy. Dividend
policy serves as a mechanism for conduct of a managerial opportunism.
The pattern of corporate dividend
policies not only varies across countries, especially between developed,
developing and emerging capital markets. If the value of a company is the
function of its dividend payments, dividend policy will affect directly the
firms cost of capital. But is there any significant relationship between
dividend policy and corporate performance in form of profitability investment
and earning per share? This is the question this research work will shed more
light on.
Dividend earnings decision is widely
considered in the business world as a strategic in corporate finance as well as
corporate performance and growth. Dividend policy directly influences the
behavioural pattern of the investors i.e. shareholders. Because the purchaser
of the company (shareholders) actually buys a dividend expectation, because of
the dividend policy decision implication on the behavioural pattern of the
shareholders be it positive or negative, the corporate world imposes the
responsibility of this great task of the boardroom affair.
Dividend policy decision as a tool in
the strategic corporate finance as well as corporate performance and growth
affect the share price as well as cost of capital, in other words on option
dividend policy that maximizes the wealth of shareholder. Due to obvious
reasons, shareholder considers impotence to dividend policy. The importance
that the individual shareholder places on dividends depends on his level of
wealth and performance for capital gains amongst others. In an environment with
progressive personnel income taxes, the individual with more wealth will tend
to proffer capital appreciation on shares than dividends. At lower level of
income, the capital gain tax rate, however, the reverse is the case with
increased income. The wealthy individual among the diverse shareholders may
then prefer capital appreciation on his share due to the aforementioned
reasons.
It is often claimed that the company’s
investment decisions and dividend decision are independent of the shareholders
decision. It should be noted that this might be entirely true, some are repay
procedures that protected the aggressive shareholders. Beside these, the
shareholders might exercise their right through the selling of their shares on
the stock exchange and this has negative consequences on the value of the
company’s share in the market which in turn affects the fortune of the company.
According to Modigliani and Muller (1961),
the impact of capital structure and dividend performance has for years been an
unsettled one. Some writers are of the opinion that the way and manner in which
the operation of a firm is financed does not affect the value of the firm while
some believe that the use of debt financing mix will magnify the value of the
firm if the financial manager will be indifferent to the source of finance that
appropriate capital structure is a critical decision for any business
organization. The decision is important not only because of the needs to
maximize return to various organization constituencies but also because of the
impact such a decision has on the organization’s ability to survive in its
competitive environment.
According to Modigliani and Muller
(1961), an optimal capital structure exist which balance the risk of bankruptcy
with the tax saving of debt. It is important to note that dividend is not a
construal obligation of a firm to its shareholder or debt providers. The amount
of dividend if any is rested on management best option is to use the income.
The board of directors who are ultimately responsible for setting dividend
policy can chose not to pay any dividend using the firms earning to acquire
additional asset instead.
In every business, capital structure is
of primary importance. It shows the general public how a company finances its
operations through some combination of equity debt etc. A firm’s capital
structure indicate how the company finances its entire operations and
expansions by utilizing different financial resources whether it is from
equity, capital or other forms of capital such as vendor financing, which is
the process of selling goods or products before paying the bill to the vendor.
Vendor financing does not cost anything to the company, instead, it gives more
return on investments. It should also be noted that capital structure includes
equity capital which is the money invested into a company in exchange for
ownership interest in the company.
According to Pandey (2005), entrepreneur
usually starts their business with other stockholders in the business in order
to contribute to the increase of the business capital. In this connection, the
management of the company is authorized to use the money collected to invest in
the factories or plant and to purchase share stock in the company, in this way,
each stockholder owns shares or percentage of the company through investing
their money as part of the capital of the company.
Nevertheless, dividend policy refers to
the company regulation and guidelines on dividend payments to shareholders of
the organization. Having a dividend policy is very essential for both the
company and shareholders, it is easier to monitor and figure out the impact of
the dividend policy in the entire performance or operation of the business.
Therefore, dividends are payments made
by the corporation to its shareholders when a company earns a project or
surplus and such money can be used as retained earnings. Hence the ability of
the company to pay dividend can be stated to measure the sounded and
profitability of a company.
Financing decisions determines the
capital structure of the firm and forms the source on which investment
decisions are made. The third decision, dividend decision which forms the focus
of this study has to do with the determination of the dividend payout adopted
by the firm in deciphering the amount of cash that is given to shareholders.
This decision is dependent on whether the potential investors and shareholders
alike have a preference for capital gain as opposed to income.
Therefore corporate organizations adopt
dividend policy that have the major aim of maximizing shareholder’s wealth or
put in a better perspective, increasing their share price/value. The financial
managers for instance have to decide on whether to adopt a high payout ratio
and turn around to borrow funds from the capital market for investment purposes
or adopt a low payout ratio and use the retained earnings in financing the
investment opportunities prevalent at that time. Others also adopt the methods
of paying stock dividends as well as cash dividends depending on their
shareholders’ preference. The particular method a firm adopts also depends on
the prevailing economics situation at that time.
Dividend policy can best be seen as a
pivot around which other financial policies operate since the other two
decisions a manager is faced with resolve around it. The financial decision and
investment decision are both dependent on the amount of retained earnings
available and this is influenced by the dividend policy.
Dividend policy is thus one of the most
important policies in corporate financing not only from the firms view point,
but also from the point of view of shareholders regulatory bodies and
stakeholders.
1.2 Statement
of Problem
Corporate organization, banks inclusive
are faced with the problem of whether to pay a larger, small or zero percentage
of their earnings as dividends. This problem is born out of the desire to
satisfy the various needs of shareholders. Some shareholders have the need for
income now and as such will prefer a high dividend payout ratio which other who
needs to invest in the future would prefer capital gains. Due to the fact of
having to deal with competing interests of various shareholders, the kind of
dividend policy a bank adopts could either lead to positive or negative effects
on the share prices of the company. The managers are therefore unable to
forecast with certainty to what extent the policy will affect their share price
of their firms.
1.3 Research
Questions
i. Should
firm’s payout money to their shareholders or invest for them?
ii. If
dividend payment is decided upon, what percentage of its earning is actually
paid?
iii. Consequent
upon the aforementioned decisions how will this share price of the firm be affected?
iv. What
is the relationship between dividend yield and firms share price?
v. What
is the impact of retained earnings ratio on the share price of Nigerian firms?
1.4 Objective of the Study
The general objective of this study is
to examine the impact of dividend policy on share price valuation in Nigeria.
Specifically, this study sought to:
i. Ascertain
if there is any significant relationship between dividend yield and share price
of listed firms in Nigeria.
ii. Determine
the impact of retained earnings ratio on the share price of Nigerian banks.
1.5 Statement
of Hypotheses
In order to provide a framework for
evaluating the impact of dividend policy on share price valuation on listed
firm in Nigeria, the following hypotheses were formulated;
Hypothesis One
HO: There is no significant relationship between
dividend policy and corporate performance of listed firms in Nigeria.
HI: There is significant
relationship between dividend policy and corporate performance of listed firms
in Nigeria.
Hypothesis
Two
HO: There is no significant
impact of retained earnings ratio on share price of listed firms in Nigeria.
HI: There is significant
impact of retained earning ratio on share price of listed firms in Nigeria.
Hypothesis
Three
HO: There is no significant
relationship between dividend yield and share price of firms.
HI: There is significant
relationship between dividend yield and share price of firms.
1.6 Significance
of the Study
The study is beneficial to many groups.
It is important to note that the study provides an avenue for an in-depth
understanding of the topic by fellow researcher, financial managers, board of
directors and other decision makers in formulating optimum policies for their
respective firms.
The study also forms as a tool for
assisting investors in making their investment decisions as well as aiding to
expose the various factors that may influence stock prices.
The study further serves as researcher
materials for future investors and also adds to the existing body of knowledge.
1.7 Scope
of the Study
The scope of this study spanned a period
from 2003 to 2013, having 11 years period for the scope of the study. The study
also focused on 14 firms including Nigerian banks (one, new generation and
other the old generation). In an attempt to empirically analyze the effect of
dividend policy on share price valuation.
This scope was expected to give an
accurate analysis and findings on the subject matter.
1.8 Limitations
of the Study
In writing the project, so many problems
were encountered which are listed below;
·
Geographical coverage: Factors that may
likely affect the work is the issue of investigating the concerned people in
carrying out the research work.
·
Problem of sourcing for material: The
research was faced with problems of getting current materials, textbooks,
journals and seminar papers related to the subject matter.
1.9 Definition
of Terms
·
Dividend:
This
is a proportion of profit allocated by a firm to its common shareholders.
·
Dividend
Decision: This is the trade-off between paying out cash and
issuing new share on one hand and retaining earning on the other hand.
·
Dividend
Per Share: The basic cash flows passed from the firm to its
stakeholders.
·
Dividend
Policy: Decision made by the board of directors as to the
amount by divided payable to equity holders.
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