THE IMPACT OF DIVIDEND POLICY DECISION ON CORPORATE PERFORMANCE OF LISTED FIRMS IN NIGERIA

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 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.