ABSTRACT
The purpose of this research work is to highlight an appraisal on the effect of dividend policy on manufacturing firms’ share value. Dividend Policy is one of the three major policy areas of financial management since Nigeria Stock Companies came into existence. it determine the distribution of earning between payments to stockholders and investment or reinvestment in the firm. It could be seen as to constitute the cash flow that accures to the stockholders. The major objective of the study is to determine the effect of dividend policy on manufacturing firms’ share value. Other objective is to ascertain the relationship between dividend per share and earning per share of manufacturing firm, to ascertain the companies dividend policy that satisfies the objectives of maximizing owners wealth. The study had a population of forty (40) quoted manufacturing firms. Out of which a sample size of fifteen (15) were selected using Yaro Yamani formula. The ex –post facto research design was adopted in the study. Three (3) hypotheses was tested using correlation co-efficient. It was found out that there is no effect of dividend policy on manufacturing firms’ share value, There is no significant relationship between earning per share and dividend per share, Dividend policy satisfy the objective of maximizing owner wealth. Thus, it is recommended that financial managers should have information on the factors in the economy that affects the behavior of investors in their purchase of stock before any public reissue. Nigeria Stock Exchange should maintain its reliance on the force of demand and supply alongside its daily biding system because it tends to give the firms a fair assessment before the public in an unstable business environment.
TABLE OF CONTENTS
Title page i
Approval page ii
Certification iii
Dedication iv
Acknowledgment v
Abstract vi
Table of Contents vii
CHAPTER ONE – INTRODUCTION
- Background of the Study 4
- Statement of the Problem 5
- Objectives of the Study 6
- Research Question 6
- Hypothesis of the Study 7
- Significance of the Study 8
- Scope of the Study 9
- Limitation of the study 9
- Operational Definition of Terms 10
References 11
CHAPTER TWO-LITERATURE REVIEW
- Introduction 12
2.1 Overview of Dividend and Earning per share 12
2.1.1 Types of dividend 16
2.2 Overview of Dividend Policy 19
2.2.1 Types of Dividend Policy 21
2.3 Dividend Policy and The Provision of Companies and Allied
Matters Acts 1990 as Amended 27
2.4 Evolution of Stock Pricing 27
2.5 Valuation Characteristics 28
2.6 Stock Valuation Models /Method 29
2.7 The Dividend Theories 33
2.7.1 Factor that influences a firm’s dividend decision 35
2.8 Relevance of Dividend Policy 38
2.8.1 Irrelevance of Dividend Policy 44
2.9 The Residual Theory of Dividend Policy 50
2.10 Securities Valuation Technique 51
2.11 Dividend Policy Payment Procedure 55
2.12 Dividend Payment Timeline 57
2.13 Measures Dividend Policy 59
2.14 Factors Influencing Dividend Policy 60
2.15 Factor influencing share price behavior in Nigeria stock
Market 64
2.16 Effects of Dividend Policy on Required Rate of Return 65
Reference 68
CHAPTER THREE – RESEARCH METHODOLOGY
3.0 Introduction 70
3.1 Research Design 70
3.2 Sources of Data 71
3.3 Method of Data Collection 71
3.4 Population of the Study 72
3.5 Sample of the Study 72
3.6 Techniques of Data Analysis 74
3.7 Model of Specification 75
Reference 76
CHAPTER FOUR – PRESENTATION OF DATA ANALYSIS AND INTERPRETATION
4.0 Introduction 77
4.1 Data Presentation / Analysis 78
4.2 Hypotheses Testing / Interpretation of Test 92
CHAPTER FIVE –SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
5.0 Introduction 103
5.1 Summary of Findings 106
5.2 Conclusion 107
5.3 Recommendation 108
5.4 Suggestion Areas for Further Research 109
Bibliography 110
Appendix 111
CHAPTER ONE
INTRODUCTION
1.0 BACKGROUND OF THE STUDY
Dividend Policy is one of the three major policy areas of financial management since Nigeria stock companies came into existence. Dividend is commonly defined as the distribution of earnings (past or present) in real assets among the shareholders of the firm in proportion to their ownership. Dividend policy connotes to the payout policy which managers’ purse in deciding the size and pattern of cash distribution to shareholders overtime. Bhattacharya (1999:P.241).Management 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 shareholder a “fair” payment on their investments. However, the impact of firm’s dividend policy on shareholders wealth is still unresolved.
According to Bolt an (2000, p.249) Dividend policy is the guiding principle in determining what proportion of earning should be paid out as dividend. Three decades ago, Black fisher (1996) in his study on dividend wrote, “The harder we look at the dividend picture the more. It seems like a puzzle with pieces that just don’t fit together”. Why shareholders like dividends and why they reward managers who pay regular increasing dividends is still unanswered. According to Frankfurter, George and Wood bob (2003) Dividend policy has been kept as the top ten puzzles in finance. The most pertinent question to be answered here is that how much cash should firms give back to their shareholders? Which factors determine or influence the type of dividend payout ratio? Does the payment of dividend affect the market price of the shares of these companies? Should corporation 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)
Firms 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 dividend and decreases in earning sometimes by dividend cuts. Second, Dividend are “sticky” because firms are typically reluctant to change dividends, in particular, firms avoid cutting dividends even when earning drops. Thirdly, Dividends tends to follow a much smoother path than do earnings. Finally, there are distinct differences in dividend policy over the life cycle of a firm, resulting from change in growth rates, cash flows and project investment in hand. Especially the companies that are vulnerable to macroeconomic vicissitudes such as those in cyclical industries are less likely to be tempted to set a relatively low maintainable regular dividend so as to avoid the dreaded consequences of a reduced dividend in a particularly bad year.
Shareholders wealth is represented in the market price of the company’s common stock and a drop in share prices occur because dividends have a signaling effect. According to the signaling effect, managers have private and superior information. Such a calculation, on the part of the management of the firm may lead to stable dividend payout ratio. Accordingly, dividend policy can be used as a mechanism to reduce agency cost. The payment of dividends reduces the discretionary funds available to manager to seek financing in capital markets. This monitoring by the external capital markets may encourage the managers to be more disciplined and act in owners’ best interest.
