CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The concept of corporate governance is one of the issues that have attracted the attention of researchers and organisation around the world. This is due to the fact that governance mechanisms involves a set of relationship among organisation’s management, its board, its shareholders and other stakeholders that provide structure in which organizational goals are set, and organizational performance are monitored. Therefore, there is need for proper incentives for the board and management to pursue objectives that are in interests of the company and its shareholders and also, there is need for enhanced effective monitoring (OECD 2004). The separation of management from ownership gave rise to the adoption of a number of mechanisms globally. These mechanisms ensure enhancement of business sustainability and survival which directly enhance companies’ ability to pay dividend.
However, financial regulators everywhere are scrambling to assess these mechanisms and administer them for the purpose of good corporate governance (Sandeep, Patel and Lilicare, 2002). It is therefore necessary to point out that the concept of corporate governance of banks and very large firms have been a priority on the policy agenda in developed and developing market economies. Several events are responsible for the heightened interest in corporate governance especially in both developed and developing countries. The subject of corporate governance leap to global business attention from relative vagueness after a string of collapses of high profile companies and banks. In Nigeria, the banking sector among other sectors has also witnessed several cases of collapses, some of which include the Alpha Merchant Bank Ltd, Savannah Bank Plc, Society General Bank Ltd among others. Although the background of corporate governance in Nigeria can be said to be distorted and obscure, it cannot be detached from company law in general. Before corporate governance became popular, company law recognized and still recognizes two organs of a company namely: the board of director and the company in general meeting. Corporate governance merely emphasizes the greater focus on how a company should be run by those at the wheel of affairs.
Unsurprisingly, the importance of the board of directors in instilling the principles of sound corporate governance in every company cannot be denied. The Nigerian banking industry plays a major inter-mediation role in the Nigerian economy, considering that they are saddled with the responsibility of mobilizing savings from surplus units to deficit units, particularly private enterprises for the purpose of expanding their businesses (Oghojafor, Olayemi, Okonji and Okolie, 2010). It is also believed that corporate governance practices are important for banks because it results in higher market value, lower cost of funds and increased profit (Claessen, 2006). A major boost for corporate governance in Nigerian banks was the consolidation exercise in 2005 which led to nearly 89 banks reduced to 25 mega banks in order to attain a minimum capital base of approximately 25billion naira. The processes of mergers and acquisitions brought unique governance challenges because of the new size of banks, which made the CBN to issue a mandatory corporate governance codes for Nigerian banks. Some other industries followed suit by introducing these codes in their respective sectors, especially the insurance and pension regulators (Soludo 2004).
Dividend are referred to as rewards for providing finances to a firm, as without any dividend payout, shares would not have any value ( Abdul-Halim & Adel 2013). Earnings distributed to shareholders are also called dividend (Pandey 2004). The need to receive dividend forms part of the primary motive why shareholders buy shares. In subscribing for a firm’s shares, investors always take into consideration a number of factors such as the dividend track record of the firm, the stock price at the floor, profile of board of directors as well as nature of firm’s investment. As a result, management strives to command a fair price for her stocks, while ensuring prompt payment of dividend. As the earnings record of a company improves, increase in cash dividend is expected to follow. The amount of dividend received by shareholders will depends considerably on the dividend policy of such organization. Dividend policy implies the payout policy that management adopts in deciding pattern of cash distribution to shareholders over time. It indicates the share of company’s earnings that are paid out to investors in cash. The study of dividend policy is increasingly becoming interesting for several reasons. First, it affects the capital structure of the firm and also changes the firm’s stock value (Nikolaos, 2005). Secondly, announcement of dividend signals information to investors about the firm’s efficiency in terms of profitability, liquidity and investment opportunity.
Thirdly, through cash dividend policy, managers reduce principal-agent relationship costs. Since the pioneering work of Miller & Modigliani (1958) in their seminal article, series of empirical and theoretical research in dividend policy have emerged and increased tremendously, some relaxing the assumptions of the M & M and offering theories and building models to guide managers formulate their dividend policy decisions. However, empirical evidences from these studies vary considerably. Some suggest that increase in dividend payout increases the firm’s market value, others posited that increase in dividend payout decreases the firm’s value, while some argue that dividend policy does not affect the market value of the firm. In spite of the continuous and increasing theoretical and empirical debate on dividend policy, there is still no generally accepted standard on how firms actually pay out dividend to shareholders at a given time period. Dividend payment is deemed to be effective corporate governance mechanism that serves to align the interests and minimize agency problems between managers and shareholders. The agency cost refers to the cost borne by shareholders for monitoring behaviour and these cost are considered as implied cost due to the potential conflict of interest among shareholders and corporate managers (Husam ,Nizar & Rekhap, 2012).
Hence dividend policy is one of the most important policies in finance because it is directly related to shareholders. It is considered one of the issues that are still subject of debate among both academics and practitioners. Previous empirical researches shows that better investor protection is associated with greater dividend payout ratios (La Porta, Lopez-De-Silanes and Shleifer, 2008). This shows that corporate governance is an important mechanism in paying out dividend, and up till now literature on the relationship between corporate governance mechanisms and dividend policy especially in financial firms in Nigeria is limited, therefore, the aim of the study is to fill this gap in empirical data by examining corporate governance and its relationship with dividend policy of banks in the Nigerian capital market.
