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PROJECT TOPIC- IMPACT OF DIVIDEND POLICY AND EARNINGS ON STOCK PRICES OF NIGERIA BANKS

PROJECT TOPIC- IMPACT OF DIVIDEND POLICY AND EARNINGS ON STOCK PRICES OF NIGERIA BANKS

 

ABSTRACT

This study examined the impact of dividend yield on stock prices of Nigerian banks; the impact of earnings yield on stock prices of Nigeria banks and the impact of payout ratio on stock prices of Nigeria banks. The study adopted the ex-post-facto research design and panel data covering 5-year period 2006-2010 were collated from annual reports of banks and the Nigeria Stock Exchange daily official list. The Ordinary Least Square Regression Model
was used to estimate the relationship between dividend yield, earnings yield, payout ratio and stock prices. Average of daily stock prices was adopted as the dependent variable, while the independent variables included dividend yield (DY), earnings yield (EY) and payout ratio (POR). The result emanating from this study revealed that dividend yield had negative and significant impact on commercial banks’ stock prices in Nigeria (coefficient of Dyield =
-3.365; p-value = 0.035). Earnings yield had negative and significant impact on commercial banks’ stock prices in Nigeria (coefficient of Eyield = -0.331; p-value = 0.048) and dividend payout ratio had negative and non-significant impact on commercial banks’ stock prices in Nigeria (coefficient of Por = -1.411; p-value = 0.269). The study thus, revealed that the dividend yield, earnings yield and payout ratio are not factors that influences stock prices
rather the bank size was found to have positive and significant impact on stock prices. The study therefore recommends among others that managers should act in the best interest of investor as to reduce the agency problem, thus complete information about the dividend polices of the firm should be provided.

CHAPTER ONE
INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The subject matter of dividend policy remains one of the most controversial issues in corporate finance. For a very long time now, financial economists have engaged in modeling and examining corporate dividend policy and earnings as they affect banks stock prices in Nigeria (Amidu, 2007). Black (1976) hinted that, “The harder we look at the dividend picture, it seems like a puzzle with pieces that don’t fit together”. In over thirty years since
then a vast amount of literature has been produced examining dividend policy.
Recently, however, Frankfurterc and Wood (2002) concluded in the same vein as Black and Scholes (1974) that the dividend “puzzle”, both as a share value-enhancing feature and as a matter of policy, is one of the most challenging topics of modern financial economics. Forty years of research have not been able to resolve it. Research no dividend policy and earnings have shown not only that a general theory of dividend policy remains elusive, but also that corporate dividend practice varies over time, among firms and across countries.

The patterns of corporate dividend policies not only vary over time but also across countries, especially between developed and emerging financial institutions. Glen, et al (1995) suggested that dividend policies in emerging markets differed from those in developed markets. They reported that dividend payout ratios in developing countries were only about two thirds of that of developed countries. Different scholars have defined the term dividend policy differently. Hamid, et al (2012) defined dividend policy as the exchange between retained earning and paying out cash or issuing new shares to shareholders.

Booth and Cleary (2010) defined dividend policy as an exclusive decision by the management to decide what parentage of profit is distributed among the shareholders or what percentage of it retains to fulfill its internal needs. Nwude (2003:112) defined the term as the guiding principle for determining the portion of a company’s net profit after taxes to be paid out to the residual shareholders as dividend during a particular financial year. Emekekwue (2005:393) defined dividend policy as the portion of firm earnings that will be paid out as dividend or held back as retained earnings. Huda and Farah (2011) pointed out that dividend policy has been an issue of interest in financial literature; academics and researchers has developed many theoretical models describing the factors that managers should consider when making dividend policy decisions.

Key factors behind the dividend decision have been studied by numerous researchers. Lintner (1956) suggested that dividend payment pattern of a firm is influenced by the current year earning  and previous year dividends. In this case, dividend may be seen as the free cash flows which comprises of cash remaining after all business expenses have been met (Damodaran, 2002). The dividend decision in corporate finance is a decision made by the directors of a company. It relates to the amount and timing of any cash payments made to the company’s stockholders. The decision as stated by Pandey (2005), is an important one for the firm as it may influence the financial structure and stock price of the firm. In addition, the decision may determine the amount of taxations that stockholders pay.

PROJECT TOPIC- IMPACT OF DIVIDEND POLICY AND EARNINGS ON STOCK PRICES OF NIGERIA BANKS

The dividend payment ratio is a major aspect of the dividend policy of the firm, which affects the value of the firm to the share holders (Litzenberger and Ramaswany, 1982). The classical school of thought holds this view and they believe that dividends are paid to influence their share prices. They also believe that market price of an equity is a representation of the present value of estimated cash dividends that can be generated by the equity (Gordon, 1959). Another classical school of thought, on the other hand, believes that the price of equity is a function of the earnings of the company. They believe that dividend payout is irrelevant to evaluating the worth of equity. What matters, they say is earnings (Miller and Modigliani, 1961).
Mayo (2008: 364-365) observed that retained earnings provide funds to finance the firms on long term growth. It is the most significant source of financing a firm’s investment. Dividends are paid in cash, thus the distribution of earnings utilizes the available cash of the company. When the firm increases the retained portion on net earnings, shareholders’ current income in the form of dividends decreases, but the use of retained earnings to
finance profitable investments is expected to increase future earnings. On the other hand, when dividends increase, shareholders’ current income will increase but the firm may be unable to retain earnings and, thus, relinquish possible investment opportunities and future earnings.
The theoretical rationale for corporate dividend policy has been an important topic in corporate finance for a very long time. After the dividend policy-irrelevance proposition by Miller and Modigliani (1961), several theories have attempted to explain why and how companies pay out the cash generated by their business operations as dividend. Three main factors may influence a firm’s dividend decision. These are: – Free cash flows, Dividend clientele and Information signaling (Pandey, 2005).

Under the free-cash flow theory of dividends, the payment of dividends is very simple: the firm simply pays out, as dividend, any surplus cash after it invests in all available positive net present value projects. Criticism of the theory is that it does not explain the observed dividend policies of real world companies. Most companies pay relatively consistent dividend from one year to the next and managers tend to prefer to pay a steadily increasing dividend rather than paying dividend that fluctuates dramatically from one year to the next. These criticisms have led to the development of other models that seek to explain the dividend decision (Brigham, 1995).
Under the dividend clientele, a particular pattern of dividend payments may suit one type of stockholders more than another. A retiree may prefer to invest in a firm that provides a consistently high dividend yield, whereas, a person with a huge income from employment may prefer to avoid dividends due to their high marginal tax rate on income. If Clientele exists for a particular pattern of dividend payment, a firm may be able to maximize its stock
price and minimize its cost of capital by catering to a particular clientele. This model may help to explain the relatively consistent dividend policies followed by most listed companies

PROJECT TOPIC- IMPACT OF DIVIDEND POLICY AND EARNINGS ON STOCK PRICES OF NIGERIA BANKS

 

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BANKACCOUNT NAME
ACCOUNT NUMBER
DIAMOND BANK
FREEMANBIZ COMMUNICATION
007 031 2905
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FREEMANBIZ COMMUNICATION
560 028 4107
GTBFREEMANBIZ COMMUNICATION013 772 5121
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FREEMANBIZ COMMUNICATION
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