CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The importance of dividend policy in the business world cannot be over-emphasized. A number of stakeholders, including investors, managers, lenders, financial consultants/analysts, etc. use it in making informed decisions. Considering the importance of dividend policy from the investors” point of view, dividend is not only a source of income but also a way to assess company from investment point of view. In other words, their main objective of investing in the stock market is to maximize the expected return at low level of risk, and this return may be in the form of dividends or capital gain. In effect, maximizing shareholders” wealth depends on the dividend policy of the company because of these shareholders would satisfy their purchasing and consumption patterns (Khan, 2012).

In companies” perspective, selecting a suitable dividend policy is an important decision for the company because flexibility to invest in future projects depends on the amount of dividends that they pay to their shareholders. As such, certain important factors like managerial and behavioural environment, firms” profitability ratios, the willingness of the company etc. are considered by companies in designing their dividend policies (Khan, 2012).

Shahrin and Othman (2008) studied the characteristics of dividend paying companies of Nigeria and found out that dividend paying companies are more profitable, less risky and more mature in their activities as compared to non-dividend paying companies. Their results also indicate that managers of Nigeria companies understand the importance of paying dividends and they pay dividends even if the companies are not earning profits.

Dividend policy, which involves itself in determining the amount to be paid to the shareholders and that to be retained in the company for future reinvestment in profitable projects or for other justifiable needs is one of the cardinal issues involved in financial management; and as such it has consistently received serious attention of researchers, even in the recent time (Chidi et al., 2013). In spite of ever increasing focus on the dividend policy issue by several authors/researchers, there has never been universally accepted conclusion, as the empirical analyses have always brought mixed results.

Black (1976) expresses^ a view concerning dividend policy that “the harder we look at the dividend picture, the more it seems like a puzzle, with pieces that don’t fit together”.

Brealey and Myers (2005) describe dividend policy as one of the top ten most difficult unsolved problems in financial economics.

One major area of conflict is whether or not dividend policy influences the market price of firms” shares and by extension, the shareholders” wealth. In this connection, two main schools of thought subsist: the first representing the view of some researchers that dividend policy impacts on companies” share prices (Salih, 2010) and the second being the view of those who claim that dividend policy bears no relevance in the corporate market value(Farrelly et al., 1986).

And so, every research focusing on the relationship between dividend policy and stock price is an attempt to confirm or disprove the above hypotheses. In Nigeria, drastic developments were experienced in the era of indigenization and in the storm of global financial crisis the hit the nation’s economy, which brought down the market values of the equity shares of listed companies. The experience came to fore in most emerging economies of the world, anyway. Following the two events, firms in Nigeria had continued to alter their dividend policies in order to ensure continual survival and maximize share price returns, the situation which seemed to have called the attention to the issue of dividend policy as it affects share pricing. Yet, there hasn’t been consensus of research findings (Adaramola et al.,, 2012).

1.2 STATEMENT OF THE STUDY

In companies” perspective, selecting a suitable dividend policy is an important decision for the company because flexibility to invest in future projects depends on the amount of dividends that they pay to their shareholders. If quoted companies donot consider the managerial and behavioural environment, firms” profitability ratios and the willingness of the company it will definitely affect the stock price of the companies.         ,

1.3 OBJECTIVES OF THE STUDY

The general objectives of this research work is to examine the impact of dividend policy on stock price of quoted companies. The specific objectives to be consider include the following:

1.       To determine the important of dividend policy on stock price of a companies

2.       To determine take benefit of dividend policy on stock price of a companies

3.       To examine whether dividend policy on stock price can actually promote the company.

1.4 RESEARCH QUESTION

The following research questions are formulated for the purpose of this research work:

1.       Does dividend policy have any positive impact on the stock price of a company?

2.       To what extent do the role of dividend policy affect the stock price of a company?

1.5 RESEARCH HYPOTHESES

From the foregoing, expected relationships between dividend policy and stock price changes is expressed in the hypotheses below:

(i)      HO: Positive significant relationship does not exist between dividends pay out and stock price in Nigeria.

(ii)     HI: Positive significant relationship exists between dividends pay¬out and stock price in Nigeria.

(iii)    HO: Positive significant relationship does not exist between retained earnings and stock price in Nigeria.

(iv)    HI: Positive significant relationship exists between retained earnings and stock price in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

This research work will be of immense significance to major companies in Nigeria. It will go a long way in enlightening them on the concept of dividend policy on stock price and its role in developing and upgrading the company performance. This research work will as well be of benefit to students and researchers because it will widen their scope from the information contained in this research work and lastly.

1.7 SCOPE OF THE STUDY

This research work is base on the impact of dividend policy #on stock price of quoted companies in Nigeria. The common proxies for dividend policy are dividend payout, dividend yield and retained earnings. This research focuses on dividend payout and retained earnings, examining how they impact on quoted stock prices.

1.8 LIMITATIONS OF THE STUDY

The following are the constraints encountered in this research:

1.       FINANCIAL CONSTRAINT: Finance is the key to the success of every research work and the said finance was readily unavailable on my part as at the time I was carrying out this research .

2.       TIME CONSTRAINT: The time stipulated for the submission of this work was obviously too short.

1.9 DEFINITION OF TERMS

DIVIDEND: Dividend could be define as an appropriation of profits to shareholders after deducting tax and fixed interest obligations on debt capital.

DIVIDEND PAYMENT: Dividend payment could be define as a signal to the investors that the company is complying with good corporate governance practices.

DIVIDEND POLICY:    dividend policy can be define as the regulations and guidelines that a company uses to decide to make dividend payments to shareholders.

The major concern of the dividend policy is, of course, the trade-off between dividend payout and retained earnings.

DIVIDEND PAYOUT: Dividend payout is defined as the ratio of total cash dividend paid out to common stock holders to net income available for common stock holders.

DIVIDEND YIELD: Dividend yield could be seen as the profitability indicator expressed as a cash dividend per share for common stocks divided by the per share market value.