CHAPTER ONE

Introduction

1.0          Background to the study

For firms to remain in business and pursue their set goals and objectives, they need to adhere to certain financial management principles and policies that can enhance their overall performance. These policies have impact on the bearing of the organization. There are so many financial policies open to firm’s management; and one of such policy is dividend policy. Dividend is the return that accrues to shareholders as a result of the money invested in acquiring the stock of a given company (Eriki and Okafor 2002). While dividend policy on the other hand is concerned with division of net profit after taxes between payments to shareholders (ordinary shareholders) and retention for reinvestment on behalf of the shareholders (Kempner 1980).

Dividend policy serves as a mechanism for control of a managerial opportunism. Empirical studies show that firms in developing Countries (e.g. Nigeria) smooth on their income and therefore, their dividends. The pattern of corporate dividend policies not only varies over time but also 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 firm’s cost of capital. But is there any significant relationship between dividend policy and corporate performance in form of profitability investment and Earning per Share? What are the factors affecting dividend policy in Nigerian firms? This topic continues as one of the most challenging and controversial issues in corporate finance and financial economies. Research into dividend policy has shown not only that a general theory of dividend policy remains elusive, but also that corporate dividend varies over time between firms. For a firm, which encounters financial difficulties, reliance is placed on retained earnings and accordingly results in lower payout ratios.