OLISEKEBE, VALENTINE IKE PG/M.Sc/04/38437

Transcription

1 OLISEKEBE, VALENTINE IKE PG/M.Sc/04/38437 EMPIRICAL ANALYSIS OF THE EFFECTS OF DIVIDEND PAYMENT ON SHARE PRICES: EVIDENCE FROM SOME QUOTED FIRMS IN NIGERIA A THESIS SUBMITTED TO THE DEPARTMENT OF BANKING AND FINANCE, FACULTY OF BUSINESS ADMINISTRATION,, UNIVERSITY OF NIGERIA ENUGU CAMPUS BANKING AND FINANCE APRIL, 2011 Webmaster Digitally Signed by Webmaster s Name DN : CN = Webmaster s name O= University of Nigeria, Nsukka OU = Innovation Centre

2 EMPIRICAL ANALYSIS OF THE EFFECTS OF DIVIDEND PAYMENT ON SHARE PRICES: EVIDENCE FROM SOME QUOTED FIRMS IN NIGERIA BY OLISEKEBE, VALENTINE IKE PG/M.Sc/04/38437 A DISSERTATION PRESENTED TO THE SCHOOL OF POSTGRADUATE STUDIES, DEPARTMENT OF BANKING AND FINANCE, FACULTY OF BUSINESS ADMINISTRATION, UNIVERSITY OF NIGERIA, ENUGU CAMPUS APRIL, 2011 EMPIRICAL ANALYSIS OF THE EFFECTS OF DIVIDEND PAYMENT

3 ON SHARE PRICES: EVIDENCE FROM SOME QUOTED FIRMS IN NIGERIA BY OLISEKEBE, VALENTINE IKE PG/M.Sc/04/38437 A DISSERTATION PRESENTED TO THE SCHOOL OF POSTGRADUATE STUDIES, DEPARTMENT OF BANKING AND FINANCE, FACULTY OF BUSINESS ADMINISTRATION, UNIVERSITY OF NIGERIA, ENUGU CAMPUS IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTERS OF SCIENCE (M.Sc) DEGREE OF THE UNIVERSITY OF NIGERIA, NSUKKA SUPERVISOR DR. B. E. CHIKELEZE APRIL, 2011 TITLE PAGE

4 EMPIRICAL ANALYSIS OF THE EFFECTS OF DIVIDEND PAYMENT ON SHARE PRICES: EVIDENCE FROM SOME QUOTED FIRMS IN NIGERIA

5 APPROVAL PAGE This dissertation has been approved by the Department of Banking and Finance, Faculty of Business Administration, University of Nigeria, Enugu Campus. Dr. B. E. Chikeleze (Supervisor) Date: Dr. J.U.J Onwumere (Head of Department) Date: External Examiner Date:

6 CERTIFICATION This is to certify that this dissertation by Olisekebe, Valentine Ike with registration number PG/M.Sc/04/38437 presented to the Department of Banking and Finance, University of Nigeria, Enugu Campus, under the supervision of Dr. B.E. Chikeleze, is original and has never been submitted for the award of any degree or diploma either in this or any other tertiary institution. Olisekebe, Valentine Ike (Student) Date This is to certify that this dissertation by Olisekebe, Valentine Ike with registration number PG/M.Sc/04/38437 presented to the Department of Banking and Finance, University of Nigeria, Enugu Campus, was submitted in partial fulfillment of the requirements for the award of Master of Science (M.Sc) degree in Banking and Finance. Dr. B. E. Chikeleze (Supervisor) Date Dr. J.U.J. Onwumere (Head of Department) Professor Ikechukwu E. Nwosu, PhD (Dean of Faculty) Date Date

7 DEDICATION This research work is dedicated to my beloved sister {(Mrs. Angela Olumide Kolapo (Nee Olisekebe)} who was called to Glory in April, May she continue to dwell in the bosom of the Lord God Almighty till we meet to part no more. Amen.

8 ACKNOWLEDGMENT I give God all the glory for preserving my life and giving me the strength, wisdom, knowledge, understanding, and most importantly for giving me good health, patience, courage and inspiration to scale through this rigorous process of Masters of Science (M.Sc) degree programme in my continuous quest for achieving greatness through divine direction. May the name of the Almighty God be continuously exalted forever and ever in JESUS Name. In the course of carrying out this research, the ALMIGHTY GOD linked me up to great personalities of different academic disciplines and professional status who have encouraged me to strive to be all I could be. And this research work therefore is a synergistic effort of those great individuals who are academically honest and professionally efficient, some of whose names appear below. I would like to express my profound gratitude to my able supervisor, Dr. B. E. Chikeleze for his patience, interest, vast experience, knowledge and most of all for devoting most of his official and leisure time to go through the manuscript and offer reliable suggestions and constructive criticisms which have certainly improve the quality of this study. I also thank Mr. Achugbue Oliver, Mrs. Ugwuanyi R.E; Mr. Mohammed B.A. (All of the Nigerian Stock Exchange, Onitsha, Anambra State, Nigeria) who provided me with relevant research materials during the course of the study. My special thanks go to the woman who conceived me: my mother: Mrs. Nkechi M.N.C. for her love, sacrifice, patience, supports, encouragements, prayers and for providing the necessary environment for the development of my potential and exposing me into this level of academic greatness. To Dr. Nwachukwu M.U. of the department of Urban and Regional Planning, Faculty of Environmental Sciences, University of Nigeria, Enugu Campus, who exposed my work into quantitative analysis of econometric and statistical approach. Indeed, Dr. Nwachukwu s. inspirations, guidance and contributions to this study made me have greater indebt knowledge and understanding of an empirical approach to academic/research work, a framework I can now use round the world. He will not be forgotten for his contributions to my knowledge which I will

9 continuously update. Many colleagues, scholars, managers, consultants and students have contributed their ideas and suggestions to this study. My good friends, Echekoba Felix, a lecturer with Nnamdi Azikiwe University Awka, State, Dr. Abel, a lecturer with the Ebonyi State University, Abakiliki, Ebonyi State, and Mr. Ekums., E., a lecturer with the Federal Polytechnic Nassarawa, were particularly generous with their time. REMS Consult, Enugu, has done much in providing me with the SPSS computer software to run the regression analysis in chapter four of this study. My wife s contribution has been important for the completion of this work. Furthermore, I wish to sincerely appreciate the effort of all the lecturers in the Department of Banking and Finance, Faculty of Business Administration, University of Nigeria, Enugu Campus. This study has also profited from the criticisms, suggestions, and technical assistance of those lecturers such as: Dr. J.U.J Onwumere: (HOD Banking and Finance), Professor Francis Okafor; Professor C.U. Uche; Professor (Mrs.) C. Nnoli;; Dr. Sam Isitor; Dr. B.E. Chikeleze; Dr. U.F. Amaeshi; D. N. Asomugba; Dr. E.O.C. Onah; F.C. Ahio; Mrs. N.J. Modebe; and many others too numerous to mention. Thank you for exposing me to reservoir of knowledge throughout my academic pursuit. At first, I thought it was a punitive measure, but at last, I understood it is a golden exercise one must encounter to become intellectually sophisticated. To pioneers in the development to what has been known as Dividend and Share Prices Valuation : - Duran, Solomon, Ezeike, Modigliani, Miller, Walter, Okafor, Iintner, Fama, Roll, Black, Schole, Myers, Ross, Bayer, Jansen, Black, Ekechi, Allile, Bar-Yosef, Brennan, Cochrane, Fisher, Friend, Puckett, Gordon, Graham, Morgan, Nnanna, Oludoyi, Osaze, Ross, Udegbunam, Williams, to numerous to mention. I wish to equally use this opportunity to express my special thanks to my brothers: Victor, Anslem and Francis; Mrs. Janet Chukwuka (Late) my grandmother who was called to glory in July, 2006 at the age of 85, she contributed immensely to my upbringing physically and otherwise, may her gentle soul continue to dwell in the presence of the Almighty God in Jesus Name. Others are: Dr. Daniel K. Olukoya -the General Overseer of Mountain of Fire and Miracle Ministries Worldwide; Pastor Enoch Adeboye General Overseer; Redeemed Christian

10 Church of God Worldwide; My father Mr. F.R.A Olisekebe for bringing me into the world; and all my course mates for their intelligent and progressive ideas during academic discussions. Finally, to staff of the Research Department of the Nigerian Stock Exchange, Lagos, Onitsha, and Abuja, all staff of the Research Department Central Bank of Nigeria, Abuja FCT, All library staff of the University of Nigeria, Nsukka and Enugu Campuses. All staff of the Research Department Securities and Exchange Commission (SEC) Abuja, and National library Abuja. Olisekebe, Valentine Ike (Research Student).

11 ABSTRACT There has been a lot of controversy over what influences stock prices mostly on the Stock Exchange. While some analysts believe that dividend payment is responsible for the stock price movements on the Stock Exchange, others claim that dividend payment is irrelevant to share price valuation. They are of the opinion that what matters to the investors are the financial performance of the companies and not dividend payouts. It is the objective or aim of the study to find out or ascertain whether dividend payment has any direct influence on the movement of share prices on the Stock Exchange with particular reference to some quoted firms in Nigeria; to analyse the effect of the size of dividend payout ratio on share prices, and to determine whether significant variations exist among the various selected quoted firms in Nigeria. This study also tried to identify other factors that may significantly affect stock prices movement. Above all, this research examined whether there is a strong empirical relationship or association between dividend and stock prices. Two models were used in this study as an econometric and statistical tools namely: Simple Linear Regression (SLR) Technique, and the Analysis of Variance, Technique. The researcher s empirical result suggests that dividend payment has no significant influence on the movement of share prices on the thirty (30) selected quoted firms in the NSE; the size of dividend payout ratio has no significant influence on the movement of share price on the thirty (30) selected quoted firms in the NSE, and lastly, that significant variations exist in the trend of share prices among the thirty (30) selected quoted firms in NSE. The study revealed that in theory, the forces of demand and supply are the major factors that influence stock prices in the Nigerian Stock Exchange (NSE). But in practice, there are some other endogenous and exogenous variables like: level of interest yield and differentials, the world Economy and political situations within the country, etc that tend to combine to influence the reactions of stock market participants to stock prices. Among others, the research recommends that quoted firms should endeavour to formulate dividend policies that will maximize the shareholders wealth, and optimal dividend payout should be determined with the firm s investment opportunities, and any preference that investors have for dividend as opposed to capital gain among others.

12 Title Page Approval Page Certification Dedication Acknowledgement Abstract Table of Contents List of Tables List of Figures TABLE OF CONTENTS i ii iii iv v viii ix xiv xv CHAPTER ONE: INTRODUCTION 1.1 Background of the Study Statement of the Problem Research Objectives Research Questions Research Hypotheses Significance of the Study Scope of the Study Limitation of the Study Definition of Terms 7 References 11 CHAPTER TWO: THE REVIEW OF RELATED LITERATURE AND THEORETICAL FRAMEWORK 2.1 Introduction Theoretical Framework Types of Cash Dividend Dividend Valuation Model Kinds of Dividend Policy Factors Influencing Dividend Policy Dividend Policy Analysis: A Case of L&T LTD 20

13 2.8 Dividend Payment and Stock Repurchase Optimal Dividend Policy Information Content of Dividend Life Cycle Growth and Dividend Consistency of Dividends Empirical Studies: A Case of U.K. United Utilities The Dividend Cover Dividend Payout Ratio Empirical Studies Magnitude of Dividend Stock Trend Analysis Dividend Announcement on Share Prices School of Though on Dividend: Empirical Evidence Argument for Relevance of Dividend Argument for the Irrelevance of Dividend Criticisms of the Modigliani and Miller s Argument Dividend and Stock Prices The Stock Valuation Model Factors that can Influence Movement of Stock Prices on the Stock Exchange Nigerian Stock Exchange (NSE) Operations on the NSE Trading System on the NSE Pricing on the NSE NSE: All Share Index Clearing, Delivering and Settlement on the NSE Stock Market Legislations: An NSE Guide Regulation on the NSE Foreign Investment on Corporate Firms on the NSE Quoted Vs. Unquoted Companies From Private to Public Company The Efficient Market Hypothesis: Introduction 62

14 Efficient Market Hypothesis Evidence against EMH and Alternate Theories of Market Behaviour Volatility Test, Fads, Noise Trading Models of Human Behaviour Keynes and EMH Section Summary 76 References 78 CHAPTER THREE: RESEARCH DESIGN/METHODOLOGY 3.1 Introduction Research Design Population of the Study The Sample and Sampling Techniques Sources of Data Collection Data Analysis Instrument Model Specification Area for Further Research 93 References 95 CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS 4.1 Introduction Data Presentation Data Analysis Data Interpretation/Implication of Results Some Further Empirical Tests and Results 150 References 173 CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS 5.1 Introduction Summary of Findings Conclusion 177

15 5.4 Recommendations 179 References 182 Bibliography 183 Appendices 195

16 LIST OF TABLES 2.0: L & T is EPS, DPS and Other Financial Data : Dunlop Nigeria Plc : R. T. Briscoe Nigeria Plc : First Bank of Nigeria Plc : United Banks for Africa (UBA) Plc : Union Bank of Nigeria (UBN) Plc : Nigeria Breweries Plc : Guinness Nigeria Plc : Ashaka Cement Plc : West African Portland Cement (WAPCO) Plc : Berger Paints Nigeria Plc : Cap Plc : Trans-Nationwide Express Plc : John Holt Nigeria Plc : Unilever Nigeria Plc : P.Z Industries Nigeria Plc : UAC of Nigeria Plc : A.G. Leventis Plc : Cappa D Alberto Nigeria Plc : Julius Berger Nigeria Plc : 7-Up Bottling Company Plc : Cadbury Nigeria Plc : Flour Mills Nigeria Plc : Nestle Food Nigeria Plc : Nigeria Bottling Company Plc : May and Baker Nigeria Plc : Neimeth International Pharmaceutical Plc : Vitafoam Nigeria Plc : Mobil Nigeria Plc 119

17 4.2.29: Texaco Nigeria Plc : Total Nigeria Plc 120 Table 4.3.0: A Summary of Dividend Payout Ratio and Market Prices of Stocks of Various Firms under Study between : Dunlop Nigeria Plc : R.T. Briscoe Nigeria Plc : First Bank of Nigeria Plc : United Bank for Africa (UBA) Plc : Union Bank of Nigeria (UBN) Plc : Nigeria Breweries Plc : Guinness Nigeria Plc : Ashaka Cement Plc : West African Portland Cement (WAPCO) Plc : Berger Paints Nigeria Plc : Cap Plc : Trans-National Wide Express Plc : John Holt Nigeria Plc : Unilever Nigeria Plc : P.Z. Industries Plc : UAC of Nigeria Plc : A.G. Leventis Plc : Cappa and D Alberto Nigeria Plc : Julius Berger Nigeria Plc : 7-Up Bottling Company Plc : Cadbury Nigeria Plc : Flour Mills Nigeria Plc : Nestle Food Nigeria Plc : Nigeria Bottling Company (NBC) Plc : May and Baker Nigeria Plc : Neimeth International Pharmaceutical Plc 143

18 4.3.27: Vitafoam Nigeria Plc : Mobil Nigeria Plc : Texaco Nigeria Plc : Total Nigeria Plc 147

19 LIST OF FIGURES 2.0: L & T EPS and DPS during : L & T Payout Ratio : L & T Share Price Behaviour : L & T Earning and Dividend Yield : Life Cycle Growth and Dividends : Dow Theory Bear Market Signal : Possible Stock Price Effect 40 4,2,2: R. T. Briscoe Nigeria Plc : Nigeria Breweries Plc : West African Portland Cement (WAPCO) Plc : Cap Plc : Unilever Nigeria Plc : P. Z. Industries Nigeria Plc : Julius Berger Nigeria Plc : Nigeria Bottling Company Plc : Vitafoam Nigeria Plc : Total Nigeria Plc : R. T. Briscoe Nigeria Plc : First Bank of Nigeria Plc : United Bank for Africa (UBA) Plc : Nigeria Breweries Plc : Ashaka Cement Plc : Berger Paint Nigeria Plc : Trains-Nationwide Express Plc : Unilever Nigeria Plc : A.G. Leventis Plc : Julius Berger Nigeria Plc : Cadbury Nigeria Plc : Nestle Food Nigeria Plc 141

20 May and Baker Nigeria Plc : Mobil Nigeria Plc : Texaco Nigeria Plc 146

21 CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF THE STUDY The payments of dividends have long been matters of debate in corporate finance under conditions of symmetric information and taxes, dividends have been dubbed a puzzle (Black, 1976). Several authors model dividend policy under the assumption that information is distributed asymmetrically between managers and investors. Bhattacharya (1979, 1980) argues that firms pays dividend because dividend signals the private information of managers and thus helps market participants value the firm. Ambarish et al (1987) suggest that high-value firms choose investment and dividends jointly to separate themselves from low-value firms. In other words, dividends are not residual payment as implied by classical finance theory. John and Williams (1985) and Ambarish et al (1987) predict a positive association between dividends and stock prices. Miller and Rock (1985) argue that once the investment decision of a firm is made, unanticipated dividends signal changes in earnings and cash flows. These models differ in details of their assumptions and approach, but reach the same broad conclusion: firms pay dividend to convey information to investors that cannot be conveyed costessly and credibly in other ways. Empirical evidence supports the signaling function of dividends. Asquith and Mullins (1983) find that the initiation of dividends has a significant positive impact on the firm s stock price. They interpret their evidence as consistent with the signaling hypothesis in'that managers use dividends to communicate private information to investors, the investors react favourably. Richardson et al (1986) report similar evidence. Furthermore, when a bank or other company has earnings, it can either (i) return them to shareholders in the form of dividends or (ii) Retain them within the firms (i.e. retained earnings). Dividends represent a direct payment to shareholders. Earnings that are retained by the firms increase the value of the firm in that they can either be invested in projects within the firm that will enhance future earnings or be invested elsewhere at the market interest rate and be paid out as dividend in the future (Baye and Jansen 2006:257). The important aspect of dividend policy is to determine the amount of earnings to be distributed to shareholders and the amount to be

22 retained in the firm. Retained earnings are the most significant internal source of financing and growth of the firm. On the other hand, dividends may be considered desirable from shareholders point of view as they tend to increase their current returns. (Pandey 2006:379). The Stock Exchange is essentially a capitalist institution (Okafor, 1983:91). That is why it is extremely important in the economic life in the U.S.A, U.K and other countries of the western world. In Nigeria the development of securities market has been influenced and fostered by the government, in some other Less Developed Countries (LDC s). There was the conviction that the securities market could be considerably depended upon to finance industrial growth (Ekechi, 1989:6). The Nigerian Stock Exchange serves the important function of financial intermediation in our economy. In performing this function the stock exchange provides essential support for financing both the private and government enterprises while creating some opportunities for the underprivileged to participate, however remotely, in corporate ownership. Thus, it provides opportunities for government, institutions and companies to raise new or additional funds to finance their activities. Securities are a documentary evidence of ownerships or entitlement to claim upon the asset of the issuing organization. To facilitate trading in these securities, prices are usually competitively fixed by the consensus of the market participants taking into account the true worth of the securities by considering the performance and the quality of the management of the organization. This becomes crucial when it is realized that the final market price of the security is seen as a mirror reflecting the performance and worth of the issuing company. In other words, the performance and worth of the issuing company determines the price which investors are prepared to pay for the company's shares. Hence, the ultimate objective of most organizations is to ensure a high market value of their shares, so as to maximize the wealth of the shareholders. This explains why financial managers are always careful in allocating earnings between dividends and retained earnings, as this decision affects the value of firms. Thus, the two objectives of dividend policy viz: distribution of dividends and retention of earnings for growth, though desirable, are in conflict. A higher dividend rate means less retained earnings which may consequently result in slower growth and lower market price per share. The market price of stock should not necessary be equal to the par value (justified price) but

23 simply reflect the forces of demand and supply especially in an efficient market. Theoretically, a share is worth the present value of the share of the issuing company. Contrary to the tenets of an efficient market, the Stock Exchange Council occasionally intervenes in the pricing on the NSE so as to prevent an irresponsible bidding. This is to protect both the investors and the issuing companies. Consequently, it is in the opinion of most researchers that most of the shares on the Nigerian Stock Exchange are under-valued. For instance, Adeosun (1982) contends that the pricing mechanism of the Stock Exchange is excessively controlled and often faulty. Contrary to the above view Alile and Anao (1986) are of the opinion that quoted companies usually have realistic market price for their securities even with little or no trading in their shares, especially if they provide performance information to the exchange. Therefore, dividend policy, NSE, the present value of share of the issuing company et cetera influences dividends payments and share price movement. 1.2 STATEMENT OF THE PROBLEM Financial Managers or Board of Directors in any quoted firm is always very careful in allocating earnings between dividend and retained earnings as such decisions affect the value of the firm. The role of stock exchange and the part that security prices play in channeling the flow of capital into various industries and firms is generally considered most important. The theory of valuation of income streams has a central and honoured place in the economic doctrine. But, special problem arise, in the valuation of investors of the income streams of corporations. These special problems are clearly indicated by the fact that recent literature, there has been considerable controversy and confusion over the fundamental factors which underline the movement in the market prices of common stock. This debate yet unresolved has since polarized into two main fractions; the dividend relevance and the dividend irrelevance groups. The dividend relevance group maintained that corporate dividend payouts are extremely important in evaluating the worth of a share. On the other hand, the dividend irrelevance groups are of the view that what matters in share valuation are the company's earnings performance and not the company's dividend payouts. Hence, it is against this backdrop that this research work intends to find out if share prices of

24 quoted companies in Nigeria are infact affected by corporate dividend payment or dividend payments merely an artifact which is no way influences the value of it's equity ownership. 1.3 RESEARCH OBJECTIVES The main objective of this research is to ascertain whether dividend payment has any direct influence on the movement of share prices on the Nigerian Stock Exchange (NSE) with particular reference to some quoted firms in Nigeria. The specific Objectives are: i) To analyse the effects of the size of the dividend payout ratio on share prices. ii) To determine whether significant variation exists in the trend of share prices among various quoted firms in Nigeria Stock Exchange (NSE). 1.4 RESEARCH QUESTIONS Based on the objective specified above, the pertinent questions we may ask are: i) To what extent does dividend payment have direct influence on the movement of share prices of quoted firms in the Nigerian Stock Exchange (NSE)? ii) To what extent does the size of the dividend payout ratio significantly affect share prices in the Nigerian Stock Exchange (NSE)? iii) To what extent does significant variations exist in the trend of share prices among various quoted firms in the Nigeria Stock Exchange (NSE)? 1.5 RESEARCH HYPOTHESES In order to achieve the set objective the following hypotheses were formulated: i) Ho 1; Dividend payment has no direct significant influence on the movement of share prices of quoted firms in Nigeria. ii) Ho 2; Size of dividend payout ratio has no significant influence on the movement of share prices of quoted firms in Nigeria. iii) Ho 3; There are no significant variations in the trends of share prices among the various quoted firms in Nigeria. 1.6 SIGNIFICANCE OF THE STUDY

25 Several researches have been done in this field (dividend payment) by different writers. But within the Nigerian stock market environment there are few empirical tests to show the relationship between dividend payment and share price behaviour. Hence the need to carryout empirical test of this nature. It is therefore, hoped that the findings of this research will help to fill up the existing gap. The research will serve as a proper guide not only to corporate officials who must set the policy on dividend payment, but to potential investors in financial assets to enable them take rational investment decisions. Furthermore, Economist seeking to understand and appraise the functioning of the capital market will find this research work very useful as it will expose them to the nitty-gritty of capital market function, hence reduce unnecessary brain storming associated with the design and articulation of policy advice to potential investors, corporate organizations, government planning portfolios. In the Nigeria context, it is relevance in relation to the stage of development in the Nigeria stock market. The NSE is characterized by many uninformed investors; most of them are ignorant of the happenings in both the economy and the stock exchange in particular, especially as regards pricing mechanisms of NSE. This study will help thus to enlighten them with regards to those factors that may influence their stock prices. Hence, will enable them to know when to purchase or dispose their holdings so as to optimize their immediate income or capital appreciation as the case may be. In addition, this study will be very important at the period of economic depression when most of the banks are engaged in 'payout war'. Thus, from the standpoint of the issuing company, the study might be relevant in taking decisions on the amount of payout annually as dividends vis-àvis on the effect on the capitalization of the company. Also it will give company policy makers an insight on how to improve the performance of their stock on the stock Exchange through manipulation of their dividend policies. Other researchers in related studies may also find this work very useful in carrying out further research or as a secondary source of information relating to dividend payments and share prices. 1.7 SCOPE OF THE STUDY

26 The study is inexhaustive when looked at from a wider perspective hence dividend payment impact on share prices is a broad field. The study does not in any way intend to exhaust all the facets of the phenomenon. Rather, it will concentrate on the impact of dividend payment while observing the effect of other factors that can affect stock price movement on the Nigerian tock Exchange (NSE). The firms that formed part of this research include those whose stocks are traded on the floor of the Nigerian Stock Exchange with exception of public utility firms. Which equally operates in the following sub-sector/industries (and are based on the NSE classifications), across the country; viz: Automobile and Tyre Banking Breweries Building Materials Chemicals and Paints Conglomerates Construction Food beverages & Tobacco Healthcare Industrial/Domestic Products Petroleum (Marketing) Printing and Publishing. At least, between one (1) to five (5) firms were carefully selected from each of the above subsectors to form part of our research using sampling procedure. The study does not cover: Preference shares Industrial debentures, and Government Development Stocks

27 1.8 LIMITATION OF THE STUDY Time and financial constraints posed a slight limitation to this study. This is because, the researcher has to travel to the major cities in Nigeria like; Lagos, Abuja, Onitsha, et cetera to source for meaningful materials to foster the completion of this research. Hence, time and financial resources were grossly inadequate. Unavailability of sufficient comprehensive data on stock prices quoted in the NSE (from ) distorted the researcher as this could not be found both at the NSE and the SEC or major libraries in cities visited. Despite the constraints, the study is not in anyway deficient since some secondary data available on stock prices of quoted firms were provided at the NSE and SEC respectively which in turn were use in the analysis of this study. Generally, the researcher put in enough efforts and a good work done for the users to have confidence on the study of the impact of dividend payment on share prices of stocks listed on the floor of the Nigerian Stock Exchange (NSE). 1.9 DEFINITION OF TERMS Blue chip: A company that is well managed with consistent track record of return on investments. Boom: When business expands and the value of commodities and securities increases. Bond: is an interest bearing debt security/instrument issued by corporate bodies, government, and government agencies for the financing of infrastructure or for expansion purposes. Bullish and Bearish: When conditions suggest lower prices, a bearish situation is said to exist. But if higher prices appear warranted, the situation is said to be bullish. Capital Gain: Profit made when common stock is sold at a premium, Capital Market: A network of financial institutions and facilities that interact to mobilize and allocate long-term savings in the economy. Clientele Effect: Argument that stock attract particular group based on dividend yield and the resulting tax effects. Debenture: A fixed interest bearing securities Declaration Date: Is the date that dividend payment is announced. Or the date on which the board of directors (BOD) passes a resolution to pay dividend.

28 Dividend Per Share (DPS); The naira amount dividends paid to shareholders for each share owned of a corporations common stock. Dividend Yield: Is the actual rate of return on this investment. Dividend Cover: This shows how many times the actual dividend cover could be paid from the available profit and it is regarded as a measure of how secured a dividend is, that is how likely it is to be maintained in future (or earning per share divided by dividend paid. Earning Per Share (EPS): Is a gross profit of a company less tax and obligation to preference shares and bondholders, divided by the company's paid-up capital. Equity Earning; A portion of surplus earnings of a subsidiary company, over dividend payments that are unreported by the parent company. Equity Securities: Any stock issue, common or preferred. Ex-dividend Date: The date by which stock purchased on or after is not eligible to receive the declared dividend. Going Public: Describes a situation when a firm's shares become available on a major Exchange. Growth Stock: Common stock of a company that has an opportunity to invest money to earn more than the opportunity cost of capital. Homemade Dividends: An individual investor can undo corporate dividend policy by reinvesting excess dividends or selling off shares of stock to receive a desired cash flow. Income Stock: Common stock with higher dividend yield and few profitability investment opportunities. Initial Public Offering (IPO): The company first public offering of its shares. This is also known as going public. Investment/Subscription: The two concepts which, may be used interchangeably and they simply refer to the commitment of funds to government or industrial securities with the expectation of a positive return commensurate with the level of risk assumed or with a potential preserving and adding to the investors or subscribers'wealth. Issue Price: The price of a new security sold to the public, determined by an underwriter or syndicate.

29 Leverage: This is the level of debt in a firm, defined here as the total book value of the firms long and short term debt, divided by the sum of the market value of the equity and the book value of debt. Listing Securities: Any stock or bond that has been admitted for trading on the Stock Exchange and whose issues have complied in every way with the listing requirements of the exchange. Market Capitalization: It is the market value of a company's issue share capital. It is the product of the current quoted price of shares and the number of shares outstanding. Market Value: Is the price the investors are willing to pay for the stock on the Stock Exchange. Over-the-Counter: An informal network of brokers and dealers who negotiate sales of securities (not a formal exchange) Par Value; Is a nominal value agreed upon by both the Nigerian Securities and Exchange Commission (SEC) and the issuing companies to be the original worth of the share at the time of first issue. Payout Ratio: Proportion of net income paid out in cash dividend. Payment Date: The date the declared dividend is actually paid. Or the date dividend checks are mailed. Portfolio: This is the collection of all the securities held by an individual or company. Primary Market: Is the market where new securities are issued and purchased. The securities traded here are called primary issues. Price Placement: Offering of company's stock through private negotiation with investors. Price-Earning Ratio (P/E): Is the price of a share or stock divided by the earning per share for a 12 month period. Private Company: Is company which by law has some business restrictions e.g. 50 members only, shares not transferable et cetera. Public Company: Is company quoted at the NSE. Record Date: The date by which all shareholders registered with the corporation will receive the declared dividend. Or date on which holders of record are designated to receive a dividend. Right Issue: Are newly issued stocks available exclusively to existing shareholders of a company to purchase. Secondary Market; The market for trading existing securities, such as the stock exchange.

30 Securities and Exchange Commission (SEC): Is an apex regulator institution of the Nigerian Capital Market: SEC regulate the issues of securities and the conduct of operators/players in the market, as well as sales practices. Scrip Dividend: The type of dividend issued by a corporation to its shareholders entitling the holder or the bearer to receive cash, stock, or a fractional share of stock, or one or more unit of the product manufactured, upon preservation or a specified future date. Stock Broker: Is a firm or people who buys and sell securities on behalf of investors for a commission called brokerage. Stock Dividend: Is payment made by a firm to its owner in the form of stock, diluting the value of each share outstanding. Stock Market; financial market where securities are bought and sold. Stock Exchange: Is an organized market where buyers and sellers competitively bid and ask for quoted securities. Thus, stock exchange provides facilities for government, institutions and companies to raise new or additional funds to finance their activities. Stock Market Aristocrat; Is a corporation that maintains a good dividend returns and has sound management and good growth potentials. Stock Repurchase: Buying back of same company's stock for some business reasons. Time Value of Money: Is the concept that money in hand worth more than the same amount to be received at a future date. Underwriter: Is an insurer who undertakes for a commission to apply for, or all part of the shares in a new issue which are not taken up by the company. Unquoted Company: Company which shares are not listed at the Stock Exchange. Quoted Company: Company which shares are listed at the stock Exchange.

31 REFERENCES Asquith P. and D. Mullins (1986), "The Impact of Initiating dividend payments on Shareholders wealth" Journal of Business, 46: Baye, M. R. and Jansen, D. W. (2006), Money, Banking and Financial Markets: An Economics Approach: 1 ed, Delhi India, AITBS Publishers and Distributors. Black, F. (1976), "The Dividend puzzle". Journal of Portfolio Management, 2:5-8, pp Brown, M. B. and A. B. Forsythe (1974), "Robust tests for the Quality of Variances" Journal of American Statistical Association, Vol. 69, pp Cohen, R. B., C, Polk and T. Vuolteenaho (2005), "Money Illusion in the Stock Market: the Modigliani -Cohn Hypothesis", Quarterly Journal of Economics, 120: (2): Dielman, T. E. and H. R. Oppenheimer (1984), "An Examination of Investor Behaviour During Periods of Large Dividend Changes Journal of Financial and Quantitative Analysis, 19: Ekechi, A. 0. (1989), Weak Form Efficiency in the Nigerian Stock Exchange, African Review of Money, Finance and Banking, 2:.6. Ezike, J. E. (1985), "On Dividend Policy and Share Price Valuation Nigerian Journal of Business Administration, 1, (l): 53. Fama, E. F., L. Fisher, M. Jensen & R. Roll (1969), The Adjustment of Stock Prices to New Information, International Economic Review.

32 Hajiassos, M.and A. Michaelides (2003), Portfolio Choice and Liquidity Constraints, International Economic Review. Miller, M. H. and K. Rock (1985), "Dividend Policy under Asymmetric Information", Journal of Finance, 40: NSE fact books various years. Ofer, A. and'd. Siegel (1987), "Corporate Financial Policy, Information, and Market Expectations: An Empirical Investigation of Dividends", Journal of finance, 42: Okafor, F. 0, (1983), Investment Decisions: Evaluation of Project and Securities, 1 ed, London: Cassell. Pandey, I. M. (2005), Financial Management, 9 ed, New Delhi India: Vikas Publishing House PVT. LTD. Public Offering and Sales of Securities: A Publication of Securities and Exchange Commission, (SEC). Richardson, G., S. Sefcik and Thompson (1986), "A Test of Dividend Irrelevance using Volume Reactions to a Change in Dividend Policy" Journal of Financial Economics, 17: Woolridge, J. B. (1983), "Dividend Changes and Security Prices", Journal of Finance, 38:

33 CHAPTER TWO THE REVIEW OF RELATED LITERATURE AND THEORETICAL FRAMEWORK 2.1 INTRODUCTION This chapter deals on the review of literature related to the impact dividend payment has on share prices of various quoted firms equities in Nigeria within the period of The review though not exhaustive, traced the meaning of dividend payment and.dividend policy analyzing it critically on both side i.e. both the theoretical review and empirical analysis. More so, this chapter deals with the concept of Nigeria Stock Exchange (NSE) it's history, functions and other activities the exchange performs, stock price valuation, efficient market hypothesis et cetera. 2.2 THEORETICAL FRAMEWORK The first step towards understanding dividend payment is to recognize that the phrase means different things to different people; therefore, we must start by defining what is meant by the term dividend. The term dividend are cash paid out of earnings, and if a payment is made from sources other than current or accumulated retained earnings, the term distribution rather than dividend is used. It is acceptable to refer to a distribution from earnings as a dividend and a distribution from capital as a liquidity dividend. A firm's decisions about dividends are often mixed up with other financing and investment decisions. Some firms pay low dividends because management is optimistic about the firm's future and wishes to retain earnings for expansion. In this case, the dividend is a by-product of the firm's capital budgeting decision. Why shareholders often clamour for higher dividends is that they don't trust managers to spend retained earnings wisely and they fear that the money will be plowed back into the building of a larger empire rather than a more profitable one. In a case like this dividend decision is mixed up with the firm's investment and operating decision, the dividend increase may lead to a rise in the stock price not because investors like dividends but because they want management to run a tighter ship.

34 Retained earnings are one of the most significant sources of funds for financing corporate growth, but dividend constitutes the cash flows that accrue to stockholders. Although, both growth and dividend are desirable, these two goals are in conflict - a higher dividend rate means less retained earnings and, consequently, a slower rate of growth in earnings and stock prices (Brealey and Myres 1996:417,429; Weston and Brigham 1977: 463). Dividend policy determines the amount of earnings retained by a corporation verses the amount of earning paid to share-holders. It could involve the decision to pay out earnings or to retain them for investment in the firm. While dividend itself are paid out of the earnings generated by the firms assets. It represents a direct payment to shareholders out of the company's earning. The important aspect of dividend policy is to determine the amount of earnings to be distributed to shareholders and the amount to be retained in the firm. Retained earnings are the most significant internal source of financing the growth of the firm. On the other hand, dividend may be considered desirable from shareholders point of view as they tend to increase their current return. Dividend, however, constitutes the use of the firms fund (Pandey 2005:379). In theory, the objective of dividend policy should be to maximize a shareholders return so that the value of his investment is maximized. Shareholders returns consist of two components: dividend and capital gains. Dividend policy has a direct influence on these two components of return. A low payout policy might produce a higher share price because it accelerates earnings growth. Investors of growth companies will realize their return mostly in the form of capital gains. Dividend yield (dividend per share divided by market price per share) will be low for such companies. The impact of dividend policy on future capital gain is, however, complex. A capital gain occurs in distant future, and therefore, many people consider that as uncertain. It is not true that low payment policy will necessarily leads to higher prices in reality. It is quite difficult to clearly identify the effect of payout on share price. Share price is a reflection of so many factors that the long-run effect of payout is quite difficult to isolate. A higher dividend means more current dividends and less retained earnings, which may consequently result in slower growth and perhaps lower market price per share. To be precise,

35 capital gains are future earnings while dividends are current earnings. In some countries, dividends are taxed more than capital gains. That is mainly the reason why some investors would prefer high-payout companies while others may prefer low-payout companies. The cash available for the payment of dividends is affected by the firm's investment and financing decision. If a firm's value is affected, it is because of the investment decision or dividend decision? Given the firm's capital expenditure, and that it does not have sufficient internal funds to pay dividends, it can raise funds by issuing new shares. In this case, the dividend decision is not separable from the firms financing decision. A dividend decision involves a trade-off between the retained earnings and issuing new shares. It is essential to separate the effect of dividend changes from the effects of investment and financing decision. (The work of Pandey 2005: ) went further to shape the objective of dividend policy in two possible view points as: (i) firms need for funds, and (ii) shareholders need for income. In the later, i.e., firms need for fund; he was of the opinion that when dividend decision is treated as a financing decision, the net earnings of the firm may be considered as a source of long term funds. Hence, dividend will be paid only when the firm does not have profitable investment opportunities. The firms grow at a faster rate when it accepts higher profitable investment projects. External equity could be raise to finance investments. But retained earnings are preferred because, unlike external equity, they do not involve any floatation costs. The distribution of cash dividends causes a reduction in internal fund available to finance profitable investment opportunities and consequently, either constrains growth or reduces the firms to find other costly source of financing. Thus, firms may retain their earnings as a part of long-term financing decision. The dividend will be paid to shareholders when a firm cannot profitably reinvest earnings with this approach; dividend decision is viewed merely as a residual decision. The other view on the objective of dividend policy is shareholders need for income, because of market imperfections and uncertainty, shareholders may prefer the near dividend to the future dividend and capital gains. Thus, the payment of dividends may significantly affect the market price of the share. Higher dividend may increase the value of the shares and low dividend may reduce the value, among others. 2.3 TYPES OF CASH DIVIDEND

36 Four broad several different forms in which cash dividend comes are identified by Ross et al (1999: ) which include: (A) Regular Cash Dividend: Is cash payments made directly to shareholders and they are made in the regular course of business. It is the most common type of dividend. (B) Extra Dividend: By calling part of the payment extra management is indicating that it may or may not be repeated in the future. Extra dividend is simply extra cash paid to regular dividends. (C) Special Dividend: Is an unusual dividend paid to stockholders out of earnings or onetime event and won't be repeated. (D) Liquidating Dividend: Means that some or all of the business has been liquidated, that is sold-off. 2.4 DIVIDEND VALUATION MODEL The current price of a share may be defined as the present value of the expected future receipts discounted at the investor's marginal rate of time preference. The current price of a share is given by: P o = D 1 + D 2 + D D...(2.0) (1+r) 1 (1+r) 2 (1+r) 3 (l+r) Where: D 1 D D are the dividend paid on the share of times 1,2,3, r is the return require by the investor on the share. Dividend on ordinary shares are expected to grow overtime. Equation (2.0) can be restated to include the constant growth rate that may be reasonably expected. The current price of a share would be given by: P o = D(1+g) 1 + D(1+g) 2 + D(1+g) D(1+g)... (2.1) (1+r) 1 (1+r) 2 (1+r) 3 (1+r) Where g is the contestant growth rate, and d is the dividend paid on the share at time t = 1 Equation (2.2) is an infinite series and therefore can be simplified to: =

37 P o D r h (2.2) r-g Equation ( ) gives a theoretical relationship between the price of a share and dividend. It is claimed that the prominent role of dividend is reflected in the fact that an ordinary share is worth the sum of all the dividends to be paid on It in the future, each discounted to its present worth. But the viewpoint is a highly disputed one (Anyafor, A. M. O. 1982:96-97). 2.5 KINDS OF DIVIDEND POLICY Most organized firms refrain 'from arbitrary paying of dividends just out of the intuitions of the Board of Directors (BOD), so they normally make policies and abide by them as much as possible. The advantage of having a dividend policy is that it helps investors to project or predict what to expect as dividend for the year. Van Home (1977) classified dividend policy into basically four main types: 1. Dividend as a Fixed Percentage of Earning: A firm can decide to be paying 40% of it's earnings as dividends every year. So during good years, investors enjoy high dividend but during depression, the dividend falls proportionately, since it will fluctuate with the earnings of the company. Prediction of dividend will be as tough as predicting the company's earnings. 2. Stable Dividend Overtime: A company may decide to maintain stable dividend over the years no matter the performance of the company with the particular year. For instance, a company may decide to be paying 20k per share irrespective of the earnings per share for that year. In a case where the earning per share goes below 20k, the company will have to compensate from the reserves of the previous years. 3. Target Payout Ratio: Here the firm maintains a stable dividend but steps up the dividend only when the earnings trends has proved that the earning will be permanently higher than those of the previous years. 4. Regular and Extra Dividend: Some company pays regular amount of dividend yearly but pays "Extra dividend" in every good years. This is a safety device on the part of the company, in that they enjoy the glory of paying extra dividends in boom periods and can as