AN APPRAISAL ON THE EFFECT OF DIVIDEND POLICY ON MANUFACTURING FIRMS’ SHARE VALUE. (A CASE STUDY OF SELECTED COMPANIES IN NIGERIA)

ABSTRACT

The  purpose of  this  research  work is  to highlight an  appraisal on  the  effect of dividend policy on manufacturing firms’ share value. Dividend Policy is one of the three major policy areas of financial management since Nigeria Stock Companies came into existence. it determine the distribution of earning between payments to stockholders and  investment or  reinvestment in  the  firm. It  could be  seen  as  to constitute the cash flow that accures to the stockholders. The major objective of the study is to determine the effect of dividend policy on manufacturing firms’ share value. Other objective is to ascertain the relationship between dividend per share and earning per share of manufacturing firm, to ascertain the companies dividend policy that satisfies the objectives of maximizing owners wealth. The study had a population of forty (40) quoted manufacturing firms. Out of which a sample size of fifteen (15) were selected using Yaro Yamani formula. The ex –post facto research design was adopted in the study. Three (3) hypotheses was tested using correlation co-efficient. It was found out that there is no effect of dividend policy on manufacturing firms’ share value, There is no significant relationship between earning per share and dividend per share, Dividend policy satisfy the objective of maximizing owner wealth. Thus, it is recommended that financial managers should have information on the factors in the economy that affects the behavior of investors in their purchase of stock before any public reissue. Nigeria Stock Exchange should maintain its reliance on the force of demand and supply alongside its daily biding system because it tends to give the firms a fair assessment before the public in an unstable business environment.

CHAPTER ONE

INTRODUCTION

1.0     BACKGROUND OF THE STUDY

Dividend Policy is one of the three major policy areas of financial management since Nigeria stock companies came into existence. Dividend is commonly defined as the distribution of earnings (past or present) in real assets among the shareholders of the firm in proportion to their ownership. Dividend policy connotes to the payout policy which managers’ purse in deciding the size and pattern of cash distribution to shareholders overtime. Bhattacharya (1999:P.241).Management primary goal is shareholders wealth maximization which translates into maximizing the value of the company as measured by the price of the company’s common stock. This goal can be achieved by giving the shareholder a “fair” payment on their investments. However, the impact of firm’s dividend policy on shareholders wealth is still unresolved.

According to Bolt an (2000, p.249) Dividend policy is the guiding principle in determining what proportion of earning should be paid out as dividend. Three decades ago, Black fisher (1996) in his study on dividend wrote, “The harder we look at the dividend picture the more. It  seems like  a puzzle with pieces that just don’t fit together”. Why shareholders like dividends and why they reward managers who pay regular increasing dividends is still unanswered. According to Frankfurter, George and Wood bob (2003) Dividend policy has been kept as the top ten puzzles in finance. The most pertinent question to be answered here is that how much cash should firms give back to their shareholders? Which factors determine or influence the type of dividend payout ratio? Does the payment of dividend affect the market price of the shares  of  these  companies?  Should  corporation  pay  their  shareholders  through dividends or by repurchasing their shares, which is the least costly form of payout from tax perspective? Firms must take these important decisions period after period (some must be repeated and some need to be revaluated each period on regular basis)

Firms adopt dividend policies that suit the stage of life cycle they are in. For instance, high growth firms with larger cash flows and fewer projects tend to pay more of their earnings out as dividends. The dividend policies of firms may follow several interesting patterns adding further to the complexity of such decisions. First, Dividends tend to lag behind earnings, that is, increases in earnings are followed by increases in dividend and decreases in earning sometimes by dividend cuts. Second, Dividend are “sticky” because firms are typically reluctant to change dividends, in particular, firms avoid cutting dividends even when earning drops. Thirdly, Dividends tends to follow a much smoother path than do earnings. Finally, there are distinct differences in dividend policy over the life cycle of a firm, resulting from change in growth rates, cash flows and project investment in hand. Especially the companies that are vulnerable to macroeconomic vicissitudes such as those in cyclical industries are less likely to be tempted to set a relatively low maintainable regular dividend so as to avoid the dreaded consequences of a reduced dividend in a particularly bad year.

Shareholders wealth is represented in the market price of the company’s common stock and a drop in share prices occur because dividends have a signaling effect. According to the signaling effect, managers have private and superior information. Such a calculation, on the part of the management of the firm may lead to  stable  dividend  payout  ratio.  Accordingly, dividend  policy  can  be  used  as  a mechanism to reduce agency cost. The payment of dividends reduces the discretionary funds available to manager to seek financing in capital markets. This monitoring by the external capital markets may encourage the managers to be more disciplined and act in owners’ best interest.

Companies generally prefer a stable dividend payout ratio because the shareholders expect it and reveal a preference for it.  Shareholders may want a stable rate of dividend payment for a variety of reasons. Risk adverse shareholders would be willing to invest only in those companies which pay current returns on shares. The class of investors which includes pensioners and other small savers are partly or fully dependent on dividend to meet their day to day needs. Such investors would therefore prefer companies which pay a regular dividend every year. This clustering of stockholders in  companies with dividend policies that  match their  preferences is called CLINETELE EFFECT.

1.1     STATEMENT OF THE PROBLEM

The problem of this research work is to examine the effect of dividend policy on manufacturing firm’s share value. A major impediment to understanding dividend policy is the availability of multiple plausible explanations for observed behavior. Booth  Laurence  and  Cleary  Sean  (2003)  clarified  the  theoretical  setting  of  this problem by showing that absent informational asymmetries, transaction costs or tax considerations, the payout behavior of firms should not affect share valuation by investor s.  it follows from these assumptions that the dividend policy instead appears to have strongly predictable components with firms gradually adjusting dividends to target levels that reflect current earnings.

What Fisher Black (1976) christened the “dividend puzzle”- the problem of reconciling observed dividend behavior with economic incentive facing the relevant decision makers- is typically cost as a result of the   relationship between external shareholder and internal corporate managers. Dividends represent gross flows from corporations to their shareholders, so to the extent that owners dictate dividend policy, they can use dividend level and can also use dividends to send credible profitability signals to the capital market. Both of these uses of dividends address needs that stem from imperfect monitoring and  information flow between  owners and  managers. Since control problems and capital market signaling carry similar empirical implication for dividend payment, it can be difficult to distinguish between them.

The most pertinent question to be answered here is that how much cash should firms give back to their shareholders? Should directors pay their shareholders through dividends or by repurchasing their shares, which is the least costly form of payout from tax perspective? Firms must have these important decision periods (some must be repeated and some need to be revaluated each period on regular basis).

1.2     OBJECTIVE OF THE STUDY

The study is focused on the achievement of the following objectives –

1.      To determine the effects of dividend policy on manufacturing firm share value

2.      To determine the factors that influence corporate decisions on dividend policies on manufacturing firms.

3.      To ascertain the relationship between dividend per share and earnings per share of manufacturing firms in Nigeria.

4.      To examine the payment of dividend on the market price of a firm’s share.

5.      To find out the association between various ownership group and dividend payout policies of Nigeria manufacturing.

6.      To  ascertain the  company’s dividend policy that  satisfies  the  objective  of maximizing owner’s  wealth.

1.3     RESEARCH QUESTIONS

In order to explore the research problem, the focus of this project is on research questions which reflect on the objectives of the study are fielded:

1.       What are the effects of dividend policy on manufacturing firms share value?

2.       Are there factors that influence corporate decisions on dividend policies on manufacturing firms in Nigeria?

3.       What are the relationship between dividend per share and earnings per share of manufacturing firms in Nigeria?

4.       What is the impact of payment of dividend on the market price of a firm’s share?

5.       To  what  extent  does  the  association between various ownership group and dividend payout policies of Nigeria manufacturing?

6.       To what extent do the company’s dividend policy satisfies the objective of maximizing owner’s  wealth.

1.4     RESEARCH HYPOTHESE

In analyzing an appraisal on the effect of dividend policy on manufacturing firms’ share value. Some tentative statements were formed to help answer the research questions. Hence the following hypotheses that have to be tested were put forward for this study.

HYPOTHESIS ONE

Ho:    There is no effect of dividend policy on manufacturing firm’s share value. H1:      There is an effect of dividend policy on manufacturing firm’s share value.

HYPOTHESIS TWO

Ho:   There is no significant relationship between dividend per share and earnings per share of manufacturing firms in Nigeria?

H1:    There is a significant relationship between dividend per share and earnings per share of manufacturing firms in Nigeria?

HYPOTHESIS THREE

Ho: Dividend policy does not satisfy the objective of maximizing owner’s wealth. H1:  Dividend policy satisfy the objective of maximizing owner’s wealth.

1.5     SIGNIFICANACE OF STUDY

Outcome of this research seeks to examine and identify the relative known determinants of dividend policy in Nigeria. The research work also has made an endeavor to bring the influence of ownership groups of a company on dividend payout behavior of a firm. This research tries to unfold the relationship between dividend per share and earning per share.

Given the diversity in corporate objectives and environments, through the research an attempt has been made to suggest how dividend policy can be set at micro level. Finance managers would be able to examine how the various market frictions such as asymmetric information, transaction cost and agency costs affect their firms a well as their current claim holders to arrive at reasonable dividend policies.

Furthermore for  the  dividend  policy  makers  of  manufacturing and  service industry, the study may prove to be useful for re-sketching their dividend policy keeping in view and analysis, results and discussion presented. Through the research, one can have better understanding of the factors that should systematically affect firms’ payout decisions. It also gives insight into what kind of ownership structure is beneficial for the shareholders.

1.6     SCOPE OF THE STUDY

This study will focus mainly on selected companies in Nigeria stock exchange which covers the period of six years. i.e. 2005 -2010.The period is chosen because six years study is assumed to give a true reflection of the performance of firms under study and availability of data was considered.

1.7     LIMITATION OF THE STUDY

As part of the research experience by researchers all over the globe, certain limitations hindered the effective and smooth collection of data for the work. In the cause of carrying out the research, the researcher experience some difficulties which manifested in the following ways-

Time constraint: Due to the limited time available for the study, the researcher could not place the source of information for the study

Attitude of respondents: Some respondent are indifferent to the study because they feel they have nothing to benefit from the study financially or otherwise.

Finance: Due to lack of financial resources of their researcher, could not visits some place to gather more information about the work.

Scope  of  the  research:  The  study  was  constrained to  the  manufacturing firms; therefore from the conclusion drawn from this study may have potential; problem on generalization.

1.8     OPERATIONAL DEFINITION OF TERMS

This section develops the definition of core terms for this research because precise definitions of core terms are the foundation of any research project.

DIVIDEND: Dividend is a periodical payment of a share of profit to shareholders in a business company.

POLICY: Policy is a plan of action, statement of aims and ideas especially one made by the management of a public corporate. It is a written statement of the terms of a contract or agreement.

DIVIDEND POLICY: The policy of a company uses to decide how much it will pay out to shareholders in dividend.

DIVIDEND PAYOUT RATIO: The percentage of earnings paid to shareholders in dividend.

EARNING PER SHARE (EPS): The reward of an investor for making his investment and it is the best measure of performance of firm.

DIVIDEND PER SHARE (DPS): Dividend per share is a ratio that measures the amount of dividend payable to shareholders on per share basis as a reward for their investment in the firm.

SHARE: Shares means any of the equal parts into which the capital of a business company is dividend giving the holders a right to a portion of the profit.

SHAREHOLDER FUND: Shareholder fund is a sum of all strategies decisions that affects the firm’s ability to effectively increase the amount of free cash flow overtime.

MANUFACTURING FIRM: Manufacturing firm is  an  industry that  produces / manufactures goods in a large quantity.

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