Dividend Policy. The Effect on the Market Value of Financial Institutions in Nigeria

Table of Contents

Title page

Dedication

Acknowledgements

Abstract

Table of Contents

Lists of Table

List of Figures

CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.2 Statement of the Study
1.3 Objectives of the study
1.4 Research Question
1.5 Research Hypotheses
1.6 Scope of the Study
1.7 Significance of the Study
1.8 Limitation of the study
1.9 Operational Definition of Terms
References

CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework
2.1.1 The Concept of Dividend
2.1.2 Types of Dividend payment
2.1.3 Essential Dates of Dividend Payments
2.1.4 Dividend Policy
2.1.5 Types of Dividend policy
2.1.6 Factors that affect Dividend policy
2.1.7 Firm Market Value and Dividend Announcements
2.2 Theoretical Framework
2.2.1 Relevance Theory of Dividend Policy
2.2.1.1 Graham and DODD traditional model
2.2.1.2 Gordon’s capitalization model
2.2.1.3 Walter’s model
2.2.2 Irrelevance Theory of Dividend policy
2.2.3 A Bird-in-the-Hand Theory of Dividend Policy
2.2.4 Signaling Theory of Dividend Policy
2.2.5 Residual Theory of Dividend Policy
2.2.6 Clientele Effect Theory of Dividend Policy
2.2.7 Agency Theory of Dividend Policy
2.2.8 Pecking Order Theory of Dividend Policy
2.3 Empirical Framework
2.4 Knowledge Gap
References

CHAPTER THREE: METHODOLOGY
3.1 Research Design
3.2 Sources of Data
3.3 Population of the Study
3.4 Sample Size and Techniques
3.5 Description of Variables
3.6 Model Specification
3.7 Estimation Procedure
3.7.1 Pre Test; Panel Unit root
3.8 Estimation Technique
3.8.1 Panel Regression Analysis
3.8.2 Pooled Regression Model (PRM)
3.8.3 Fixed Effects Model (FEM)
3.8.4 Random Effect Model (REM)
3.8.5 Model Selection in Panel Data Analysis
3.9 Apriori Expectation
References

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction
4.2 Data Presentation
4.3 Unit Root Test
4.4 Test of Hypotheses
4.4.1 Hypothesis One
4.4.2 Hypothesis Two
4.4.3 Hypothesis Three
4.5 Discussion of the Panel Regression Result and the Tested Hypotheses
References

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendations
5.4 Contribution to knowledge
5.4 Recommendation for Further Research

Bibliography

Appendixes

DEDICATION

This research is strictly dedicated to the Two Hearts of Love: Jesus and Mary.

ACKNOWLEDGEMENTS

My utmost gratitude goes to Jesus and Mary; the Incarnate Wisdom and the Seat of Wisdom for their inspirations towards the completion of this research and the entire program.

My heartfelt gratitude goes to my able supervisor, Prof. Mrs. Grace. N. Ofoegbu (FCA), for her patience, notable contributions, supervision and concern, which led to the successful completion of this work. I doff my hat for you ma’am.

I will not fell to acknowledge the lecturers and staff of Accountancy Department for their effort and time, especially the Head of Department, Dr. Steve. E. Emengini, Dr. Robinson.O. Ugwuoke, Mr. Solomon .N. Kodjo, Dr. Edith. O. Onyeanu, Prof. Mrs. Regina. G. Okafor, Dr. Anastecia Anisiuba, non tutorial staff of the department Mrs. Blessing, Mrs. Ogbodo and others for their support and advice during the study.

Special thanks go to Madam Christy, mother per excellence (my backbone) my brothers John, Richy, Sammy and Emma. Thanks for your wonderful support God bless you.

To my friends, Dr. Charles Ubagwu thank you so much for providing the basic guidance and foundation for this work, Dr. Ajuh Ali, Dr. Chike Ezenwa, Dr. Udo Emmanuel thank you for tidying chapter four of this work, Mrs. Francisca Chukwukere my good in-law with a good heart, Engr. Emmanuel Nze, Mrs. Adaeze Ovuoh a friend turned sister, Mbajekwe Chidinma a matured minded roommie and chief Amaraegbu’s family (nwannedinamba) may God bless you all immensely.

To my fellow legionaries, sis Nneka, sis Maris (our able presdo), diamond, Bro Chimezie, bro Ugoo, Bro Dozman just to mention but a few. May Our Lady Help of Christians never stop advocating for you for your selfless contribution to this program.

To my parish priest Rev. Fr Christian Chibueze Eze you are really a father. May God bless you beyond your imaginations for your support and prayers.

I humbly confess my indebtedness to all whose names are not mentioned here you are all great and wonderful. Thank you all for your contributions.

Finally my posthumous gratitude goes to my Dad late Jude Chukwuemeka and my only sister late Agnes Chikaodinaka may your souls rest eternally, Amen.

List of Table

Table 2.1 Empirical Summary

Table 3.1 Variable Construe

Table 4.1 Study Variables

Table 4.2 Descriptive Statistics

Table 4.3 Unit root Test Result

Table 4.4 Hausman Test for Hypothesis

Table 4.4.1 Comparison of the Fixed and Random Effect Models Results

Table 4.4.2 Panel Regression Result

Table 4.5 Hausman Test for Hypothesis

Table 4.5.1 Comparison of the Fixed and Random Effect Models Results

Table 4.5.2 Panel Regression Result

Table 4.6 Hausman Test for Hypothesis

Table 4.6.1 Comparison of the Fixed and Random Effect Models Results

Table 4.6.2 Panel Regression Result

List of Figures

Conceptual Framework Model showing variables relationship

Abstract

The study examined the effect of dividend policy on the market value of 24 listed insurance companies using empirical evidence from Nigeria. Objectives of the study is to examine the effect of dividend per share (Dps), dividend pay-out ratio (Dpor), and dividend yield (Dy) on market value per share (Mvps), Net asset per share (Naps) and firm age. Hypotheses of the study were stated in line with the objectives. Data were obtained from financial statements of 10 Insurance firms listed in the floor of the Nigerian stock exchange. The panel data covering a period of eight years from 2011 to 2018 were used. The regression model took the form of the Fixed Effects Model, Random Effects Model, and the Pooled Ordinary Least Square (POLS) model in order to establish the most appropriate regression with the highest explanatory power that is better suited to the data set employed in the study. The usual identification tests and the Housman’s Chi-square statistics for testing the appropriate estimator were also computed for each model. A panel regression analysis technique was employed. The results showed that dividend payout ratio and dividend per share have positive and non-significant effect on Market value per share, net asset per share and the firm age. Dividend yield showed a negative and non-significant result on the dependent variables. The study concluded that dividend policy is capable of influencing market value of financial service sector in the Nigerian stock market since an upward shift in dividend per share and dividend payout ratio leads to a rise in market value, which in turn leads to increased profit that can be used to pay off dividend for future earnings. The study recommends that managers should establish and maintain an optimal dividend payout policy that can maximize shareholders wealth and suggests that firm managers embark on steady dividend payment policy, as investors prefer cash to retention approach. This they can achieve by investing in projects that have more positive Net Present Values (NPV), thereby making enough profits which can be employed in paying off steady dividends to the business owners.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Over the years, the link between dividend payments and market value has continued to generate empirical debates among scholars. The debates have particularly been intensified by the empirical study done by Miller and Modigliani (1961) and other supporters of the Irrelevance theory of dividend policy, which contrasts the findings of Graham and Dodd (1951), Gordon (1959), Walter and Linter (1962). The global financial crisis of 2007 – 2011, which can be compared to the great depression of the 1930s that triggered the capital market crisis in many developed and developing countries, including Nigeria, is another problem causing unsteady dividend policy of firms. Due to the disparity in the interest of shareholders and their agents, treatment of reserves has become a problem because of the dual expectations of maximizing the shareholders' wealth as well as making the organizations a going concern, and managers have been left in a wandering imagination over dividend payment. However, both theoretical and empirical evidence on the effect of dividend policy and market value has remained largely inconclusive. The extant literature has proposed a number of theories, hypotheses, and models from various schools of thought in an attempt to solve the puzzle on dividend policy, but no consensus has been achieved to date. The primary schools of thought in dividend policy and market value are the irrelevance theorist (Miller & Modigliani, 1961; DeAngelo & DeAngelo, 2007); the relevance theorist (Lintner, 1962; Khan, Nadeem, Islam, Salman & Gill (2016) and the Clientel effect theorist Black and Scholes (1976); amongst others. These scholars have continued to come out with different findings in their researches, thereby making managers remain in confusion over dividend decisions.

Dividend is an amount paid on regular intervals, usually annually, semi-annually or quarterly, by firms to business owners out of its earnings/reserves (Grant, 2018; Troughton, 2012; Gill, Biger & Tibrewala, 2010). "Dividend is the fraction of the earnings / after-tax profit available to be shared among shareholders as a reward for their ownership stake in the business (Nwude, 2004:112; Emekekwue, 2008:393). According to them; dividend puts disposable income in the hands of shareholders and could be in the forms of cash, stock or other property; however, the cash dividend is the most preferred by business owners, which are in line with the "bird in the hand theory." Grant (2018) opines that dividend payout can affect the price of a company's underlying stock in a variety of ways. According to him, the dividend history of a given firm actually plays a general role in its popularity; the announcement and payment of dividends also have a specific and predictable effect on market value. Though most firms resort to retained earnings when they are faced with a financial problem, and this may lead to a lower payout, a ratio that is against shareholders whose interest and expectations are in the outcome of their investments.

Naturally, investors are risk-averse, and the unpredictability of their investments measures the level of risk they are expose to, (Aggarwal, Cao & Chen, 2012). It is imperative that corporate bodies be aware that investors pay close attention to their dividend returns, as the level of riskiness of their investments may affect the value of a firm at the long run. The rate at which management changes policy on the dividend is a universal threat to all investors who hold ordinary share investments (Guo, 2002). The decision to announce dividends, amount of the earnings to distribute, when to distribute it, and mode of Distribution are known as dividend policy, and this decision is taken solely by the Firm and its board of directors based on the organizational long-term earning ability (Kibet, Jagongo & Ndede, 2016; Jakata & Nyamugure, 2014). Pandy (1999) defines dividend policy as a decision by the financial managers as to whether the firm should distribute all profit, retain all, or distribute part and retain the balance. These methods of dividend payments; are in turn affected by the type of policies made by the firm managers.

One of the most critical decisions organizational managers should make in order to maintain the going concern of the enterprise, ensure shareholders satisfaction, attract potential investors and attain high market value is the decision on how to treat cash reserves, (Al-Najjar & Hussainey, 2009). Dividend policy involves financial decisions about paying cash dividends now or paying capital gains later (Gill et al., 2010). According to Lintner (1956), firms in the developed markets target their dividend payment ratio with the help of current earnings and past dividends, and several modifications are made by a firm in order to reach such target for a stable dividend policy to be maintained. Management of firms would always want to plough back their surplus earnings, and it might also seem equally evident that managers would want to pay shareholders their dividends. The question now is, should firms payout their surplus as dividends to investors, or should they reinvest the money into the business in order to pay the increased amount to shareholders in the future? Unsteady market value is a sign of irregularity in the dividend policy of firms, and the relationship that exists between them reveals how different dividend decisions affect the Firm's value, as noted by Brealey, Myers and Allen (2011). Unsteadiness of market value can be seen as the degree of fluctuation in a particular firm's stock and can also be explained as being a general risk -measure for investors (Hussainey & Chijoke, 2011). Persistent fall in the market value of firms has been a pressing issue to investors and financial analysts all over the world. Financial analysts, though, have attributed this fall to non-payment of dividends since the significant objective of managers is to maximize shareholders' wealth. Once investors are not getting returns on a particular investment, they tend to divert their funds to other viable investment opportunities that could yield them immediate returns.

Obviously, dividend policy adopted by any firm has a short-term or long-term effect on its market value, because a firm that pays dividend regularly is perceived as being effective as this conforms with the "Bird in the Hand" theory, which states that investors prefer cash dividend from their investments to potential capital gains because of the inherent uncertainty of capital gains (DeAngelo, DeAngelo & Skinner, 2000; Faccio, Lang &Young, 2001; Gugler, 2003). This has led some firms in Nigeria to even go the extra mile in order to pay dividends at all costs, regardless of the level of profit. According to Kehinde and Abiola (2001), dividend policy is the decision of a firm on how to divide income between retained earnings and dividends. It determines how much dividend a firm declares at any point in time.

Dividend payment policy aims at meeting the expectations of the existing investors, as well as the potential ones, and the decisions to pay dividends are not standardized; instead, they differ from company to company, industry to industry, and from period to period (Monogbe, 2015). This is true because dividend decision is taken by the Firm's board of directors' base on the current financial state and future activities of the Firm in their usual quarterly or semi-annual dividend meetings when profits are generated but may abstain from paying any dividends when profits are not adequate. Dividend decision, which serves both as a market value-enhancing feature and as a matter of policy is one of the most challenging issues of the modern financial economy (Frankfuter & McGoun, 2000). Despite the numerous studies done by several scholars (Fariso, Geary & Moser, 2004; Amidu, 2007, Howatt, Zuber & Gandar, 2009, Adefila, 2012); on dividend policy, there has not been a universal agreement, and as such, the issue remains unresolved in corporate finance. Few empirical studies have been done to establish the relationship between dividend policy and market value still; an ideal dividend policy had not been framed or agreed upon, and that is why Black et al. (2018) have termed it "dividend puzzle" due to its confusing nature.

Financial institutions are made to transfer funds from surplus economic units to deficit economic units in order to produce goods and services and to make an investment in new equipment and other facilities so that economy and the standard of living of its citizens will improve. It serves as a catalyst in the development of an economy and a function of the size of its economy Onwumere, Onudugo and Ibe, (2013). Usually, an economy that is still developing places more responsibilities on the financial sector to activate the capital needed to facilitate activities such as production, employment, and income. Any economy that has rise and fall growth is likely to have inactive financial institutions, as there are no incentives for investment. Through the process of growth, the financial institution offers several options for savers and issuable instruments for investors, a function often referred to as financial intermediation (Odeniran & Udeaja, (2010) as cited in Onwe (2015). Nigerian financial system consists of institutions, markets, and operations that are in the business of providing financial services. We have money markets and capital markets. The money market facilitates the growth of short-term financial instruments(banks and discount houses) while the capital market, on the other hand, deals with long term transactions. Financial institutions are the Securities and Exchange Commission (SEC) which is the apex regulatory body, the Nigerian Stock Exchange (NSE), the issues houses, stock broking firms and the registrars (Olofin & Udoma, 2008). According to Oima, and Ojwang (2013) as stated in Onwe (2015), the scope of financial institutions in Nigeria has expanded both in size and operation, and the development has increased the rate of competition among banks.

The insurance industry is a financial institution that helps businesses to operate in a cost-effective manner by providing risk transfer mechanisms whereby risks associated with business activities are borne by third parties (Trichet 2009). It allows credit to businesses, which banks and other credit-providers may not be able to give for fear of losing their capital without such protection and it provides protection against the business risks of expanding into unfamiliar territory – new locations, products or services, which is critical for encouraging risk-taking and creating and ensuring economic growth (Das, Davies and Podpiera). Beyond commercial activities, insurance is also helpful to individuals and families. Organizations, individuals and families will be without protection from the uncertainties if there is no insurance coverage. Again, it is imperative that life, health, property and other valuables are under insurance coverage for financial stability, well-being and peace of mind of insurers.

Insurance companies are legally bound to pay losses of the policyholder when a specific event occurs. The insurer will accept the risk that the event will occur in exchange for a fee (premium). The insurer thereby passes on some of the risks to other insurers or reinsurers, making it possible for ventures that would otherwise be prohibitively expensive if one party had to absorb all the risk cost protective (Häusler 2003). Insurance has made advancement in medicine, product development, space exploration and technology a reality. Consumers buy automobile insurance to cover both their cars and people who may be injured in accidents. Homeowners and renters buy insurance policies to protect their property and protect themselves from liability. People buy life and health insurance to protect themselves and their families from financial disaster. Most times, governments require businesses to indulge in financial responsibility requirements by mandating them to purchase. Distribution of insurance is done in many ways, but the most common is through the use of insurance intermediaries/brokers/agents. Insurance plays essential roles in the modern economy and has been recognized for centuries as a necessity to business activity and protection of a large part of the country's wealth. Insurance is essential means by which the problem of an individual is shared by many and that of a community shared by other communities, thereby lessening great catastrophes and repairing them (Trichet 2005).

1.2 Statement of the Problem;

One of the significant concerns of financial management is to maximize shareholders wealth considering the maintenance of balance amongst the three major decisions ranging from first; Investment decisions which deal with the selection of the assets to invest Firm's resources in order to gain the highest possible returns. Second, financing decisions have to do with the decision taken with respect to various securities in the capital structure of the organization. In business, two things matter, money and decision. Without money, an enterprise will not survive, and without decisions, money (investment) cannot survive. A finance manager takes several decisions in the lifetime of a business; thus, the most important ones are related to money hence financing decisions. Third, dividend decisions which is one of the crucial decisions made by the finance managers relating to the Distribution of profits earned by the organization. The primary alternatives are whether to retain the earnings or to distribute them to business owners (Odion, Idewele &. Murad, 2017). Dividend decisions, which form the basis for dividend policies, necessitated this study and moves around the determination of the payout policy adopted by management in determining the amount along with the method of cash allocations to shareholders.

The effect of dividend policy on market value has been an unresolved issue despite several types of research carried out; there has not been a consensus yet amongst scholars. A study carried out by Amidu (2007) revealed that dividend policy affects firm performance as measured by its profitability. Howatt, Zuber, Gander and Lamb (2009) also concluded that positive changes in dividends are associated with positive future changes in earning per share and vice visa. In addition, Dhanani (2005), who used a survey approach to capture managerial views and attitudes of corporate managers regarding dividend policy, found that dividend policy serves to enhance corporate market value. However, Fariso et al. (2004) argues that empirical studies that conclude a causal relationship existing between earnings and dividends are based on short periods of time and are therefore misleading to potential investors and concluded that dividends do not provide enough evidence to predict future earnings. Miller and Modigliani came up with the total irrelevance of dividend payment, arguing that paying a dividend has no impact on the market value of firms. Scholars with their different perspectives have left managers of organizations in a confused state about whether dividend payment affects the long term stock value.

Other examples of empirical studies carried out in Nigeria on the effect of dividend policy on market value are: Osakwe, Ezeabasili and Chukwunulu (2018); examined the effect of dividend policy on stock prices using consumer goods firm, Uwuigbe, Jafaru and Ajayi (2012); examined the determinants of dividends policy in the Nigerian stock ex-change, Ordu, Enekwe and Anyanwaokoro (2014); the effect of dividend payment on the market prices, Eniola and Akinselure (2016); examined the Effect of internal control on financial performance of firms in Nigeria (selected manufacturing firms. Some are in support, while some oppose. This has been a problem to the management of listed financial institutions in any economy, especially that of developing countries like Nigeria, which uses dividend policy as a strategy to create resources from long term capital investment project or other anticipated further expenditure. Due to lack of consensus by scholars on the relationship between dividend and market value, the disparity in managers and shareholders' interests, the global financial crisis and due to most previous studies carried out in Nigeria were done on sectors such as; manufacturing companies, banking sector, consumer goods firms quoted on the floor of Nigerian Stock Exchange for their studies and it became evident that there is scarce literature as regards to the insurance industry. It is against this backdrop that the present study seeks to fill this critical research gap by empirically examining the effect of dividend policy on the market value using Insurance companies, which seem to be neglected and more broad-base propositions/variables within the period, 2011 to 2018.

1.3 Objective of the Study

The broad objective of the study is to examine the effect of dividend policy on the market value of financial institutions listed on the floor of the Nigerian Stock Exchange within the period 2011-2018. The specific objectives are to:

i. Determine the effect of dividend payout ratio on the market value of financial institutions listed on the Nigerian Stock Exchange.
ii. Assess the effect of dividend yield on market value of financial institutions listed on the Nigerian Stock Exchange.
iii. Evaluate the effect of dividend per share on market value of financial institutions listed on the Nigerian Stock Exchange.

1,4 Research Questions

The study strives to provide answers to the following research questions in line with the objectives of the study:

i. How has the dividend payout ratio affected the market value of financial institution listed on the Nigerian Stock Exchange?
ii. To what extent has dividend yield affected the market value of financial institutions
listed on the Nigerian Stock Exchange?
iii. How has dividend per share affected the market value of financial institutions listed on the Nigerian Stock Exchange?

1.5 Research Hypotheses

The following research hypotheses were tested in order to answer the above research questions:

i. The dividend payout ratio does not have a significant effect on the market value of financial institutions listed on the Nigerian Stock Exchange.
ii. The dividend yield does not have a significant effect on the market value of financial institutions listed on the Nigerian Stock Exchange.
iii. Dividend per share does not have a positive effect on the market value of financial institutions listed on the Nigerian Stock Exchange.

1.6 Scope of the Study

This study covered 10 (ten) listed Insurance companies (financial services) on the Nigeria Stock Exchange within the period of 2011 - 2018. The choice for this period was geared towards capturing the state of Nigeria economy after the global crisis, which seems to have ceased around the year 2010, in order not to affect the study, hence 2011. The study ended in 2018 because data (annual report) for 2019 of the sector under review may not be available or ready within the period of study. Again, the result of this study is limited only to Insurance companies because it is evident that dividend payment is one of the central business strategies of financial institutions.

1.7 Significance of the Study

Financial Sector regulators: Due to the relevance of dividend policy in shaping firm value, result of the present study will serve as a guide to the financial Sector regulators as; the core essence of insurance regulation is to ensure efficiency in practice, as the recent experience from the global financial crisis of 2001 through 2010, highlights the imperatives of countries to embark on regular policy review. the result provided by the study will give some learning curves and further information to financial sector regulators to adapt or redesigned polices to suit industry and country-specific challenges.

Financial institutions: The present study will provide an academic view and unbiased critique of the role of financial institutions in the Nigerian economy, which will help decision-makers in making, reversing, amending and enacting decisions taken.

Researchers: The research work will serve as a base on which subsequent studies will be made and add to the existing works of literature on dividend and their role on market value.

Managers and Investors: The findings of the study will help firm managers to plan and ensure proper investments and guide the kind of dividend policy to adopt in order to manage investors wealth efficiently. The affairs of corporate bodies will be well directed for the best ownership structure, as the study will help them to choose and direct potential investors to invest wisely for a better yield on their investments.

Scholars: In anticipation of the analysis, findings and conclusions to be presented in the study, there will be additional knowledge in the area of Accounting and Finance for a better understanding of those factors that affect firms' dividend.

1.8 Limitation of the study

The research work is limited to financial institutions quoted on the floor of the Nigerian Stock Exchange (NSE). Therefore, the result of this study can only be generalized to firms that are similar to those included in this research. Another constraint is the task of searching through the bulky annual reports of the company under review in order to extract the information required to carry out the research. The major limitation of this study is that there may be other approaches and models which are not within the knowledge of the researcher which could be used as an alternative.

1.9 Operational Definition of Terms

Dividend per share (DPS): This is the sum of declared dividends issued by a firm for every ordinary share outstanding. The dividend per share is calculated by dividing the total dividends paid by the number of outstanding ordinary shares issued.

Market Share price (MSP): The share/stock price is the value of the Firm's common stock at the stock market.

Dividend yield (D.Y.): This is the ratio of cash dividend per share divided by the current market price per share

Dividend Payout ratio (POR): This is the fraction of net income a firm pays to its stockholders in dividends. The remaining is called retained earnings.

Earnings per share (EPS): This is a firms profit divided by the number of common stock it has outstanding.

Dividend: dividend is that portion of the after-tax profit that is distributed to the shareholders as a reward for investment and the level of riskiness.

Dividend policy: This is the decision/rule guiding managers on how to divide their income between retained earnings and dividends.

Dividend puzzle: This is used to express the type of argument that exists amongst scholars (economists) over the merits of a dividend-paying stock.

Shareholders: these are the owners of a business enterprise who receive dividend as compensation for the capital they invest in a given firm.

Potential investors: These are those who are capable of investing or buying a firms' stock in the nearest future.

Retained earnings: This is the portion of' profit, which a manager ploughs back into investment for future growth of the Firm

Financial crisis: This is a situation where financial assets suddenly lose a large part of their nominal value.

Market value: This is the price at which an asset would trade in a competitive auction setting.

Cash reserves: These are funds that companies set aside for use in emergency situations in order to avoid credit card debt.

Insurance company: A financial institution that provides a range of insurance policies to protect individuals and businesses against the risk of financial losses in return for regular payments of premiums.

Nigeria Stock Exchange (NSE): This is a place where stock/securities are bought when the price falls and sold when the price rises.

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CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 Conceptual Review

Dividend payment is the distribution of earnings (past or present) in real assets among the shareholders of a firm in proportion to their ownership stake in business (Kapoor, 2009; Pandey, 2011). Dividend is usually expressed as a fraction of nominal value of the firm’s ordinary share capital or a fixed amount per share. According to William and Scott (2006), dividend is referred to as a periodic cash payment that firms make to investors who holds the firms’ preferred or common stock. The decision between paying dividend and retained earnings has been taking seriously by both investors and management, and has been the subject of research by economists in the several past decades both in developed and developing countries, (Amihud & Murgia, 1997; Chariton & Vafeas, 1998); as cited in Adelegan (2001). Nwude (2003) defined dividend as the guiding principle for determining the portion of a company’s net profit after taxes to be paid out to shareholders as dividend during a particular financial year.

Dividend payment could be in the form of cash, stock split, reverse stock split, stock repurchase and stock bonus issue (Nwude, 2003). Dividends are meant to communicate information to the market because predictions about the future earnings of a firm based on dividend information should be superior to forecasts made without dividend information. A number of studies have tested these implications of the information content of dividends and suggested that dividend changes provide information about current and past levels of earnings, (Anike, 2015). Dividend-payment patterns of firm is a cultural phenomenon influenced by several factors as; beliefs, regulations, customs, public opinions, , economic conditions and several other factors, all in perpetual change, impacting different firms differently as a result, cannot be modeled mathematically and uniformly for all firms at all times, (Frankfurter & Wood 1997).

2.1.2 Types of Dividend payment

Cash dividend is the payment of dividends from cash reserves. It is a routine for any firm that declares dividends to pay cash and when a cash dividend is paid, it affects balance sheet of the firm’s cash and reserves account by reducing the firm’s total assets and net worth. If a firm declares cash dividend, it signals that they have enough cash reserves.

Stock split is the division of the existing share price by two or multiplication of the existing number of shares by two. This type of dividend payment reduces the prevailing par or nominal value of shares by half and doubles the existing number of shares. Management uses stock split to lower the price of firm shares to attract increased trading activity at the stock market. Stock split does not affect either side of the balance sheet in terms of Naira amount, but changes the figure and book entry of the number of outstanding shares as well as the par value.

Reverse Stock split is a financial strategy of consolidating the nominal value of an existing number of shares issued and a corresponding decrease in the number of shares in existence.

Stock Repurchase is the purchase of a firm’s remaining stock by the firm itself to keep as reserves in order to reduce the number of remaining stock and increase the earnings per share which will increase the market value, and thus, general capital gains to shareholders.

Stock / Bonus Issue is the payment of dividend in the form of issuing additional stock to the residual owners of the firm. It involves capitalizing the firms’ share premium or reserves and increasing the share capital account by the same amount capitalized from the reserves account. Stock dividend is issued to each shareholder in proportion to their existing shareholding in the firm (Anike, 2009).

2.1.3 Essential Dates of Dividend Payments

Date of Declaration: The date on which the board of directors announces to shareholders and the market as a whole that the firm intends to pay a dividend. On this day, the firm provides three more dates that pertain to the payout.

Ex-div date : This is the single most important date in the dividend investing world. On or after the ex-dividend date, a stock no longer comes attached with the right to be paid the most recently declared dividend. In other words, shareholders must purchase a stock before its ex-dividend date to receive its next scheduled dividend payout.

Record date: Record date is the date on which the firm looks at its records to see who the shareholders of the firm are. In almost all cases, the record date falls two to three business days after the ex-dividend date.

Payment date: This is the day when the actual dividend cheques will be mailed to the shareholders of a firm or credited to brokerage accounts. This date may be several weeks after the date of record so that the firm can accurately confirm the payout to the shareholders of record (Baker, 2015).

2.1.4 Dividend Policy

The firm's decision on whether to plough back earnings or payout earnings to shareholders is refers to as dividend policy. Earnings can be returned to shareholders in the form of either dividends or capital gain through stock repurchases (Nwude, 2008). For each of the two channels, there exist several methods: Dividends can take the form of; regular cash dividend or special cash dividend while stock repurchase can be in the form of; buy shares directly in the market, make a tender offer to shareholders, buy shares using a declining price auction (i.e. Dutch auction) or through private negotiation with a group of shareholders. Hamid, Hanif, Ul-Malook and Wasimullah (2012) defined dividend policy as the exchange between retained earnings and paying out cash or issuing new shares to share-holders. Dividend policy is an exclusive decision by the management to decide what percentage of profit is distributed among the shareholders or what percentage of profit it retains to fulfill its internal needs (Booth & Cleary, 2010; Baker, 2009). Baker, Powell and Veit, (2002) defines dividend policy under the relevance theory as follows; the dividend policy is a practical approach which treats dividends as an active decision variable and retained earnings as the residual dividends or more than just a means of distributing net profit, and that any variation in dividend payment ratio could affect shareholders wealth, a firm should therefore, endeavor to establish an optimal policy that will maximize shareholders wealth. Dividend payment pattern of a firm is influenced by the current year earnings and previous year dividends. In this case, dividend may be seen as the free cash flows which comprises of cash residual after all business expenses have been met (M’rabet & Boujjat, 2016; Anike, 2015;).

The dividend policy of a firm refers to the views and practices of the management with regard to the distribution of earnings to the shareholders in the form of dividends. It could mean to be the trade-off between retained earnings on one hand, and cash distribution or securities on the other. The portion of earnings which is undistributed is retained earnings. The retained earnings are the major sources of internal financing to a business and are often the cheapest source of finance. The opportunity cost of retained earnings therefore is the dividend payment that is forgone (Pandey, 2011; Anike, 2009). (Glen, Karmokolias, Miller & Shah. 1995), are of the view that dividend policies in emerging markets like Nigeria differ from those in developed markets. These scholars reported that the ratio of dividend payment in developing countries were only about 0.6 of that of developed countries Naser, Nuseibeh and Rashed (2013) in their own view said that “dividend policy is important for firms since it is used as a mechanism to signal to the outside world information about a firm’s vision of strength and expansion”. Shareholders and potential investors create investment impressions about firms by looking into the management’s ability to make the first move of dividends announcement. In addition, dividend policy affects the capital structure and investment decision of firms which in turn could be used by managers as well as shareholders to minimize agency costs. Managers’ success is measured by their ability to maximize shareholders’ wealth and in order to achieve this objective; managers need to have full understanding of dividend policy devices (Zhuo & Ruland 2006).

Decision or policies made by the directors of firms that relates to the amount and timing of any cash payments made to the investors is known as dividend decision in corporate finance. The significance of dividend policies is evident in the residual theory which is of the view that dividends are paid by managers when they cannot find any viable investment opportunities to invest their reserves. Its’ importance can also be derived from the fact that it affects firms’ market value so corporate bodies prefer not to reduce or eliminate dividend payments as this signals poor performance (Litzenberger & Ramaswamy, 1982; Yilmaz & Gulay, 2006; Arnott, 2003). According to DeAngelo, DeAngelo and Skinner (2006), dividend policies changes over time, so that an important task of corporate finance research is to identify the factors that shape their growth. A good dividend policy is very important to investors who value the steady profit of a firm because a high and regular corporate dividend policy indicates that such firm is doing well and therefore; gives a signal about the healthiness of the firm. Dividend policy involves elements such as the average fraction of earnings to be paid- out over time so that firms should maintain a constant dividend growth rate over time.

In theory, dividend policy is determined by factors such as: accessibility to cash, available profitable investment opportunities, liquidity, inflation level, share value, shareholders, policy toward dividends payment, limit of contracts imposed by lenders, availability of external sources of funds, and management's attitude and objective. Firms that have a long-standing history of stable dividend payments would be positively/ negatively affected by any changes in their policy, hence, firms without a dividend history may be viewed favorably when they declare dividends. Numerous studies have been undertaken to explain dividend policy Ansar, Butt and Shah, (2015); Al Masum, (2014); Naser et al., (2013); Gill, Nahum and Tibrewala (2010); Most of these studies, however, have covered developed countries whereas only limited number of studies has been conducted in developing countries. The core reason for the success or failure of firm amongst others are corporate management style, firms culture, diversification in the human resource, capital structure, dividend payment under the strict corporate tax rates, technological achievements and the political stability in the market where the firm is carrying out its activities (Kostyuk, 2006).

2.1.5 Types of Dividend policy

Residual Dividend Policy: firms that rely on internally generated fund to finance new projects employ residual dividend policy (Aduda & Kimathi, 2011). The residual type of dividend policy is a method of distribution where dividends are paid after all the requirements for capital are met. Thus, dividends are computed from the residual cash after spending on new capital project. The aim of this dividend policy is to decide if there is enough money left after all costs are met. Residual dividend policy is taken after determining the value of operating and development expenses required for the year, determining the total amount of earnings that can be used to finance the development, use the earnings to finance part or all of the development operating cost and then any earnings left can be distributed as dividends to shareholders.

Stable Dividend Policy: This is the ability of a firm to pay dividend consistently in each year. It is the regular payment of a certain amount of dividend year in year out no matter the amount earned by the firm or in a varying economic situation (Ap-Gwilym, Morgan & Thomas, 2000). This is because shareholders value regular dividend payment no matter the amount than off and on dividend policy. This policy satisfies the demand of some individual and institutional investors in securing regular income. Under a stable dividend payment policy, shareholders can predict dividends payments and view the firm to have a financial stability. Constant Dividend per Share: firms pay an exact amount per share year in year out (Brigham & Ehrhardt, 2012). They base their capital budgeting decisions on what is left from the earnings after paying dividends.

Low Regular Dividend plus Extras: Hybrid Dividend Policy states that firm is expected to pay a regular minimum amount of dividends each year and to pay extra dividends if it performs better than expected (Marsh, 2012). Under this policy, investors are certain about a minimum amount of income every year. Although this policy provides investors with minimum certain income, it might send negative signals to the market if it continued to pay the minimum amount of dividends and this could be viewed by the market as the company is not making good progress.

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