ABSTRACT
This study was carried out to
determine effects of dividends and earnings on stock price movement in Nigeria.
This was done by examining the significance of cash dividend and corporate
earnings on stock prices in the Nigerian Stock Exchange for a period of ten
years from 1999 – 2008. The data sourced from Nigeria Stock Exchange reports
and the company annual reports were analyzed using the regression tool. After
the process of experimentation using this regression tool, the researcher
observed that stock price movement is more significantly related to dividend
than corporate earnings. Secondly, the optimization of corporate earnings
influences positively stock price movement as many investors look at it as a
significant factor for their choice for stock investment. This drive for such
stock and the market price adherence to the law of demand and supply influences
the stock price. Nevertheless, it is also observed that there is an
autocorrelationship of the three variables, dividend, earnings per share and
stock price in choice of stocks for investment. It is recommended, therefore,
that Management should optimize their corporate earnings and derive a dividend
and retention policy decision in an optimum manner to achieve the objective of
maximizing the wealth of shareholders since the interrelationship of there
decision have a significant impact/effect on equity share price.
It is also recommended that
further works on this should be carried out in order to improve the body of
existing knowledge in those areas in addition to a longitudinal study that will
cover a time horizon of more than ten years should be conducted as this may
enable a proper test on dividends and earnings. Management of this kind of
investors should develop policies that will satisfy the investors and thus,
enhance their firm’s value.
There should be a dividend pay
out ratio that companies need to maintain so that they can enhance the value of
their firms. Nevertheless, the study brings to the knowledge of all and sundry
that investors in Nigeria are dividend driven and would therefore be willing to
pay higher prices for stock that pay more dividend.
Finally, although factors like
efficient market hypothesis, volume of equity, traded law of demand and supply
etc influence investors decisions, but, suffice it to say that with available
evidence, Nigeria investors are dividend driven as shown in the stock price
movement/trend over the years.
CHAPTER
ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
In a competitive economy, it is
clear that investments are undertaken due to the available benefits perceived
or which they provide to the investors. Investment in securities are for the
purpose of earning income which could be in form of dividends, profits
or/capital gains. With this in mind, it could be said that no right thinking
investor will put his funds if he does not expect some form of returns. Apart
from the above reasons, prestige, power, control etc. could also be adduced,
but primarily, the motive is to earn some form of returns.
Stocks or securities are
documentary evidence of ownership or entitlement to claim upon the income and
the assets of the issuing organization, which may be a publicly or privately
owned institution. Investments in securities are carried out through a market
known as the stock market, commonly referred to as the stock exchange, an
example of which is the Nigerian stock exchange and it is the centre point of
the Nigerian Capital Market (NCM).
The stock exchange as the
hallmark constituency of the capital market is many things at the same time. It
is a place where debt and equity securities of varying types are traded
transparently. It is a market that facilitates capital mobilization and
allocation, as both governments and companies can raise funds through the
market on long and most prudent terms through the offer of shares (by
companies) and bonds (by companies and governments) http://www.tritune.com.ng/izii2007/managment.html
The Securities and Exchange
Commission (SEC) is the apex regulatory institution of the Nigerian capital
market and is charged among other things with the responsibility of approving
the price at which securities of all companies quoted on the stock market are
to be listed. The principal objective of vesting this role on the SEC is to
protect the generality of the investing public who are unsophisticated and
therefore cannot understand the nature and operation of companies sufficiently
to be able to appropriate value on their securities.
Economic
analysts have discovered a number of factors affecting stock prices on the
stock market. Among the factors affecting stock prices are:
-
Dividend policy of a company
-
Corporate earnings and
-
Volume of equity traded.
There has been a long standing
controversy in academic circles as to which has greater impact/ influence on
security prices. The dividend payment ratio is a major aspect of the dividend
policy of the firm, which affects the value of the firm to the stock holders.
The classical school of thought holds this view and they believe that dividends
are paid to influence their share prices and furthermore, they believe that
market price of an equity is a representation of the present value of estimated
cash dividends that can be generated by the equity. The new classical schools
of thought on the other hand, believe that the price of equity is a function of
the earnings of the company. They believe that dividend payout is in no way
relevant to evaluating the worth of an equity. What matters, they said is
earnings.
Retained earnings provide funds
to finance the firms long – term growth. It is the most significant source of
financing a firm’s investment. Dividends on the other hand are paid in cash,
thus the distribution of earnings utilizes the available cash of the company.
When the firm increases the retained portion of net earnings, shareholders’
current income in the form of dividends decreases, but the use of retained
earnings to finance profitable investments is expected to increase future
earnings on the other hand, when dividends are increased, shareholders current
income will increase but the firm may be unable to retain earnings and thus
relinquish possible investment opportunities and thus future earnings.
Management therefore is in a
dilemma to device a dividend and retention policy that divides the corporate
earnings into dividend and retained earnings in an optimum manner to achieve
the objective of maximizing the wealth of shareholders. The interrelation of
these decisions and the impact/effect they have on equity share prices in the
Nigerian capital market is the focus of this paper.
Attempts will also be made to explain
movement of stock prices through a third approach known as “Efficient Market
Hypothesis”. This hypothesis seeks to explain that security prices adjust to
new information released to the market. Taking into consideration the basic
assumption that the market is very rapidly processed so that securities are
properly priced at a given time. An important premise of an efficient market is
that a large number of profit maximizing participants are concerned with the
analysis and valuation of securities. The hypothesis assumes that no stock
price can be in disequilibrium or improperly priced for a very long time. There
is almost instantaneous adjustment to new information. The hypothesis applies
most directly to large firms trading on the major security exchange. It further
assumes that information travels in a random, independent fashion and that
prices are an unbiased reflection of all currently available information.
Having mentioned this, in
Nigeria, the question of dividend payments by companies before 1988 have not
been regulated by the company Acts but also by section 4 (5) of Decree No 30 of
1997 which gave a ceiling they must not exceed when they pay dividends to their
shareholders. Today, the questions of dividend payments have taken a new
dimension. Although, they are still being governed by the company and banking
Acts for companies and banks respectively, dividend payments have now being
liberalized. This could be evident in the productivity, prices and income board
income policy guidelines (1988) which states that dividend payments have now
being deregulated. The levels of distributable dividends are now at the
discretion of individual companies.
The Securities and Exchange
Commission evaluates new issues principally by the maintainable annual earnings
method.
This method takes into
recognition the profit of the time and asset of the firm. It is considered and
believed that when a firm’s assets are judiciously used, earning are increased
which in turn enhances the value of the firm. Conversely, loses reduce that
value of a firm in the eyes of the investing public. It is also in this regard
that one finds the issue very interesting and the question now (which is the
subject matter of this study) is “what is the relevant impact of dividends and earnings
on security prices movements in Nigeria?
Therefore, in critically
analyzing the impact of dividend and corporate earning policy decisions on
equity share prices in the Nigerian capital market, a theoretical framework of
the effect of dividend policy decisions on the value of the firm would be
considered.
1.2 STATEMENT
OF THE PROBLEM
The volatility of the stock
market and its attendant upward and downward swings in share prices have
continued to confound critics and observers of the capital market. There have
been diverse views as to the various reasons why share prices move the way they
do. Various schools of thought have their own opinions as to the factors that
influence share price movement.
Robert J Shriller in his
article of 2nd January, 1987 questioned the volatility of stock
market prices, “why are stock market prices so volatile?
He presents the standard
derivation from 1871 to 1986 of the January to January percentage change in the
real standard and poor composite stock price index as thus: The real price
index rose 85% between 1927 and 1929, and fell 52% between 1929 and 1932. It
rose 69% between 1954 and 1957. It fell 56% between 1973 and 1975. What is it
that is so different about the demand for, or supply of, corporate shares from
one year to the next that might account for such big price movements?
There is a contention in
deciding on which of dividend and corporate earnings affects share price
movements at the Nigerian stock exchange. At the Nigeria stock market, share
price movements are every day affairs and have become synonymous with the
market. This study therefore, has the major characteristic statement of problem
in deciding the effect of dividend and corporate earnings on share price
movements at the Nigerian stock exchange.
In the Nigerian context, the
average investor in the capital market places a high emphasis on dividend
payments, as most investors tend to be medium to long – term holders of stock.
However, a larger part of investing public also do not have an in-depth
knowledge of the various indices and variables at play in the market and
therefore cannot fully appreciate the requisite analysis of corporate
earnings and dividend policies. This study therefore would critically appraise this
problem......
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