ABSTRACT
This study examined the impact of
dividend yield on stock prices of Nigerian banks; the impact of earnings yield
on stock prices of Nigeria banks and the impact of payout ratio on stock prices
of Nigeria banks. The study adopted the ex-post-facto research design and panel
data covering 5-year period 2006-2010 were collated from annual reports of
banks and the Nigeria Stock Exchange daily official list. The Ordinary Least
Square Regression Model was used to estimate the relationship between dividend
yield, earnings yield, payout ratio and stock prices. Average of daily stock
prices was adopted as the dependent variable, while the independent variables
included dividend yield (DY), earnings yield (EY) and payout ratio (POR). The
result emanating from this study revealed that dividend yield had negative and
significant impact on commercial banks’ stock prices in Nigeria (coefficient of
Dyield = -3.365; p-value = 0.035). Earnings yield had negative and significant
impact on commercial banks’ stock prices in Nigeria (coefficient of Eyield =
-0.331; p-value = 0.048) and dividend payout ratio had negative and
non-significant impact on commercial banks’ stock prices in Nigeria
(coefficient of Por = -1.411; p-value = 0.269) . The study thus, revealed that
the dividend yield, earnings yield and payout ratio are not factors that
influences stock prices rather the bank size was found to have positive and
significant impact on stock prices. The study therefore recommends among others
that managers should act in the best interest of investor as to reduce the
agency problem, thus complete information about the dividend polices of the
firm should be provided.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
The subject matter of dividend
policy remains one of the most controversial issues in corporate finance. For a
very long time now, financial economists have engaged in modeling and examining
corporate dividend policy and earnings as they affect banks stock prices in
Nigeria (Amidu, 2007). Black (1976) hinted that, “The harder we look at the
dividend picture, it seems like a puzzle with pieces that don’t fit together”.
In over thirty years since then a vast amount of literature has been produced
examining dividend policy. Recently, however, Frankfurterc and Wood (2002)
concluded in the same vein as Black and Scholes (1974) that the dividend
“puzzle”, both as a share value-enhancing feature and as a matter of policy, is
one of the most challenging topics of modern financial economics. Forty years
of research have not been able to resolve it. Research no dividend policy and
earnings have shown not only that a general theory of dividend policy remains
elusive, but also that corporate dividend practice varies over time, among
firms and across countries. The patterns of corporate dividend policies not
only vary over time but also across countries, especially between developed and
emerging financial institutions.
Glen, et al (1995) suggested that dividend policies
in emerging markets differed from those in developed markets. They reported
that dividend payout ratios in developing countries were only about two thirds
of that of developed countries. Different scholars have defined the term
dividend policy differently. Hamid, et al (2012) defined dividend policy as the
exchange between retained earning and paying out cash or issuing new shares to
share-holders. Booth and Cleary (2010) defined dividend policy as an exclusive
decision by the management to decide what parentage of profit is distributed
among the shareholders or what percentage of it retains to fulfill its internal
needs. Nwude (2003:112) defined the term as the guiding principle for
determining the portion of a company’s net profit after taxes to be paid out to
the residual shareholders as dividend during a particular financial year. Emekekwue
(2005:393) defined dividend policy as the portion of firm earnings that will be
paid out as dividend or held back as retained earnings. Huda and Farah (2011)
pointed out
The decision as stated by Pandey
(2005), is an important one for the firm as it may influence the financial
structure and stock price of the firm. In addition, the decision may determine
the amount of taxations that stockholders pay. The dividend payment ratio is a
major aspect of the dividend policy of the firm, which affects the value of the
firm to the share holders (Litzenberger and Ramaswany, 1982). The classical
school of thought holds this view and they believe that dividends are paid to
influence their share prices. They also 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 (Gordon, 1959). Another classical school of thought,
on the other hand, believes that the price of equity is a function of the
earnings of the company. They believe that dividend payout is irrelevant to
evaluating the worth of equity. What matters, they say is earnings (Miller and
Modigliani, 1961).
Mayo (2008: 364-365) observed that
retained earnings provide funds to finance the firms on long term growth. It is
the most significant source of financing a firm’s investment. Dividends are
paid in cash, thus the distribution of earnings utilizes the available cash of
the company. When the firm increases the retained portion on 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 increase, shareholders’ current
income will increase but the firm may be unable to retain earnings and, thus,
relinquish possible investment opportunities and future earnings.
The theoretical rationale for corporate dividend
policy has been an important topic in corporate finance for a very long time.
After the dividend policy-irrelevance proposition by Miller and Modigliani
(1961), several theories have attempted to explain why and how companies pay
out the cash generated by their business operations as dividend. Three main
factors may influence a firm’s dividend decision. These are: - Free cash flows,
Dividend clientele and Information signaling (Pandey, 2005). Under the
free-cash flow theory of dividends, the payment of dividends is very simple:
the firm simply pays out, as dividend, any surplus cash after it invests in all
available positive net present value projects. Criticism of the theory is that
it does not explain the observed dividend policies of real world companies.
Most companies pay relatively consistent dividend from one year to the next and
managers tend to prefer to pay a steadily increasing dividend rather than
paying dividend that fluctuates dramatically from one year to the next. These
criticisms have led to the development of other models that seek to explain the
dividend decision (Brigham, 1995).
Under the dividend clientele, a
particular pattern of dividend payments may suit one type of stockholders more
than another. A retiree may prefer to invest in a firm that provides a consistently
high dividend yield, whereas, a person with a huge income from employment may
prefer to avoid dividends due to their high marginal tax rate on income. If
Clientele exists for a particular pattern of dividend payment, a firm may be
able to maximize its stock price and minimize its cost of capital by catering
to a particular clientele. This model may help to explain the relatively
consistent dividend policies followed by most listed companies (Okafor, 1983).
According to the clientele effect theory of dividend policy, investors who
would like to receive some cash from their investment always have the option of
selling a portion of their holding. This argument is even more cogent in recent
times with the advent of very low-cost discount stockholders. Thus, it remains
possible that there are taxation based clientele for certain types of dividend
policies (Pandey, 2005).
Information content or signaling
says that investors regard dividend changes as signals of management earning
potentials. The model was developed by Ezra (1983). It suggests that dividend
announcements convey information to investors regarding the firm’s value
prospects (Ezra, 1983). He said many earlier studies had shown that stock prices
tend to increase
when an increase in dividend is announced but tend to decrease when a decrease
or omission is announced. Therefore, Ezra pointed out that, this is likely due
to when investors have complete information about the firm, they will look for
other information that may provide a clue as to the firm’s future prospects and
also managers have more information than investors about the firm and such
information may inform their dividend decision. It could be seen, therefore,
that when mangers lack confidence in the firm’s ability to generate cash flows
in the future, they may keep dividends constant or possibly even reduce the
amount of dividends payout. Conversely, managers that have access to
information that indicates very good future prospects for the firm are more
likely to increase dividends (Ezra, 1963).
Hence, the purpose of this study
is to perform a cross-sectional study to find the situations in Nigeria which
these hypotheses apply and also determine how stock prices react to such
dividend and earnings report as indicated by investors’ ratio values with bias
to bank stocks......
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