THE INFLUENCE OF TAXES ON DIVIDEND POLICIES OF SELECTED FINANCIAL INSTITUTIONS

THE INFLUENCE OF TAXES ON DIVIDEND POLICIES OF SELECTED FINANCIAL INSTITUTIONS

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CHAPTER ONE

  INTRODUCTION

1.0     BACKGROUND OF THE STUDY

          Taxes are compulsory payment imposed on the income of individuals, families, communities, trustees, and corporate bodies by the government of the country. Taxes are levied on income and is paid by all income earners. A lot of controversies has emerged on why taxation. Majority of people look at tax as a compulsory burden they have to bear for the nation, while others view it as a contribution they have to make for the nation’s well being.

        Dividends are usually paid to shareholders or owners of business at specific periods. This is apparently based on the declared earning of the company and the recommendations made by the directors, thus, if there are no profits made, dividends are not declared. But when profits are made,   the company is obligated to pay corporate tax including other statutory taxes to the government. This is an essential corporate responsibility particularly profit making companies. The taxes no doubt reduce the profits available at the disposal of the organizations, either to be retained or distributed as dividend to shareholders of the company.

        However, a lot of controversies regarding taxes and dividend policy have attracted many academic interests. Financial theorists such as Brennan (1970), Masulis and True Man (1988) have stipulated that taxes affect organizational corporate dividend policy. If this speculation were true, changes in corporate dividend payout would be expected whenever the government changes its income taxes policy Wu(1996:110). However, this does not always apply especially in the banking business.

Lintner (1956:46), has asserted that “the major determinants of dividend policy are the anticipated level of future earnings and the pattern of past dividend”.

        This discrepancy may have underpinned Modigliani and Miller (1961) theory, which provide a platform for the enormous debates and researches on dividend policy. The banking sector is of interest in this research because of the structure of its dividend as revealed in the study.

        For decades, several postulations and assumptions have been made regarding whether the taxes paid by organizations actually affect their pattern of dividend policy. Dividend policy is therefore the trade-off between retaining earning and paying out cash or issuing new shares to shareholders. Some firms may have low dividend pay out because management is optimistic about the firms’ future, and therefore wishes to retain their earnings for further expansion. It is hard to deny that taxes are important to investors.

        According to Brealey et al (1995:51), Although dividend affects the shareholders tax liability, it does not in general alter the taxes that must be paid regardless of whether the company distributes or retains its profit. Conscious of these assumptions, surrounding dividend policy, and this study is directed at evaluating the influence of taxes on the dividend policies of selected financial institutions in Uyo- Nigeria.

1.1   STATEMENT OF THE PROBLEM

Tax constitutes a potentially important consideration in firm’s financing decisions. The debate regarding dividend policies is yet unending. Academicians have postulated several theories on what an Ideal dividend policy should be. There seems to be a chasm with what is really obtainable in practice. There are extraneous factors dictating the tune of any policy to be applied by organizations.

        There is also the link of taxation and the impact it exudes on the formulation of dividend policy. Financial theorist such as WU (1996:45) opined that evasion of taxes by companies is a key factor in the determination of the extent to which its dividend policy is affected”.

        Miller and Scholes (1982:37), however admits that ‘taxes weigh tremendous influence on corporate dividend structure’’. In turn, there are contentions on the effect of dividend policy on company’s share price. Whether these are true has remained a matter of intense debate.

        The avalanche of opinion regarding dividend policy and taxes is not only examinable but mind probing for academic research. This research is therefore poised at making further contributions by examining the theories but with specific application to the banking sector in Uyo and Nigeria as a whole.

1.2      OBJECTIVES OF THE STUDY

        This study is designed with the following objectives:

1.           To investigate the factors that affect dividend policies of   banks.

2.           To examine the effects of taxes on dividend policies of     banks.

3.           To find out the influence of profit on dividend policy of     banks.

4.           To identify the various models/types of dividends policies.

5.           To identify mode/means of dividend payment (ie either    cash or stock).

6.           To identify the problems of taxation in Nigeria.

7.           To find out the relationship existing between tax and       dividend

8.           To make suggestions and recommendations on ways of    achieving effective dividend policy.

1.3      SIGNIFICANCE OF THE STUDY

        Over the years, economists have devoted considerable effect to understanding the incidence of company income tax and its impact on dividend policies of firms in developed countries, with differential political environment, especially in the united states. Hence, this study constitutes an attempt at a cross-cultural study of a phenomenon that may impact the dividend policies of corporate firms recognized in developed countries but not previously observed in a developing countries environment.

        These findings should provide information in developing a positive theory of the link between corporate dividend policies and taxation for a developing country like Nigeria.

        These findings will be useful for the following groups of people:

(a)        To the government: it will increase their revenue.

(b)        To the researcher: The study will help in fulfilling partial        requirements for graduation.

(c)         To the future researchers: This study is yet another     contribution to the existing literature in the study of   dividend  policy; and    hence, acts or serves as a         reference materials.

(d)    To the organization: The result of the study will be       very useful to organizations in articulating a viable       dividend policy. It will also enhance the proper       understanding of the   intricacies of the dividend theories         and the effects of their application on their organizations.

1.4      SCOPE AND LIMITATIONS OF THE STUDY

        This study focuses on the influence of taxes on dividend policies of selected financial institutions in Uyo – Nigeria. This research has a wide range of focus, which provides the basis for more in-depth investigation.

        However, in a bid to work within manageable limit and within the limited time and resources available, this study shall be restricted to only one financial institution which is: united bank for Africa. it shall concentrate on the dividend policies that are applicable this bank and whatever will be the findings from this case study will be generalized as what is obtainable in most financial  institutions in the country.

        The following are the limitations of the study:

(a)        Time factor: This was one of the major problems encountered in the course of this study since the researcher has to allocate part of her time to classroom work and other activities.

(b)        Financial factor: The financial cost of this study is estimated as being very enormous by the researcher. This consisted mainly of transportation expenses, cost of materials to be used for the study, typing and binding the project, this enormous amount (for a student) will surely constitute a limitation.

(c)       Ignorance of Respondents: The subject matter in question is not all that popular, and so, the respondents may not have the correct response to the questionnaires which would be presented to them.

(d)        Paucity of literature to review: There have been few literature on dividend policies and tax and these has posed a constraint.

(e)        Secrecy/ confidentiality: Issue of financial activities are not usually the most favorable topic of discussion for banks. So, it took the researcher considerable time to convince the staff the study was strictly an academic exercise.

1.5      RESEARCH HYPOTHESIS

   In order to carry out this study properly and successfully, the following null hypothesis would be tested:

(a)                There is no significant effect of profit on dividend        policies of banks in Uyo-Nigeria.

(b)             &n





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