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1.1 Background of the Study

Dividend policy is concerned within the allocation of earnings between “dividend pay-out and retained part of the earnings. Dividend policydetermines what proportion of earnings is to be paid to shareholders by way of dividends and what proportion is ploughed back in the firm itself for its reinvestment purposes (Lakshmi & Azhagaiah, 2015). Shareholders like cash dividends, but they also like the growth in EPS that results from ploughing earning back into the business (Khan & Jain, 1992). The optimal dividend policy is the one that maximizes the company's stock price which leads to maximization of shareholders' wealth and thereby ensures more rapid economic growth Mageshwari (1992). Paying out large chunk of the earnings to the shareholders will impress them and attract more investors in the firm, we should not be ignorant of the effect of not retaining enough part of the earnings for future financing of the firms’ project. The effect of dividend policy on share price is important to management, investors who plans their portfolios. Some scholars like Modigliani and Miller (1961) believe that dividend policies are irrelevant in determining the wealth of shareholders while others argue that dividend policies are relevant and greatly influence the wealth of shareholders, that is stock prices (Ozuomba & Okoye, 2013). This affects the growth of the firm. Share price of stock is one of the major indicators of how well a company is fairing, a Company is rated high if its shares have a high market value but otherwise when it has a low market value.

Payment of dividend most often are made from the current year’s profit and sometimes from the general reserve (Miller & Modgiliani, 1961). Dividends can be in the form of cash, stock, stock split, stock repurchases, and regular dividend payment.

The choice of dividend policy to be adopted by a company is a decision based on mature experience and a careful weighing of many intertwining factors by the financial manager for instance there are varieties of consideration and influence on dividend. Pay-out policy like, what amount of the year profit is to be retained for financing projects in a near future, the interest of the shareholders which demands a high rate of dividend, legal requirements, a desire to maintain dividend stability etc. it is when a balanced argument on the above factor is resolved that the financial manager chooses to adopt stable pay-out policy, residual dividend policy, or stock split as may be favored.

Net earnings of a company are divided into two parts: retained earnings and dividends. The retained earnings may be reinvested and treated as a source of long-term funds. However, the dividends should be distributed to shareholders in order to maximize the shareholders’ wealth, usually represented by market share price, as the shareholders have invested their money with the expectation of benefitting financially (Wet & Mpinda, 2013). While determining dividend policy, the management of a company must consider to what extent the dividend policy would influence firm value because the objective of financial management is the maximization of shareholders' wealth. This objective can be achieved by giving the shareholders a ‘fair’ payment on their investment. The payment of a dividend should be preferred if it will lead to the maximisation of the owners’ wealth. If it will not do so, the firm should retain the profit and should not distribute dividends (Wet & Mpinda, 2013).

Asquith and Mullins (1983) found that, dividend increases and dividend initiations have a significant positive impact on shareholder wealth. On the other hand there are other proponents who argue that dividend policy did not have significant effect on shareholders’ wealth. Modigliani and Miller (1961) indicate that dividend policies are less important and irrelevant to the value of a firm due to the fact that shareholders can create their dividend if they do not receive dividend from the company by selling their shares. Dhanani, 2005 however, ascertains that companies can either retain and reinvest free cash flow or distribute it to their shareholders as dividends. In 3

It is a complex decision given that the mode so far developed to provide mathematical solution which do not provide for all the relevant variables. Dividend once declared its usually paid in cash but alternatively, stock, bonds notes, property could be given. Shareholders of a company are particularly interested in the dividend policy since the basic relationship they have with company is evidence by the number of shareholder and also favorable policy encourages increase in the number of shareholders.

The number at which these share go in the market is another important aspect of this study, does the price of share have a direct or inverse relationship with the dividend policy of the company? This is the main focus of this study.

This study is aimed at establishing what effect a choice of dividend policy will have on the market price of the same company’s shares.

1.2 Statement of the Problem

According to Kapoor (2009), dividend policy can be of two types: managed and residual. In residual dividend policy the amount of dividend is simply the cash left after the firm makes desirable investments using NPV rule. In this case the amount of dividend is going to be highly variable and often zero. If the manager believes dividend policy is important to their investors and it positively influences share price valuation, they will adopt managed dividend policy. The optimal dividend policy is the one that maximizes the company’s stock price. Whether or not dividend policy can contribute to the value of firm is a debatable issue.

In the world of corporate finance, the question that whether the earnings of the firm should be distributed to shareholders or it must be reinvested in future profitable projects has great importance. To answer this question finance mangers must consider which dividend policy will increase the shareholders’ wealth and market stock prices. Shareholders like the cash dividends but on the other hand they also want the growth of the company by reinvesting the funds.

Previous empirical studies on the impact dividend policy on share price have focused mainly on developed economies. The impact of dividend policy on market share price is yet to be exhausted in the Nigeria context as there are few studies that examine this influence. Most Nigeria based studies focus on performance indicators like return on asset, earning per shares, return on investment and other macroeconomics variables as determinants of market share price. Ojeme, Mamidu & Ojo (2013) in their study of dividend policy and its impact on shareholder’ wealth analyzed the data for 4 years (2007-2010) while Ozuomba & Okoye (2013) used 10 companies across Nigerian stock exchange. Given the diversity in corporate objectives and environments, it is conceivable to have divergent dividend policies that are specific to firms, Industries, markets or regions. the impact of dividend changes is also likely to vary across economic environments in different countries. The present study seeks to find out the impact of dividend policy on share prices using quoted Deposit Money Banks (DMBs) as a focal point.


The problem in this study can be stated by answering questions like; what relationship does the DMBs’ dividend policy has with the market price of the share? Is dividend payout policy of the banks causing a change in the company’s share price in market? Does retained earnings affect share prices of the banks in the stock market? What influence does earnings per share has on share price of listed DMBs in Nigeria?

1.3 Objective of the Study

The main objective of the study is to examine the impact of dividend policy on share price of the listed DMBs in Nigeria. However, the study has the following specific objectives:

        i.            To examine the effects of Dividend Payout Ratio (DPR) on share price of Nigeria listed DMBs.

      ii.            To determine the impact of Retained Earnings (RE) on share price of Nigeria listed DMBs.

    iii.            To evaluate the influence Earning Per Share (EPS) on share price of Nigeria listed DMBs.

1.4 Hypotheses of the Study

As the main objective is set towards ascertaining the impact of dividend policy on share price of the listed DMBs in Nigeria, hence the following hypotheses are formulated in null form:

Ho1: Dividend Payout Ratio does not have significant impact on share price of Nigeria listed DMBs.

Ho2: Retained Earnings per share does not have significant impact on share price of Nigeria listed DMBs.

Ho3: Earnings Per Share does not have significant effect on share price of Nigeria listed DMBs.

1.5 Scope of the Study

This study focused on studying the impact of Dividend policy on share price of Nigeria DMBs quoted on the Nigeria stock exchange (NSE) for the period 2010 to 2014.

The study restricts itself to analyzing quantitative data in determining the impact of dividend policy on share price of Nigeria listed DMBs. Thus, secondary data obtained from respective companies’ financial statements are used. For the study, we will be looking at the subject “share price valuation” from a specific angle of the dividend policy.  The study would be looking at shares valuations in the capital market at the end of banks’ financial year; and emphasis will be on Nigeria Deposit Money Banks.

1.6 Significance of the Study

It is important that company’s financial manager should have a firm grasp of tools of financial management at his disposal. There is not and should not be room for uncertainty. An understanding of this area of management is particularly useful to any financial manager, knowing the true relationship between share price and his dividend policy will influence his control over share price and on the other hand, if it is established that no relationship exists, then each can be managed independently, no matter the outcome of this study. It is of great essence that the manager gets enlightened and most importantly put it into action. The study will also be valuable to potential investors, stock brokers, business entities and society to be able to utilize the outcome of the research in making economic decision.

The influence of dividend policy on the market price of share is crucial hence need to be mastered by all financial managers and interest groups. A good understanding of this relationship will not only help the management adopt best suited dividend policy but will as well improve the ever needed harmony between the shareholders and the company’s directors.

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