The annual reports for the period 2006-2010 were utilized s the main source of data collection for the 50 sampled firms. The regression analysis method was employed as a statistical technique for analyzing the data collected. We find that there is a significant positive association between the performance of firms and the dividend payout of the sampled firms in Nigeria. The study also revealed that ownership structure and firm’s size has a significant impact of the dividend payout of firms too.
Financial performance, annual reports, firms, ownership structure, dividend policy, dividend payout, Nigeria INTRODUCTION The issue of dividend policy is a very important one in the current business environment. Dividend policy remains one of the most important financial policies not only from the viewpoint of the company, but also from that of the shareholders, the consumers, employees, regulatory bodies and the Government. For a company, it is a pivotal policy around which other financial policies rotate (Alai et al. , 1993).
Dividend or profit allocation decision is one of the four decision areas in finance. Dividend decisions are important because they determine what funds flow to investors and what funds are retained by the firm for investment (Ross et al. , 1 Correspondence address: Lowland Gibber, Department of Accounting, School Of Business, College of Development Studies, Covenant University, tot, Gun state, Nigeria; Tell. +234-8052363513; Email: lowland. [email protected] Deed. Eng Dividend policy and firm performance: a study of listed firms in Nigeria 2002).
More so, they provide information to stakeholders concerning the company’s performance. Firm investments determine future earnings and future potential dividends, and influence the cost of capital (Font et al. , 2007). The survival of any company is dependent on the continuous investment in facilities and the employment of internal financing, through the SE of retained earnings from an integral part of the sources of finance to foot the investment needs (Baja & Fiji 1 990; Soaks & Nana, 1990). Government fiscal policies tend to put some restrictions on the amount of dividend a company may pay.
This invariably has forced part of the realized profits to be ploughed back. This was very obvious during the indignation exercise of the seventies. The restriction is further strengthened by section 379 (2) of the company and allied matters act (CAM) 1 990, which provides that the general meeting shall have power to decrease the amount recommended. One of the reasons behind the dividend decision policy Of the Nigerian government is to ensure that funds are available for continuous investment in assets, so that the companies will continue to operate on the going concern principle.
The realization of the laudable goals of entrepreneurial investment in Nigeria has been inhibited by lack of sufficient funds. In fact the low level of investment capital available to most industrial organizations has accounted for the low capacity utilization. The Manufacturers Association of Nigeria recently put this at below 30% (Ungraciousness’s. Mom). As one of the responses to the agony of capital shortage in the industrial sector, government initiated the deregulation of the capital market.
The excess was to foster a developed capital market. However, irrespective of the various laudable efforts by the government, the Nigerian capital market is still at its emerging state. In the face of this looming shortage predicament, this paper will basically attempt to ascertain whether there is a relationship between the financial performance and dividend payout of listed firms in Nigeria. In addition, basically seeks to investigate the legislation between the financial performance and dividend payout of listed firms in Nigeria.
To achieve this objective, the corporate annual reports for the period 2006-2010 were analyzed. In addition, using the judgmental sampling technique, the study considered a total of 50 listed firms in the Nigerian stock exchange market. The choice of these industries arises based on the size, market capitalization and the availability of the annual report of the sampled firms. In the light of the aforementioned objective, the remaining part of this paper is structured as follows.
Following the introductory section is the review Of elevate literature and hypotheses development. The next sections then present the variables definitions, econometric model and the preliminary empirical evidence. Finally, the last sections summarize the main findings and conclusion of the study. Volvo. 11, NO. 3 443 1. LITERATURE REVIEW The behavior of dividend policy is one most debatable issue in the corporate finance literature and still keeps its prominent place both in developed and emerging markets (Hafted & Tatty, 2009).
Many researchers have tried to uncover issues regarding the dividend dynamics and determinants of evident policy but we still don’t have an acceptable explanation for the observed dividend behavior of firms (Black, 1976; Bearable & Myers 2005). Dividend policy has been analyzed for many decades, but no universally accepted explanation for companies’ observed dividend behavior has been established (Samuel & Edward, 2011 It has long been a puzzle in corporate finance.
Miller & Modeling (1961) argued that under certain simplifying assumptions, the dividend decision does not affect the value of a firm and is, hence, unimportant. Yet, traditional wisdom with changed postulations advocates that a properly managed dividend policy is vital to shareholders because it can affect share prices and shareholder’s wealth. This argument is based upon two assumptions that there is no tax disadvantage to an investor to receiving dividends, and the second is that firms can raise funds in capital markets for new investments without bearing significant issuance costs.
The proponents of the second school feel that dividends are bad for the average stockholder because of the tax disadvantage they create, which results in lower value. Finally, there are those in a third group who argued that vividness are clearly good because stockholders like them. Thus, despite voluminous research on dividends, corporate managers and financial economists still face what Black (1976) once described as a dividend enigma with pieces that just don’t seem to fit. Prior studies by Lease et al. (2000), Iberian (2001 Baker et al. 2002), Frankfurter et al. (2003) have described it as an appropriation of profits to shareholders after deducting tax and fixed interest obligations on debt capital. According to Limeade & Addendum (1987), it is seen as cash flows that accrue to equity investors. That is a form of return to shareholders on their investment, and the aim is to increase their confidence in the future of the company in which they have invested. Dividends are compensatory distribution to equity shareholders for both time and investment risks undertaken.
Such distributions are usually net of tax and obligatory payments under debt capital and they represent a depletion of cash assets of the company (Lipton et al. , 1998). Dividend policy is the regulations and guidelines that a company uses to decide to make dividend payments to shareholders (Animism & Xiv, 2001 The evident policy decisions of firms are the primary element of corporate policy. Dividend, which is basically the benefit of shareholders in return for their risk and investment, is determined by different factors in an organization.
Basically, these factors include financing limitations, investment chances and choices, firm size, pressure from shareholders and regulatory regimes. However, the dividend payout of firm’s is not only the source of cash flow to the shareholders but it also offers information relating to firm’s current and future performance. A considerable Dividend policy and firm performance: a study Of listed firms in Nigeria umber of papers, including Apothecary (1979; 1980), Linter (1956), Linter (1962), Miller & Rock (1985) suggest that firms dividend payouts policies are designed to reveal the earnings prospects to investors.
Related prior studies on the dividend payout policies of firms have produced a large body of empirical research, particularly following the publication of Miller and Modeling (1961) on the dividend irrelevance hypothesis. Basically existing academic literatures presently on the determinants of dividend policy can be traced to the seminal paper of Lintier (1956) and Miller & Modeling 1961).
According to Lintier (1956), changes in earnings and existing dividend rates are the most important determinants of a firm’s dividend policy decision. Miller and Modeling (1961) while presenting the irrelevance proposition opined that in a perfect capital market company’s dividend policy decision is not a thing of salient value at all. However, although investors agree on some key determinants of dividend policy of firms, the effect of dividend policy on firm value is largely challenged.
Thus relating to the relationship between firm performance and dividend payout policy, many academic scholars have examined the effect of firm performance on dividend policy; still no general consensus has yet emerged after several decades of investigation, as scholars often disagree even about the same empirical evidence. This inconclusiveness of empirical findings has made the issue of dividend payouts more complex. Kale and One (1990) in a related study opined that a firm’s dividend basically indicates the stability Of the firm’s future cash flows.
A review Of related prior studies shows further that the main factors that influence a firm’s dividend decisions include cash flow considerations, investment returns, after tax earnings, liquidity, future earnings, past dividend practices, inflation, interest, legal requirements and the future growth projection. This view however corroborates the suggestions of Brigham (1995) where a firm’s dividend policy is seen as a major determinant for a firms’ performance. Similarly, Karri and Tan (2007) also stressed the fact that investments made by firms’ influences the future earnings and future dividends potential. Kiwis, Accusers & Pound (1990) in a related study found out that there is no significant difference among dividend payouts with or without large block shareholders. In addition, Koki and Guiana (2009), and Kumar (2006) also observed in their study that managerial ownership appears to have a visible and significant effect on dividend payout. Nevertheless, while several prior empirical studies from developed economies have shed light on the relationship between firm performance and dividend payout, the same is not true in developing economies like Nigeria.
This study therefore tends to fill this gap in literature by examine the relationship between the financial performance of firms and the dividend payout Of listed firms in Nigeria. The study will in addition, attempted to find whether there is a relationship between ownership structure, firm size and the dividend payout of listed firms in Nigeria. Volvo. 11, No. 3 445 2. DEVELOPMENT OF HYPOTHESES The hypotheses to be tested in this study are stated below in their null form: HI : There is no significant relationship between the financial performance and dividend payout of listed firms in Nigeria.
H2O: There is no significant relationship between ownership structure and the dividend payout of listed firms in Nigeria. HA: There is no significant relationship between firm size and the dividend payout of listed firms in Nigeria. . RESEARCH METHODOLOGY To achieve the objectives of this study, the annual reports for the period 2006-2010 were analyzed. This is due to the fact that annual reports are readily available and accessible. However, using the judgmental sampling technique; a total of 50 listed firms operating in high profile industries in the Nigerian Stock Exchange were selected. This represents 20. 5% of the total population.
This is consistent with the propositions of Creakier & Morgan (1970) where a minimum of 5% of a defined population is considered as an appropriate sample size in making generalization. The choice Of the sampled firms was based on the size, market capitalization and the availability of the annual report of the sampled firms. Nevertheless, in testing the research hypothesis, the ordinary least square (LOS) was used in the estimation of the regression equation under consideration. 4. MODEL SPECIFICATION The following model is used to examine the association between independent and the dependent variables of the listed firms in Nigeria.
EDP it = f (Rotate, joist, This can be written in explicit form as: Where: ROE it SO it 446 = go + Rotate + џassist + џfizzles + Dividend Payout ratio is measured as the dividend per equity share divided by earnings per share Return on Equity for firm I at time t (in years). Used as a proxy for performance and is measured as net profit after tax divided by shareholders equity. = Ownership structure has been calculated by the percentage of shares held by board Of directors divided by total numbers Of shares Volvo. 11, No. 3 FIZZES it = Firms size is proxies as total number of directors present in the Board of Directors.
Stochastic or disturbance term. Time dimension Of the Variables = Constant or Intercept. џ1-3 Coefficients to be estimated or the Coefficients of slope parameters. The expected signs of the coefficients (a priori expectations) are such that ’31 – CO > 0. Table 1. Proxies and Predicted Signs for Explanatory Variables Variable ROE Predicted Sign Type Independent so FIZZES Scale Measured as net profit after tax divided by shareholders equity Percentage of director’s equity interest Total number of directors present in the Board of Directors. . DISCUSSION OF RESULTS Findings from our descriptive statistics as presented in table (2) present a mean dividend payout of about . 43148 for the firms under consideration. This represents an averaged percentage distribution of about 43% for the period. On the other hand; return on equity, ownership structure and firm size maintains an averaged mean distribution value of about . 33575, . 14954 and . 28200 respectively for the sampled listed firms in the Nigerian Stock Exchange market.
However, a marathon review of empirical findings from the Pearson correlation analysis on the relationship between dividend policy and firm performance shows that there is a positive correlation between the performance of firms (proxies by ROE I. E. Net profit after tax divided by warehouses equity) and the dividend payout of listed firms in Nigeria, and it is significant at 1% probability level with a correlation coefficient (r) Of . 44.