The Effect of Dividend Policy on the Growth of Micro Finance Institution
Chapter One
Objectives Of The Study
An investor’s return received from a particular company for putting his money in such a company is usually in form of dividend. Such dividend depends on the amount of earning which the company made that financial year. Such earnings help to indicate the performance of the company. Therefore, it is very important for us to establish whether there is any relationship between the earnings of a company and the corporate value.
The objectives that this research work seeks to achieve include:
To ascertain whether there is any relationship between the earnings of a company as reflected in the Earnings per Share (EPS) and the value of the company.
To determine whether there is any relationship between the amount of Dividend per Share (DPS) paid by a company to its shareholders and the value of the company.
To ascertain whether or not there is a relationship between Earnings Yield of a company and its market value.
CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
Our focus in this chapter is to critically examine relevant literature that would assist in explaining the research problem and furthermore recognize the efforts of scholars who had previously contributed immensely to similar research. The chapter intends to deepen the understanding of the study and close the perceived gaps.
Precisely, the chapter will be considered in two sub-headings:
- Conceptual Framework
- Chapter Summary
CONCEPTUAL FRAMEWORK
Dividend
The concept of dividend has been defined by many authors and researches. Bierman (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. Dividends are compensatory distribution to equity shareholders for both time and investment risks undertaken (Uwuigbe, et al, 2012). Pandey (2010) defines dividend as a portion of a company’s net earnings which the directors recommend to be distributed to shareholders in proportion to their shareholdings in the company. It is usually expressed as a percentage of nominal value of the company’s ordinary share capital or as a fixed amount per share. Dividends are usually paid out of the current year’s profit and sometimes out of general reserves. They are normally paid in cash and dividend payment is known as cash dividend. Dividend payment is a major component of stock return to shareholders (Zakaria, et al 2012). Jo and Pan (2009) assert that dividend payment could provide a signal to the investors that the company is complying with good corporate governance practices.
Dividend payout is the amount of cash that a company sends to its shareholders in the forms of dividends. The company can decide to send all the profits back to its shareholders or investors, or could keep a portion of it as retained earnings. Healthy dividends payouts thus indicate that companies are generating real earnings rather than cooking books (Barron, 2002). Zhou and Ruland (2006) revealed that high dividend payout firms tend to experience strong future earning but relatively low past earnings growth despite market observers having a contradicting view. Arnoth and Asness (2003) also revealed that future earnings growth is associated with high rather than low dividend payout. A high payout ratio means more dividends and less funds for expansion and growth. A low payout, on the other hand, results in a higher growth (Pandy, 2012). Considering dividend payout in information perspective, the dividends signaling theory prescribes that dividend payout can be used as a device to communicate information about a company’s financial performance to investors. Murekefu, et al (2012) says that cash dividend announcement convey valuable information which shareholders do not have about management’s assessment of a firm’s future profitability, thus reducing information asymmetry. Such information can be made use of by investors in assessing the firms’ financial performance and making investing decision. Dividend policy under this model is therefore relevant (Al-Kuwari, 2009). The word ‘Performance’ is derived from the word ‘Parfourmen’ which means ‘to do’, ‘to carry out, and ‘to render’. It refers to the act of performing, executing, accomplishing and fulfillment e.t.c. In broader sense, performance refers to the accomplishment of a give task measured against preset standards of accuracy, completeness, cost and speed. In other words, it refers to the degree to which an achievements being or has been accomplished. In the words of French Kohlar “the performance is a general term applied to a part or to all the conducts of activities of an organization over a period of time often with reference to past or projected cost efficiency, management responsibility or accountability or the like”. Thus, not just the presentation, but the quality of results achieved refers to the performance. Financial performance refers to the act of performing financial activity. In broader sense, financial performance refers to the degree to which financial objectives being or has been accomplished. It is the process of measuring the results of a firm’s policies and operations in monetary terms. Financial performance is used to indicate firm’s success, conditions and compliance. It is used to measure firm’s overall financial health over a given period of time and can also be used to compare similar firms across the same industry or to compare industries or sectors in aggregation. Shareholders, investors, creditors, managers have most interest in knowing the financial performance of a firm before investing.
CHAPTER THREE
RESEARCH METHODOLOGY
Research Design
This study aims to empirically investigate the relationship between earning, dividend and the value of a Microfinance Institution Nigerian quoted firms over a 15 year period. The study therefore adopted a panel research design method.
Data type and Source
The study utilised data from the secondary source. This is because the estimation of the model in the study requires the use of pooled cross-section and time series data in the form of financial and market information. The sources of data for the study are therefore the Nigerian Stock Exchange (NSE) fact books for 1997 to 2012, daily official lists of the NSE for the study period, and the annual reports and accounts of the companies.
Population of the study
The population of this study covers all the Microfinance Institution in Nigeria. However, the study draws data upon a sample of 10 Microfinance Institution for a fifteen year period (1997 to 2012) based on criteria adopted by previous similar studies. The choice of fifteen years is based on the fact that the period is long enough to adequately factor in events that occurred in the period before, during and after the crash in the stock market of 2008.
CHAPTER FOUR
RESULT AND DISCUSSION
The analyses are based on the descriptive statistic of our model. Table 4.1 is used to explain the behavior of our model proxies.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
The paper empirically investigated the effect of dividend policy on the growth of micro finance institution. This is as a result of the unresolved and divergent position of several studies on the impact of firm’s dividend policy on share price. The study also conducted a sectoral analysis of the impact of dividend policy on share price to see if these impacts are sectoral specific. Literatures reviewed revealed that there is a school of thought that advocates that the higher the dividend payout ratio, the more attractive the share is to shareholders. Hence, investors place higher values on the shares of such firms. However, this is not always true as some investors view firms that retained higher proportions of their profits as firms with strategic investment opportunities. In this vein, another school of thought emanated in the literature suggesting that those firms who have viable investment opportunities should retain their profits and invest in such opportunities
The result of the empirical study carried out revealed that the earning streams of companies in Nigeria have a greater impact than their dividend payouts in shaping the price of their shares in the market. Similarly, the result of the sectoral analysis carried out also revealed that, in each of the sectors, earnings drives share prices the most. Practically, this implies that the market price of shares on the Nigerian stock exchange reacts more to earning capability of firms than they do to the dividend payout of the firms. This is in line with the M-M irrelevancy of dividend theory which posits that dividend payout ratio does not affect shareholders’ wealth. Rather, the theory hinges on the belief that the value of the firm is determined by the streams of its earnings or its pattern of investment rather than pattern of distribution of its profits. However, this is not to say that the dividend policies of firms are completely irrelevant as the result shows a positive relationship between dividend payout and share price.
RECOMMENDATION
The study therefore recommends that; (i) corporate managers should strive to maintain a steady increase in earnings by maximizing return on investment. This is in view of the fact that market price of shares in Nigeria is majorly influenced by level of earnings and, (ii) firms should maintain a stable dividend payout in order to increase internal finance available to pursue further profitable investments that will help increase earnings.
REFERENCES
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- Adefila, J.J., Oladipo, J.A. and Adeoti, J.O. (2013). The Effect of Dividend Policy on the Market Price of Shares in Nigeria: Case Study of Fifteen Quoted Companies. Available online at: http://unilorin.edu.ng/publications/adeotijo/THE%20EFFECT%20OF%20DIVIDEND %20POLICY.pdf and http://www.scribd.com/doc/132398617/14-the-Effect-ofDividend-Policy-1
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