Abstract
This study attempt to evaluate the observed dividend policy of a cross section of 27 Nigeria quoted companies using theories tested to explain dividend behavior of those firms. These theories which are several and varied; even contradict each other and considerable doubt exist as to which theory best represent the observed dividend behaviour of Nigerian firms; hence the need for this study. To carry out this study a more recent data for the period (1996 – 2006) were reviewed and a model with the necessary policy variables constructed. Factor upon which dividend decisions are based are identified and the magnitude of their effect estimated. Our estimation reveals that the traditional factors are significant in explaining and predicting their dividend decision within the period under review. The result provides strong support for the explanatory or predictive power of Lintner’s model. Also, factors which attempt to explain variations in share market prices were identified, and the magnitude of their effect estimated. The result confirms that share market price is a representation of market valuation of dividends.
Highlights
The finance profession has long struggled to develop a simple satisfactory model of dividend determination without much success
The dividend policies of quoted companies in Nigeria are significantly influenced by their earnings and previous year dividend and that because of the reluctance to cut dividends, companies only partially adjust their dividends to changes in earnings
Our empirical evidence indicates that the hypotheses of Lintner/Gordon as well as that of signaling theory of Bhattacharya performs remarkably well with respect to the dividend policy of quoted companies under review. this confirms previous result as cited in Nyong(1990),Adesola(2004) that
Summary
The finance profession has long struggled to develop a simple satisfactory model of dividend determination without much success. A firm’s financing decision including dividends, have no effect on the value of the firm, nor the distribution of wealth between classes of security holders. With information asymmetry, Bhattacharya (1979) demonstrates that dividends provide information about the firm’s future cash flow and the dividend decision can change a firm value. An increase in payment ratio signals to shareholders a permanent or long-term increase in firms expected earnings. Dividend may offer tangible evidence of the firm’s ability to generate cash, and as a result, the dividend policy of the firm affects the share price (Solomon, 1963). The market value of share is affected not because of the change in dividend but because of the information about changes in the future expected earnings conveyed through the payment (Pandey, 2000 pp.765)
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