Information Content of Dividends: A Case Study of Nigerian Firms

Abstract

Corporate dividend policy has been a thing of concern to the financial managers and the firm at large. Firms are faced with dilemma of sharing dividend to stock-holders and retaining their earning with the view to ploughing it back into the business so as to foster further growth of the business. This study is an attempt to evaluate the observed dividend policy of a cross section of 60 Nigerian quoted Firms. The information content of dividends (signalling) hypothesis predicts that dividends can be used to signal firm’s future prospects and only good-quality firms can use such a device. Nigeria as an emerging market provides an excellent laboratory to test this hypothesis. Specifically, the Nigerian investment environment is pervaded with a host of uncertainties. Cross sectional weighted least squares regression provides strong support that the information content of dividends’ hypothesis holds well in Nigeria. Our empirical evidence indicates that the hypotheses of signalling theory performs remarkably well in Nigeria. Corporate dividend payout policy signals crucial information to investors about companies’ future prospects. We recommend that corporate management should follow a generous dividend policy which will maximize the long term benefits to its stockholders.