Effect of Dividend Policies
Introduction
The optimal dividend policy of a firm depends on investor’s desire for capital gains as opposed to income, their willingness to forgo dividend now for future returns, and their perception of the risk associated with postponement of returns.
However any normative approach to dividend policy intended to be operative under real world conditions should consider the firms investment opportunities, any preferences that investors have for dividends as opposed to capital gains and vice versa, and difference in
“cost” between retained earnings and new equity issues.
Various firms adopt dividend policies depending on the company’s articles of association and the prevailing economic situation. Some make high pay out, while others make low pay out and yet others pay stock dividends (bonus issue) in lieu of or in addition to cash dividend while others pay cash only. All in a bid to maximize shareholders wealth which, in this case, is the market value of the firm’s common stock.
Modigliani and Miller (1961) demonstrated the irrelevance of dividend policy under a set of assumption, that is, dividend policy has no effect on stock prices. But when these assumptions are relaxed, the theory begins to collapse. This raises the question does dividend policy have any effect on the value of firms in Nigeria? If yes, to what extent?
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Objective of Study
The objective of this study is to critically examine the possible effects that a firm’s dividend policy might have on the market price of its common stock and also, those factors that influence firm’s dividend policy in general.
It further attempts at identifying other factors that influence share price behaviour of quoted companies in Nigeria, and finally identifies the most commonly practiced dividend policy in Nigeria.
Theoretical Framework
Pandy (1979) defines dividend as that portion of a company’s net earnings which the directors recommend to be distributed to shareholders in proportion to
The optimal dividend policy of a firm depends on investor’s desire for capital gains as opposed to income, their willingness to forgo dividend now for future returns, and their perception of the risk associated with postponement of returns.
However any normative approach to dividend policy intended to be operative under real world conditions should consider the firms investment opportunities, any preferences that investors have for dividends as opposed to capital gains and vice versa, and difference in
“cost” between retained earnings and new equity issues.
Various firms adopt dividend policies depending on the company’s articles of association and the prevailing economic situation. Some make high pay out, while others make low pay out and yet others pay stock dividends (bonus issue) in lieu of or in addition to cash dividend while others pay cash only. All in a bid to maximize shareholders wealth which, in this case, is the market value of the firm’s common stock.
Modigliani and Miller (1961) demonstrated the irrelevance of dividend policy under a set of assumption, that is, dividend policy has no effect on stock prices. But when these assumptions are relaxed, the theory begins to collapse. This raises the question does dividend policy have any effect on the value of firms in Nigeria? If yes, to what extent?
2
Objective of Study
The objective of this study is to critically examine the possible effects that a firm’s dividend policy might have on the market price of its common stock and also, those factors that influence firm’s dividend policy in general.
It further attempts at identifying other factors that influence share price behaviour of quoted companies in Nigeria, and finally identifies the most commonly practiced dividend policy in Nigeria.
Theoretical Framework
Pandy (1979) defines dividend as that portion of a company’s net earnings which the directors recommend to be distributed to shareholders in proportion to