EVALUATION OF THE DIVIDEND PRACTICES AMONG SELECTED
NIGERIAN QUOTED FIRMS
BY
DR. S. L. ADEYEMI
DEPARTMENT OF BUSINESS ADMINISTRATION
UNIVERSITY OF ILORIN, ILORIN
AND
A. A. ADEWALE
DEPARTMENT OF ACCOUNTING AND FINANCE
UNIVERSITY OF ILORIN
ABSTRACT
Dividend policy is a pivot around which other financial policies rotate, hence central to the
performance and valuation of listed firms. This is moreso because managers as decision makers
are often confronted with the “dividend puzzle” - the problem of reconciling observed dividend
behaviour with economic incentives. This paper is motivated by the apparent dearth of empirical
works on dividend policies and practices in Nigeria and hence aims to evaluate such policies and
practices among selected Nigerian quoted firms. The result of the survey questionnaires show
that Nigerian investors’ attitudes are consistent with those of the bird-in-the-hand theorists.
Hence Nigerian managers belief that dividend payout have significant signaling effect both on
share price and future prospects of a firm. Consequently, they strive to maintain a consistent and
uninterrupted dividend payout policy.
INTRODUCTION
No doubt, one of the most important policies in corporate financing is the dividend policy. This
is not only from the viewpoint of the company, but also from that of the shareholders, the
consumers, the workers, the regulatory bodies and the government. The relative importance of
this policy stems from the fact that it is a pivotal policy around which other financial policies
rotate, hence central to the performance and valuation of firms (Bebczuk, 2004). According to
1
Olowe (1998), financial managers make inter-alia three decisions pertaining to financing,
investment and dividends simultaneously. While financing decision is influenced by the dividend
decision through retained earnings, the investment decision depends on the amount of retained
earnings and the amount that can be raised externally.
Though a very important financial policy, the dividend policy remains one of the most puzzling
issues in corporate finance (Baker, Powell, and Veit, 2002: 255). According to Desai, Foley and
Hines Jr. (2001) a major impediment to understanding corporate dividend policy is the
availability of multiple plausible explanations for observed behaviour. Among the principal
explanations stressed by modern theories include agency and other informational problems
between owners and managers (Bebczuk, 2004). Thus, while the shareholders use dividends to
wrest resources from the control of managers, corporate managers on the other hand use
dividends to send credible profitability signals to the capital market.
Dividend payments reduce the free cash flows under the discretion of the corporate members [the
controlling owners and top management] and this help alleviate expropriation of minority
shareholders [Hwang, Park and Park, 2004]. Hence the need to control corporate managers is
often invoked to explain the existence of large and frequent dividend payments from
corporations to common shareholders [Desai et al, 2001]. On the other hand, information
asymmetries between managers and shareholders necessitates that the former focus attention on
the information content of dividends that are conveyed to the latter regarding future earnings or
cash flows.
The above explanation is succinctly put by Rigar and Mansouri (2003):
Policy of dividends practiced by a corporation is a robust signal of a
firm’s value, even though relationship between the two variables does not
meet unanimity of theoretical and empirical research. Indeed, generous
distribution of profits in favour of shareholders may be considered as a
signal of treasury ease as it can be interpreted as revealing obstacles at
the level of investment horizons. Similarly, maintaining profits to be
reinvested is an action that is generally less appreciated by shareholders,
and often badly interpreted by the market, especially in the case of listed
companies, but this may also be considered as a signal of strong growth
potentials.
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Therefore, the following research questions are addressed in this paper. What effects does
dividend have on share value? How does the dividend policy impact on both the clientele and
signaling effects? What are the firms’ attitude on both Litner’s findings and the residual policy?
And what are the determinants of dividend policy? The aim is to draw on the synthesis of these
questions, drawing on responses to survey questionnaires administered on corporate respondents.
The remaining parts of this paper is structured as follows: In the next section a brief review of
past studies on the dividend policy and practices is attempted. Afterwards, the research
methodology adopted in the study is described, and thereafter the discussion of results is
presented. The last section contains some conclusion drawn from the study.
DIVIDEND POLICY: ISSUES AND CHALLENGES
Reviews of past studies show that finance scholars have engaged in different empirical and
critical studies on dividend policy. In his seminal paper, Litner (1956) concluded that a major
portion of dividend of a firm would be expressed in terms of the firm’s desired dividend payment
and target pay out ratio. Together with other early proponents of the ‘bird-in-the-hand’ theory,
like Gordon (1959), they contend that shareholders prefer dividends to the capital gains that
would be expected to result from the reinvestment of earnings by the firm. On the basis of
interviews conducted with United States [U.S] corporate executives, Litner (1956) found that
firms behave as though dividend policy matters by selecting target payout ratios based on
earnings to which they gradually adjust actual dividend payments over time. He latter
hypothesized a lagged adjustment model that relates changes in dividends to both current
earnings and lagged past dividends and found out that they positively influence current
dividends. Various finance scholars in United State [U.S] like Fama and Babiak (1968), Baker,
Farrelly and Edelman (1985), Pinegar and Wilbricht (1989) have attempted an empirical test of
Litner’s behavioural model or its variations over the years. Similar studies were carried out in
Australia by Shevlin (1982), in Singapore by Ariff and Johnson (1989) etc. Generally, the results
of these studies are consistent with Litner’s hypothesized partial adjustments towards target
payout ratio. In their surveys of the Chief Executive Officers (CEOs) of listed firms in Australia;
Hong Kong; Indonesia; Malaysia; the Philippines and Singapore; Kester et al (1998) found that
executives in these countries belief that firms should have target pay out ratios, strive for
3
uninterrupted dividend payments, and avoid changes in dividend that may have to be reversed.
These findings are consistent with those of Arsiraphongphisit, et al (2003) in their survey of
Chief Executive Officers (CEOs) in Thailand.
An alternative view to the ‘bird-in-the-hand’ theory is the ‘Dividend Irrelevance Theory’
advanced by Miller and Modigliani (1961) in their seminal theoretical paper. They advanced the
view that the value of a firm depends solely on its earning power and is not influenced by the
manner in which its earnings are split between dividends and retained earnings. They further
argued that when financial markets are frictionless, investors are indifferent between dividends
and capital gains as far as they can substitute one for the other to reach their desired level of cash
dividends by selling or buying stock. This assertion is supported by the findings of Fama and
French (2001) that the proportion of dividend paying firms among U.S quoted firms has been
declining overtime, thus implying a decline in the perceived benefits of dividends. Furthermore,
Karak (1993) examined the policy decision regarding divisible profit and dividend decision
among Indian firms. The study concludes that management in India follow conservative policies
with regards to dividends. Hence, there is an increasing tendency on their part to finance
expansion out of internal resources as far as possible. However, a major argument against the
dividend irrelevance proposition is the difference in tax rates between dividends and capital
gains. Consequently, Black (1976) coined the term “dividend puzzle” – the problem of
reconciling observed dividend behaviour with economic incentives facing the relevant decisionmakers.
It could be deduced from both the bird-in-the-hand theory and the dividend irrelevance theory
that potential explanations for observed dividend behaviour center on corporate control
problems, signaling explanations, and the tax effects of paying dividends, with each of them
carrying implications for how dividend policy is conducted.
For about two decades now, quite a number of appealing alternative approaches have been
offered by scholars in order to solve the dividend puzzle. Most of these approaches are rooted in
asymmetric information between firm insiders and outsiders and bounded rationality of the latter.
Bebczuk (2004), provides a useful survey of this literature. Among the recent hypotheses offered
4
is that firms use dividend payouts to signal their quality to the market (Hwang et al 2004, Rigar
and Mansouri, 2003), so as to mitigate the under-valuation that arises in an adverse selection
context, [Bebczuk, 2004].
Agency problems have also been advanced as another explanation for the dividend puzzle. When
the goals of corporate managers diverge from those of shareholders, financial policies can be
used to reduce agency costs. Desai, et al (2001), Hwang et al (2004) and Bedczuk (2004) opined
that consistent dividend payments can mitigate agency conflicts by distributing investment
returns and thereby reducing the scope of managerial misallocation and appropriation of
corporate resources. Furthermore, Chirinko and Philips (1999) in their study of evolution policy
at the Baby Bells also conclude that agency problems provide the strongest explanation in
comparison to alternative explanations.
Tax considerations have obvious potential to influence dividend payment to common
shareholders, since dividends trigger tax obligations that might otherwise be deferred or avoided.
According to Desai et al (2001), evidence indicates that firms pursue dividend pay out policies
designed in part to minimize tax obligations. Furthermore, Baker and Powell (2000), Baker and
Smith (2003), find that the desire to conform to the industry dividend practice is an important
factor influencing dividend policy. Hence, industry affiliation can be advanced as another
explanation for the dividend behavior. In a recent survey, Brav, Graham, Harvey and Michaely
(2003) also found that the dividend policies of competitors are moderately influential when
managers set their own dividends.
Corporate governance has also been found out to influence dividend behavior. For instance,
Hwang, et al (2004) find that firms that practice higher-quality governance also have favourable
pay out policies to investors. Also, Bhojraj and Senguptra (2004) conclude that firms with
greater institutional ownership and stronger outside board control enjoy lower bond yields and
higher ratings on their new bond issues. This evidence suggests that governance mechanism can
reduce cost of debt capital by mitigating agency costs and by reducing information asymmetry
between the firm and the lenders (Bebczuk, 2004). Other explanations offered for the dividend
patterns could be said to be behavioural in nature. An example is the investors’ preference for
5
cash dividends, such as the psychological (but necessarily rational from a purely financial standpoint) loss derived from the principal reduction of selling stock or the regret of liquidating stock
just before its price rises (Bebczuk, 2004).
The dividend puzzle remains yet unresolved. Consequently, finance scholars have engaged and
are still engaging in different empirical studies to explain the dividend policy. However, the issue
still apparently remains scarcely investigated in an emerging country like Nigeria in stark
contrast to the developed countries of Europe, Asia and America.
METHODOLOGY
The population of focus in this study consists of top management staff of sampled firms in
Nigeria. Efforts were made in some cases to ensure that the staff respondents of such firms are
their Financial Managers. Survey method was adopted in the study. This method is especially
useful for the study on non-observable events such as opinions, attitudes, preferences, or
dispositions (Soyombo, 2002). Moreover, while survey method is not flawless, it has been
generally accepted as a reasonable proxy given the time and personal constraints in large
corporations (Ryan and Ryan, 2002).
The research instrument used in the study is the structured questionnaire. A charge is made
against surveys of this nature that the respondent is usually a junior executive with a limited
viewpoint (Aggarwal, 1980). To ensure that the respondents who completed the questionnaire
understand the survey, educational achievement and academic training were solicited. These two
characteristics are important to assess the respondents’ familiarity with the subject matter. In
addition, respondents were offered complete anonymity in order to improve response rate,
reliability, honesty, and thus reduce response bias.
A total number of 150 questionnaires were administered out of which only 51 representing 34%
were received and used for analysis. The research instrument contained 14 closed ended and 1
open ended statements on dividend policy against which the respondents were asked to indicate
their level of agreement upon a five point Likert scale (where 5 = strongly agree, and 1 =
strongly disagree). Each statement number is subsequently referred to as S1-S14.
6
The data obtained were subjected to statistical analysis using both descriptive and inferential
statistics. The descriptive tools used were the simple percentage, arithmetic mean and standard
deviation, while the inferential statistics was the students-t test at relevant alpha levels.
ANALYSIS AND FINDINGS
The distribution of the respondents by demographic characteristics is presented below by
educational qualification; management programmes or courses attended; work experience in
years, and length of service in present company.
Table 1. Demographic Characteristics of the Respondents
Characteristics
Educational Qualification:
HND/B.Sc
MBA/M.Sc/Equivalent
Others
Exposure to Management Programme
Yes
No
Working Experience in Years:
Less than 5 years
5-10 years
10-20 years
20 years and above
Length of Working Experience in years in present company:
Less than 5 years
5-10 years
10-20 years
20 years and above
Respondents
Percent
16
31
4
31
61
8
37
14
73
27
10
29
11
1
20
57
22
2
15
20
16
0
29
39
32
0
Source: Field Survey, 2004
Table 1 above shows that all the respondents have one form of college training or the other. 61%
have above first-degree education, while 31% have at least HND or first degree. The remaining
8% have other qualifications, which include diploma, and professional qualifications. This
distribution demonstrates a high level of educational attainment by the respondents. Furthermore,
most of the respondents, 37 representing 73% have exposure to management development
programmes and courses. This distribution with that of educational qualification indicate that the
respondents are likely to be very familiar with the subject matter and thus greatly influencing
7
their responses. Only 14 respondents representing 27% have never attended any management
development course (s).
Majority of the respondents, 29 representing 57% have between 5 and 10 years of working
experience, while 11 respondents representing 22% have between 10 – 20 years of working
experience. Only 1 respondent 2% has above 20 years working experience. Others representing
20% have less than 5 years experience. The quality of their responses is expected to be positively
influenced by their experience. Nearly 40% of respondents have 5 – 10 years working experience
in their present company. Another 32% have between 10 –20 years while only 15 respondents
representing 29% have less than 5 years working experience in their present company. This
indicates that majority of the respondents do not change jobs frequently and thus should have
sufficient knowledge of the dividend policies and practices of their firms.
ATTITUDE ON DIVIDENDS AND SHARE VALUE
According to table 2, 78% of the respondents agreed with the statement that dividend payment
indeed affects share prices. While 13% were neutral, only 8% disagreed. The basic justification
of the traditionalist that investors prefer dividends to capital gains was also agreed to by 72% of
the respondents indicating a mild agreement. Only 14% apiece were indifferent and/or disagreed
with this assertion. The mean scores of 4.27 and 3.73 out of a maximum scale of 5.00 and a
standard deviation of 0.98 and 1.11 respectively also indicate respondents positive disposition
towards S1 and S2. These statements were also statistically significant using student’s t –
statistic computed at an alpha level of 5% and n –1 (51-1) degree of freedom. This is so because
critical value of 1.99 from table is less than the values of 12.90 and 7.92 for S1 and S2
respectively. These findings are consistent with that of Arstraphongphisit et al (2003).
8
Table 2: Impact of Dividends on Share Value
Research Statements
Percentage of
Responses (%)
S1. Dividend payment affects the share price
5
4
3
2
1
Mean
S.D
T-Test
56
22
13
8
0
4.27
0.98
12.90
24
48
14
9
5
3.73
1.11
7.92
S2. Capital gains expected to result from
earnings retention are riskier than
dividend payments
Source: Authors’ Computations
ATTITUDE ON LITNER’S FINDINGS
Table 3 shows that 55% of the respondents agreed with the statement that a firm should strive to
maintain an uninterrupted dividend payout. While 15% disagreed, 30% were however,
indifferent to this statement. Furthermore, 59% of the respondents agreed that changes in
dividends that might have to be reversed in a year or so should be avoided. Only 15% of the
respondents do not agree with this statement while 26% were indifferent. The mean scores of
3.53 and 3.59 out of a maximum scale of 5.00 and a standard deviation of 1.10 and 1.12
respectively also indicate respondents’ positive disposition towards S3 and S4. These statements
were also statistically significant using student’s t- statistic computed at an alpha level of 5% and
n-1 (51) degree of freedom. This is so because critical value of 1.99 from table is less than the
computed values of 6.69 and 6.95 for S3 and S4 respectively. This finding is consistent with
those of Pinegar and Wilbrecht (1989) who found strong evidence for managerial preference for
dividend continuity among U.S. firms. Litner’s hypothesize model was also supported by the
findings in this study. 62% of the respondents agreed that a firm should have a target payout ratio
and periodically adjust its payout towards that target. 14% and 23% of the respondents disagreed
with and were indifferent to this statement respectively. 45% (less than half) agreed with the
statement that “a change in existing dividend is more important than the actual dividend” while
35% were indifferent, 20% disagreed. The mean scores of 3.63 and 3.31 out of a maximum scale
of 5.00 and a standard deviation of 1.02 and 1.12 respectively also indicate respondents positive
disposition towards S5 and S6. These statements were also statistically significant using
student’s t- statistic computed at an alpha level of 5% and n-1 (51-1) degree of freedom. This is
9
so because critical value of 1.99 from table is less than the computed values of 7.91 and 5.17 for
S5 and S6 respectively.
Table 3 Attitude on Litner’s Findings
Research Statement
Percentage of
Responses (%)
5
4
3
2
1
Mean
S.D
T-Test
19
36
30
10
5
1.10
6.69
21
38
26
10
20
42
23
13
1
3.63
1.02
7.91
11
34
35
11
9
3.31
1.12
5.17
3. A firm should strive to maintain
uninterrupted dividend payment
3.53
4. A firm should avoid making changes in
dividends that might have to be reversed in a
5
3.59
1.12
6.95
year or so
5. A firm should have a target payout ratio and
periodically adjust its payout toward the
target.
6. A change in the existing dividend payout is
more important than the actual amount of
dividends
Source: Authors’ Computations
ATTITUDE ON THE SIGNALING EFFECT
Changes in dividend may, due to information asymmetry between managers and investors,
convey new information to the latter regarding future earnings or cash flows. Hence, the
signaling effect holds that changes in dividend payout may positively or negatively impact on a
firms share price, and ultimately, its prospects. On statements involving signaling effects, table 4
below shows that 80% and 81% respectively agreed that reasons for dividend policy changes
should adequately be disclosed to shareholders (S7) and that dividend payment provides a
“signaling” device of a company’s future prospects (S8). 42% and 7% of the respondents
disagreed with both statements, while 16% and 12% were indifferent respectively. The mean
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scores of 4.10 and 4.12 out of a maximum scale of 5.00 and a standard deviation of 0.84 and 0.91
respectively also indicate respondents positive disposition towards S7 and S8. These statements
were also statistically significant using student’s t-statistic computed at an alpha level of 5% and
n – 1 (51-1) degree of freedom. This is so because critical value of 1.99 from table is less than
the computed values of 13.61 and 12.72 for S7 and S8 respectively. This findings is consistent
with those of Hwang et al (2004) and Bebczuk, (2004) who found out that firms use dividend
payouts to signal their quality to the market so as to mitigate the under valuation that arises in an
adverse selection context. On the statement that the market uses dividends announcements as
information for assessing security values, 54% agreed, 11% disagreed, while 35% were neutral.
The mean score of 3.59 out of a maximum scale of 5.00 and a standard deviation of 1.05
respectively also indicates respondents positive disposition towards S9. This statement was also
statistically significant using student’s t-statistic computed at an alpha level of 5% and n – 1 (511) degree of freedom. This is so because critical value of 1.99 from table is less than the
computed values of 7.41 for S9. This findings is consistent with those of Arsiraphongphisit et al
(2003).
Table 4: Attitude on Signaling Effect
Research Statement
Percentage of
Responses (%)
5
4
3
2
1
Mean
S.D
T-Test
42
38
16
4
0
4.10
0.84
13.61
40
41
12
7
0
4.12
0.91
12.72
18
36
35
6
5
3.59
1.05
7.41
7. Reasons for dividend policy changes should
be adequately disclosed to investors
8. Dividend payments provide a “signaling”
device of future company prospects
9. The market uses dividend announcements
as information for assessing security values
Source: Authors’ computations
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ATTITUDE ON THE CLIENTELE EFFECT
The clientele effects offer another explanation for dividend stability. It describes a firm’s
tendency to attract its own clientele of investors partially due to its dividend payout policy. Table
5 shows that 68% of the respondents agreed with the statement that management should be
responsive to its shareholders preference regarding dividends while only 2% disagreed.
However, 30% were neutral on this statement. The mean score of 3.84 out of a maximum scale
of 5.00 and a standard deviation of 0.80 respectively also indicate respondents’ positive
disposition towards S10. This statement was also statistically significant using student’s tstatistic computed at an alpha level of 5% and n – 1 (51-1) degree of freedom. This is so because
critical value of 1.99 from table is less than the computed values of 11.96 for S10. This finding
corroborates that of Shleifer and Vishny (1986) and Allen, Bernado and Welch (2000) who noted
that institutional investors prefer dividend payments, and argue further that large investors are
often attracted to provide important monitoring services in order to mitigate agency problems.
On the statement that investors basically differ between preference for capital gains or dividends,
58% of the respondents indeed agreed, while 23% disagreed. However, only 19% were
indifferent. Thus implying that investors are not indifferent between returns from dividends
versus those from capital gains. The mean score of 3.66 out of a maximum scale of 5.00 and a
standard deviation of 1.20 respectively also indicate respondents positive disposition towards
S11. This statement was also statistically significant using student’s t-statistic computed at an
alpha level of 5% and n – 1 (51-1) degree of freedom. This is so because critical value of 1.99
from table is less than the computed values of 6.90 for S11. This finding is consistent with those
of Arsiraphongphisit et al (2003). S 12 is similar to S2 both in terms of statement and statistic
hence was not subjected to another analysis.
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Table 5: Attitude on the Clientele Effect.
Research Statement
Percentage of
Responses (%)
5
4
3
2
1
Mean
S.D
T-Test
26
42
30
2
0
3.84
0.80
11.96
32
26
19
22
1
3.66
1.20
6.90
22
46
14
11
7
4.06
1.51
7.38
10. Management should be responsible to its
shareholders preference regarding dividends
11. Investors are basically different between
returns from dividends versus those from
capital gains
12. Capital gains expected to result from
earnings retention are riskier than dividend
expectations
Source: Authors’ Computations
ATTITUDE ON RESIDUAL POLICY
According to Arsiraphongphisit et al (2003), depending upon the timing and magnitude of
earnings and investment opportunities available to the firm, strict adherence to the residual
policy on a year-to-year basis result in an erratic pattern of dividends. On the statement that new
capital investment requirements of the firm generally have little effect on modifying dividend
behaviour, 30% of the respondents agreed, while 35% were neutral. 35% however, disagreed
indicating that no strong agreement was made on this statement. The mean score of 3.02 out of a
maximum scale of 5.00 and a standard deviation of 1.02 respectively also indicate respondents
positive disposition towards S13. This statement was also statistically significant using student’s
t-statistic computed at an alpha level of 5% and n – 1 (51-1) degree of freedom. This is so
because critical value of 1.99 from table is less than the computed values of 3.64 for S13. The
statement on whether dividend policy should be viewed as a residual after financing deserved
level of investments from available earnings was agreed with by 74% of the respondents, while
16% and 10% were neutral, and disagreed respectively. The mean score of 3.88 out of a
maximum scale of 5.00 and a standard deviation of 1.02 respectively also indicate respondents
13
positive disposition towards S14. This statement was also statistically significant using student’s
t-statistic computed at an alpha level of 5% and n – 1 (51-1) degree of freedom. This is so
because critical value of 1.99 from table is less than the computed values of 9.66 for S14.
Table 6: Attitude on Residual Policy
Research Statement
Percentage of
Responses (%)
5
4
3
2
1
Mean
S.D
T-Test
5
25
35
29
6
3.02
1.02
3.64
24
50
16
7
3
3.88
1.02
9.66
13. New capital investment requirements of
the firm generally have little effect on
modifying the pattern of dividend behaviour
14. Dividend distributions should be viewed
as a residual after financing desired
investments from available earnings.
Source: Authors’ Computations
DETERMINANTS OF DIVIDEND POLICY
On the question that bothers on the determinants of dividend policy, respondents offered various
factors, especially since the question is open ended. Despite varying responses, however, the
most common factor sighted was industry effect. This is consistent with the findings of Graham,
Harvey, and Michaely (2003) that dividend policies of competitor firms are a moderately
important determinant of firms’ dividends.
CONCLUSION
This study examined dividend policies and practices among some Nigerian quoted firms. The
study is in part a response to the dearth of empirical works on the subject matter in Nigeria in
stark contrast to the developed countries of Europe, America and Asia. The results were
consistent with most findings from previous empirical studies.
14
The study concludes that investors prefer dividend payout to capital gains and that consequently,
management of firms in Nigeria pay serious attention to shareholders preference for dividend.
Thus justifying the traditionalist or bird-in-the-hand theorist view of dividend relevance.
Moreover, another major conclusion arrived at in this study is that dividend payment affects
share price. Hence, Nigerian investors’ attitudes are synonymous with the findings of Litner
(1956) and similar recent studies.
Consequent upon the conclusion above, this study also concludes that investors prefer consistent
and uninterrupted dividends payouts, and as long as dividend is paid, they are indifferent
between the changes in dividend and actual dividend. Hence, this study reveals that management
of Nigerian firms belief that a firm should have a target payout policy that is adjusted
periodically.
Finally, this study concludes that the dividend payout policy of a firm has significant signaling
effect on its share price. Thus, Nigerian firms not only use dividend payout policy to signal their
quality, but also to signal their future prospects.
15
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