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

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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

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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 decision-

makers.

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

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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

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cash dividends, such as the psychological (but necessarily rational from a purely financial stand-

point) 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.

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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 Respondents PercentEducational Qualification:HND/B.Sc 16 31MBA/M.Sc/Equivalent 31 61Others 4 8Exposure to Management ProgrammeYes 37 73No 14 27Working Experience in Years:Less than 5 years 10 205-10 years 29 5710-20 years 11 2220 years and above 1 2Length of Working Experience in years in present company:Less than 5 years 15 295-10 years 20 3910-20 years 16 3220 years and above 0 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

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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).

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Table 2: Impact of Dividends on Share Value

Research Statements Percentage of

Responses (%)

5 4 3 2 1 Mean S.D T-Test

S1. Dividend payment affects the share price 56 22 13 8 0 4.27 0.98 12.90

S2. Capital gains expected to result from

earnings retention are riskier than

dividend payments

24 48 14 9 5 3.73 1.11 7.92

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

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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

3. A firm should strive to maintain

uninterrupted dividend payment 19 36 30 10 5 3.53 1.10 6.69

4. A firm should avoid making changes in

dividends that might have to be reversed in a

year or so

21 38 26 10 5 3.59 1.12 6.95

5. A firm should have a target payout ratio and

periodically adjust its payout toward the

target.

20 42 23 13 1 3.63 1.02 7.91

6. A change in the existing dividend payout is

more important than the actual amount of

dividends

11 34 35 11 9 3.31 1.12 5.17

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 (51-

1) 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

7. Reasons for dividend policy changes should

be adequately disclosed to investors 42 38 16 4 0 4.10 0.84 13.61

8. Dividend payments provide a “signaling”

device of future company prospects 40 41 12 7 0 4.12 0.91 12.72

9. The market uses dividend announcements

as information for assessing security values 18 36 35 6 5 3.59 1.05 7.41

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 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 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

10. Management should be responsible to its

shareholders preference regarding dividends 26 42 30 2 0 3.84 0.80 11.96

11. Investors are basically different between

returns from dividends versus those from

capital gains

32 26 19 22 1 3.66 1.20 6.90

12. Capital gains expected to result from

earnings retention are riskier than dividend

expectations

22 46 14 11 7 4.06 1.51 7.38

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

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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

13. New capital investment requirements of

the firm generally have little effect on

modifying the pattern of dividend behaviour

5 25 35 29 6 3.02 1.02 3.64

14. Dividend distributions should be viewed

as a residual after financing desired

investments from available earnings.

24 50 16 7 3 3.88 1.02 9.66

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.

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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.

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