The efficient and effective financial
administration in corporate organization is sine quad non'' to the
achievement of the organizational objective.
Dividend policy is said to be financial
policy that is responsible for the determination of the market price of
shares. But there are divergent views on the effect of dividend policy
on the market price of shares. Dividend relevance and dividend
irrelevance theories. The regression analysis performed on the secondary
data collected, using market price of shares as dependent variable,
dividend per share, retained earnings per share and earnings per share
as independent variables, revealed that there is significant
relationship between dividend policy and market price of shares. It was
also revealed that dividend affect market price of share more than
retained earnings. It was also concluded that the belief of the dividend
irrelevance theorists is wrong in the real life situation where forces
of demand and supply play a determining role. It was recommended that
financial administrators study and educate the environment in the
formulation of dividend policy. Hence, optimum dividend policy will be
achieved which in tum increases the value of the business firm.
1.1 BACKGROUND OF THE STUDY
Efficient management of the flow of funds within a firm shows that
the firm has a goal or an objective because judgment as to whether or
not financial decision is efficient must be made in the light of some
standard. The objectives of firms are multidimensional; this may range
from social, to economics and to finance.
The social objective holds the view that the firm should socially
responsible. This is because the firm is not operating in a vacuum but
within environment, internal and external environments of the firm.
These social responsibilities include the supply of quality products at
low prices to the customers, tarring of roads maintenance of sound
industrial relations, giving a fair deal to employees and seeking their
participation in management and contribution towards the social
overheads through taxes and donations. However, the social welfare
maximization objective is greeted with very may criticism. The economics
objective has profit maximization objective as its own objective and
holds the view that sole objective of any firm should be to maximize
The objective though considering better than that of social school of
thought, also witness several and serious criticisms. The finance is
maximizing the, wealth of the shareholders or value of the firm. The
objective of wealth maximization would cause financial managers to take
decisions, which balance returns and risk in such a manners as to
maximize the benefits, through dividends and enhancement of share price,
to the shareholders.
Dividend policy is seen to be sine-qua-non to the value of a firm
subject to the position maintained in the above paragraph. The
shareholders see dividends as signals of the firm’s ability to generate
future income, hence, it is used in the valuation of the firm. The
management of the firm is expected to choose the capital structure that
will be able to give optimum return to the firm.
Hence, dividend policy “… consist of rules by which the earning are
distributed between retention and dividends to shareholder,” Oloyede
The form of returns, dividends and retained earning play important
role in maximizing the value of the firm. Infact, in any business
organization, the issues of dividend policy cannot over – emphasized.
Dividends policy of an organization are those policies that determine
the amount of earning that the organization will pay as dividend versus
the amount .of earning that will be retained and reinvested in the
organization, Pantalone (1988).
Dividend decision of the firm is a very important area of financial
management. The financial manager is faced with two conflicting interest
vis-a-vis income to the shareholders in form of dividend and retention
to ensure adequate growth rate. Therefore appropriate balance has to be
maintained so as to satisfy the two conflicting interest.
This optimal dividend policy, which forms the main focus of dividend
policy, ensure the appropriate balance between the current dividends and
adequate growth, thereby maximizes the values (Market) of the firm’s
Miller and Modigliani (1961) opined that the effect of the company’s
dividend policy on the value of its shares is a matter of considerable
importance not only to the corporate managers who must set the policy
but to investors planning port folio and to economists seeking to understand and appraise the functions of the capital market.
The ability to pay dividends duly and regularly is an important
factor in determining the success and value of such firm. For the vest
majority of common shares, the dividends record and prospects have
always been the most important factor controlling investment quality and
value of the stock. The success of the company is measured by its
ability to pay liberal steadily increasing dividend on the shareholders
investment. This is because the true and intrinsic value of any
financial assets is based on the cash flows that the investor expects to
receive in the futures for owning such assets. Dividends tend to be
viewed both by the firms management and by the recipient shareholder as
the equivalent of an interest payment of a loan to creditors, a
compensation for the shareholders delaying consumption, Gordon and
There have been theories on the variable that influences the market
price of a share more than the other between dividend rate and retained
earnings. Infact, there are conflicting theories regarding the impact of
dividend decision on the market value of a given form’s share. Some
theorists even opined that dividends decision does not have relationship
the value of a firm.
1.2 OBJECTIVE OF THE STUDY
Generally, the study will examine the effect of dividend policy on
the market price of shares. The study will appraise and evaluate the
effectiveness and efficiency of dividend policy in the determination of
the market prices of shares using First Bank of Nigeria as a case study.
The study will also appraise the role of maximizing the value of
corporate organization in the aggregate economic development. Also, the
research work will seek to know whether dividend policy in its context
and application is the only alternative or with some adjustment that
will bring the lasting solution to the problem of fluctuation in the
market prices of shares.
At the end of the day, useful recommendation will be made on how the
firms can improve the move on the market prices of their shares.
Having discussed the broad objective of the study, there is needed to
specifically state the specific objectives of this research work. The
specific objectives are as follows:
i. To examine dividend policy as a financial administration policy.
ii. To examine the relevance of dividend to stockholders satisfaction and market prices of shares.
iii. To examine the effect of dividend policy on the market prices of shares.
iv. To examine the relevance of retained earnings on the growth
of the firm and the consequent effect on the market price of shares.
v. To examine the variable that mostly influences the market prices of shares.
vi. To examine the trend of dividend payment on the future value of the firm.
vii. To examine the contribution of corporate business organization in the economic development.
viii. To examine the constraints of dividend payment in practice.
1.3 STATEMENT OF PROBLEM
The shareholders are always conscious of what returns they would get
from their investments at the end of the day. At the same time companies
always want to exploit the opportunity of retain earnings as a source of getting fund for the growth of the company.
The ability of the company to determine appropriate dividend policy
would influence the prospective investors and even the existing
shareholders to be invested in company stocks or buy additional ones.
This will invariably influence the market price of the companies share
at the capital market.
Thus, there is the problem of being able to strike a balance between
growth of the company and satisfy the shareholders. Thus, this study
will proffer solution to the following research questions.
1.4 RESEARCH QUESTIONS
i. To what extent bas dividend policy influence the market share price?
ii. How efficient is dividend policy in determining market share price.
iii. Does the dividend policy maximize shareholders/investors interests?
iv. Is dividend policy sufficient in determining market price of shares?
v. To what extent has dividend policy enhances capital formation in the economy?
1.5 RESEARCH HYPOTHESIS
HI-There is significant relationship between market prices of share and dividend policy.
Ho -There is no significant relationship between market price of shares and dividend policy.
HI-Dividend policy affect market price of share more than retained earnings.
Ho -Dividend policy does not affect market price of share more than retained earnings.
HI – There is a significant relationship between dividend policy and capital formation in the economy.
Ho -There is no significant relationship between dividend policy and capital formation in the economy.
HI – Dividend policy has a significant relationship with shareholders interest.
Ho- Dividend policy has no significant relationship with shareholders interest.
1.6 SIGNIFICANCE OF THE STUDY
From the Marco – economic perspective, it is the investors that help
in capital formation, which is eventually used for possible investment
and growth of the economy.
Dividend policy therefore will go a long way to influence the capital
formation of the country. So the significance of this study cannot be
over emphasized as it will exposes how dividend policy has encourage or
otherwise the capital formation in the country and hence the economic
From the micro level, one would see that as a rational being,
investors/shareholders would be attracted to investment that brings
about attractive returns. It is the dividend policy that determines
this. So the management of dividend policy by the business managers goes
a long way to attract these investors. It is the belief of this
researcher therefore that results got from this study will go a long way
to influence business managers in designing their dividend policy and
shareholders response to share market price.
1.7 SCOPE AND LIMITATION OF THE STUDY
I confine myself for the purpose of this research work to the
dividend policy and its effect on market price of shares as it is
applied in financial administration in content context and concept.
I limit myself to the available data to be collected at relevant section of Nigerian stock exchange, security
and exchange commission, first bank of Nigeria, libraries and other
research institutes. Sources of information are from journals,
statistical bulletins, periodicals, news abstract, annual reports of
first bank of Nigeria, textbook and other government publications.
In assessing the effect of dividend policy therefore, both quantitative and qualitative approach will be employed.
I cannot, but say that the research work is faced with some
limitations. The time available to carryout this research work is very
inadequate. The research work of this nature normally requires much time
and attention, which is very had to come by in programmes such as that
Access to some useful information for the purpose of this research
project was denied due to secret management of information by Nigerian
business organizations. The current data are also seemingly unfeasible
in such organization due to poor management of information in Nigeria.
The fund available for the purpose of this research work is not adequate
for it requires a lot of money to put everything together in the cause
of making research.
1.8 PLAN OF THE STUDY
As chapter one has successfully dealt with the necessary introductory
background of the study, chapter two will be dealing with literature
review, conceptual and theoretical framework. Chapter three will deal
with research methodology of the study, Chapter four will deal with data
presentation and analysis. While chapter five will finally deal with
the summary, concluding remark and recommendation