THE DETERMINANT OF DIVIDENT POLICY: A STUDY OF BANKING SECTOR PROFITABILITY IN NIGERIA

THE DETERMINANT OF DIVIDENT POLICY: A STUDY OF BANKING SECTOR PROFITABILITY IN NIGERIA

ABSTRACT

There were several researchers who investigated dividend policy in developed countries like the USA (Chang and Rhee, 1990), the UK (Al-Najjar and Hussainey, 2009) Argentina (Bebzuk, 2005), Poland (Kowalewski et al., 2008) or Japan (Ho, 2003) and some authors studying this in developing countries such as Tunisia (Naceur et al., 2006) or Pakistan (Mehar, 2002) with widely different results but no researches have been done in Nigerian determinants of its dividend policy. Therefore the purpose of this paper is to examine the determinants of dividend policy in Nigerian, an emerging stock market that was officially established in July, 2000. The paper identifies whether firms’ characteristics and corporate governance affect their dividend payments. Firm’s characteristics include profitability, business risk, management ownership board composition. The author relies on a sample of 116 companies listed on the Nigeria stock exchange for the year of 2009 in Nigeria. Being similar to studies in US, the UK, Argentina, Tunisia and Poland, it is found that, Nigeria profitability influence positively and business risk impacts negatively on dividend disbursement. Moreover, there are relationship between capital base, liquidity position and asset size and dividend payment. This research contribute to Nigeria literature in asserting that profitability is the most important future to consider whether there should buy, hold or sell its shares.

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND TO THE STUDY

Dividend payment is the distribution of net profit after tax to a company’s shareholders after keeping a specific amount of earnings to reinvest in the business. Dividend policy is a significant concern of both financial managers in shareholding firms and outside investors. Specially, in Nigeria, securities are still fresh to investors and people alike; and this can cause confusion when choosing whether to make buy, hold or sell decisions about stocks. Thus, findings which show how Nigeria firms’ features and corporate governance affect dividend policy will be of real importance to external investors interested in stock market investment in Nigeria.

The role and the application of dividend policy are supported by different theories such as signalling theory, trade-off theory, agency theory, transaction cost theory and pecking order theory. Until now, several researchers have continued to prove and developed new theories in order to determine the factors which influence the dividend policy of a joint-stock enterprise.  Generally there are two main groups of factors comprising firm’s characteristics and corporate governors. Firm’s characteristics include several factors such as profitability (Lintner, 1956; Fama and French, 2002), firm size (Farinha, 2003; Bebczuk, 2005), and business risk. Corporate governance consists of management ownership, board of directors. It is found that factors impacting dividend policy are still the subject of debate.

1.2     STATEMENT OF THE PROBLEM

In spite of the laudable benefits the Nigeria banking sector stands to derive from the dividend policy and its attending contribution to economic growth, the problem arises as to what extent the Nigerian banking sector should depend on dividend policy.

1.3     OBJECTIVES OF THE STUDY

          A.       General objectives:                                                       

The general objective of the study is to examine the determinant of dividend policy on profitability of the Nigeria banking sector.

B.       Specific objectives:

The specific objectives are as follows:

1.            To examine the determinant of dividend policy on return on assets of Nigeria banking sector.

2.            To examine the determinant of dividend policy on dividend per share of Nigeria banking sector.

3.            To examine the determinant of dividend policy on BETA of Nigeria banking sector.

1.4     RESEARCH QUESTION

          The following research questions are given consideration in this work as:

1.            What is the determinant of  dividend policy on ROA in Nigerian banking sector

2.            What is the determinant of dividend policy on DPS in Nigerian banking sector.

3.            What is the determinant of dividend policy on BETA in Nigerian banking sector.

1.5     STATEMENT OF HYPOTHESIS

          The following null hypotheses are formulated for this study:

Ho₁.    Dividend policy does not have a significant positive relationship on ROA of Nigerian banking sector.

Ho2.   Dividend policy does not have a significant positive relationship on DSP of Nigerian banking sector.

Ho3.   Dividend policy does not have a significant positive relationship on BETA of Nigerian banking sector.

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1.6.    SIGNIFICANCE OF THE STUDY

          The acknowledge benefit of dividend policy is more than the benefits. This research contributes to banking sector in asserting that profitability is the most important determinant of dividend policy in banking sector, so external investors can rely on expectations about the profitability of a firm in the future to consider whether they should buy, hold or sell its shares.

1.7.    SCOPE OF THE STUDY

          The emphasis of this study is on twenty-five (25) deposit money banks. The period 2009 to 2014 covers the aspect dealing with our data for statistic analysis. The time period has been selected considering that it offers recent time series observations on the dependent and independent variables.

The determinant of dividend policy and banking sector profitability dividend policy indicator are Growth opportunities, Business risks, Board composition.

Banking sector profitability indicators are dividend per share (DPS/Return on asset ROA) BETA.

1.8.      DEFINITION OF TERMS

Ø  Dividend: a sum of money paid regularly typically annually by a company to its profit ( or reserves) or is a share of the after tax profit of a company distributed to its shareholders.

Ø  Corporate governance: broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed.

Ø  Policy: is a deliberate system of principles to guide decisions and achieve rational outcomes.

Ø  Business risk: refers to the possibility of inadequate profit or even losses due to uncertainties e.g. changes in government.

CHAPTER TWO

LITERATURE REVIEW

2.1.    INTRODUCTION

This chapter contains the theoretical frameworks that are used as a guide to this study. Theories like agency theories and dividend signalling theories. They are stated in this chapter. The concept of dividend policy was also define in various views, previous study conducted on the subject matter by various contributors where reviewed in this chapter in the form of empirical literature review.

2.2.    CONCEPTUAL FRAMEWORK

Ø  Concept of dividend policy

Ø  Concept of profitability

The two concepts that are focused in this study are dividend policy and profitability. There are several opinion and views on the meaning of these two concepts, the views by various contributors are discussed below:

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