CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

Dividend is the return that accrues to shareholders as a result of the money invested in acquiring the stock of a given company (Eriki and Okafor, 2002). While dividend policy on the other hand is concerned with division of net profit after taxes between payments to shareholders (ordinary shareholders) and retention for reinvestment on behalf of the shareholders (Kempner 1980). A difficult decision for both public and private limited companies is to determine the appropriate level of dividend to be paid to shareholders, and to decide whether or not to offer non-cash alternatives such as scrip dividends According to Davidson (1990). The existence of some share price reactions on dividend announcement prompts an analysis of the evidence for both shareholder clienteles and possible interaction of firms’ dividend policies with key activities such as internal investments. An aspect of the theory of dividend policy is part of a continuum of control allocations between managers and investors, and hence cross-sectional variations in dividend policy are driven by an underlying factor. The allocation of controls between the manager and investors is important not because of agency or private information problems, but because of its potentially divergent beliefs that can lead to a disagreement about the value of project available to the firm. This underlying factor is “Corporate Performance”.‘Corporate performance is at the heart of the managerial function of an organization’ (Samuel 1989). Analysis of corporate performance is mainly concerned with the development of a modelling methodology to help in the diagnosis of past performance and thus provide a framework for evaluating the effect of changes in operating parameters as a guide for future planning. The performance of an Organization is measured by the choice of the management form of wealth to be held. If the performance of an organization is good there will be little or no disagreement between the management and the shareholders (Anyigbo, 2008).  In evaluating Corporate Performance, the emphasis is on assessing the current behaviour of the organization in respect to its efficiency and effectiveness. To measure overall corporate performance goals are set for each of these perspectives and specific measure for achieving such goals are determined. Each of these perspectives is critical and must be considered simultaneously, to achieve overall efficiency and effectiveness, and to succeed in the long-run. If any area is either over-emphasized or underemphasized, performance evaluation will become ‘unbalanced’. In this way, the aim of the concept is to establish a set of measures both financial and non-financial, through which, a company can control its activities and balance various measures to effectively track performance. Modigliani and Miller (2011) observed that ‘The theoretical principles underlying the dividend policy and its impact on firms can be described either in terms of dividend irrelevance or dividend relevance theory’. Therefore, dividend policy is irrelevant for the cost of capital and the value of the firms in a world without taxes or transaction cost. This shows that when investors can create any income pattern by selling and buying shares, the expected return required to induce them to hold firm’s shares will be invariant to the way the firm packages its dividend payments and new issues of shares. It is to be observed that a firm’s assets, investments opportunities, expected future net cash flows and cost of capital are not affected by the choices of dividend policy. Dividend payments and leverage policy are substitute mechanism for controlling the agency cost of free cash flow hence, improves performance. If a firm’s policy is to pay dividend each year end to shareholders, the level of activity in the organization will increase to obtain more income and have excess retained earnings to meet the standard set. ‘Dividend policy has the effect of destabilizing dividend as only a prolonged increase or decrease in profits will affect the average sufficiency to have any appreciable effect on the size of the distribution’. Since it is a conservative dividend policy-in the long run, only one half of all profits will be distributed and there will be substantial build-up of retained earnings. This will certainly reinforce further, the consistency of dividends, which could for a while, be maintained even in the face of actual losses. It may also relieve the company of having recourse to external sources of finance. The retention under this policy bears no relationship to the availability of profitable investment opportunities. The risk is that projects yielding less than the true cost of capital will be undertaken in order to absorb funds which would otherwise lie idle. Shareholders are entitled to a revenue stream of dividends. The value of the share corresponds to the present value of this stream of dividend payments. So many factors affect the performance of corporate organizations and one of those factors is dividend policy. Dividend policy serves as a mechanism for control of a managerial opportunism. Empirical studies show that firms in developing Countries (e.g. Nigeria) smooth on their income and therefore, their dividends. The pattern of corporate dividend policies not only varies over time but also across countries, especially between developed, developing and emerging Capital markets. If the value of a company is the function of its dividend payments, dividend policy will affect directly the firm’s cost of capital. But is there any significant relationship between dividend policy and corporate performance in form of profitability investment and Earning per Share? This is the question this research study intends to answer.

1.2 STATEMENT OF THE PROBLEM

The major factor that necessitated this research work is that previous studies have shown that the financial performance of Nigerian banks is very poor when compared with their counterpart in other developed countries. Management are in a dilemma about whether to pay a large, small or zero percentage of their earnings as dividends or to retain them for future investments. This has come about as a result of the need for management to satisfy the various needs of shareholders. For instance, shareholders who need money now for profitable investment opportunities would like to receive high dividends now. On the other hand, shareholders who would like to invest in the future will prefer dividends to be retained by the company and be reinvested. Also, in Nigeria dividends are subject to 10% rate of withholding tax whereas capital gains on shares listed on GSE are exempt from tax (see FIRS Act, 2000). This makes capital gains on shares lowly taxed, thus, some shareholders prefer low dividends to high dividends in order to take the benefits accruing on capital gains. In addition, some country laws prohibit companies from paying dividends if so doing will make a company insolvent. For instance, section 71(1) of the Companies Code inter alias states that return or distribution of any of its assets to its shareholders unless: a) the company is able, after such payment, return or distribution, to pay its debts as they fall due; b) the amount or value of such payment, return or distribution does not exceed its income surplus immediately prior to the making of such payment, return or distribution. Furthermore, Section 30(1) of Banking Act (2004) Act 673 states that a bank shall not declare or pay dividend on its shares unless it has: a) completely written off all its capitalized expenditure; b) made the required provisions for non-performing loans and other erosions in asset values; c) supplied the minimum capital adequacy ratio requirements; and d) completely written off all its accumulated operating losses from its normal operations. Since management are dealing with competing interests of various shareholders, the kind of dividend policy they adopt by them may have either positive or negative effects on the share prices of the company. Corporate organization, banks inclusive are faced with the problem of whether to pay a larger, small or zero percentage of their earnings as dividends. This problem is born out of the desire to satisfy the various needs of shareholders. Some shareholders have the need for income now and as such will prefer a high dividend payout ratio which other who needs to invest in the future would prefer capital gains. Due to the fact of having to deal with competing interests of various shareholders, the kind of dividend policy a bank adopts could either lead to positive or negative effects on the share prices of the company. The managers are therefore unable to forecast with certainty to what extent the policy will affect their share price of their firms.

1.3   RESEARCH QUESTIONS

i.      Should firm’s payout money to their shareholders or invest for them?

ii.     What are the determinants of dividend policy in Nigerian firms?

iii.    Consequent upon the aforementioned decisions how will this share price of the firm be affected?

iv.    What is the relationship between dividend payment and corporate performance of commercial banks in Nigeria?

v.     What is the effect of dividend payment on corporate performance of commercial banks in Nigeria?

1.4   OBJECTIVE OF THE STUDY

The general objective of this study is to examine the effect of dividend payment and corporate performance of commercial banks in Nigeria.

Specifically, this study sought to:

i.      Ascertain if there is any significant relationship between dividend payment and corporate performance of commercial banks in Nigeria.

ii.     Determine the effect of dividend payment and corporate performance of commercial banks in Nigeria.

1.5   STATEMENT OF HYPOTHESES

In order to provide a framework for evaluating the effect of dividend payment on corporate performance of commercial banks in Nigeria, the following hypotheses were formulated;

Hypothesis One                  

HO:   There is no significant relationship between dividend payment and corporate performance of commercial banks in Nigeria.

HI:    There is a significant relationship between dividend payment and corporate performance of commercial banks in Nigeria.

Hypothesis Two

HO:   There is no significant effect of dividend payment on corporate performance of commercial banks in Nigeria.

HI:    There is a significant effect of dividend payment on corporate performance of commercial banks in Nigeria.

1.6   SIGNIFICANCE OF THE STUDY

The study is beneficial to many groups. It is important to note that the study provides an avenue for an in-depth understanding of the topic by fellow researcher, financial managers, board of directors and other decision makers in formulating optimum policies for their respective firms.

The study also forms as a tool for assisting investors in making their investment decisions as well as aiding to expose the various factors that may influence stock prices.

The study further serves as researcher materials for future investors and also adds to the existing body of knowledge.

1.7   SCOPE OF THE STUDY

The scope of this study focused on selected commercial banks in Nigeria. In an attempt to empirically analyze the effect of dividend payment and corporate performance of commercial banks in Nigeria. This scope was expected to give an accurate analysis and findings on the subject matter.

1.8   LIMITATIONS OF THE STUDY

In writing the project, so many problems were encountered which are listed below;

Geographical coverage: Factors that may likely affect the work is the issue of investigating the concerned people in carrying out the research work.

Problem of sourcing for material: The research was faced with problems of getting current materials, textbooks, journals and seminar papers related to the subject matter.

1.9   DEFINITION OF TERMS

Dividend: This is a proportion of profit allocated by a firm to its common shareholders.

Dividend Decision: This is the trade-off between paying out cash and issuing new share on one hand and retaining earning on the other hand.

Dividend Per Share: The basic cash flows passed from the firm to its stakeholders.

Dividend Policy: Decision made by the board of directors as to the amount by divided payable to equity holders.