Dividends Policy and Common Stock Prices
ABSTRACT
The issue of how much a company should pay its stockholders, as dividend is one that has been of concern to managers for a long time. The optimal dividend policy of a firm may be defined as the one that increases shareholders wealth by the greatest amount. It is therefore necessary, to understand the nature of the relationship between dividend and value of the firm. It is in the light of this that the study examines the possible effects of a firm’s dividend policy on the market price of its common stock with reference to the Nigerian context, using Nestle Nigeria Plc. as case study. In so doing, the methodology adopted include the use of ex post facto research techniques to acquire data and the use of co-relational research techniques, which featured the simple regression analysis used to establish the nature of any relationship existing between the two variables. The methodology also featured the use of Person’s Product Moment Correlation to test the significance of any empirically derived relationship between the variables based on the data that collected on the company in focus. The analysis led to the rejection of the null hypotheses and formulation of conclusion that dividend policy has an inverse relationship with common stock prices in the Nigerian stock market. It was, therefore, recommended that Nigerian firms should take the advantage of rising earnings and keep the level of dividends at a fixed amount which would mean a reduction in the proportion of earnings that is distributed as profit though the face value of the dividends may be fixed. The analysis also showed a high significance in the relationship between dividend policy and common stock prices in the Nigerian stock market. As such, it was also recommended Nigerian firms should consider all the other factors that affect stock prices before formulating a dividend policy, in order to have an optimal policy that satisfies its shareholders and other interested third party. TABLE OF
The issue of how much a company should pay its stockholders, as dividend is one that has been of concern to managers for a long time. The optimal dividend policy of a firm may be defined as the one that increases shareholders wealth by the greatest amount. It is therefore necessary, to understand the nature of the relationship between dividend and value of the firm. It is in the light of this that the study examines the possible effects of a firm’s dividend policy on the market price of its common stock with reference to the Nigerian context, using Nestle Nigeria Plc. as case study. In so doing, the methodology adopted include the use of ex post facto research techniques to acquire data and the use of co-relational research techniques, which featured the simple regression analysis used to establish the nature of any relationship existing between the two variables. The methodology also featured the use of Person’s Product Moment Correlation to test the significance of any empirically derived relationship between the variables based on the data that collected on the company in focus. The analysis led to the rejection of the null hypotheses and formulation of conclusion that dividend policy has an inverse relationship with common stock prices in the Nigerian stock market. It was, therefore, recommended that Nigerian firms should take the advantage of rising earnings and keep the level of dividends at a fixed amount which would mean a reduction in the proportion of earnings that is distributed as profit though the face value of the dividends may be fixed. The analysis also showed a high significance in the relationship between dividend policy and common stock prices in the Nigerian stock market. As such, it was also recommended Nigerian firms should consider all the other factors that affect stock prices before formulating a dividend policy, in order to have an optimal policy that satisfies its shareholders and other interested third party. TABLE OF
Bibliography: 2.2.1 CONCEPT OF DIVIDENDS Pandey (2010) defines dividend as that portion of a company’s net earnings which the directors recommend to be distributed to shareholders in proportion to their shareholdings in the company Stock Dividend: - This is a distribution of additional shares to the existing shareholders in proportion to their existing share capital instead of paying them in cash. Stock dividend is popularly termed as issue of bonus shares (Olowe, 2008). According to AL-Shubri (2009), the dividend decision of the firm is crucial for the finance manager because it determines: The amount of profit to be distributed among the shareholders – dividend policy, and 2.2.1.3 DIVIDEND POLICY According to Van Horne (1971), dividend policy entails the division of earnings between shareholders and reinvestment in the firm 2.2.1.5 FACTORS THAT INFLUENCE DIVIDENDS POLICY According to Dinesh (2006), a number of considerations affect the dividend policy of a company