EFFECT OF DIVIDEND POLICY ON MARKET PRICE OF A FIRM

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EFFECT OF DIVIDEND POLICY ON MARKET PRICE OF A FIRM

(A case study of Nigeria Stock Exchange Commission)

ABSTRACT

This project examines the influence of dividend policy on market price of an organization. How do dividend policy decisions affect a firm market power, it is a widely researched topic in the field of investments and finance but still it remains a mystery that whether dividend policy affect the market price or not. There are those who suggest that dividend policy is irrelevant because they argue a firm’s value should be determined by the basic earning power and the business risk of the firm. Attempts are made to examine the kind of relationship that exists between dividend policy and market price. Panel data explain the relationship between dividends and stock price and significantly explain the variations in the market prices of shares while the dividend yield and profit after tax has negative insignificant relation with stock price. Overall results of this study indicate that dividend policy has significant positive effect on market price.

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

The optimal dividend policy of a firm depends on investors’ desire for capital gains as opposed to income, their willingness to forgo dividend now for future retunes and their perception of the risk associated with postponement of returns. The dividend policy decision of one of the most important decision in any organization in order to achieve efficient performance and attainment of objective, because the role of finances increased significantly in company’s overall growth strategy that is why dividend decisions pare recognized as centrally important.

Market price is the current price at which an asset or service can be bought or sold. Economic theory contends that the market price converges at a point where the forces of supply and demand meet. In regard to stocks, the market Price of a stock is the most recent price at which the stock was traded. It does not guarantee that an investor will receive the same price upon buying the stock afterward. In finance profession has long struggled to develop a simple satisfactory module of dividend determination without much success. Modigliani and Miller (1961) show that perfect capital market with no information asymmetry and predetermined investment decision, the value of the firms is independent of the financing decision.

Dividend policy is one of the most widely research topic in the field of finance but the question is wither dividend policy affects stock prices still remain debatable among managers, policy maker and researchers for many years.

1.2     STATEMENT OF THE PROBLEM

The market price of common stock of a firm actually represents the wealth of shareholders, which in turn is a function of financing investment and dividend of a firm. Various firms adopt dividend policies depending on the company’s articles of association and the prevailing economic situation. Some make high payout, while others make low payout and yet others pay stock dividends (bonus issue) in lieu of or in addition to cash dividend while others pay cash only. All in a bid to maximize shareholders wealth which in this case, is the market value of the firms’ common stock.

1.3     OBJECTIVE OF STUDY

The main objective of this study is to critically examine the possible effects that a firms dividend policy might have on the market price of its common stock and also, those factors that influence firm’s dividend policy in general.

It further attempts at identifying other factors that influence share price behavior of companies in Nigeria, and finally identifies the most commonly practiced dividend policy in Nigeria.

1.4     RESEARCH QUESTIONS

In the course of fact finding, for this study, solution, answers will be proffered to this research question. The research question is what is the effect or impact of dividend policy on market price.

1.5     STATEMENT OF HYPOTHESIS

This research work is intended to deal with the impact of accounting information in decision making process in an organization. The hypothesis to be tested includes the following:

H_O: There is a relationship between dividend policy and market price.

H_i: There is no relationship between dividend policy and market price.

1.6     SIGNIFICANCE OF THE STUDY

The study is significant that it is aimed at assessing the influence of dividend policy and the market price of economic situation. The policy has a direct linkage affect to the impact of an accountant in the decision making process in an organization. The shareholders benefit from the dividend policy of any firms and in market price the customers, investors benefit from it.

1.7     SCOPE OF THE STUDY

The scope of this research work is within a given geographical area and time frame. It is also because of the difficulties involved in administering large questionnaires and cost of logistic, the project work is restricted with the jurisdiction of Nigeria stock exchange.

1.8     DEFINITION OF TERM

Dividend policy: A dividend policy is a company’s approach to distributing profits back to its owners or stock holders. 

Market price: It is the price of an asset or product as determined by supply and demand.

Financial account: It is the process of collecting recording, presenting and analyzing, interpreting financial information on the users of financial statement.

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