Accounting Education Project Topics

The Impact of Dividend Policy Decision on Corporate Performance of Listed Firms in Nigeria

The Impact of Dividend Policy Decision on Corporate Performance of Listed Firms in Nigeria

The Impact of Dividend Policy Decision on Corporate Performance of Listed Firms in Nigeria

Chapter One

Objective of the Study

  • The main objective of this study is to empirically examine whether there is any significant relationship between banks‘ dividend policy and their performance(ROE).
  • The secondary objective of the study is to determine the impact of dividend policy on banks ROE




This chapter focuses on previous studies done by various authors in relation to dividend policy and firm performance. The section discusses the key theoretical considerations from previous studies to inform the general and specific objectives developed for this study, that is, dividend policy and firm performance; extend of  their relationship; factors that affect dividend policy and forms of dividend policy used by listed firms.

Many studies are observed to be present concerning the dividend policies when reviewing the literature. But majority of these studies are focused on the factors determining dividend payments. Moreover, there is scarcely any empirical study measuring the influence of dividend payments on financial performance. This section will lay down the summaries of the studies analysing the relation between dividend payments and firm value, banks; financial performance or its profitability (ROE).

Theoretical Framework

 Agency theory

The agency cost theory suggests that, dividend policy is determined by agency costs arising from the divergence of ownership and control. Managers may not always adopt a dividend policy that is value-maximizing for shareholders but would choose a dividend policy that maximizes their own private benefits. Making dividend pay-outs which reduces the free cash flows available to the managers would thus ensure that managers maximize shareholders‘ wealth rather than using the funds for their private benefits (DeAngelo, H., & DeAngelo, L., 2006). In the process of attracting new equity, firms subject themselves to the monitoring and disciplining of these markets.

Agency theory states that managers of firms are likely to engage in Non-Value Maximizing (NVM) behaviour. Jensen and Meckling (1976) theorized that the value of the firm would be decreased by the agency costs incurred due to NVM managers. However, if a manager‘s personal wealth were linked to the price of the firm‘s common equity, these agency costs could be reduced. Thus, managerial ownership of equity (insider holdings) could serve as an agency- cost reducing mechanism, increasing the value of the firm.

Signalling Theory

The signalling theory proposes that dividend policy can be used as a device to communicate information about a firm‘s future prospects to investors. Cash dividend announcements convey valuable information, which shareholders do not have, about management’s assessment of a firm’s future profitability thus reducing information irregularity. Investors may therefore use this information in assessing a firm‘s share price. The intuition underlying this argument is based on the information irregularity between managers and outside investors, where managers have private information about the current and future fortunes of the firm that is not available to outsiders. Dividend policy under this model is therefore relevant (Al-Kuwari, 2009).

According to the information content of dividends or signalling theory, firms, despite the distortion of investment decisions to capital gains, may pay dividends to signal their future prospects. Here, managers are thought to have the incentive to communicate this information to the market. Bhattacharya (1979).

John and William (1985), and Miller and Rock (1985) argued that information asymmetries between firms and outside shareholders may induce a signalling role for dividends. They show that dividend payments communicate private information in a fully revealing manner. The most important element in their theory is that firms have to pay out funds regularly. An announcement of dividends increase is taken as good news and accordingly the share price reacts favourably, and vice-versa. Only good- quality firms can send signals to the market through dividends and poor quality firms cannot mimic these because of the dissipative signalling cost (for e.g. transaction cost of external financing, or tax penalty on dividends, distortion of investment decisions). Therefore, a similar reasoning applies to recurrent share buy-backs.

 Bird in hand theory

Bird in hand theory proposes that a relationship exists between firm value and dividend pay-out. It states that dividends are less risky than capital gains since they are more certain. Investors would therefore prefer dividends to capital gains (Amidu, 2007). Because dividends are supposedly less risky than capital gains, firms should set a high dividend pay-out ratio and offer a high dividend yield to maximize stock price. The essence of the bird-in-the-hand theory of dividend policy (John Lintner in 1962 and Myron Gordon in 1963) argues that outside shareholders prefer a higher dividend policy. Investors think dividends are less risky than potential future capital gains, hence they like dividends. If so, investors would value high pay-out firms more highly.

The ―Bird in Hand‖ theory of Gordon (1961, 1962) argues that outside shareholders prefer a high dividend policy. They prefer a dividend today to a highly uncertain capital gain from a questionable future investment. A number of studies demonstrate that this model fails if it is posited in a complete and perfect market with investors who behave according to notions of rational behaviours (See Miller and Modigliani, 1961; Bhattacharya, 1979 etc.). Nonetheless, the original reasoning of Gordon (1961) is still frequently studied.





The methodology of every research work includes the sources and methods of collecting and analysing data. It is the heart of the study. The generality of the findings depends on methodology used. Therefore the choice of methods must be thoroughly chosen to minimize any chances of bias. This study is similar to the works of Amidu (2007) and Agyei and Marfo-Yiadom (2011) in that it also examines the effect of dividend policy on banks performance, but different in the sense that this study examines inflation, CEO duality, and capital adequacy which were ignored in the earlier studies. The study employs the methodology of Amidu (2007) with some modifications.

Research design

The study adopts quantitative data technique using panel data type constructed from the annual reports of the selected firms for the study. Listed banks are considered for the analysis focusing on the most recent ten year data obtained from their annual records, Cbn and GSS. Stata version 13 is used in estimating the regression results where return on equity is denoted as the main dependent variable with dividend per share being the independent variable as measured by Hashim et al 2013.

Study population

Collecting and analysing data from every possible case or group is sometimes not possible due to time limitation, cost or non-availability of data. In instances like these, a sampling technique is employed to select cases to represent the whole. Sampling techniques provide a range of methods that allows a researcher to reduce the amount of data needed to collect, by only selecting from the population some cases to represent the whole (Saunders, Lewis & Thornhill, 1997). The size and the method of sampling can affect the generality of the findings and therefore samples must be carefully selected to minimize bias.

In view of the above, companies listed on the Nigeria Stock Exchange (NSE) were selected for the present study as the total population.




This chapter analyses, discusses and reports the findings of the research. Regression estimation was done by the researcher using Stata 13. The section analyses and discusses the hypothesis set in this research, provides the descriptive results, regression results and the necessary diagnostic tests.





This chapter presents the overall findings of the research, necessary recommendations areas for further studies and the general conclusion of the study. It thus gives clear cut policy guidelines that must be adopted and the existing business processes worthy of espousing enormously to increase banks performance following the findings.

Summary of findings

Size of a bank has been found to be a significant determinant in explaining banks performance. It was revealed that as banks increase in size in terms of total assets, performance is likely to increase. This could be due to the utilisation of idle assets (resources) to generate more sales revenue in order to increase profitability all else constant. Further explanation could be due to the growth of conglomerates and Multinational Corporation resulting in what is called synergy.

A bank‘s leverage was found to have an insignificant adverse effect on its performance all from the fact that risks increase as banks borrow from external sources. The restrictive covenants imposed and the regulations to abide by trammel actions in an attempt to undertake risky investments to yield higher returns. That is agency problem is created between shareholders and debt holders which ultimately may lead to the gradual plummeting of performance.

Age of a banks listing since IPO has also been found to be a significant determinant factor in determining banks performance unfavourably. Holding that, the older the company, the more woefully the company is likely to perform. The justification could be due to the cling to the antiquated ways of business norms, rules, procedures and conduct (business processes). Businesses (banks) become less flexible to accommodate change for positive results all because of the difficulty in the change process but do fail to recognise the immense economic benefits the change will bring to the firms.

Growth in sales was also found to report a significant coefficient in determining banks performance positively. Following the above, this was further justified by the economies of scale, scope and the learning curve effects, aged firms are more likely to reap fruitful results, holding all costs constant. Growth in sales revenue gives such firms additional power over competitors in order to withstand and outwit keen competition from external pressures thereby placing such banks highly advantageous.

Inflation reports an insignificant effect statistically in determining banks performance. This shared light with fisher‘s proposition that real interest rate is equal to the nominal rate less inflation rate. Since, banks adjust such rate accordingly depending on the mode of anticipation in order not to jeopardize their profitability margins. The spread is however adjusted (often upwards) to commensurate the level of inflation hikes between saving and borrowing rates.

Capital adequacy of the banks was also found to report an adverse effect in determining banks performance. The association could be explained by the poor asset quality, under capitalisation inexperienced personnel, illiquidity an inconsistent regulatory polices making it less difficult for banks to meet the required capital adequacy ratio in ensuring safe and sound investments without any loss of confidence among stakeholders that may lead to the downward movement in performance.

Dividend policy measured in terms of the dividend per share by the stockholders was found to be a highly significant predictor in explaining the banks performance. This was further explained by the signalling effect reposing much confidence in the company thereby translating into higher results. Dividend policy of payment is self- disciplinarian action against manager behaviour thereby offering the platform to create incremental value for owners.

CEO duality had also been found to be significant in explaining banks performance. The negative impact however was possibly due to the agency conflict of interest that is likely to persist once this phenomenon so exist. Managerial/CEO clout advancement unjustifiably could also be responsible for the adverse effect in performance. Additionally, job role enlargement on one person would not create the enabling environment for fresh ideas to be injected into the business to yield results.


From the fore-going, it is highly recommended that;

  1. Banks should strive to utilise all idle resources (assets) if desirable, merge with other banks to reap the benefit of synergy alongside. Specifically, amount of cash being held for precautionary measures may be reduced or reinvested in short term securities. Besides, customers who withdraw huge sums of money occasionally may be advised to give a prior notice of say three months earlier for the banks to meet such
  2. In their propensity to reduce leverage, unprofitable ventures that command huge sums of money may be abandoned. These projects push firms to increase gearing; else banks should associate themselves with risky investments promising higher returns. That is, banks should not open new outlets or  branches in locations that are not revenue generating. There is therefore the need for proper feasibility studies before such projects may be carried out.
  1. It is also more imperative for banks to become more flexible and adapt to change (positive) easily in their business processes without causing any undue harm. In this regard, banks can review their business processes from time to time and see where there is the need for a swift change being it technology- wise or
  2. Growth in sales revenue also must be continually sustained by exploring different marketing strategies say niche marketing. Precisely, there is the need for more marketing strategies to maintain and attract new customers in their bid to increase market share and
  3. Banks must not also relent on their effort to adjust their spread or nominal rate of interest to match the inflationary trend. Thus, if policy rates increases by say one percent, then banking institutions must also reflect the change in their relative prices(rates).
  4. Regulatory bodies like Cbn can also loosen the tight banking regulatory policies regarding capitalisation, liquidity and policy rates, in order to increase banking results for its owner. For instance, regulations on minimum capital adequacy ratio may be reviewed from time to time but central banks must not also be oblivious of the need to increase the profitability of the
  5. It is also recommended that banks should continually sustain (if possible) increase their divided per share policy due to the benefits that are likely to perceive. In accomplishing this, constant and steadily increasing dividend policies may be adopted whilst management adopt stringent measures to curtail agency problems and other suboptimal
  6. Lastly, CEO duality should be separated or position split between different people in order to forestall its antecedent repercussions. Put simply, one person should not be allowed to hold dual positions on the board unless there is a strong justification which does not raise any reasonable doubt to do

Further research

It must be noted that this work is solely confined to Nigerian quoted banks on the Nigeria Stock Exchange and hence the analysis may be limited in scope compared to other non- banking industries listed at the NSE. Further research could be carried out in a different non- banking industry say manufacturing, pharmaceutical, distribution or insurance companies depending on the potential researchers‘ preference.

Besides, as a way of robustness check, further research could be carried out in the same banking industry increasing the scope to cover non listed banks whilst using different performance measure like return on assets or share price as the depend variable.


In the nutshell, it could be stated unequivocally from the study that dividend policy has an affirmative impact on banks performance. There is no gainsaying the fact that strict attention paid to dividend policy by banking institutions would lead to a better performance results. It therefore behoves on management to craft an ideal dividend policy that would appeal to stockholders the most as a way of returning value to them by virtue of their sacrifices made.


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