This study investigated dividend policy as a strategic tool for financing in corporate organizations in Nigeria. Specifically, it examined the nature of the relationship between dividend payments and the value of the firms.

The study employed secondary annual data, collected from two selected commercial banks operating in Lagos State over a period of twenty years from 1988 to 2008. The secondary annual data were sourced from annual reports and statement of accounts of the selected commercial banks and the Central Bank of Nigeria

(Various issues). The study employed an ordinary Least-squares method to examine the effects of dividend policy on the capital structure of corporate organizations in Nigeria. Simple Regression Analysis was also employed to analyze the relationship between dividend policy and capital structure of the sample commercial banks.

The empirical results showed that there is a relationship between earnings per share and dividend payout with co-efficient values of 138.200 (∞t= 8.120, P< 0.05). Also, the results revealed that the payout ratio has a positive relationship with profit after tax with a coefficient value of 30708.728 (∞t= 6.297, P< 0.05).

The study concludes that dividend policy decision is not a decision of the board of directors alone. The shareholders should be given recognition in "a policy like this because they are directly affected by the policy.


Title Page




Table of content



1.1      Background of the Study

1.2      Statement of the problem

1.3      Research Questions

1.4      Objective of the study

1.5      Statement of Hypothesis

1.6      Methodology of the Study

1.7      Significance of the Study

1.8      Limitation and Scope of the Study

1.9      Definition of Terms



2.0      Introduction

2.1      Concept of Dividend and Dividend Policy

2.2      Forms of Dividend

2.3      Theoretical Viewpoint

2.3.1   Dividend Relevant Theory: Walter's Model

2.3.2   Criticism of Walter's Model

2.3.3   Dividend Relevant: Gordon's Model

2.3.4   Dividend and Uncertainty: The Bird-In-The Hand Argument

2.4      Dividend Irrelevant Theory

2.4.1   Criticisms of M & M Theory of Dividend Irrelevance

2.5      Implication of the Theories on Dividend Decision

2.6      Practical Factors Determining Dividend Policy

2.7      Concept of Capital Structure

2.8      Capital Structure Theories

2.8.1   Modigliani and Miller Approach to Capital Structure

2.8.2   Durand View on the Effect of Capital Structure On Firm's Value and Cost Of Capital

2.8.3   Traditional Approach

2.9      Recent Theories on Optimal Capital Structure

2.10    Empirical Tests of Dividend Theories



3.1      Introduction

3.2      Variable and Data Sources

3.3      Restatement of Research Hypothesis

3.4      Sources of Data

3.5      Model Specification

3.6      Model Estimation Technique.

3.7      Analytical Techniques

3.8      Limitation of Methodology


4.1      Introduction

4.2      Data Presentation

4.3      Empirical Result and Interpretation

4.4      Summary of Findings

4.5      The Implication of Findings


5.1 Summary

5.2 Conclusion

5.3 Recommendations




The topic of dividend policy continues as one of the most challenging and controversial issues in corporate finance and financial economics. Research into dividend policy has shown not only that a general theory of dividend policy remains elusive, but also that corporate dividend varies over time between firms.

For a firm, which encounters financial difficulties, reliance is placed on retained earnings and accordingly results in lower payout ratios.

However, shareholders have been enthusiastic interest in the outcome of their investments. These outcomes are expressed in terms of earnings and capital gains.

These two ingredients are in turn affected by the quality of policies made by the management team of the enterprises. Among the most important decisions that management of an enterprise must take which has a direct bearing on a firm’s continuity, earning potentials, investors' satisfaction, and share price gain is the decision to withhold or distribute net earnings as retained profit or dividends.

Pandey (1999), stated firmly that "Dividend policy is a decision by the financial manager whether the firm should distribute all profit or retain them or to distribute a portion and retain the balance. Payments made to stockholders from a firm's earnings, whether those earnings were generated in the current period or in previous periods. Dividend policy is an important aspect of corporate finance and dividends are major cash outlays for many corporations.  

Garrison (1999) defined dividend policy as payments made to stockholders from a firm's earnings', whether those earnings were generated in the current period or in the previous period. The dividend could also be referred to as that part of the enterprise earning that is given to shareholders as interest on' their investment. Also, it represents the return to investors who put their money at risk in the company.

The company pays a dividend to reward existing shareholders and encourage others that are prospective shareholders to buy new issues of the common stock at a high price.

However, many seem obvious that a firm would always want to give as much as possible to its shareholders by paying dividends. It might seem equally obvious that a firm can always invest the money for its shareholders instead of paying it out. The heart of the dividend policy question is should the firm pay out money to its shareholders or should the firm take the money and invest it for shareholders into the enterprise business.

Valuation is considered the heart of finance, understanding what determines the value of a firm, and how to estimates that value seems to be a prerequisite for making sensible decisions (Damodaran, 2006). Company valuation is a delicate concoction of both science and art. The former takes the shape of the quantitative risk-return model, and the latter, experience, and judgment on the part of the appraiser - intuitive elements that belong to the artistic realm (Pereiro, 2002). In general, there are four approaches to valuation (Damodaran, 2006). Quantitatively oriented valuation techniques include the discounted cash flow-based method (DCF) and the real options model. The traditional fundamental valuation technique is the discounted' cash flow (DCF) based method, which relies on capital asset pricing (CAPM) to compute the cost of capital. And an attractive technique for valuing future opportunities is the real options framework. This method is used when there is a reasonable chance of reserving the rights of exploration for the investments undertaken (Pereiro, 2002). A third model for valuation is based on relative valuation and involves computing value multiples for a representative sample of comparable companies or transactions similar to the target under appraisal

(Pereiro, 2002). Excess return models have their roots in capital budgeting and the net present value rule with its widely used variant, the Economic Value Added (EVA (R).

(EVA (R) is a registered trademark of stem steward & co. EV A (R) is a measure of the surplus value created by an investment or a portfolio of investments. It is computed as the product of the "excess return" made on an investment(s) and the capital invested in that investment) (Damodaran, 2006).

Moreover, it has been discovered that the .dividend policy of a firm always has a short term or long term effect on the market price of its shares. It shall be found out in the course of this research, the actual relationship between the dividend payout and dividend policy of companies i.e payout ratio of the firm is a percentage of dividends to earnings.

It is quite difficult to clearly identify the· effects of payout on the firm's valuation. The valuation of a firm is a reflection of so many factors that the long-run effect of payout is quite difficult to separate. J.S. Kehinde (2001) viewed dividend policy as "the dividend policy of a firm accounts for how a firm divides its income between retained earnings and dividends. It states the policy measure of how much dividend to the declared, in what form should the dividend be declared- either as a cash dividend or as stock dividends. By dividend .policy the corporate organization, strikes a balance between current income to the shareholders and a future income.

Income can be retained and reinvested' into available profitable investment opportunities. The retained earnings provide the cheapest source of financing. This research is to examine empirically the dividend policy of all quoted companies (banks) in Nigeria and to present evidence on what determines corporate payout policy in this market. In addition, it tends to identify the impact of dividend policy on company valuation and the various approaches to a dividend payment to stakeholders as against retaining it for re-investment.


Maximization of shareholder's wealth appears to be the cardinal objective of most firms. The value of wealth to the shareholders is represented by the market price of the firm's common stock, which is tum is a reflection of the firm's investment, financing, and dividend decision.

Dividend policy is thus assumed to have an influence on the value of a firm's common stock and hence its value. Despite the above statement, the impact of dividend policy, especially dividend payout on the valuation of a firm's common stock is still open to academic debate.

This study thus intends to empirically investigate whether the dividend payout ratios of firms quoted in the Nigerian Stock Exchange influence the process at which the stocks of these firms are being sold. Also to be examined empirically is the extent to which the received theory about traditional determinants of dividend decisions of business firms serves in explaining the dividend behavior of Nigerian companies (Van-Home, 1983).

Both Gordon and Miller-Modigliani developed theoretical models with which they argued their respective positions. These models apart from being applicable under very restrictive conditions also lead to estimated prices that may or may not correspond with the actual prices obtainable in the market. This study hence intends to specifically test for the relationship between market prices as contrasted with estimated prices of stock quoted in the Nigerian stock exchange and the dividend payout ratios of the respective firms.


This research tends to investigate the following questions:

i.   To what extent can dividend policy affect the price of shares?

ii.   To which extent can retain earnings, affect the growth rate of a firm?

iii. What portion of total earning should a firm distribute or retain?


The broad objective of this study is to analyze the effects of dividend policy on the value of the firm while its specific objectives include the following:

i.      To examine the nature of the' relationship between dividend payments and the value of the firm.

ii.     To examine the long-term relationship between retained earnings and the growth rate of the selected banks.


The hypothesis tested in this study is stated below:

Hypothesis 1

Ho: The payout ratio has no significant influence on the value of the firm.

Hi: The payout ratio has a significant influence on the value of the firm.

Hypothesis II

Ho: The dividend policy of a firm is not determined by its long-term payout ratio.

Hi: The dividend policy of a firm is determined by its long-term payout ratio.


The data used were gathered from secondary sources. Secondary data are reliable easy to understand and are of descriptive models. These secondary data for this essay topic include; Journal of Central Bank of Nigeria (CBN), Economic and Financial Review (EFR), and the Nigerian Stock Exchange Facebook (NSEF).

The variable on which data was collected includes; Dividend per share, profit after tax, payout ratio, and earnings per share. The earnings per share are used as a proxy for the value of the firm while profit after tax captures the firm's dividend policy. The variables identified would be integrated into models to test the impact of dividend policy on the value of the firm. The data covered periods of 1988 to 2008.


This study will be of great benefit to individuals, society, corporate organizations, government, etc.

To the individual, it would be of benefit in deciding' on which company to invest - either to invest in a firm where the higher dividend is paid with a corresponding increase in the number of investors which tends to increase the company's value or to invest in a firm with lower dividends and returns inform of capital gain in the future.

To society, the effect of the higher dividend will influence the number of individuals who are ready to subscribe to the firm’s shares. It thus helps to increase investment in the economy and maximization of the wealth of society.

This study will also provide empirical evidence to prove the relationship between firm values and dividend 'policy in terms of inter-dependence that exist between them also, the fundamentals and importance of dividend in maximizing shareholders’ value will be exposed.


This study of the effect of dividend policy on company valuation will be restricted to the listed bank in the economy. The study will focus on the relationship between dividend policies and the value of the firm.

Out of the various listed banks, two banks have been chosen in view of limitations and resources available.

These banks were chosen from a benchmark of a minimum of 20 years quotation at the stock exchange as well as its spread across the country. The banks to be used as a case study of this project are First Bank of Nigeria PIc and Union Bank of Nigeria PIc (UBN).


Dividend: This is defined as the payment 'made to shareholders from .firm earnings, which serve as an interest income, to their investment. Pandey, I. M. (1999).

Dividend Policy: This involves the decision to pay out earnings or to retain them for re-investment in the firm. It determines whether the firms should pay out dividends as current earnings or retain them as capital gains.

Dividend Pay Out Ratio: The percentage of retained earnings, payment in the form of a cash dividend.

Optimal Policy: This is the policy that strikes a perfect balance between current dividends and future growth and thereby maximizes the price of the firm's cost.

Dividend Yield: The ratio of the current dividend to the current price of a share of stock. That is, the firm expected dividend payment per share dividend by its current share price.

Dividend Re-Investment Plan: This is a plan, which enables a stockholder to automatically re-invest dividends received - back into the stock of the paying corporation.

Wealth Maximization: This has to do with-maximizing the Net present value to a course of action. The net present value of a course of action is the difference between the Gross Present Value of the benefit of that action and the amount of investment required to achieve those benefits.




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