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OFFORDILE HENRY OBI
PG/M.SC/06/46288
THE IMPACT OF DIVIDEND AND CORPORATE
EARNINGS ON STOCK PRICES
DEPARTMENT OF BANKING AND FINANCE
UNIVERSITY OF NIGERIA, ENUGU CAMPUS
A THESIS SUBMITTED TO THE DEPARTMENT OF BANKING AND FINANCE,
FACULTY OF BUSINESS ADMINISTRATION, UNIVERSITY OF NIGERIA, ENUGU
CAMPUS
Webmaster
Digitally Signed by Webmaster‟s Name
DN : CN = Webmaster‟s name O= University of Nigeria, Nsukka
OU = Innovation Centre
APRIL 2009
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THE IMPACT OF DIVIDEND AND CORPORATE
EARNINGS ON STOCK PRICES
BY
OFORDILE, HENRY OBI
PG/M.Sc/06/46288
DEPARTMENT OF BANKING AND FINANCE,
FACULTY OF BUSINESS ADMINISTRATION,
UNIVERSITY OF NIGERIA,
ENUGU CAMPUS.
APRIL, 2009
3
THE IMPACT OF DIVIDEND AND CORPORATE
EARNINGS ON STOCK PRICES
BEING A DISSERTATION PRESENTED TO THE
DEPARTMENT OF BANKING AND FINANCE,
FACULTY OF BUSINESS ADMINISTRATION,
UNIVERSITY OF NIGERIA
ENUGU CAMPUS
BY
OFORDILE, HENRY OBI
PG/M.Sc/06/46288
IN PARTIAL FULFILMENT OF THE REQUIREMENTS
FOR THE AWARD OF DEGREE OF MASTER OF
SCIENCE (M.Sc) IN BANKING AND FINANCE OF THE
UNIVERSITY OF NIGERIA
SUPERVISOR: PROF.C.U. UCHE
APRIL, 2009
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CERTIFICATION
This study is certified to have been carried out by Ofordile Henry Obi in the school
of Post Graduate Studies, University of Nigeria, Enugu Campus and we have
approved that the research work is adequate in scope and quality for the partial
fulfillment of the requirements for the award of degree in Master of Science (MSc) in
Banking and Finance of the University of Nigeria
____________________ ____________
OFORDILE HENRY OBI DATE
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APPROVAL
This thesis by Ofordile Henry Obi PG/MSC/06/46288 presented to the Department of
Banking and Finance in the Faculty of Business Administration, University of
Nigeria, Enugu Campus for the award of Degree of Master of Science (M.Sc) in
Banking and Finance has been approved by
____________________ ______________________
PROF. C. U. UCHE J.N MODEBE (MRS)
(PROJECT SUPERVISOR) (HEAD OF DEPARTMENT)
______________________ _____________________
DATE DATE
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DEDICATION
This research work is specifically dedicated
To my
darling and amiable wife,
Lady Josephine O. Ofordile
Who firmly stood by my side with all encouragement.
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ACKNOWLEDGEMENTS
First and foremost, I give all the glory to God Almighty even as I acknowledge the
contributions of the following persons to the successful completion of this research
work.
It is with utmost gratitude that I acknowledge the contributions of ebullient co
supervisor, Dr. J. U. J Onwumere, whose patience, guidance and friendly disposition
contributed in no small measure to the structure and general layout of the research
work when my supervisor Prof. Uche was away on sabbatical leave.
I thank also my Supervisor Professor C. U. Uche for his contributions and guidance.
Most importantly, I thank him for handing me over to an ideal supervisor Dr. J.U.J
Onwumere who handled me with utmost affection.
I also wish to acknowledge the immense contribution of my wife, Lady Josephine O.
Ofordile to the successful completion of this academic programme. She stood by me
and encouraged me at the time I needed it most. To her I say a big thank you for her
support and affection. And also, I thank Sister Nkiru Angela Ohamadike my wife‟s
close friend for her ceaseless prayers towards successful completion of this my
academic programme.
My gratitude also goes to Engr. Abel Nwobodo (Jnr), Senior Special Assistant to
Governor on Project Development and Implementation, for his moral and financial
support and Mrs. P. N. Aniemeka, for her steadfastness in covering some of my
official duties during the course of this my academic programme.
I also thank my friends and colleagues at school who helped and contributed in no
small measure to the completion of this work, notable amongst them are Ujunwa
Austin, Chinelo Obiekwe and Nduka Joseph. I thank the lecturers and other non
academic staff who diligently caused out their duties to make sure that the academic
performance did not fall short of our high expectations. Thank you all for your
individual and collective contributions.
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ABSTRACT
This study was carried out to determine effects of dividends and earnings on stock price
movement in Nigeria. This was done by examining the significance of cash dividend and
corporate earnings on stock prices in the Nigerian Stock Exchange for a period of ten years
from 1999 – 2008. The data sourced from Nigeria Stock Exchange reports and the company
annual reports were analyzed using the regression tool. After the process of experimentation
using this regression tool, the researcher observed that stock price movement is more
significantly related to dividend than corporate earnings. Secondly, the optimization of
corporate earnings influences positively stock price movement as many investors look at it as
a significant factor for their choice for stock investment. This drive for such stock and the
market price adherence to the law of demand and supply influences the stock price.
Nevertheless, it is also observed that there is an autocorrelationship of the three variables,
dividend, earnings per share and stock price in choice of stocks for investment. It is
recommended, therefore, that Management should optimize their corporate earnings and
derive a dividend and retention policy decision in an optimum manner to achieve the
objective of maximizing the wealth of shareholders since the interrelationship of there
decision have a significant impact/effect on equity share price.
It is also recommended that further works on this should be carried out in order to improve
the body of existing knowledge in those areas in addition to a longitudinal study that will
cover a time horizon of more than ten years should be conducted as this may enable a proper
test on dividends and earnings. Management of this kind of investors should develop policies
that will satisfy the investors and thus, enhance their firm‟s value.
There should be a dividend pay out ratio that companies need to maintain so that they can
enhance the value of their firms. Nevertheless, the study brings to the knowledge of all and
sundry that investors in Nigeria are dividend driven and would therefore be willing to pay
higher prices for stock that pay more dividend.
Finally, although factors like efficient market hypothesis, volume of equity, traded law of
demand and supply etc influence investors decisions, but, suffice it to say that with available
evidence, Nigeria investors are dividend driven as shown in the stock price movement/trend
over the years.
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TABLE OF CONTENTS
Title Page i
Certification ii
Approval iii
Dedication vi
Acknowledgements v
Abstract vi
CHAPTER ONE – INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of the Problem
1.3 Objectives of the Study 4
1.4 Research Questions 5
1.5 Hypotheses of the Study
1.6 Significance of the Study 5
1.7 Scope and limitations of study 6
1.8 Operational Definition of Terms 7
References 9
CHAPTER TWO – REVIEW OF RELATED LITERATURES
2.1 The Concept of Investment 11
2.2 The Nigeria Capital Market 12
2.3 The Stock Market 15
2.3.1 Trading 15
2.3.2 Importance of Stock Market 16
2.3.3 The Behaviour of Stock Market 17
2.4 The Stock Exchange 20
2.4.1 The Nigeria Stock Exchange 22
2.4.2 The Stock Exchange and Capital Formation in Nigeria 24
2.4.3 Broadening Ownership 25
2.4.4 Institutional Framework 26
2.4.5 Legal and Regulatory Environment 26
2.4.6 Savings Structure 27
2.5 The Stock Prices 27
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2.5.1 Dividend Policy 30
2.5.2 Types of Dividend 31
2.5.3 Dividend Theories 32
2.5.4 Dividend Relevant Theories 32
2.5.5 Walter‟s Model 33
2.5.6 Gordons Model 34
2.5.7 Bird in Hand Argument 34
2.5.8Dividend Irrelevance 35
2.5.9 Modigliani and Millers Hypothesis of Dividend 35
2.5.10 Methodology of Dividend Payment 38
2.6 Factors Determining Dividend Policy 40
2.6.1 Level of Profit 40
2.6.2 Perceived Further Profit 41
2.6.3 Existence of Profitable Investment Opportunities 41
2.6.4 Shareholders Preference 42
2.6.5 Liquidity 42
2.6.6 Available Sources of Fund 43
2.6.7 Existence of Legal Restriction 43
2.6.8 Perceived Impact of Dividend on Share Price 43
2.7 Information Content of Dividend 44
2.8 Relation of Stock Prices to Corporate Earnings 49
2.8.1 Stock Prices and Dividend 51
2.8.2 Growth Earnings and Dividend Distribution Policy 54
2.8.3 Linkages between Share Price, Earnings and Dividend 57
References 58
CHAPTER THREE – RESEARCH METHODOLOGY
3.1 Research Design 61
3.2 Nature and Sources of Data 61
3.3 Techniques of Data Collection 61
3.4 Population and Sample 62
3.5 Models 62
3.6 Analytical Techniques 63
References 64
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CHAPTER FOUR – DATA PRESENTATION AND ANALYSIS
4.1 Introduction 65
4.2 Data Presentation 65
4.3 Data Analysis 67
CHAPTER FIVE – SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings and conclusion 78
5.2 Recommendations 79
Appendix 80
Bibliography 97
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In a competitive economy, it is clear that investments are undertaken due to the
available benefits perceived or which they provide to the investors. Investment in
securities are for the purpose of earning income which could be in form of dividends,
profits or/capital gains. With this in mind, it could be said that no right thinking
investor will put his funds if he does not expect some form of returns. Apart from the
above reasons, prestige, power, control etc. could also be adduced, but primarily, the
motive is to earn some form of returns.
Stocks or securities are documentary evidence of ownership or entitlement to claim
upon the income and the assets of the issuing organization, which may be a publicly
or privately owned institution. Investments in securities are carried out through a
market known as the stock market, commonly referred to as the stock exchange, an
example of which is the Nigerian stock exchange and it is the centre point of the
Nigerian Capital Market (NCM).
The stock exchange as the hallmark constituency of the capital market is many things
at the same time. It is a place where debt and equity securities of varying types are
traded transparently. It is a market that facilitates capital mobilization and allocation,
as both governments and companies can raise funds through the market on long and
most prudent terms through the offer of shares (by companies) and bonds (by
companies and governments) http://www.tritune.com.ng/izii2007/managment.html
The Securities and Exchange Commission (SEC) is the apex regulatory institution of
the Nigerian capital market and is charged among other things with the responsibility
of approving the price at which securities of all companies quoted on the stock market
are to be listed. The principal objective of vesting this role on the SEC is to protect the
generality of the investing public who are unsophisticated and therefore cannot
understand the nature and operation of companies sufficiently to be able to
appropriate value on their securities.
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Economic analysts have discovered a number of factors affecting stock prices on the
stock market. Among the factors affecting stock prices are:
- Dividend policy of a company
- Corporate earnings and
- Volume of equity traded.
There has been a long standing controversy in academic circles as to which has
greater impact/ influence on security prices. The dividend payment ratio is a major
aspect of the dividend policy of the firm, which affects the value of the firm to the
stock holders. The classical school of thought holds this view and they believe that
dividends are paid to influence their share prices and furthermore, they believe that
market price of an equity is a representation of the present value of estimated cash
dividends that can be generated by the equity. The new classical schools of thought on
the other hand, believe that the price of equity is a function of the earnings of the
company. They believe that dividend payout is in no way relevant to evaluating the
worth of an equity. What matters, they said is earnings.
Retained earnings provide funds to finance the firms long – term growth. It is the
most significant source of financing a firm‟s investment. Dividends on the other hand
are paid in cash, thus the distribution of earnings utilizes the available cash of the
company. When the firm increases the retained portion of net earnings, shareholders‟
current income in the form of dividends decreases, but the use of retained earnings to
finance profitable investments is expected to increase future earnings on the other
hand, when dividends are increased, shareholders current income will increase but the
firm may be unable to retain earnings and thus relinquish possible investment
opportunities and thus future earnings.
Management therefore is in a dilemma to device a dividend and retention policy that
divides the corporate earnings into dividend and retained earnings in an optimum
manner to achieve the objective of maximizing the wealth of shareholders. The
interrelation of these decisions and the impact/effect they have on equity share prices
in the Nigerian capital market is the focus of this paper.
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Attempts will also be made to explain movement of stock prices through a third
approach known as “Efficient Market Hypothesis”. This hypothesis seeks to explain
that security prices adjust to new information released to the market. Taking into
consideration the basic assumption that the market is very rapidly processed so that
securities are properly priced at a given time. An important premise of an efficient
market is that a large number of profit maximizing participants are concerned with the
analysis and valuation of securities. The hypothesis assumes that no stock price can be
in disequilibrium or improperly priced for a very long time. There is almost
instantaneous adjustment to new information. The hypothesis applies most directly to
large firms trading on the major security exchange. It further assumes that information
travels in a random, independent fashion and that prices are an unbiased reflection of
all currently available information.
Having mentioned this, in Nigeria, the question of dividend payments by companies
before 1988 have not been regulated by the company Acts but also by section 4 (5) of
Decree No 30 of 1997 which gave a ceiling they must not exceed when they pay
dividends to their shareholders. Today, the questions of dividend payments have taken
a new dimension. Although, they are still being governed by the company and
banking Acts for companies and banks respectively, dividend payments have now
being liberalized. This could be evident in the productivity, prices and income board
income policy guidelines (1988) which states that dividend payments have now being
deregulated. The levels of distributable dividends are now at the discretion of
individual companies.
The Securities and Exchange Commission evaluates new issues principally by the
maintainable annual earnings method.
This method takes into recognition the profit of the time and asset of the firm. It is
considered and believed that when a firm‟s assets are judiciously used, earning are
increased which in turn enhances the value of the firm. Conversely, loses reduce that
value of a firm in the eyes of the investing public. It is also in this regard that one
finds the issue very interesting and the question now (which is the subject matter of
this study) is “what is the relevant impact of dividends and earnings on security prices
movements in Nigeria?
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Therefore, in critically analyzing the impact of dividend and corporate earning policy
decisions on equity share prices in the Nigerian capital market, a theoretical
framework of the effect of dividend policy decisions on the value of the firm would
be considered.
1.2 STATEMENT OF THE PROBLEM
The volatility of the stock market and its attendant upward and downward swings in
share prices have continued to confound critics and observers of the capital market.
There have been diverse views as to the various reasons why share prices move the
way they do. Various schools of thought have their own opinions as to the factors that
influence share price movement.
Robert J Shriller in his article of 2nd
January, 1987 questioned the volatility of stock
market prices, “why are stock market prices so volatile?
He presents the standard derivation from 1871 to 1986 of the January to January
percentage change in the real standard and poor composite stock price index as thus:
The real price index rose 85% between 1927 and 1929, and fell 52% between 1929
and 1932. It rose 69% between 1954 and 1957. It fell 56% between 1973 and 1975.
What is it that is so different about the demand for, or supply of, corporate shares
from one year to the next that might account for such big price movements?
There is a contention in deciding on which of dividend and corporate earnings affects
share price movements at the Nigerian stock exchange. At the Nigeria stock market,
share price movements are every day affairs and have become synonymous with the
market. This study therefore, has the major characteristic statement of problem in
deciding the effect of dividend and corporate earnings on share price movements at
the Nigerian stock exchange.
In the Nigerian context, the average investor in the capital market places a high
emphasis on dividend payments, as most investors tend to be medium to long – term
holders of stock. However, a larger part of investing public also do not have an in-
depth knowledge of the various indices and variables at play in the market and
therefore cannot fully appreciate the
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requisite analysis of corporate earnings and dividend policies. This study therefore
would critically appraise this problem.
1.3 OBJECTIVES OF THE STUDY
The broad objective of this study is to assess if stock exchange market is able to effect
the federal belief that market price of share depends on streams of expected future
dividends or corporate earning policy decisions. In other words, that market price of
shares reflect fundamental values as contained in information released to the public
through dividend policies.
The specific objectives of the study are as follows.
i. To find out the various variables at play in stock price movement at the
Nigerian stock exchange.
ii. To determine the effects of dividend and corporate earning policy decisions on
share price movements at the Nigerian stock market.
iii. To determine the relationship among the three variables dividend, corporate
earnings and stock prices.
To accomplish the above objectives the study is designed to critically examine the
contention of Graham and Dodd that stock prices bear a specific relation to dividends
and earnings.
1.4 RESEARCH QUESTIONS
The research study will attempt to address the following questions at the end of the
study.
i. What are the effects of dividend payment decisions on stock price
movements?
ii. What are the relationship between stock prices and corporate earnings?
iii. What are the relationships among the three variables, dividend, corporate
earnings and stock prices?
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1.5 HYPOTHESES OF THE STUDY
Our hypotheses of the study are as follows.
H0 There is no positive correlation between dividend declaration and stock prices
H0 Corporate earnings of quoted companies do not have a significant positive
effect on share price movements at the stock exchange.
H0 There is no positive relationship between dividend, corporate earnings and
stock prices.
1.6 SCOPE AND LIMITATIONS OF THE STUDY
The fact that only the stock price of companies quoted on the public and that the legal
requirement for public disclosure of dividend declaration applies only to such quoted
companies makes it imperative that this study is limited to such companies.
The study covers a ten year period (1998-2007), and is based on reports of ten
companies from financial and non financial institutions/companies. These are
companies that filed all their returns with the stock exchange during this period. Data,
used for the study were obtained from records maintained by the stock exchange in
respect of share prices of these ten companies.
1.7 SIGNIFICANCE OF THE STUDY
This study will prove to be significant in the following ways;
It is believed that this work will add to the growing body of knowledge on the
behaviour of stock prices.
It will enable management shape their dividend policy and increase their earnings
when they know the degree of influence expected by these two variables.
It will be a contribution to the already established “Information content” of dividend
hypotheses and the ability of prices in efficient capital markets to reflect fundamental
value of revealed information released to the public through dividend policy
announcements.
Moreover, the study will add to our knowledge of the level of efficiency of the
Nigeria stock exchange market and will also help to assess the issue of rational
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behaviour of investors in the exchange and the level of “speculative bubbles” in
exchange (if it exists).
There is an unconfirmed belief that investors and dealers in shares hardly undertake
analysis before advice are given and investment decisions made. Perhaps, at the end
of this study, more light will be shed on this, or the belief will at best remain
unfounded.
1.8 OPERATIONAL DEFINITION OF TERMS
Securities as used refer to equities, popularly referred to as ordinary shares. Owners of
those shares are called shareholders. They receive dividends in cash or kinds after all
fixed interest bearing securities and taxes have been satisfied. Dividends as frequently
used in this study only take cognizance of dividends, paid in cash only. Bonus issues
which increase shareholders‟ holdings in the companies are not included here because
such increase is not a conscious investment by the shareholders, hence, they are
excluded. Earnings shall be only income earned from trading hence extra – ordinary
items shall be discountenanced in treating earnings.
Some mere concepts used in the study need further definition and simplification to
reflect the context in which they are used here.
Price This refers to the market price of the common stock as
determined at the dealing session. It could also be referred to as
quotation.
Earnings Per Share This is the per share value of the amount remaining when tax
and fix obligations in term of interest bearing assets (example
are preference share, loan stock, debentures etc) have been
deducted. It is usually given by the ratio.
Dividend Dividend are payable to share holders in Proportion to the
company. Usually, these are based on the normal value of the
fully paid up shares or stocks. Dividend by simple definition is
a portion of the net profit that has been officially declared by
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the Board of Directors for distribution to shareholders. A
dividend is paid at a fixed amount for each share of stock hold
by the shareholder. In this study, only cash dividend is taken
cognizance of and Bonus issues were exempted.
Stock The interest is on equity or common Stocks. Bonds, debentures,
preferred and loan stocks are excluded.
Exchange This simply refer to the Nigerian stock Exchange where trading
of stocks takes Place.
Capital Market This is an institution which facilitates the Transfer of medium
and long – term funds from the surplus sector to the deficit
sector of the economy. It is concerned with the channeling of
medium and long – term funds to the productive sectors of the
economy for developmental purposes. It is also a market which
encompasses both the market for distributing securities from
the issuing firm to the federal, public and the markets for
trading in outstanding securities Cooke (1987:17).
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REFERENCES
Aharony, J & Swarry I (1980); “Quarterly Dividend and Earnings Announcement and
Shareholders‟ Returns: An Empirical Analysis”. The Journal of Finance,
Vol. 35 pp 123-42.
Blake, M (1994), “Earnings, Trends and Investment Section”. Financial Analysis
Journal. Vol 29 No 15 December pp 31-42
Cooke, J. L (1987); Investment Management Theory and Application, New York:
University of Notre Dame.
Gordon M.J. (1969) “Dividend Earnings and Stock Prices” The Journal of
Economics, Vol. 41, No 2 Part 1 May pp 99 – 105.
Horne V & James C (1988); Financial Management and Policy India, 7th
Edition,
Prentice Hall, New Delhi.
Irwin F and Marshall P (1965). “The American Economic Review”, The Journal of
Economics, Vol. 54, No. 5 (Sept 1965), pp 656 – 682.
Lev, B (1997) “Corporate Earnings. Facts and Fiction” Journal of Economic
Perspectives Vol. 17; No 2, spring: pp 27 – 50.
Osaze BE (1987); The Capital Market: It’s Nature and Operational Character,
Benin, Benin City: University Press.
Ramasastry. A (1987) “Efficient Signal of Dividends and Investments” The Journal of
Finance vol 42, No 2. pp 206-208.
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Ross, SA (1977) “The Determination of Financial Structure: The Incentive Signally
Approach Bell” Journal of Economics vol. 8 (Spring) pp 23-40.
Sasson, B &. Kolodny R (1976) “Dividend Policy and Capital Market Theory”
Review of Economics and Statistics. Vol 58 May pp 181 – 90.
Shiller, RJ “Stock prices, Earnings and Expected Dividends” The Journal of Finance
vol. 43 Jan pp 661-676.
http://www.tribune.com.ng/izii2007/managment.html
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CHAPTER TWO
LITERATURE REVIEW
2.1 THE CONCEPT OF INVESTMENT
Ibenta (2005) in his book Investment Analysis and Financial Management strategy
said that the term “investment” may be defined as accumulation and commitment of
funds in financial or real assets with the objective of obtaining income over time. It is
a commitment of resources made in the hope of realizing benefits that are expected to
occur over a reasonable long period of time in the future.
Investment thus implies using present capital to create or generate future incomes or
capital. Investments could be in real physical assets or in financial assets. A
financial asset is not a real physical asset but a claim or a title to a real asset which
confers a right to participate in the sharing of income to be generated by the real asset.
Thus, investment in a financial sense means the placing of money in the hands of
others for their use in return for securities, which promise fixed income payments or
offer participation in expected profits of the business. Financial asset investment
transaction could imply mere transfer of claims between investors or may result in an
increase in the economy‟s capital stock where there is a fresh issue of security to
acquire more machines and plants.
Nevertheless, an investment is made because the investor anticipates a return. The
return on an investment is what the investor earns. This may be in the form of
income, such as dividends and interests, or in the form of capital appreciation if the
asset price rises. Not all assets offer both income and capital appreciation. Some
stocks pay no current dividends but may appreciate in value. Other assets, including
savings accounts, do not appreciate in value, and the return is solely the interest
income.
It is through the financing of business that stocks, bonds, and other securities come
into existence. Firms issue securities such as stocks or bonds, public and by financial
institutions. Once in existence, many of these securities may be traded in the
secondary markets, such as the Nigerian Stock Exchange. Secondary markets make
securities more attractive to individuals because investors know there is a place to sell
the securities should the need arise.
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Objectives of investment could be summarized as thus: -
- To derive a steady source of income over time, either as dividend or
interest while ensuring the safety of invested capital.
- To maximize immediate gains as a result of changes in stock prices.
- To benefit from long-term capital appreciation, i.e. growth in the value of
security.
- Other objectives include liquidity and hedge against inflation. The
emphasis here is not just on the protection of principal but the purchasing
power of the funds, which are always exposed to purchasing power risk
due to inflationary pressures.
Having discussed the notion of investment, one can proceed to look at the Nigerian
capital market.
2.2 THE NIGERIAN CAPITAL MARKET
In discussing the financing of businesses, it is imperative to discuss the development
of the Nigerian Capital Market. The need for this cannot be overemphasized
considering the fact that without the capital market, there would not be any Issuing
House and it will be difficult to raise long- term capital for development purposes. In
its indept sense, a capital market is a network of individual, institutions and
instruments involved in the efficient channeling of funds from the surplus to the
deficit economic units. The capital market is the long-term end for financial market.
It is made up of market and institutions that facilitate the issuance and secondary
trading of long-term financial instruments. Unlike the money market, which
functions basically to provide short term funds, the Capital Market provides funds to
industries and governments to meet their long-term capital requirements, such as
financing for fixed investments – buildings, plant, bridges, etc.
Historically, the Nigerian Capital Market (NCM) first came into existence in 1960
with the establishment of the Lagos Stock Exchange, but became operational in 1961.
Before then, the British colonial administration had in 1946 floated on £300,000
(three hundred thousand pounds) loan stock with 3¼ percent interest for financial
development projects under the ten-year plan Local Ordinance. The loan stock was
oversubscribed, expectedly, the bulk of the subscribers were from the United
Kingdom. Similarly, in 1951, a loan fund for the financing of some public utilities
was floated. It was funded from the publicly collected revenues. Soft loans were
granted regularly from the fund for the development of essential public corporations.
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The banking sector remained the major formal avenue for savings and deposits before
1961.
Following the introduction of Structural Adjustment Programme (SAP) in1986 and
the adoption of realistic policies such as the Foreign Exchange Market (FEM), the
deregulation of interest rate structure and dividend policy, the Nigerian Capital
Market has become a viable option for capital formation. More companies now use
the market facilities for strengthening their balance sheets and growth. In the process,
there has been a flurry of right issues, offers for subscription for equity and debenture
stocks. For instance, from 1994 – 2000, the total amount of capital raised on the
market amounted to N38, 552 billion.
In the last decade, the Federal Government has been encouraging state government to
approach the capital market to raise long-term capital for projects on their own market
and in the process, subjecting their operations to market discipline. The defunct
Bendel State Government was the first to raise N20 Million for its housing project.
This was followed by Ogun State which raised N25 Million for the water supply
project, Oyo State Government for its public market shops development, Kaduna
State raised N50 Million for its ginger processing project and Lagos State raised in
two trenches N90 Million for its new Town Development (Lekki Penisula) and the
N10 Million Lagos Island Local Government revenue bond – the first local
government bond to be floated in Nigeria.
In a nutshell, the motivation for the establishment of the Nigerian Capital Market as
stated above and today fulfils the following role and function within the economy.
- It provides a means of raising long- term finance to assist government and companies
to execute their development projects, modernization and expansion.
- It provides access to finance for new and smaller companies and encourage
institutional development in facilitating the setting up of Nigeria‟s domestic funds,
foreign funds and venture capital funds.
- It provides liquidity for the investment of funds from the standpoint of individuals
and for the economy.
- It provides an additional channel for engaging and mobilizing domestic
savings for productive investment and represents an alternative to bank
deposits, real estate investment and the financing of consumption loans.
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- It provides depositors with better protection against inflation and currency
depreciation.
- It improves the gearing of the domestic corporate sector and helps to reduce
dependence on borrowing.
- It improves the efficiency of capital by providing market measure of returns
on capital and a market mechanism for management changes.
Secondly, through its pricing mechanism, it provides industrial management
with some idea of the current cost of capital and this can be important in
determining the level and rate of investment.
- In summary, the Nigerian capital market helps to stimulate industrial as well
as economic growth and development of the Nigerian economy.
Having x-rayed the roles and functions of Nigerian capital market in the Nigerian
economy, it is pertinent to mention that the capital market can be broadly classified
into four categories namely:
- Providers of funds – This class consists of individuals, unit trusts, pension
funds, insurance companies etc.
- Users of funds – This group consists of companies and governments.
- Intermediaries – These are stock broking firms, issuing houses, registrars,
auditing firms and the solicitors.
- Regulators – This class comprises the securities and Exchange
Commission and the Nigerian Stock Exchange as a regulatory
organization.
Financial instruments traded on the capital market can be broadly classified into the
following:
o Equity – Ordinary shares and preference shares
o Debt – Government Bonds (Federal, States and Local Governments)
Industrial Loans/Debenture stocks and Bonds.
o Derivatives - Consisting of options, rights, swaps, futures etc
Major participants in the Nigerian Capital Market include:
o The Securities and Exchange Commission (SEC) which is responsible
for the overall regulation of the entire market.
26
o The Nigerian Stock Exchange (NSE), a self- regulatory organization in
(NCM) that supervises the operations of the formal quoted market.
o Market operators; this consists of the Issuing Houses (Merchant Banks
and Stock broking firms), stockbrokers, Trustees, Registrars, etc.
o Investors, Insurance Companies, Pension Fund, Unit Trusts
(Institutional Investors) and individuals.
o The Central Bank of Nigeria (CBN)
o The Federal Ministry of Finance
http://www.tribune.com.ng/13112007/management.html1/21/2008pgs1
&2of6
2.3 THE STOCK MARKET
The expression “stock market” refers to the market that enables the trading of
company stocks (collective shares), other securities, and derivatives. Bonds are still
traditionally traded in an informal, over-the-counter market known as the bond
market. Commodities are traded in commodities markets, and derivatives are traded
in a variety of markets (but, like bonds, mostly „over-the-counter‟).
The size of the worldwide “bond market” is estimated at $45 trillion. The size of the
“stock market” is estimated at about $51 trillion. The world derivatives market has
been estimated at about $480 trillion “face” or nominal value, 30 times the size of the
U.S. economy…and 12 times the size of the entire world economy. It must be noted
though that the value of the derivatives market, because it is stated in terms of
notional values, cannot be directly compared to a stock or a fixed income security,
which traditionally refers to an actual value. (Many such relatively illiquid securities
are valued as marked to model, rather than an actual market price.)
The stocks are listed and traded on stock exchanges which are entities (a corporation
or mutual organization) specialized in the business of bringing buyers and sellers of
stocks and securities together. The stock market in the United States includes the
trading of all securities listed on the NYSE, the NASDAQ, the Amex as well as on the
many regional exchanges, e.g. OTCBB and Pink Sheets. European examples of stock
exchanges include the Paris Bourse (now part of Euro next), the London Stock
Exchange and the Deutsche Borse.
http://en.wikipedia.org/wiki/stockmarket3/24/2008
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2.3.1 Trading
Participants in the stock market range from small individual stock investors to large
hedge fund traders, who can be based anywhere. Their orders usually end up with a
professional at a stock exchange, who executes the order.
Some exchanges are physical locations where transactions are carried out on a
trading floor, by a method known as open outcry. This type of auction is used in
stock exchanges and commodity exchanges where traders may enter “verbal” bids and
offers simultaneously. The other type of exchange is a virtual kind, composed of a
network of computers where trades are made electronically via traders.
Actual trades are based on an auction market paradigm where a potential buyer bids a
specific price for a stock and a potential seller asks a specific price for the stock.
[Buying or selling at market means you will accept any ask price or bid price for the
stock, respectively.] When the bid and ask prices match, a sale takes place on a first
come first served basis if there are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between
buyers and sellers, thus providing a marketplace [virtual or real]. The exchanges
provide real-time trading information on the listed securities, facilitating price
discovery.
The New York Stock Exchange is a physical exchange, also referred to as a listed
exchange - only stocks listed with the exchange may be traded. Orders enter by way
of exchange members and flow down to a specialist, who goes to the floor trading
post to trade stock. The specialist‟s job is to match buy and sell orders using open
outcry. If a spread exists, no trade immediately takes place - in this case the specialist
should use his/her own resources [money or stock] to close the difference after his/her
judged time. Once a trade has been made the details are reported on the “tape” and
sent back to the brokerage firm that then notifies the investor who placed the order.
Although there is a significant amount of human contact in this process, computers
play an important role, especially for so-called “program trading”.
http://en.wikipedia.org/wiki/stockmarket3/24/2008pages1&2of9
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2.3.2 The Importance of Stock Market
The stock market is one of the most important sources for companies to raise money.
This allows businesses to be publicly traded, or raise additional capital for expansion
by selling shares of ownership of the company in a public market. The liquidity that
an exchange provides affords investors the ability to quickly and easily sell securities.
This is an attractive feature of investing in stocks, compared to other less liquid
investments such as real estate.
History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood.
Rising share prices, for instance, tend to be associated with increased business
investment and vice versa. Share prices also affect the wealth of households and their
consumption. Therefore, central banks tend to keep an eye on the control and
behavior of the stock market and, in general, on the smooth operation of financial
system functions. Financial stability is the raison d‟etre of central banks.
Exchanges also act as the clearinghouse for each transaction, meaning that they
collect and deliver the shares, and guarantee payment to the seller of a security. This
eliminates the risk to an individual buyer or seller that the counter-party could default
on the transaction.
The smooth functioning of all these activities facilitates economic growth in that
lower cost and enterprise risks promote the production of goods and services as well
as employment. In this way, the financial system contributes to increased prosperity.
http://www.ansers.com/topic/market-1?cat=bizfinpage12of18
2.3.3 The Behavior of the Stock Market
From experience we know that investors may temporarily pull financial prices away
from their long-term trend level. Over-reactions may occur – so that excessive
optimism (euphoria) may drive prices unduly high or excessive pessimism may drive
prices unduly low. New theoretical and empirical arguments have been put forward
against the notion that financial markets are efficient.
29
According to the efficient market hypothesis (EMH), only changes in fundamental
factors, such as profits or dividends, ought to affect share prices. (But this largely
theoretic academic viewpoint also predicts that little or no trading should take place –
contrary to fact – since prices are already at or near equilibrium, having priced in all
public knowledge.) But the efficient-market hypothesis is surely tested by such events
as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percent
the largest-ever one-day fall in the United States. This event demonstrated that share
prices can fall dramatically even though, to this day, it is impossible to fix a definite
cause: a thorough search failed to detect any specific or unexpected development that
might account for the crash. It also seems to be the case more generally that many
price movements are not occasioned by new information; a study of the fifty largest
one-day share price movements in the United States in the post-war period confirms
this. Moreover, while the EMH predicts that all price movement (in the absence of
change in fundamental information) is random (i.e. non-trending), many studies have
shown a marked tendency for the stock market to trend over time periods of weeks or
longer.
Various explanations for large price movements have been promulgated. For instance,
some research has shown that changes in estimated risk, and the use of certain
strategies, such as stop-loss limits and Value at Risk limits, theoretically could cause
financial markets to overreact.
Other research has shown that psychological factors may result in exaggerated stock
price movements. Psychological research has demonstrated that people are
predisposed to „seeing‟ patterns, and often will perceive a pattern in what is, in fact,
just noise. (Something like seeing familiar shapes in clouds or ink blots.) In the
present context this means that a succession of good news items about a company
may lead investors to overreact positively (unjustifiably driving the price up). A
period of good returns also boosts the investor‟s self-confidence, reducing his
(psychological) risk threshold.
Another phenomenon – also from psychology – that works against an objective
assessment is group thinking. As social animals, it is not easy to stick to an opinion
that differs markedly from that of a majority of the group. An example with which
30
one may be familiar is the reluctance to enter a restaurant that is empty; people
generally prefer to have their opinion validated by those of others in the group.
In one paper the authors draw an analogy with gambling. In normal times the market
behaves like a game of roulette; the probabilities are known and largely independent
of the investment decisions of the different players. In times of market stress,
however, the game becomes more like poker (herding behavior takes over). The
players now must give heavyweight to the psychology of other investors and how
they are likely to react psychologically.
The stock market, as any other business, is quite unforgiving of amateurs.
Inexperienced investors rarely get the assistance and support they need. In the period
running up to the recent NASDAQ crash, less than 1 per cent of the analyst‟s
recommendations had been to sell (and even during the 2000 – 2002 crash, the
average did not rise above 5%). The media amplified the general euphoria, with
reports of rapidly rising share prices and the notion that large sums of money could be
quickly earned in the so-called new economy stock market. (And later amplified the
gloom which descended during the2000 – 2002 crash, so that by summer of 2002,
predictions of a DOW average below 5000 were quite common.)
http://en.wikipedia.org/wikistockmarketpage5&8of93/24/2004
Irrational Behavior: Sometimes the market tends to react irrationally to economic
news, even if that news has no real effect on the technical value of securities itself.
Therefore, the stock market can be swayed tremendously in either direction by press
releases, rumors, euphoria and mass panic.
Over the short-term, stocks and other securities can be battered or buoyed by any
number of fast market-changing events, making the stock market difficult to predict.
Crashes: A stock market crash is often defined as a sharp dip in share prices of
equities listed on the stock exchanges. In parallel with various economic factors, a
reason for stock market crashes is also due to panic. Often, stock market crashes end
up with speculative economic bubbles.
31
There have been famous stock market crashes that have ended in the loss of billions
of dollars and wealth destruction on a massive scale. An increasing number of people
are involved in the stock market, especially since the social security and retirement
plans are being increasingly privatized and linked to stocks and bonds and other
elements of the market. There have been a number of famous stock market crashes
like the Wall Street Crash of 1929, the stock market crash of 1973-4, the Black
Monday of 1987, the Dot-com bubble of 2000. But those stock market crashes did
not begin in 1929, or 1987. They actually started years or months before the crash
really hit hard.
One of the most famous stock market crashes started October 24, 1929 on Black
Thursday. The Dow Jones Industrial lost 50% during this stock market crash. It was
the beginning of the Great Depression. Another famous crash took place on October
19, 1987 – Black Monday. On Black Monday itself, the Dow Jones fell by 22.6%
after completing a 5-year continuous rise in share prices. This event not only shook
the USA, but also quickly spread across the world. Thus, by the end of October, stock
exchanges in Australia lost 41.8%, Canada lost 22.5%, Hong Kong lost 45.8% and
Great Britain lost 26.4%. Names “Black Monday” and “Black Tuesday” are also used
for October 28-29, 1929, which followed Terrible Thursday – starting day of the stock
market crash in 1929. The crash in 1987 raised some mysticism - main news or
events did not predict the catastrophe and visible reasons for the collapse were not
identified. This event had put many important assumptions, of modern economics,
under uncertainty, namely, the theory of rational conduct of human being, the theory
of market equilibrium and the hypothesis of market efficiency. For some time after
the crash, trading in stock exchanges worldwide was halted, since the exchange‟s
computers did not perform well owing to enormous quantity of trades being received
at one time. This halt in trading allowed the Federal Reserve System and central
banks of other countries to take measures to control the spreading of worldwide
financial crisis. In the United States the SEC introduced several new measures of
control into the stock market in an attempt to prevent a re-occurrence of the events of
Black Monday. Computer systems were upgraded in the stock exchanges to handle
larger trading volumes in a more accurate and controlled manner. The SEC modified
the margin requirements in an attempt to lower the volatility of common stocks, stock
options and the futures market. The New York Stock Exchange and the Chicago
32
Mercantile Exchange introduced the concept of a circuit breaker. The circuit breaker
halts trading if the Dow declines a prescribed number of points for a prescribed
amount of time.
http://en.wikipedia.org/wikistockmarketpage6&7of93/24/2004
2.4 THE STOCK EXCHANGE
As the hallmark constituency of the capital market, the stock exchange is many things
at the same time. First, it is a place where debt and equity securities of varying types
are traded transparently. It is a market that facilitates capital mobilization and
allocation, as both governments and companies can raise funds through the market on
long and most prudent terms through the offer of shares (by companies) and bonds
(by companies and governments).
The facility, which the stock exchange represents and provides for trading in existing
securities, removes the restriction that would have prevented individuals from
investing their savings in securities. In fact, the opportunity which it offers for
subsequent trading in existing securities has made it a decisive factor in the success or
otherwise of many corporate issues, and, by extension, the efficiency of capital
formation in the economy. Thus the, availability of a secondary market that is, daily
trading of securities on the stock exchange engenders capital formation and socio-
economic development.
An efficient stock market mobilizes savings and allocates a greater proportion to those
companies with the highest prospective rates of returns after giving due allowance for
risk. This allocate function is critical in determining the overall growth of the
economy. If capital resources are not provided to those economic areas, especially
industries, where demand is growing and which are capable of increasing production
and productivity, the rate of expansion of the economy inevitably suffers.
Also, the pricing mechanism of the stock exchange makes it a reliable economic
indicator. The stock exchange presents this feature and more in its regular operations
as a facility for the disciplined mobilization and allocation of capital for pursuing
business expansion, modernization and growth.
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This awareness has propelled many economies to use stock exchanges as conduit for
channeling long-term funds to their productive sectors. In particular, with the
difficulties faced by many development finance institutions in developing countries,
the stock market route has become a credible alternative source of supporting equity
and long-term investment financing. These realities must have informed the decision
at the Abuja Summit of OAU Heads of States in 1991 that each country in Africa
should set up a stock exchange as a way of promoting a balanced financial system and
also as an element of the then proposed African Economic Community.
However, it must be emphasized that the capacity to generate long-term capital does
not emerge spontaneously. Though potentially useful, stock exchanges take time to
nurture. The development of stock markets requires not just establishing the right
legal and regulatory framework, but it is also associated with the building of an
enterprising and flourishing private sector as well as political stability. It also
demands effective monetary and fiscal policy management, and, indeed, a stable
macro-economic environment. .
Enterprising private sector: The role of a stock exchange within an economy as an
engine for capital formation is intertwined with finding a positive and constructive
role for the private sector in general. To achieve this, both the private sector and the
capital market must be integrated into the country‟s overall development
programmed; both must know and be responsive to the needs of the population as a
whole.
Government policies on credit, foreign exchange allocation and taxation as well as its
public expenditure and investment programmers interact in numerous ways to
constitute a regime of disincentives and constraints or otherwise to private enterprise
development. Examples of these include:
- Excessive government borrowing which tends to crowd out private sector;
- Relatively high corporate taxes which squeeze private sector profits and
hence limit the capacity to generate local investment funds.
A stock market can only be effective if there is a vigorous and healthy private sector
within the economy. Identifying this is not an easy task and cannot be taken for
granted. It involves the tricky problem of convincing the governments in developing
34
countries that private enterprises can identify closely with the broader aims of the
nation as has happened with minimal conflict in richer nations. Fiscal incentives and
sound macro-economic policies must be adopted to promote private sector
development and growth. In particular, government can also strengthen the private
sector through sustained implementation of well-articulated privatization programs
and sound public policies.
http://www.tribune.com.ng/13112007/management.htmlpage2of6
2.4.1 The Nigerian Stock Exchange
Following the establishment of the Central Bank of Nigeria in 1959, it was logical to
have a stock exchange; hence the incorporation of the then Lagos Stock Exchange in
1960. The Stock Exchange is a private, non-profit making organization limited by
guarantee. It was incorporated via the inspiration and support of businessmen and the
Federal Government via CBN, but today about 400 members own it. The
membership includes financial institutions, stockbrokers and individual Nigerians of
high integrity who have contributed to the development of the stock market and the
Nigerian economy.
The Council Members (Boards of Directors) of The Stock Exchange are elected at
each Annual General Meeting by members of the Exchange. The tenure of the
Presidency is limited to one three-year term. The Council is responsible for policy-
making but the Director General and her team of executives administer the day-to-day
affairs of the Exchange. The Council members, management and staff of the Nigerian
Stock Exchange as well as stockbrokers are subject to a stringent regime of codes of
conduct, which calls for a high degree of integrity, discipline, sacrifice and a high
sense of patriotism.
Trading commenced on The Exchange in 1961 after the enactment of the Lagos Stock
Exchange Act of 1961. The self-regulatory organization was subsequently
reorganized and renamed The Nigerian Stock Exchange in 1977. Today, the NSE has
ten functional trading floors in different parts of the country namely: Lagos, Abuja,
Kaduna, Port Harcourt, Kano, Onitsha, Ibadan, Yola, Benin and Uyo. The nine
branches also double as area offices to allow regional securities dealing firms execute
transactions on behalf of clients. Trading on The Nigerian Stock Exchange is
automated as orders are executed via computers linked to a central server. All
35
branches are linked for online trading with the headquarters in Lagos. Also, dealing
members can trade online from their offices in Lagos. Trading on the Exchange starts
at 9.30 a.m. every business day and closes at 12.30pm. The Exchange is working on
the possibility of further increasing the trading time.
As part of the effort to make the Exchange more investor-friendly, in 1992, a
subsidiary called the Central Securities Clearing System Limited (CSCS), was
incorporated, to manage an automated clearing and settlement system as well as a
Central Depository for the market. The CSCS, which also offers custodial services,
commenced operations on April 14, 1997. Since then the market has been settling
and clearing trades on a T +5 settlement cycles, reducing it to T +3 on March 1, 2000.
T +5 is the minimum transaction settlement time recommended for all emerging
marks by the World Federation of Exchanges (WFE), of which The Nigerian Stock
Exchange is a member.
http://www.tribune.com.ng/13112007/management.htmlpages4&5of6.
2.4.2 The Stock Exchange and Capital Formation in Nigeria
As stated earlier, a stock market exists primarily to facilitate the mobilization and
efficient allocation of long-term funds. The extent to which The Exchange has served
this purpose, therefore, constitutes the first and probably the most important criterion
for evaluating its performance overtime. For purposes of this measurement, we will
restrict the definition of capital mobilization to the channeling of savings into new
uses through the issuance of securities, which result in a net increase in capital
formation.
Going by this definition, The Nigerian Stock Exchange has contributed immensely to
capital formation in Nigeria. Since 1961, when the Exchange opened its floor to the
public, the Federal Government of Nigeria has raised long-term funds through it for
on-lending to the regional and later the State governments for development projects.
The Federal Government renewed its interest in the market in 2004 culminating in the
issue of special purpose bonds to settle pension arrears and local contractor debts. In
2006, the Federal Government issued new bonds valued at N527.4 billion. The
36
Central Bank of Nigeria has always acted as the issuing house, underwriter and buyer
of last resort in this regard.
In the last decade, the Federal Government encouraged the state and local
governments as well as government corporations to use the capital market to close
their resource gaps. Consequently, more than five state governments have raised
loan capital (bonds) on the market. In 1993, The Exchange listed the first municipal
bond – the Lagos Island Local Government N100 million Floating Rate Revenue
Bond 1996/2000 – for part-financing the building of the popular SURA market. The
facility has been fully redeemed.
With the introduction of the Structural Adjustment Programme (SAP) in 1986 and the
subsequent adoption of realistic policy instruments such as the Foreign Exchange
Market (FEM), the deregulation of interest rate structure and dividend policy, the
Nigerian Stock Exchange has become a more viable option for capital formation.
Increasing numbers of companies now use the market facilities for strengthening their
capital structure, for modernization and expansion of operations and also source
working capital funds.
http://www.tribune.com.ng/13112007/management.htmlpage5of6.
2.4.3 Broadening Ownership
A great problem in establishing equities market is the reluctance of many family-
owned companies to list on the stock exchange and to sell an adequate proportion of
their equity capital to the public (i.e. dilution of ownership). The owners want to
retain absolute control and absolute independence of action. They value their privacy
and quite a number declare losses year-in year-out, but continue to exist. They prefer
to forego more rapid expansion if the price to be paid is the public issue of securities
with all its requirements for disclosure of information. But, truly, the Nigerian
experience shows that public issues do not result in the loss of family control. It does,
however, reduce independence of action because management is accountable to a
potentially questioning set of shareholders and the media as well as to the family.
Fiscal incentives can be employed by taxing the profits of such publicly quoted
companies at sufficiently lower rate than that of privately-held “companies to induce
37
them to go public. Such tax incentives have been used successfully to stimulate
companies to go public in certain countries, notably Brazil, Indonesia, Iran (under the
Shah) and South Korea and/or for individuals to invest in the publicly quoted
securities.
Rational Fiscal and Monetary Policies:-Such policies should be conducive to both
savings and investments to ensure greater confidence in the stability of the economy.
Policies just ensure attractive yields for equities in comparison with other domestic
and foreign investment alternatives. Frequent devaluation and negative real rates of
return force investors to move to other less risky assets or countries (capital flight).
Therefore, countries should adopt realistic exchange rates and positive real interest
rates to inhibit capital flight. Also in many countries, notwithstanding otherwise
favorable conditions, investors shun the stock market when tax on dividends and
capital gains are punitive compared to taxes on interest income from savings
alternatives such as bank deposit or treasury bills. Specifically, fiscal incentives for
listing may include reduction in corporate tax, capital gain tax and low withholding
tax on dividend. It is gratifying therefore, that the federal government finally acceded
to sustained private sector demand for the abolition of capital gains tax on equity
investments.
2.4.4 Institutional Framework
Equity markets cannot function without an effective system of intermediation,
including brokers, dealers, investment banks and underwriters. The banks may
perform these intermediary activities as the market is beginning to develop but should
become independent as soon as financial intermediaries become viable.
Institutional framework must have an adequate infrastructure for efficient
communication, pricing of issues, marketing of equities, efficient deliveries and
settlements. Communication facilities must be adequate to relay information between
buyers and sellers. Introduction of an institutional system for transmitting
information regarding price, market, and quoted companies to the public is necessary
for instilling confidence and knowledge about companies. Pricing of issues must be
reasonable as companies consider the all-in cost of funds in evaluating funding
alternatives. http://www.tribune.com.ng/13112009/management.htmlpage3&4of6.
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2.4.5 Legal and Regulatory Environments
The purpose of regulation is to protect investors and in the process, increase investor
confidence. Regulation is also necessary to ensure a fair and orderly securities
market. To this end, company laws are continuously modernized, the conditions for
granting listing to companies seeking quotation must be clear and positive. There
must also be adequate rules and regulations for the brokers, underwriters and other
operators of the stock market. In addition, there must be code of conduct for brokers,
directors and managers of the stock exchanges, stock broking firms and quoted
companies. There should also be provision for an adequate flow of accurate and
timely information on the performance of companies and economic development. In
essence, provisions requiring high standard of financial reporting, disclosure and
general transparency assist stock markets and their operators to gain the confidence of
investors.
2.4.6 Savings Structure
The size and structure of savings are vital to a flourishing stock market. Savings
pattern, however, depends on the level of distribution of income and profit; the returns
on savings or interest rate, social attitude to savings and existence of reliable and
acceptable savings institutions. It should be noted that the development of stock
exchanges in South East Asia was influenced by the very high savings disposition of
the people. For example in Taiwan, the savings ratio was over 20 per cent for over
two decades leading to its very dynamic and liquid stock market.
While many developing countries may not be able to meet the high level of savings in
the short run, we can start by promoting, more savings institutions, especially those
that can also serve as investors through our stock market. In Nigeria, the insurance
companies and various pension funds mobilize savings from millions of people for
investments through the Stock Exchange.
In addition to insurance companies and pension funds, the Unit Trust (Mutual Fund)
Scheme was introduced to mobilize savings for investment in our stock exchange.
Currently, there are nineteen (19) of such unit trust schemes that have been granted
memorandum quotation on the Nigerian Stock Exchange. Until recently, the effect of
39
these mutual funds on The Nigerian Stock Exchange was marginal. However, there
are hopes that they may become veritable sources of investment funds for the
Nigerian stock market. For instance, the net value of funds under management is in
excess of N50 billion.
http://www.tribune.com.ng/13112007/management.htmlpages4of6.
2.5 STOCK PRICES
Shares or stocks are always quoted at prices which contemplate transferring to the
purchaser the ownership of the share and all future dividends or other disbursements
except those already of record and in process of payment. Even accumulated back
dividends on preferred stock are transferred from the seller to the buyer. The price of
the stock must be determined with this in mind.
Theoretically, the value of share of common stock is determined by the present value
of share of expected future cash flows derived from ownership of that stock.
Williamson (1971:75) says the discounted present value of the payment that will be
received by the holder of that share will consist of dividends and perhaps, the
proceeds of sale of the shares sometime in future. If the shareholder intends to hold
the shares indefinitely, the total present value of all the dividends to infinity is the
value of the share. This is represented by the formula below assuming no growth rate:
MV = dr
Where
MV = Expected Market Value
d = Expected dividend receivable
r = Company‟s cost of capital.
Where the dividend is assumed to grow at a constant rate the formula is modified
thus:
MV = do (1 + g)
r – g
Where
Mv and r still remain the same as in above:
do = Current dividend
40
g `= Growth rate
Where the shareholder wishes to sell the share at sometime (say year n), the formula
will be:
Mv = d1 + d2 + d3 + dn + vn
1+r (1+r)2 (1+r)
3 (1+r) (1+r)
n
Where:
MV = Expected market value
d = Expected dividends receivable from year one, y or n
r = Company‟s cost of equity
Vn = Value of share at the time of disposal.
Williamson (1971:75) went ahead to say if the result of market value obtained by the
use of the above formula is above the actual market value determined by SEC, then
the stock is “undervalued” by the market, and should be bought but if the result is
below that of the market, then the stock is “overvalued” and should be sold.
As Akintola Bello (1989: 125) puts it “when prices are falling, it is time to hurry up
and buy cheap and when they are rising, better sell off quickly and make an
“arbitrager‟s profit”. That sounds cheap and easy enough, but the most difficult thing
is knowing with a reasonable degree of assurance when prices will actually be high or
low. He went ahead to say “Don‟t try to speculate the market, is not very friendly
with “gamblers” more often woe betides them.” One of the greatest fallacies on the
stock market is that investors naively think that whatever has been good in the past
will remain good; therefore companies who have been paying dividend on an
increasing rate will continue to do so. This is not always the case as the opposite does
happen because there will be no logic in a world in which one stock or sector always
did better than the rest, Akintola Bello (1989:125).
Baker and Haslem (1974:135) discovered through survey that three basic variables are
considered by investors to estimate the price of securities. These factors are dividend,
future expectations and financial stability. Dividends seem to account for a greater
portion but investors differ widely in their opinions concerning the importance of
41
dividends. Investors who prefer dividends, might have the assumption that actual
dividends are less risky than the capital gains expected from reinvested earning,
Gordo (1992:17). When Baker and Haslem related the three factors to socio/economic
and behavioral variables, dividends was positively correlated with individuals who
seek high dividend income, old age, female civil servants and pensioners. The
investors had relatively low family incomes and were willing to accept only a low risk
of financial cost and demonstrated little, if any, interest in capital appreciation. Future
expectations were significantly associated with investors who sought a high increase
in the value of their stock and had a moderately high amount of common stock
holdings. Financial stability was also associated with old age and females. They also
tend to have little education and expect a moderately large increase in the value of
their stock.
Mayo (1988:111) considered dividend yield basis of share valuation to be suitable for
small share holders in unquoted companies because such shareholders are really
interested in dividend, since they are not in any position to control decisions affecting
the company‟s profits and earnings. A suitable offer price would therefore be one
which compensates them for the future dividends they will be given if they sell their
shares.
Random Walk Theory of Share prices is consistent with fundamental theory of share
values which is also in line with definition given by Williamson which says, that
market price of a share will be the discounted present value of all future expected
dividends on the share, discounted at shareholders cost of capital. Random Walk
Theory accepts that a share should have an intrinsic price dependent on the fortunes of
the company and the expectations of investors. One of its underlying assumptions
according to Mayo (1988:111) is that all relevant information about a company is
available to all potential investors who will act upon the information in a rational
manner. It can be shown that random movements in share prices will occur, if the
stock market operates efficiently and market information about company‟s earnings,
dividends, etc. are freely (or cheaply) made available to all customers in the market.
2.5.1 Dividend Policy
42
Dividend policies vary among firms. Some vary with the business cycle while others
do not. The so called growth firms usually pay out paltry amounts to shareholders and
use what is left to address the financial needs of the firm. The essence of dividend
policy is to determine what portion of a firm‟s earnings that will be paid out as
dividend or held back as retained earnings. Retained earnings are one of the most
important sources of financing a firm‟s project. Dividend on the other hand is that
portion of after tax profit that is shared out to shareholders as reward for investment.
Dividend so to speak puts disposable income in the hands of shareholders.
However, the objective of providing funds to build up reserves in order to finance
expansion projects, service and retire existing obligations and consequently enhance
the earnings power of the firm is at variance with putting disposable income in the
hands of shareholders. A higher rate of retained earnings, translates to a lesser
amount of disposable income to shareholders. Similarly, if a large portion of
corporate earnings is paid out as dividend, then they will not have enough to service
and retire existing obligations, and of course for their re-investment purposes. Since
retained earnings act as a buffer to the future earnings capability of the firm, it is
generally argued that a drop in retained earnings will precipitate a drop in the market
value of stocks.
In a bid to satisfy these two objectives, management is put in serious dilemma as they
must come up with policies that will address their need for reserves and disposable
income to stockholders.
2.5.2 Types of Dividends
There are two forms that dividend payment could take. The first and usual form is to
pay dividends in cash. The second option is payment through bonus shares of stock
dividend.
Cash Dividend
This is the most common form of dividend payment. Cash dividend payment involves
immediate outflow of cash. For a company to pay cash dividend, it has to have
enough cash, otherwise, it may have to borrow to finance the dividend payment or to
finance operations after the payment of dividends. In most cases, especially when a
43
company does not follow a stable dividend policy, it is relatively difficult to make
cash planning in anticipation of the dividend needs of the company.
Furthermore, paying cash dividend in place of retaining earnings to finance existing
viable investment opportunities may lead to forgoing projects with positive net
present values, or obtaining funds form external sources. Apart from this, on the
payment of cash dividends, both the total assets and the net worth of the company are
reduced. The market price of the shares are also expected to drop by the amount of
the cash dividend payment, thus plans to pay cash dividends call for proper cash
planning, because of the effect of such dividend payment on the company‟s finances.
Stock Dividend
Bonus issues or stock dividend represents a recapitalization of the owner‟s equity
pattern i.e. the reserves. It is merely an accounting transfer from reserves to paid up
capital. The declaration of the bonus shares will increase the paid up share capital and
reduce the reserves and retained earning of the firm. It is a distribution of shares in
lieu of cash as dividends to the existing shareholders. It essentially involves a
recapitalization of the existing reserves and is normally in the proportion of holdings
in the equity shares of the company. It leads to a proportional increase in number of
shares held by each equity holder and neither the total assets nor the net worth of the
company is affected by stock dividend. Since stock dividends are only a
recapitalization, it does not affect the net worth of the company, and as such does not
affect the wealth of the equity holders.
2.5.3 Dividend Theories
Different theories have been advanced to explain the relationship between dividend
policy and the value of the firm. It is assured that the market values of quoted shares
are dependent on expected dividends. The higher the expected future dividends, the
higher will be the pricing of shares all things remaining the same. But a higher
dividend would mean less retained earnings, which may consequently result in slower
growth and lower market value of shares. Management therefore must have
necessarily carefully decide the allocation of net earnings between dividends and
retained earnings. Dividend policy is therefore concerned with the quotation of which
is better;
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a. The payment of all earnings as dividends now (maximizing dividends).
b. The retention of all earnings for capital gains (maximizing capital gains) or
c. Adopting a dividend payment ratio that maximizes the combined value of
dividends and capital gains.
These theories emerged in an attempt to determine an optimal dividend policy. These
theories can be grouped into two.
i. Theories which consider dividend decisions to be irrelevant.
ii. Theories that consider the dividend decisions to be an active variable
influencing the value of the firm thus seeing dividend as being relevant.
2.5.4 Dividend Relevant Theories
These theories consider dividend decisions as being a determinant of share prices and
they see dividend as good if it increases shareholders‟ value. There are basically three
major views under this school of thought: the Walter‟s Model. The Gordon Model and
the Bird-in-Hand argument.
2.5.5 Walter’s Model
Walter‟s (1963) model states that the choice of dividend policy always affects the
value of the firm. His model shows clearly, the importance of the relationship
between the firm‟s internal rate of return and the cost of capital in determining the
policy that will maximize the wealth of shareholders.
Stated below is Walter‟s (1963) Model:
P = DIV + r (EPS – DIV)/k
k
Where k = Firm‟s cost of capital or capitalization rate.
P = Market price of shares
DIV = Dividend per share
EPS = Earnings per share
r = Firm‟s rate to return (average)
To show the effect of dividend or retention policy on the market value of shares, the
equation stated below will be used;
P=DIV+{r/k}(EPS – DIV)
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k
The model is based upon five assumptions namely:
a. The firm finances all investments through retained earnings
b. The firm‟s internal rate of return and cost of capital are constant.
c. All earnings are either distributed as dividends or immediately re-invested
internally.
d. Beginning earnings and dividends remain constant.
e. The firm has a very long or infinite life.
Walter (1963) concludes that growing firms should retain all earnings to finance
investments while declining firms should pay out all its earnings as dividends as this
will maximize the wealth of the shareholders. Following his model, dividend policy
depends on the availability of profitable investment opportunities and the relationship
between the firm‟s internal rate of return and the cost of capital. In this case, dividend
policy is a financing decision.
2.5.6 Gordon’s Model
Gordon‟s (1968) model explicitly relates the market value of a firm to its dividend
policy.
The model is based on the following assumptions;
a. The firm is an all – equity firm,
b. No external financing is available
c. The internal rate of return and capitalization rate are constant
d. The firm and its stream of earning are perpetual.
e. No corporate taxes.
f. The retention rate once decided is constant.
g. The discount rate is greater than the growth rate.
According to Gordon‟s (1968) Model, the market value of firm‟s share is equal to the
present value of an infinite stream of dividends to be received by the shareholders.
However, the dividend per share is expected to grow when earnings are retained. The
46
retained earnings are assumed to be reconverted within all-equity firms at a constant
rate of return.
2.5.7 Bird – In – The Hand Argument
The logic underlying the dividend effect on the share value can be described as the
Bird-in- the-Hand Argument. The argument was put forward initially by Krishnan
(1933) in the following words;
“of the two stocks with identical records and prospects, but with
one paying a larger dividend than the other, the former will
undoubtedly command a higher price merely because stakeholders
prefer present to future value. Myopic vision plays a part in the
price making process. Stockholders often act upon the principles
that a bird in hand is worth two in the bush and for this reason
are willing to pay a premium for the stock with the higher
dividend rate, just as they discount the one with the lower rate”.
A similar view is also held by Graham and Dodd (1934) as follows
“The typical investor would most certainly prefer to have his
dividend today and let tomorrow take care of itself. No instances
are on record in which the withholding of dividends for the sake of
future profits has been hailed with such enthusiasm as to advance
the price of the stock. The direct opposite has invariable been true.
Given two firms in the same general position and with same
earning power, the one paying the larger dividend will always sell
at a high price “.
2.5.8 Dividend Irrelevance
47
The proponents of the dividend irrelevance theory are those who believe that
dividend policy makes no difference of the firm‟s share value. This school of thought
has two proponents; Miler & Modigliani (1961).
2.5.9 Modigliani and Miller’s Hypothesis of Dividend
Modigliani and Miller (1961) assert that given the investment decision of the firm, the
dividend pay-out ratio (the split of net earnings between dividends and retained
earnings) is a mere detail and of no significance in determining the value of the firm.
They argue that value of the firm is determined by the earning power of its assets and
its investment policy. Their hypothesis policy is based on the following assumptions;
1. There is perfect market, where investors have access to perfect
information.
2. Investors act rationally based on available information
3. There is no floatation or transaction cost
4. There is perfect certainty from the investors‟ point of view, as to future
investments and earnings of the company (This was later dropped)
5. The company will maintain a fixed investment policy
6. There exists no tax or that dividend and capital gains are subjected to the
same rate of tax.
They argue that a company with investment opportunities could pay dividend and
finance the shortfall due to the payment of dividend through outside sources. That the
resultant loss of value on the existing shares as a result of outside financing instead of
using retained earnings will be equal to the dividend paid, so a company should be
indifferent between outside sources and retained earnings. According to them,
arbitrage assures that the sum of market value of shares plus current dividend to two
companies identical in all respect, other than dividend pay-out ratio, will be the same
and as such, shareholders should be indifferent between dividend and capital gains.
They further argued that even if debt capital is used, the irrelevance of dividend
policy argument remains valid. According to them, the cost of debt capital could be
lower than the cost of equity, but the increase in the company‟s gearing due to debt
financing will cause cost of equity to rise, so that the effective marginal cost of capital
and the weighted average cost of capital (WACC) will remain unchanged. This is the
48
same position they hold under gearing and cost of capital. Even under uncertainty,
they contend that the irrelevance of dividend policy argument still holds, given
investment policy. Those firms having the same capital (finance), investment and risk
characteristics should have the same value irrespective of the dividend policy.
Their position ignores the effect of tax and relief of interest on debt, as well as
personal tax on dividend and capital gains. This is one ground on which their theory is
heavily attacked. They also argue that as for shareholders preference between
dividend and capital gain, if a company adopts a consistent policy, it would tend to
attract to itself a „clientele‟ consisting of those investors preferring its particular pay-
out ratio. This implies that market value will be unaffected by the choice between
dividend and capital gain.
If dividend pay-out ratio is irrelevant, should dividend be the foundation for the
valuation of common stocks? It should be noted that even if Modigliani and Miller‟s
(1961) argument is true, the initial assumption that share price depends on present
value of stream of dividends is not violated. What Modigliani and Miller (1961) are
saying is that the timing of dividend does not matter, because the present value of all
future dividends remains unchanged, whatever the timing. They do not argue that
dividend including liquidation dividends is never paid.
They also hold that the reaction of share price to changes in dividend pay-out rate is
as a result of the information content of dividend and does not render invalid the
irrelevance of dividend policy argument. Investors rationally should perceive a
change in dividend policy as a change in management‟s view of the future earnings
prospect of the firm. So price changes as a result of dividend change is not caused by
the dividend policy, but by the underlying factors (earnings, risks) leading to that
change in dividend policy. Assuming that the change in dividend policy leads to a
wrong perception by investors, in the near future as event unfolds they argue, the
price change would adjust to reflect the true position.
Those opposed to Modigliani and Miller‟s (1961) argument say that dividend decision
should be an active variable influencing the value of firm. The irrelevance of dividend
argument has been criticized on the following grounds.
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1. There exists differences in the rate of tax on dividends and capital gains and as
such, shareholders are likely to have preference for dividend or capital gains.
2. There exist a number of imperfections in the capital market, and there could be
difficulties in selling of shares at a fair price, so that shareholders might prefer
current dividend so as to have funds for investment opportunities outside the
company.
3. These critics argue that in periods of capital rationing, earning retention should
be preferred, since otherwise would worsen the shortage of funds.
Elaborating further on the issue of market imperfection, they argue that because of
transaction costs on the sale of shares, investors in need of cash from their
investments should prefer receiving dividends rather than selling part of their
investments. Furthermore, information available to shareholders is imperfect, thus
investors may not be aware of future investment plans and expected earnings of the
company, or may not wholly believe such information when they are available. As a
result of imperfect information:
a. Companies are normally expected to pay constant or increased dividend
every year, otherwise, investor‟s confidence in the future of the firm would
be undermined.
b. In practice, share prices respond gradually to information on investments
yielding positive net present values (NPV).
2.5.10 Methodology of Dividend Payment
In this country, the payment of dividend is predicated on the existing legislations,
which could be amended from time to time.
In the past the amount to be paid out as dividend is regulated by the government in the
monetary and fiscal policies announced every year. For example, in 1976/77 fiscal
year, the distribution of dividends in excess of 30 percent gross was prohibited. In
1978/79 fiscal year the ceiling on dividends was raised from 30 to 40 percent and
1979/80 fiscal year it was further raised to 50 percent.
These days however things have changed as the Companies and Allied Matters Act
(CAMA) of 1990 regulate the dividend policy of firms in this country. Section 379(5)
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provides that dividends shall be payable to shareholders only out of distributable
profits of the company. Section 380(a) permits a company to pay dividends out of
profits arising from the use of the company‟s property although it is a wasting asset.
While section 380(b) allows a company to pay dividends out of revenue reserves, that
is profits of previous years which had not been distributed or capitalized. This simply
means that retained earnings which are meant to boost the earnings capability of firms
could be used to pay dividends. Also section 380 (c) allows as distributable, profits
arising from the sale of a fixed asset, provided that if more than one asset is sold the
net profit on the sale of the assets must be taken into account.
Section 379 provides that a company may in its general meeting declare dividends in
respect of any year or other period only on the recommendation of the directors. The
company may also from time to time pay to members such interim dividends as
appear to the directors to be justified by the profits of the company. The general
meeting shall have the power to decrease the amount of dividend recommended by
the directors, but shall have no power to increase the recommended amount. Where
the recommendation of the directors is varied by the company, a statement to that
effect must be included in the annual returns. Furthermore, Section 381 of CAMA
provides that a company may only declare or pay dividend if there are reasonable
grounds for believing that the company is or could after the payment be able to pay its
liabilities as they become due.
In this country dividends are often paid twice, the first is the interim dividend and the
final dividend.
A company as a first step might make a forecast of an amount of dividends to be paid
out provided it was not in excess of the stipulated percentage before the accounts are
audited. After the accounts have been fully prepared, depending of course on the
level of earnings, the final payment of dividends will be made, so long as it was below
the prescribed percentage. The essence of this restriction is to enable companies build
up adequate reserves for reinvestment. In declaring dividends it is usual for a
company to choose a sustainable amount for their declaration. This is because if such
level of dividend is not sustained, investors might interpret the business as facing a
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down turn. This interpretation will cause the market value of the stock to cascade
downwards.
Dividends are declared as at a record dates. If for instance Universal Exports declares
on the 2nd
of January that it would pay dividends to all shareholders of record on the
10th
of January. This simply means that January10th is the record date and dividends
will be paid to all shareholders whose names are recorded in the books of the
company as at January 10th
. Thus, if Musa buys the share of Universal Export on the
11thof January, the purchase is ex-dividend as Musa will not be entitled to participate
in the dividends to be declared by the company consequently the market price of the
shares is expected to be less than it should be if he were to participate in the
dividends. Similarly, if Musa bought the shares on 4thJanuary and his name has been
entered in the books of universal exports as shareholder he will be entitled to the
dividends that will be declared. As a result of this extra privilege to enjoy the
dividends, the price of the stock is expected to increase by the additional amount he
will enjoy as dividends.
This is one of the reasons why in choosing a broker, a potential investor amongst
other qualities of a broker like integrity, good financial position, experience, spread of
operations, wants a broker that can deliver prompt and efficient service. This is
because the inability of a broker to effect transfer of stock immediately may rob a
potential investor of this dividend opportunity. Having said this, the following factors
are considered to influence dividend declarations. They include:
- Future investment needs of the firm
- Legal constraints from prior contracts
- Financial preference of stock holders
- Liquidity considerations.
Nevertheless, according to Sarkis (1971:87), smaller firms did tend to retain a higher
percentage of earnings than larger firms, who pay out a larger percentage as
dividends. Those investors seeking steady income should invest in larger firms, while
growth seeking investors buy shares in smaller firms. The test by Sarkis (1971:91)
showed that wealthy investors have a greater interest in smaller firms because capital
gains taxes are lower than taxes on ordinary income.
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Badger and Coftman (1967:413) said that gone are the days where current market
value of stock could be calculated by the simple process of dividing cash dividend by
cost of capital. More sophisticated approaches are now required and even these
approaches have their limitations. They concluded by saying, any human endeavors
aimed at peering into the future is certain to have its frailties. Despite the significance
of dividend in share valuation as stated above, not all investors consider it as the most
important factor to influence their investment decisions. It is against this background
therefore that other factors have to be looked into.
2.6 FACTORS DETERMINING DIVIDEND POLICY
Despite Miller and Modigliani‟s (1961) view that dividend is irrelevant, practice has
shown that companies adopt some kind of dividend policy. A good number of
companies pay out a portion of their net profits as dividends and retain the balance. In
reality, the directors in deciding the amount to be paid as dividend and the form of
such dividend payments take into consideration a number of factors. These factors are
discussed below.
2.6.1 Level of Profit
As stated earlier, dividend policy involves decisions on what portion of net income is
to be distributed as dividend. Such decisions are made after taking into consideration
the amount of profit available for distribution; directors are usually uncomfortable
when dividend payment can lead to depletion of the exiting reserves. This is the case
where current dividends cannot be covered by current residual earnings. In most
cases, dividend reductions are associated with persistent poor performance. Lintner
(1956) in his work titled “Distribution of incomes of corporations among dividend,
retained earning and taxes”, has a general view of corporate dividend policy which
indicates that;
1. Current income and not bottom – line income is a critical determinant of
dividend changes
2. Managers‟ reluctance to reduce dividend should lead them to do so only when
earnings are especially poor.
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Although, all revenue reserves are available for distribution as dividend, the
distribution of past reserves as dividend may not be viewed favorably by market
participants and can impact negatively on share price.
2.6.2 Perceived Further Profit
Directors will not alter the existing dividend policy except where they have good
reasons to do so. This is consistent with reluctant- to-change dividend assertions,
restated in Aharony and Swary (1980) which states that managers do not change
dividend payment unless they have reasons to expect a significant change in the future
prospect of the firm. One issue that might lead to alteration of the existing dividend
policy is future perception on profit of the company.
If it is believed that net profit will improve significantly in the near future, directors
may increase current dividend, especially where future cash requirement does not
present constraints. On the other hand, reduction in dividend indicates perception of
poor profit in the future. Directors will normally consider the ability of not only
current profit to sustain current dividend, but the ability of future profit to sustain
current level of dividend. This is supported by Modigliani and Miller‟s (1961)
analysis of information content of dividend, which suggests that dividend changes
depend on management expectation of future earnings.
2.6.3 Existence of Profitable Investment Opportunities
The prime objective of any firm is to maximize the wealth of its owners. This is
achieved if the firm undertakes investments with positive net present values. Walter
(1963) holds that firms with profitable investment opportunities should retain earnings
to finance such investments, while firms with no profitable investment opportunities
should distribute its earnings as dividend. It therefore follows that, rationally,
directors should not pay dividend while retaining enough funds to finance existing
profitable investments. Cash dividend becomes a passive residual, when dividend
policy is treated as using retained earnings as sources of finance. This is consistent
with Ezra‟s (1963) view that „when dividend policy is treated as a financing decision.
The payment of cash dividend becomes a passive residual”.
2.6.4 Shareholders Preference
54
Shareholders are the owners of the company, but appoint directors to manage the
company on their behalf. So despite the fact that legally, the directors are free to
decide on how to distribute the residual earnings, they should do that in such a way
that the desires of the shareholders are satisfied. Shareholders‟ expectations differ
depending on their economic status and effect of tax differential on dividend and
capital gain. Shareholders in high – income brackets are subject to high personal
income tax rate and ordinarily, will prefer to realize returns on their investment in
shares in the form of capital gain. This will result in lower tax obligations when
compared to tax on dividend, which will be taxed as personal income.
Elton and Gruber (1970) find evidence consistent with a clientele effect, where
investors at high tax brackets show preference for capital gains and those at low tax
brackets show preference for dividends. Brennan and Thakor (1990) however stress
that despite the preferential tax treatment of capital gains for individual investors, it is
known that the majority of a firm‟s shareholders may support a dividend payment for
small distributions. The directions in making dividend decisions should therefore give
some consideration to the preference of the various categories of shareholders. The
problem is usually that of identifying the consensus preference of shareholders,
especially in the case of widely held companies.
2.6.5 Liquidity
Payment of cash dividend involves outflow of cash. In deciding what dividend should
be declared, consideration must be given to the liquidity position of the company. The
fact that a company made good earnings does not imply that it can conveniently pay
dividend. In effect, though much as dividend is paid out of earnings, actual outflow is
cash. A growing company with investment opportunities is thus likely to be more cash
constrained than matured companies with few investment opportunities.
2.6.6 Available Sources of Fund
A company may not have liquid funds, but can pay dividend if it can raise funds
through new debts or equity. This is very feasible if it has access to the capital market.
Most reputable companies have access to such sources of fund. They can also obtain
credit facilities from their banks and other financial institutions. This is more difficult
in the case of small unquoted companies with no reliable track record.
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2.6.7 Existence of Legal Restriction
In evolving a dividend policy for a company, consideration must be given to the
existing legal restrictions on payment of dividend. The companies and Allied Matters
Decree 1990, allows dividends to be declared only out of current and past profit.
Apart from this, there can also be restrictions on loan agreements that may not allow
for payment of dividend or payment above certain level until a specified condition is
met. Such agreement can also affect further issues of equity, or the use of certain
categories of debt financing. Directors must therefore take these restrictions into
consideration in making dividend decisions.
2.6.8 Perceived Impact of Dividend on Share Price
Directors are well aware of the fact that rational investors want to resolve
uncertainties associated with future cash flow as soon as possible, and will value the
shares of companies paying generous dividend higher than that to companies paying
no dividend. This is in consonance with Krishan‟s (1993) “bird-in-hand argument”, in
which he states that stock holders often act upon that a bird in hand is worth two in
the bush.
This view is also supported by Graham and Dodd (1934) when they stated that the
typical investors would most certainly prefer to have his dividend today and let
tomorrow take care of it. This should be the case, at least in the immediate future.
Having this in mind, directors try to pay as much dividend as possible after due
considerations are given to more compelling needs and conditions, some of which
have been discussed above.
2.7 INFORMATION CONTENT OF DIVIDEND
Announcements of dividend are usually followed by changes in share price. This is
because dividend is perceived as a pointer to what should be expected in the future.
One of the most important signaling devices available is the dividend figure. The
“information content of dividend hypothesis asserts that managers use cash dividend
announcements to signal changes in their expectations about the future prospect of the
firm”. There is also “the reluctance to change dividend” assertion, which states that
56
mangers do not change dividend payment unless they have reasons to expect a
significant change in the future prospect to the firm.
Following this assertion, increase in dividend signals a favourable change in
managers‟ expectations, whereas, a decrease should indicate a pessimistic view of
future prospects. In addition to this, announcements of dividend changes provide less
ambiguous information signal than earning numbers. Aharony and Swary (1980)
assert that if dividends then do convey useful information in an efficient capital
market, this will be reflected in stock price changes immediately following a public
announcement.
It is presumed that firms with good news about their future profitability will want to
communicate the same to its shareholders and increasing dividend to add conviction
to such statement. If a firm with a history of stable dividend pays out, investors are led
to believe that the management is announcing a change in the expected future
profitability of the firm. Dividend speaks louder than words and a change in dividend
has considerable information content. Modigliani and Miller (1961) point out that
dividend changes are more reliably viewed as deliberate policy shift rather than
continuation of previously established policy to preserve stable dividend. Their
analysis of information content of dividend suggests that dividend changes also
depend on management‟s expectation of future earnings.
De-Angelo (1992) in an attempt to relate loss to dividend, states that dividend policy
has information in that knowledge that a firm has reduced dividend improves the
ability of current earnings to predict future earnings. His work supports Modigliani
and Miller‟s (1961) and (1959) hypothesis that dividend reduction coveys information
that future prospect are poor. Their findings reflect the fact that dividend and current
earnings are substitute means of forecasting earning. Dividend has information
content primarily when the firm has extreme or otherwise unusual earning realization
that inherently has limited predictive power.
Leftwich and Zmijewski (1991) in their work indicate that dividend has information
content, but only when company announcement reveals good news about earnings or
bad news about dividend. Ofer and Siegel (1987) in their own work use a new
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methodology that combines analysis of stock price movement and earning forecast
data, and document the relationship between announcement of unexpected changes in
financial policy and unexpected changes in performance of the firm. They provide
evidence that analysis revise their earning forecast following the announcement of an
unexpected dividend change by an amount positively related to the size of the
unelected dividend change. They also provide evidence that these revisions are
negatively related to the change in equity value surrounding the announcement. The
result therefore provides direct evidence consistent with the hypothesis that
unexpected dividend changes signal information about a firm‟s performance to the
market participants.
Their methodology differs in important ways from event – study methodology, which
has been used to test for the information content of changes in financial policy. Event
study methodology attempts to identify information content by examining security
price reactions to announcement of policy changes. It cannot however, differentiate
whether the stock price reactions are caused by information about the economic
performance of the firm or other factors that are also consistent with the observed
price reactions. For instance, Handjinicolaou and Kalay (1984) use the event study
methodology to test for additional implications of dividend signaling by examining
the effect of announcement of dividend changes on bond price. Their results are not
conclusive, but suggest the plausibility of the signaling hypothesis. Recently, other
studies have also documented a relationship between announcement of changes in
corporate financial policy and subsequent firm‟s performance. Aharony and Dothan
(1995), Healy and Palepu (1986) observe a positive association between unexpected
dividend changes and subsequent unexpected earnings of the firm.
Changes in dividend therefore provide an explicit statement of management
expectations of future earnings. Penman (1983) tested dividend as well as direct
management earnings forecasts as predications of future earnings and firm‟s value,
and found both to have predictive power, but that the direct forecast possesses
somewhat more information. However, Asquith and Mullins (1983) in a study of
firms initiating dividend for the first time of after a long period of non – dividend
discovered significant positive excess return. This was interpreted as supporting the
view that dividend covey valuable information to investors over and above that
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available from other sources. Investors are willing to pay a premium for stable
dividend because of, among other things, the information content of dividend. Stable
dividend resolves uncertainties in the mind of investors. Even in the face of a drop in
earning, stable dividend can be used to portray management‟s confidence that the
future is better than the drop. This is possible because of the information content of
dividend. The information content of dividend hypothesis has been tested in several
recent empirical studies. The evidence has been inconclusive.
However, Laub (1976) using quarterly data, suggests that dividend announcements
convey information beyond that already reflected by contemporaneous earning
numbers. Aharony and Swary (1980) using dividend expectation model with data
from 149 industrial firms, examined empirically the adjustment of common stock
price following the announcement of quarterly dividends. Their methodology is
different from those used in previous studies. The model adopted forecast no change
in dividend from one quarter to another. This was justified with management‟s
reluctant to change dividend assertion. Their study attempts to resolve the empirical
issues as to whether quarterly dividend announcements covey information beyond that
conveyed by quarterly earning numbers. The methodology used examined only those
quarterly dividends and earnings announcements made public on different dates
within any given quarter. It distinguishes earnings announcements that precedes or
follows, from those that accompanied dividend announcements.
Their findings on capital market reactions to dividend announcement strongly support
hypothesis that changes in quarterly cash dividends provide useful information
beyond that provided by corresponding quarterly earning numbers. In addition, the
results also support the semi-strong form of the efficient capital market hypothesis,
that on the average, the stock market adjusts in an efficient manner to new quarterly
dividend information. Their findings have important implications for effectiveness of
using quarterly dividend and earning numbers as devices for signaling management
expectations, namely, that quarterly dividend provides signaling device that is at least
as effective as quarterly earning numbers.
Bhattacharya (1980) using non –dissipative in terms of “costless signal” applied the
quota based signaling model. The basic characteristic of these models is that, they are
59
inter-temporal, involving at least three or more time points. He developed the model
in the simplest three – time point snapshot version to illustrate some basic
considerations relating to existence of rational expectation over time, in the non-
dissipative dividend signaling model. He derived and discussed the implications of the
existing conditions for a class of non – dissipative signaling model. He also discussed
some simple exploratory application to the modeling of the information content of
corporate dividends as signal of future earning prospects. The result of his study and
the question raised suggests that future research on models with an endogenously
degree of moral hazard is needed to provide richer and more robust structures, in
which the self – section models can be embedded.
His paper shows that under appropriate conditions, dissipative signaling equilibrium
might emerge, with the level of dividend serving as the signal. Tax costs and the cost
of raising unanticipated new financing to fulfill dividend commitments make up the
exogenous signaling costs. He also stresses that if accounting report can be relied
upon, the ex-post earnings that accounting numbers covey, is capable of enhancement
by the requirements of paying cash dividend that are exogenously costly for the firm.
That the incorporation of such assumptions into a self-section model would be of
great importance for the information content hypothesis. His model is comparable to
Ross‟ (1977) model with risk- neutral agents. Ross (1977) obtained signaling
equilibrium through the use of managerial incentive signaling cost structure, based on
ex-post indictors to earnings, which do not entail an assumption that the signaling cost
structure is similar for shareholders.
Ambarish, John and Williams (1987) state that at equilibrium, many firms both
distribute dividend and deviate from first-best investment. Also that the impact of
dividends on stock price is positive. Some of the questions they raise are; why do
dividends persist despite their dissipative cost including both adverse personal taxes
and any investment foregone to finance dividends internally? According to them, to
many economists, the question remains, why should corporate insiders‟ signal with
dividends when less costly mechanism could convey credible private information to
the market? E.g. enounced investment or its net new issue of securities. They observe
that dividends must be efficient to survive in this signaling equilibrium. They show
60
that firms with valuable insider information distribute dividends in an efficient
signaling equilibrium.
Morgan (1982) relates stock returns to forecast of dividend yield obtained from past
data. He goes on to argue that dividend announced and paid in the same month
constitute surprise, which interferes with the test of the effect of dividend yield on
stock returns. On the whole he concludes that abnormal return is related to forecast
dividend yield but not in the precise way specified by the simple version of Capital
Assets Pricing Model (CAPM).
Ofer and Thakor (1987) in considering the theory of stock price response to stock
repurchase and dividend a model in which managers can signal their firm‟s the value
by using either a dividend or a stock repurchase or both. They enumerate a number of
stylized facts about these cash disbursement mechanisms, particularly those
concerning the relative magnitude of stock price response to dividend and
repurchases. According to them, when a firm announces a stock repurchase or a
dividend increase, its stock price increases.
Aharony and Sway (1980), Asquith and (1982) and Handjincolaou and Kalay (1984)
provide a summary on this. Ofer and Siegel (1987) provide more direct evidence
using a more discriminating empirical methodology, that changes in dividend policy
convey information. Ofer and Thakor in their approach adopted a dissipative signaling
framework in which managers transmit privately held information through both
corporate cash distribution methods. Their study differs from that of Bhattacharya
(1980), John and Williams (1985) and Miller and Rocks (1985), where the value
dissipation caused by a dividend is attributable to transaction cost. Their funding
shows that both dividends and stock repurchases will generally be used as signal and
that neither dominates the other under any circumstance. Bar-Yosef and Sarig (1992)
in a bid to infer dividend surprises from option and stock prices adopted a method
which is regarded as superior to model base methods used in earlier studies. It
compares the reaction of option and stock prices announcement. By examining the
relative changes in option and stock prices following a dividend announcement, they
were able to identify the change in expectations or dividend surprises. The results of
their analysis were that:
61
- Their new approach to identify and measure dividend surprises detects
dividend surprises, even when dividend is constant.
- Unexpected dividend payment brings about statistically significant market
reactions.
These show that dividend have information content even for closely monitored large
corporations. Their suggested method was found to be more correlated with the true
surprise than with the other models used in past studies.
2.8 RELATION OF STOCK PRICES TO CORPORATE EARNINGS
Those who have been involved with stock market have probably heard talk of such
things as earnings reports and whisper numbers. Over the last couple of years,
corporate earnings have become very important to many short-term as well as even
long-term investors through numerous internet websites and television shows that
report them.
As its name suggests, corporate earnings are basically how much a company made or
lost during a given amount of time. This is found by subtracting all of their expenses,
spending, and so on from their revenues.
Investors like you and I find out information about companies‟ earnings through their
earnings reports. These reports are distributed quarterly so investors can compare the
company‟s performance to that of three months ago. At the end of the year, the
earnings are then added together to calculate the annual earnings per share.
Corporate earnings are given to investors in per-share form. This method is really
helpful because it gives investors a standard for comparing different stocks with each
other and eliminates the need to remember large total earnings figures. Per-share
earnings are found by taking a company‟s total earnings and dividing it by the number
of shares outstanding. So if a company made $100 million one year and they have
500 million shares of stock that means the company made $0.20 per share.
When a company reports their earnings, the public usually have an idea of what to
expect. The reason for this is because analysts usually review the company and tell us
62
how much they expect the company to make. This number is then published as the
earnings estimates figure.
People have a way of rewarding companies that do well and punishing those that do
poorly. For example, if a company says that they beat the earnings estimates, the
stock usually rises. And when a company fails to meet the estimates or warns that
they might not in the future pay dividend, their stock usually declines quite a bit.
But analysts aren‟t the only ones these days that are giving their opinion of corporate
earnings. Whisper numbers have become quite popular lately. They are basically
how much insiders and other investors think the company will make or lose. While
they seem harmless, they have had some negative effects. Whisper numbers are
becoming so accepted that it is becoming harder for companies to live up to people‟s
expectations. We urge you not to get too caught up in these whisper numbers because
they are more for short-term investors. For long-term investors, regular earnings
estimates give you a much more reasonable outlook of the company.
The main purpose of corporate earnings is to help investors decided how well the
company is growing by comparing it to the company‟s earnings in the past. For
example, if a company reported earnings that were 50% higher than the previous year,
you would assume that that company is growing very quickly.
For a young investor, corporate earnings are great ways to determine the health of our
long-term investments. By looking at a company‟s short –term performance, you can
sometimes get an idea of where the company is heading in the future. And keeping
your long-term view on companies is one of the keys to success.
The Journal of Business of the University of Chicago, vol 2, No 4 (Oct 1929) pp 383-
395.
2.8.1 Stock Prices and Dividend
The recent literature has been characterized by considerable controversy and
confusion over the relative importance of dividends and retained earnings in
determining the price – earning ratios of common stocks. The disagreement over
theoretical specifications of the expected relationship seems to us to have reached a
point of rapidly diminishing returns, with much of the disagreement reflecting
63
differences in interpretation of the question being raised. However, there seem to be
very real difficulties in the reconciliation of available empirical findings with almost
any sensible theory, and in the derivation of more definitive tests to choose among
different specifications.
Relative prices of different issues of a stock at a point of time are presumably
determined by suitable discounting of expected future returns. These returns may take
the form of dividend income or capital gains, both of which, assuming rational
behavior, should be estimated on an after- tax basis with a higher average tax
applicable to dividend income than to capital gains. The discount factor relevant to
these expectations of future return is a function of both the pure rate ( or rates) of
interest and the degree of risk associated with a particular issue- the evaluation of risk
reflecting both the subjective probability distribution of expected return on total
capital of the issuer and the degree of financial leverage in the issuer‟s capital
structure.
The fact that investors are willing to hold ( or buy) a company‟s shares at the
prevailing price implies that the rate of discount which equates their income
expectation with market price constitutes a rate of return at least as high as could be
obtained in alternative investments of comparable risk. Now, if these investors are
willing to increase their holdings of shares at the same rate of market return, they
should also be willing to forgo current dividends insofar as the added equity
investment yields this rate. Stated another way, investors should be indifferent if the
present value of the additional future returns resulting from earnings retention equals
the amount of dividends foregone. Moreover, because increase in recent value
(market price) are realized as capital gains, earning retention carries a tax advantage
that lowers the rate of return on corporate investment necessary for shareholders
indifference between current dividends and earnings retention.
The influence of earning retention on share prices should therefore be a function of
the profitability of corporate investment opportunities, ceteris paribus, in view of the
fact that external equity financing is generally not a completely satisfactory substitute
for internal financing. When this corporate rate of profit exceeds the minimum rate
required by stockholders, price should increase as the proportion of earnings retained
64
increases (though, since profitability is presumably a decreasing function of the
amount of investment, beyond some point increased retention associated with
excessive investment may depress the marginal return on investment below the
required rate) conversely, when the corporation‟s profit rate is less than the market
rate, price should decrease with increasing earnings retention.
Despite these theoretical conclusions, empirical findings indicate that, when stock
prices are related to current dividends and retained earnings, higher dividend payout is
usually associated with higher price earnings, ratios. This result, it might be noted, is
found just about as often in highly profitable “growth” industries as it is in less
profitable ones. Probably the earliest and best – known observation of this “ dividend
effect” was made a generation ago by Graham and Dodd, who went so far as to assert
that a dollar of dividends has four times the average impact on price as does a dollar
of retained earnings . More recent statistical studies by Myron Gordon, David Durand,
and other indicate that the dividend multiplier is still several times the retained
earnings multiplier, with Gordon finding little change on the average in the four- to-
one ratio of the two multipliers, though the ratio varies widely and inconsistently from
industry to- industry and from year to year. These statistical results, it mighty be
noted, are based on a large number of cross-section studies utilizing linear and
logarithmic (and occasionally even other) relationships between prices and both
dividends and retained earning to explain price variations in samples of companies
drawn from particular industries.
Despite the massive array of statistical results tending to confirm the existence of a
strong dividend effect, many market analysts have become increasingly skeptical of
their validity. With the rise in market emphasis on growth in recent years, and the
presumed close relationship between growth and retention of earnings in the minds of
investors and managements, it seems strange to many analysts that a dollar of retained
earnings (or of total earnings) should be valued so low relative to a dollar of dividends
– and even stranger that there seems to have been no substantial shift in the
relationship in recent years. Moreover, these doubts are supported quite strongly by
several past surveys of shareholders opinion that indicate earnings and capital gains
do, in fact, weigh more heavily than dividends in evaluating the relative desirability of
alternative stock investment: “Investors who say a change in corporate earnings
65
would influence their investment decisions outnumber by three to one those who
would be influenced by a change in dividends”.
The behavioural assumptions necessary for theoretical support of a consistently
lower market valuation of retained earnings than of dividends are also quite suspect.
This lower valuation could exist if any one of the following situations is present: (1)
the average holder of common stock possession, at the margin of his portfolio, a very
strong preference for current income over future ( a situation which hardly could be
expected to persist over time); (2) the expected increase in earnings arising from
increased per-share investment is viewed as involving a much higher degree of risk
than that attaching to earnings on existing corporate assets; ( 3) the profitability of
incremental corporate investment, as viewed by shareholders, is extremely low
relative to the competitive yield prevailing in the stock market.
Each of the first two of these assumptions implies high rates of discount on
incremental investment which results in little short – run price appreciation from
earnings retention, even though the expected profitability of additional investment
may be quite high. However, neither of these assumptions is consistence with
observed behaviour of the market. Contrary to what mighty be expected from both of
these assumptions, we do not normally witness perceptible drops in the market price
level when the aggregate supply of corporate stock is increase by new issues,
requiring for their absorption the substitution of current for future income and
potentially raising the risk premium demanded by investors; nor do we typically
witness sharp drops in per- share price when the supply of an individual company‟s
shares is increased. It is possible to infer of course that these increases in supply are
precisely timed so as to automatically offset by upward shifts in investor expectations,
but this seems completely unrealistic. Thus, both of these first two assumptions can be
questioned on the basis of market behaviour as well as logical content.
The third assumption- that investors view the profitability of incremental investment
as being quite low- also seems highly suspect. Marginal profit rates in a substantial
number of industries appear to be quite high and undue pessimism is hardly consistent
with the acceptable image of the average shareholder. Moreover, the generally
66
favourable market reaction to new public stock offerings in recent years further belies
the prevalence of any pessimistic beliefs about marginal profit rates.
In view of all this, it is our opinion that those statistical studies purporting to show a
strong market preference for dividend are in error – especially since the analysis
typically employed includes as a part of the market‟s valuation of retained earnings
the price paid for the relatively high internal rates of return which might be expected
to be associated with high retention. Nonetheless, we would still not expect to find a
uniform preference for dividends even if internal rates of return were held constant
over the sample of companies being examined. We do not, however, deny the
existence of instances in which retained earnings are valued less than dividends.
Certainly, some companies maybe controlled by managements who knowingly do not
act in the shareholder‟s best interest, or there may be sharp disagreement between
these two groups over how that interest is defined. However, we feel that these
instances are likely to be the exception rather than the rule. Moreover, we would
expect that for the average firm, irrespective of investor preferences between
dividends and capital gains, payout polices are such that at the margin a dollar of
retained earnings should be approximately equal in market value to the dollar of
dividends foregone.
2.8.2 Growth of Earnings and Dividend Distribution Policy
Corporate dividend policy has been the object of lively discussions in finance
literature. These discussions, however, have not yet resulted in a unified and
commonly accepted theory about optimal dividend policy. The debate has revolved
around the question of whether companies with generous distribution policies
consistently sell at a premium higher than those with low payout ratios and whether
there exists an optimal payout ratio. An optimal policy is understood in terms of the
maximization of the market value of outstanding shares.
Most authors on the subject have come to the conclusion that an increase in the
proportion of profit retained will lead to a decrease in the market value of shares.
Gordon, for example, explains this by pointing out that an increase in the proportion
of retained profit now means higher cash dividends in the future. However, the higher
the retention rate, the farther in the future cash dividends are moved and the greater
67
the uncertainty about their actual amount. Most shareholders are risk averters so that
they discount a more distant income by a higher rate than present cash dividends.
Miller and Modigliani have argued, on the other hand, that dividend policy is
irrelevant to the market value of shares. In a model which disregards taxes they
conclude that the payout policy which the corporation adopts has no effect on the
price of shares.
When the tax differential is in favour of capital gains, Miller and Modigliani find that
it is to the shareholders advantage to increase the proportion of profit retained in the
corporation. The policy of a high retention ratio should therefore lead to an increase in
the market value of shares. If the shares of low payout companies sell at a discount, as
the other group of authors suggests, the only explanation is a systematic irrationality
on the part of the investing public.
Corporations generally follow a low payout policy. In the United States for example,
corporations distributed approximately 40 per cent of their profits in the form of cash
dividends between 1946 and 1966. In 1966 stock holders received $20.9 billion out of
total corporate profits of $48.4 billion. In fact, retained earnings have become the
most important source of funds. During the 15 year period, from 1947 to 1961, they
have accounted for 70 per cent of the total growth of corporate capital funds. In the
same period new issues accounted for less than 4 per cent of the total growth. This
would seem to indicate that management follows the policy recommended by Miller
and Modigliani.
However, when dual-purpose investment funds which offer two kinds of shares (one
designed solely to provide cash dividends and the other for capital gains) recently
became available, the demand for the income – producing shares provide to be
greater. This appears to indicate that investors prefer cash dividend to capital gains.
The question is whether they are acting irrationally, as Miler and Modigliani
suggested.
A possible explanation was offered by Little who studied 441 British firms where data
was available for the period 1951 through 1959. He investigated whether the amount
that a corporation plows back influences the rate of growth of its earnings. In other
68
words, he inquired about a factor regarded as self – evident in both the Modigliani –
Miller theory and that of the opposing camp. From his regression analysis he obtained
results which he termed “shocking”. He did not find any significant correlation
between plowback and growth. In fact, the opposite was true. The sign of the
regression coefficient was both wrong and significant for the whole sample of large
firms. If the growth in earnings of corporations with a high retention ratio is in no way
different from that of corporations with a high payout, then it should not be surprising
that investors prefer shares with high cash dividends. The only conclusion Little was
able to arrive at on the basis of his study was that corporations with a high retention
rate of profits select relatively unprofitable investments.
The same conclusion was reached by Baumol. Commenting of Little‟s study, he noted
that “it suggests that from the point of view of stockholders, retained funds are used
with astonishing inefficiency”
This conclusion may be correct. The present author would like to go a little further
and suggest that sometimes a high retention ratio in itself may be a sign of inefficient
use of corporate funds.
Corporate income tax now amount to approximately 50 percent of the firm‟s pre-tax
profit. In many cases, this has caused management to view this tax as a nuisance
which should be avoided as much as possible. The firm‟s profit before tax is therefore
a decision variable which is subject to the control of management, at least to a given
extent.
The increase in the importance of the corporate income tax has been accompanied by
another significant development. In a recent study, Larner demonstrated that
privately – owned large firms had completely disappeared in the United States by
1963. At the same time, 84.5 per cent of the large firms analyzed had been
transformed into management controlled ones, i.e. firms in which an individual, a
family or a group hold less than 10 per cent of the voting stock and which are not
controlled by a legal device.
In a management – controlled corporation the management tends to view the
shareholders as a group of financiers. They let the management run the corporation as
69
long as they receive a satisfactory dividend. In this situation the management tries to
pay a target dividend for every period.
2.8.3 Linkages between Share Price, Earnings and Dividends
According to I.M. Pandey, he posits why do investors buy shares? Do they buy them
for dividends or for capital gain? Investors may choose from growth shares or
income shares. Growth shares are those which offer greater opportunities for capital
gains. Dividend yield (i.e. dividend per share as a percentage of the market price of
the share) on such shares would generally be low since companies would follow a
high retention policy in order to have a high growth rate. Income shares on the other
hand, are those which pay higher dividends, and offer low prospects for capital gains.
Because of the high pay out policy followed by companies, their share prices tend to
grow at a lower rate. Dividend yield on income shares would generally be high.
Those investors who want regular income would prefer to buy income shares which
pay high dividends regularly. On the other hand, if investors desire to earn higher
return via capital gains, they would prefer to buy growth shares. They would like a
company to retain its earnings in the expectation of higher market price of the share in
the future.
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CHAPTER THREE
RESEARCH METHODOLOGY
3.1 RESEARCH DESIGN
In the designing of this research framework, the topic was looked at from the
perspective of the Nigerian Stock Market. The Nigerian Stock Market is still clearly
dominated by about 3 (three) major sectors and these maintain dominance as regards
market capitalization and volume of equity traded. For a thorough research to be
carried out therefore, it would suffice for the study to incorporate a design that
captures the entire market behaviour. To this end, the research design incorporates a
10 year study span 1998 – 2007 which widens the scope of the study. In view of the
peculiarities of the Nigeria Stock market as regards market size, sectoral distribution
and dividend history, the research is carefully designed to properly capture the market
in its totality. In addition to this, the design takes into consideration, the important
influence and function of the various players in the Nigerian equity market; these
include the stockbrokers, the Nigerian Stock Exchange, the Securities and Exchange
Commission, the quoted companies and investing public.
3.2 NATURE AND SOURCES OF DATA
In view of the nature of this research project, secondary data would be necessary for
an incisive and far reaching analysis. The sources of secondary data for this research
range from review of literature, the Nigerian Stock Exchange reports and daily
official listings over the earlier specified ten-year period.
3.3 TECHNIQUES OF DATA COLLECTION
The technique used to gather secondary data for this research study consist of a
systematic scrutiny of available literature especially the annual report and statement
of accounts of the respective companies which yields data on dividend and earnings
per share, profit after tax of the respective companies and share price of the
companies before the declaration of results, all of which are be attached as schedules
at the end of the work.
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3.4 POPULATION AND SAMPLE
The population of the study consists of all quoted companies. A research sample is a
representative number of respondents taken from a population. The research sample in
this study is made up of ten (10) chosen quoted companies taken from financial
institution and non financial institutions.
3.5 MODELS
Models of this study are as follows i.e. In line with the hypotheses:-
i. For the relationship between dividend earnings (or declaration) and stock
prices, the model is
SP = F(D,E) ------ (1)
αo+α1 DE+µ -----(2)
Where:-
DE Dividend Earnings
SP Stock Prices
ii. For impact of corporate earnings on share prices, we have
SP = F (CE) ------- (3)
Where
SP - Stock prices
F - Function
CE - Corporate Earnings
Mathematically, we have
SP = αO + 1 C E+ ------- (4)
Where - the stochastic error term.
iii. For the relationship between dividend corporate earnings and stock prices the
model will be
SP = F (DE), (CE) ------------(5)
SP = bo + b1 (DE) +b2 (CE)+ -----------(6)
Where DE = Dividend earnings
CE = Corporate earnings
SP = Stock Prices
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3.6 ANALYTICAL TECHNIQUES
The secondary statistical data that were obtained from the Nigeria Stock Exchange
were presented and analyzed in schedules, which places the data into a 10 – year
period in line with the scope of the research. These yearly data, which ranged from
dividend per share, earnings per share, share price before declaration of result and
share price after declaration of result, were analyzed using time series analysis from a
year – to – year standpoint to establish a trend.
Hypotheses were tested using regression techniques. Models 1 – 4 were tested using
simple regression technique while models 5 and 6 were tested using multiple
regression technique.
77
REFERENCES
Asika, N (2000): Research Methodology in the Behavioural Sciences, Lagos,
Longman.
Biyi A (2005), Introductory Statistics. Ibadan Evans Brothers (Publishers) Ltd.
Egbui K.I (1998), Groundwork of Research Methods and Procedures. Institute for
Development Studies, University of Nigeria, Enugu Campus.
Ihemeje, J (1998), Research Methodology a Statistical Forecasting. Lagos Rabboni
Publishers Limited.
Molokwu E.C (2006), Business Statistics for Management. Enugu JTC Press Limited.
Onwumere JUJ (2005), Business and Economic Research Methods,Lagos: Don-
Vinton Limited.
Orji J.I (1996), Business Research Methodology. Enugu Metesor Press Limited.
Ugwuonah, GE (2005), Data Analysis and Interpretation, Enugu: Cheston Ltd
78
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 INTRODUCTION
Data for the study were sourced from the official list of the Nigeria Stock Exchange
of quoted companies in the Nigeria Stock Exchange Market. Ten (10) companies
were selected 5 each from financial institutions and petroleum industry. It should be
recalled that the drive for choosing these two sectors is because they are the most
volatile in the stock market.
Below are the ten selected equities
Financial Institution
1. First Bank of Nigeria Plc
2. Union Bank of Nigeria Plc
3. United Bank for Africa Plc
4. Guarantee Trust Bank Plc
5. WEMA Bank
Petroleum Industry
6. Total Oil
7. MOBIL Oil
8. African Petroleum
9. Eternal Oil
10. Texaco
4.2 DATA PRESENTATION
The table below showcases the data for the values of dividends, earnings per share
and stock prices of each of the ten (10) quoted companies under study for ten (10)
years from 1998 to 2007.
79
NOTE QUOTED COMPANIES DATA HERE
80
4.3 DATA ANALYSIS
The analyses are based on the process of experimentation. Thus, in this way the
organizations for the purpose of test of hypothesis are treated one by one. (See
Appendix A for the tables)
Total Oil
SP = 150.223 + 41.476D + 12.619 EPS … eqn. (1)
(t = 1.915) (t = 0.878)
R2 = 0.803
Ř2 = 0.746
F = 14.233
DW = 2.533
From equation (1) above, share price of Total Oil is positively but insignificantly
influenced by dividend and earnings per share (the sign of the coefficient of the two
independent variables are positive but dividend has a less than 2 value i.e. 1.915 and
earning per share also has a less than 2 value i.e. (0.878).
From the equation the two independent variables explain 80.3% of variation in share
price. The F-static of 14.233 is high showing that the equation is significant. The
D.W of autocorrelation is acceptable.
We can therefore reject our null hypothesis and accept with caution our alterative
hypothesis (because the t-value are insignificant though that of dividend is almost 2).
Eternal Oil (EPS)
SP = -18.455 – 75.893 EPS … eqn. (2)
( - 1.759)
R2 = 0.279
Ř2 = 0.189
F = 3.094
DW = 1.081
81
From equation (2) above Eternal Oil stock price is influenced negatively and
statistically insignificant (t = -1.759 < -2.0 by EPS). This shows that the earnings per
share is not really considered in shareholders choice of the company‟s shares.
However it has to be noted that only 27.9% of variations on stock price are explained
by this variable. Though, the F-Statistic is high, the low DW value statistics further
confirm the result as it goes to show that variables other than the stated independent
variable play more dominant roles. Hence, the null hypothesis should be accepted
and the alternative hypothesis rejected.
AP (Dividend)
SP = -74.523 + 38.818D … eqn. (3)
(t = 2.612)
R2 = 0.460
Ř2 = 0.393
F = 6.821
DV = 0.825
From equation 3 above, 46% of variations in stock price are explained by dividend.
The impact of dividend is positively significant (as the t-value of 2.612 > 2.0). Again,
the equation is significant given by the high F-value of 6.821. The D-W of 0.825 may
be explained by the equation being a 2-variable model. Other independent variables,
excluded from the current equation may be contributory factors. Nevertheless, the
significant impact of dividend on SP is not in doubt as shown by the equation above.
Based on the above, the null hypothesis is hereby rejected and the alternative
hypothesis accepted. Thus, dividend payout has a significant positive impact on share
(stocks) price.
AP (EPS)
SP = 1.918 + 19.960 EPS … eqn. (4)
t = (2.661)
R2 = 0.470
Ř2 = 0.403
82
F = 7.080
DW = 0.540
From equation 4 above, 47% of variations in stock price of AP is explained by
earnings per share. The impact however of EPS on stock price is positive shown by
sign of the coefficient and significant (t = 2.661 > 2.0).
Thus in choice of shares (to purchase shares) of AP, earnings per share is considered
by potential share holders. The equation is significant by having high F statistic value
of 7.080. The dividend of 0.540 may be explained by the equation being a 2-variable
model. Other independent variables excluded from the current equation may be
contributory factors. Nevertheless, the significant impact of EPS is not in doubt as
shown by the equation above. Based on the above, the null hypothesis is rejected and
alternative hypothesis accepted. Thus EPS has a significant positive impact on share
(stock) price
Mobil (Dividend)
SP = 135.023 + 4.646D … eqn. (5)
(0.262)
R2 = 0.009
Ř2 = -0.115
F = 0.069
DW = 0.654
From equation 5 above, 0.9% of variations in stock price are explained by dividend.
The impact of dividend is not significant as the value of (t = 0.262 < 2.0). Again the
equation is not significant given by the low F value of 0.069 and the DW of 0.654.
Though the low DW may be explained by the equation being a 2 variable model as
the other independent variables excluded from the current equation may be
contributory factors. Nevertheless, the insignificant impact of dividend on stock price
is not in doubt as shown by the equation above.
Based on the above, the null hypothesis is hereby accepted while the alternative
hypothesis is rejected. Thus, dividend payout has no significant impact on share price.
83
Total (Dividend)
SP = -129.823 + 57.864D … eqn. (6)
t = (5.340)
R2 = 0.781
Ř2 = 0.754
F = 28.512
DW = 2.303
From equation 6 above 78.1% of variations in stock price are explained by dividend.
The impact of dividend is positively significant (as the t value of 5.340 > 2.0). Again
the equation is significant given by the high F value of 28.512 and the DW value of
2.303 is also high and acceptable.
The impact of dividend to stock price is also positive as shown by the sign of the
coefficient.
Based on the above, the null hypothesis is hereby rejected and the alternative
hypothesis accepted.
Thus, dividend payout has a significant positive impact on share (stock) price.
Total EPS
SP = -137.370 + 36.330 EPS … eqn. (7)
t = (4.313)
R2 = 0.699
Ř2 = 0.662
F = 18.602
DW = 2.537
From equation 7 above total stock price is influenced positively by earnings per share
as shown by the positive sign of the coefficient.
The impact of earnings per share is also positively significant on the t value of 4.313
> 2.0
84
From the above equation 69.9% of variation in stock price are explained by earnings
per share.
Again the equation is significant given by the high F value of 18.602 and the DW
value of 2.537 which is acceptable.
Based on the above, the null hypothesis is hereby rejected and the alternative
hypothesis accepted.
Thus, EPS has a significant positive impact on stock prices.
Texaco (Dividend)
SP = 49.681 + 23.067 D … eqn. (8)
t = (0.904)
R2 = 0.120
Ř2 = 0.027
F = 0.817
DW = 1.220
From equation 8 above, 12% of variations in stock price is explained by dividend. The
impact of dividend is not significant as the value of (t = 0.904 < 2.0). Again the
equation is not significant given by the low F value of 0.817 < 2.0 and DW of 1.220.
Though, the low DW may be explained by the equation being a 2 variable model as
the other independent variables excluded from the current equation may be
contributory factors. Nevertheless, insignificant impact of dividend on stock price is
not in doubt as shown by the equation above.
Based on the above, the null hypothesis is hereby accepted while the alternative
hypothesis is rejected.
Thus dividend payout has no significant impact on share price.
85
WEMA BANK (EPS)
SP = -2.270 + 15.677 EPS … eqn. (9)
t = (1.602)
R2 = 0.243
Ř2 = 0.148
F = 2.567
DW = 1.274
From the equation 9 above, 24.3% of the variations in stock price of WEMA bank is
explained by earnings per share. The impact however of EPS on stock price is
positive shown by the sign of the coefficient but insignificantly influenced by
Earnings per share as it has less than 2.0 value i.e. (t = 1.602 < 2.0).
Though, the F statistic of 2.567 > 2.0 the low DW of 1.274 may be explained by the
other independent variables excluded from the current equation may be contributory
factors.
Since the t value of EPS is less than 2.0 this show that EPS is not really considered in
shareholders choice of the company‟s shares hence, the null hypothesis should be
accepted while the alternative hypothesis rejected.
GTB (Dividend)
SP = -13.727 + 70.410D … eqn. (10)
t = (3.733)
R2 = 0.635
Ř2 = 0.590
F = 13.938
DW = 1.924
From the equation, 10 above, 63.50% of variations in stock price of GTB is explained
by dividend. The impact however of dividend on stock price is positive shown by sign
the coefficient and significant shown by (t value of 3.733 > 2.0). Thus in choice of
shares (to purchase shares) of GTB dividend is considered by potential share holders.
The equation is significant by having high F. statistic value of 13.938. The DW of
86
1.974 may be explained by the equation being a 2-variable model. Other independent
variables excluded from the current equation may be contributory factors.
Nevertheless, the significant impact of dividend is not in doubt as shown by the
equation above. Based on the above, the null hypothesis is rejected and the alternative
hypothesis accepted. Thus, dividend has a significant positive impact on share (stock)
price.
GTB (EPS)
SP = -11.939 + 28.236 EPS … eqn. (11)
t = (4.480)
R2 = 0.715
Ř2 = 0.679
F = 20.068
DW = 2.25
From equation 11 above GTB stock price is influenced positively by earnings per
share as shown by the positive sign of the coefficient. The impact of earnings per
share is also positively significant as the (t value of 4.480 > 2.0).
From the above equation 71.5% of variations in stock price are explained by earnings
per share. Again the equation is significant given by the high F value of 20.068 and
the DW value of 2.251 which is acceptable.
Based on the above, the null hypothesis is hereby rejected and the alternative
hypothesis accepted.
Thus EPS has a significant positive impact on stock price.
GT Bank
SP = -13.875 + 20.951 D + 21.276 EPS … eqn. (12)
t = (0.574) (1.542)
R2 = 0.728
Ř2 = 0.650
F = 9.358
DW = 2.162
87
From the equation 12 above, the share price of GT bank is positive but insignificantly
influenced by dividend and earnings per share (the sign of the co-efficient of the two
independent variables are positive but dividend and earnings per share have a less
than 2.0 t value respectively. (i.e. 0.574 < 2.0 for dividend and 1.542 < 2.0 for EPS).
The equation reveals that the two independent variables explains 72.8% of variation
in share price. The F. statistic of 9.358 is high showing that the equation is significant.
The DW of 2.162 though contains elements of auto correlation, is acceptable. We can
therefore reject our null hypothesis and accept with caution our alternative hypothesis
(because the t values are insignificant though that of earnings per share is almost 2.0).
UBA
SP = -13.647 + 47.659 D + 15.846 EPS … eqn. (13)
t = (2.370) (1.344)
R2 = 0.653
Ř2 = 0.553
F = 6.577
DW = 1.659
From equation 13 above 65.3% of variations in stock price are explained by the two
independent variables (dividend and earnings per share). The impact of dividend is
positively significant (t = 2.370 > 2.0) while that of earning per share is positively
insignificant. (t = 1.344 < 2.0).
Again the equation is significant given by the high F value of 6.577. The DW of 1.659
may be explained by the equation being a 3 variable model. Other independent
variables excluded from the current equation may be contributory factors.
Nevertheless the contributory impact of dividend on stock price is not in doubt as
shown in the equation above.
Based on the above, the null hypothesis is hereby rejected and the alternative
hypothesis accepted with caution because the t value of earnings per share is
insignificant though, that of dividend is above 2.0.
88
UBA (Dividend)
SP = -17.736 + 60120 D … eqn. (14)
t = (3.211)
R2 = 0.563
Ř2 = 0.508
F = 10.310
DW = 1.484
From equation 14 above, 56.3% of variations in stock price of UBA is explained by
dividend. The impact however of dividend on stock price is positive shown by sign of
the coefficient and significant shown by (t value of 3.211 > 2.0). Thus, in choice of
shares (to purchase shares) of UBA dividend is considered by potential share holders.
The equation is significant by having high F. statistic value of 10.310. The DW of
1.484 may be explained by the equation being a 2 variable model. Other independent
variables excluded from the current equation may be contributory factors.
Nevertheless, the significant impact of dividend is not in doubt as shown by the
equation above. Based on the above, the null hypothesis is rejected and the alternative
hypothesis accepted.
Thus, dividend has significant positive impact on share (stock) price.
UBA EPS
SP = -17.325 + 28.728 EPS … eqn. (15)
t = (2.186)
R2 = 0.374
Ř2 = 0.296
F = 4.781
DW = 0.690
From equation 15 above, UBA stock price is influenced positively by earnings per
share as shown by the positive sign of the coefficient. The impact of EPS is also
positively significant as the (t value of 2.186 > 2.0). From the equation, 37.4%
variations in stock price are explained by earnings per share.
89
The equation is also significant by having high F. statistic of 4.781. The DW of 0.690
may be explained by the equation being a 2-variable model. Other independent
variables excluded from the current equation may be contributory factors.
Nevertheless, the significant impact of EPS is not in doubt as shown by the equation
above. Based on the above, the null hypothesis is rejected and the alternative
hypothesis accepted. Thus, dividend has a significant positive impact on share price.
Union Bank
SP = 43.361 + 15.299D – 15.459 EPS eqn. (16)
t = (1.275) (- 2.653)
R2 = 0.503
Ř2 = 0.360
F = 3.535
DW = 2.109
From equation 16 above, Union Bank share price is influenced negatively by earnings
per share and positively by dividend. The impact, however, of earnings per share on
stock price is negative showing by the sign of the co-efficient and negatively
significant (t = - 2.653 > - 2.0).
Thus, in choice of shares (to purchase shares) of Union Bank, earnings per share is
not considered by potential share holders. However, other factors might be
contributory to the decision to buy (purchase to hold). Though, dividend coefficient is
positive the impact of dividend on stock price is low (1.275 < 2.0). From the equation
the two independent variables explain 50.3% of variations in share price. The „F‟
statistic of 3.535 and the DW of 2.109 are also high showing that the equation is
significant and acceptable even though they contain elements of auto correlation. We
can then accept the null hypothesis.
First Bank
SP = 55.807 + 9.961 D – 15.460 EPS … eqn. (17)
t = (0.278) (-0.933)
90
R2 = 0.189
Ř2 = - 0.043
F = 0.815
DW = 1.005
From equation 17 above, First Bank stock is influenced positively by dividend and
negatively by earnings per share and statistically insignificant t = 0.278 < 2.0 for
dividend and t = -0.933 < - 2.0 for Earnings per share. The impact of earnings per
share is negative as shown by the sign of the coefficient.
Both dividend and earnings per share are not really considered in share holders choice
of the company‟s shares.
However, it is to be noted that only 18.9% of variations in stock price are explained
by these two variables. The low F-statistic of 0.815 and DW 1.005 further confirm the
results as they go to show the variables other than the stated independent variable play
more dominant role, hence, the null hypothesis should be accepted and the alternative
hypothesis rejected.
91
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 SUMMARY OF FINDINGS
1. That there is a significant impact of dividend on stock price movement in the
Nigerian Stock Exchange Market.
2. That the optimization of corporate earnings influences positively stock price
movement as many investors look at it as a significant factor for their choice
for stock investment.
3. That relationship exists between the three variables, dividend, earnings per
share and stock price in choice of stocks for investment.
5.2 CONCLUSION
This study was the result of the researcher‟s aim to form empirical evidence that there
is a substantial degree of relationship between stock prices, dividends and corporate
earnings. In addition, the study is aimed at finding out which, dividends or corporate
earnings influence stock prices more in the Nigerian Stock Exchange Market.
Chapter four of the study presented the data and information obtained and upon which
the researcher‟s analysis was based.
The analytical frame work provided the researcher further information that earnings
results were significant for some stocks. The results obtained from the data of stock
prices, dividends paid and corporate earnings over the last ten years (1998 – 2008),
showed absolutely that the influence of dividend on stock prices is greater generally
than that of corporate earnings.
It highlights the knowledge of all and sundry that investors in Nigeria are dividend
conscious and would therefore be willing to pay higher prices for stock that pay
higher dividends. A corollary to this is that management should be willing to offer
investors dividend if they want to enhance the market value of their firm. However,
they need to determine the payout ratio that maximizes the value of their firm. This is
the subject of further research.
92
Furthermore, it revealed another interesting aspect with regard to financial sector
where it was observed that results obtained was in favour of earnings and the only
credible explanation that could be adduced is that inspite of the fact that banks which
mainly make up this sector earn some huge sums of profits in the face of severe
austerity measures, there dividend pay out has not kept pace with their earnings,
Hence, their stock prices have been on the increase because investors see them as
good investments in terms of hedging against risk of loss and unfavourable
speculative market trends.
5.3 RECOMMENDATIONS
1. A longitudinal study that will cover a time horizon of more than ten years as
this may add value to my findings.
2. The management should optimize their corporate earnings and device a
dividend and retention policy decision in an optimum manner to achieve the
objective of maximizing the wealth of shareholders since the
interrelationship of these decision have a significant impact/effect on equity
share price movement.
3. The dividend pay out ratio that companies need to maintain so that they can
enhance the value of their firms.
4. Management of this kind of investors should be able to develop policies that
will satisfy the investors and thus, enhance their firm‟s value.
5. The consensus of the relevant influence of stock prices.
6. The productive models obtained for those stocks that had over 80% goodness
of fit should be tested if they can form a basis of determining and predicting
further prices of such stock.
7. Optimization of corporate earnings to enable companies pay adequate
dividends to shareholders as well retain part of the profits for investment to
increase the value of the firm.
93
APPENDIX
Regression (Total)
Descriptive Statistics
Mean Std. Deviation N
SP 147.3470 93.29327 10
dividend 4.7900 1.42474 10
EPS 7.8370 2.14739 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .896(a) .803 .746 46.99588 2.533
a Predictors: (Constant), EPS, dividend
b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 62872.419 2 31436.209 14.233 .003(a)
Residual 15460.286 7 2208.612
Total 78332.705 9
a Predictors: (Constant), EPS, dividend
b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) -150.223 59.452 -2.527 .039
dividend 41.476 21.663 .633 1.915 .097
EPS 12.619 14.373 .290 .878 .409
a Dependent Variable: SP
94
Regression (GTB)
Descriptive Statistics
Mean Std. Deviation N
SP 15.5630 13.14313 10
dividend .4160 .14879 10
EPS .9740 .39359 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .853(a) .728 .650 7.77533 2.162
a Predictors: (Constant), EPS, dividend b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 1131.486 2 565.743 9.358 .011(a)
Residual 423.190 7 60.456
Total 1554.676 9
a Predictors: (Constant), EPS, dividend b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) -13.875 7.653 -1.813 .113
dividend 20.951 36.499 .237 .574 .584
EPS 21.276 13.798 .637 1.542 .167
a Dependent Variable: SP
95
Regression (UBA)
Descriptive Statistics
Mean Std. Deviation N
SP 23.3260 18.67564 10
dividend .6830 .23310 10
EPS 1.4150 .39758 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .808(a) .653 .553 12.47987 1.659
a Predictors: (Constant), EPS, dividend
b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 2048.785 2 1024.393 6.577 .025(a)
Residual 1090.230 7 155.747
Total 3139.015 9
a Predictors: (Constant), EPS, dividend
b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) -31.647 16.471 -1.921 .096
dividend 47.659 20.111 .595 2.370 .050
EPS 15.846 11.791 .337 1.344 .221
a Dependent Variable: SP
96
Regression (Union Bank)
Descriptive Statistics
Mean Std. Deviation N
SP 29.9000 11.12589 10
dividend 1.2300 .27203 10
EPS 2.0880 .56002 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .709(a) .503 .360 8.89812 2.109
a Predictors: (Constant), EPS, dividend b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 559.833 2 279.916 3.535 .087(a)
Residual 554.236 7 79.177
Total 1114.069 9
a Predictors: (Constant), EPS, dividend
b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 43.361 14.964 2.898 .023
dividend 15.299 11.998 .374 1.275 .243
EPS -15.459 5.828 -.778 -2.653 .033
a Dependent Variable: SP
97
Regression (First Bank)
Descriptive Statistics
Mean Std. Deviation N
SP 32.9720 13.04228 10
dividend 1.3100 .21960 10
EPS 2.3210 .47449 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .435(a) .189 -.043 13.31958 1.005
a Predictors: (Constant), EPS, dividend
b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 289.031 2 144.516 .815 .481(a)
Residual 1241.879 7 177.411
Total 1530.910 9
a Predictors: (Constant), EPS, dividend
b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 55.807 26.820 2.081 .076
dividend 9.961 35.800 .168 .278 .789
EPS -15.460 16.568 -.562 -.933 .382
a Dependent Variable: SP
98
Regression (Eternal Oil)
Descriptive Statistics
Mean Std. Deviation N
SP 8.5890 16.66223 10
EPS .1300 .11595 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .528(a) .279 .189 15.00727 1.081
a Predictors: (Constant), EPS b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 696.921 1 696.921 3.094 .117(a)
Residual 1801.746 8 225.218
Total 2498.668 9
a Predictors: (Constant), EPS b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 18.455 7.347 2.512 .036
EPS -75.893 43.143 -.528 -1.759 .117
a Dependent Variable: SP
99
Regression (AP)
Descriptive Statistics
Mean Std. Deviation N
SP 69.1040 85.51142 10
dividend 3.7000 1.49443 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .678(a) .460 .393 66.63557 .825
a Predictors: (Constant), dividend
b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 30287.442 1 30287.442 6.821 .031(a)
Residual 35522.391 8 4440.299
Total 65809.833 9
a Predictors: (Constant), dividend
b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) -74.523 58.892 -1.265 .241
dividend 38.818 14.863 .678 2.612 .031
a Dependent Variable: SP
100
Regression
Descriptive Statistics
Mean Std. Deviation N
SP 69.1040 85.51142 10
EPS 3.3660 2.93551 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .685(a) .470 .403 66.06018 .540
a Predictors: (Constant), EPS b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 30898.250 1 30898.250 7.080 .029(a)
Residual 34911.583 8 4363.948
Total 65809.833 9
a Predictors: (Constant), EPS b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 1.918 32.771 .059 .955
EPS 19.960 7.501 .685 2.661 .029
a Dependent Variable: SP
101
Regression (Mobil)
Descriptive Statistics
Mean Std. Deviation N
SP 160.8420 104.22949 10
dividend 5.5570 2.07212 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .092(a) .009 -.115 110.07944 .654
a Predictors: (Constant), dividend b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 834.209 1 834.209 .069 .800(a)
Residual 96939.868 8 12117.484
Total 97774.077 9
a Predictors: (Constant), dividend b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 135.023 104.379 1.294 .232
dividend 4.646 17.708 .092 .262 .800
a Dependent Variable: SP
102
Regression (Total)
Descriptive Statistics
Mean Std. Deviation N
SP 147.3470 93.29327 10
dividend 4.7900 1.42474 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .884(a) .781 .754 46.31811 2.303
a Predictors: (Constant), dividend
b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 61169.769 1 61169.769 28.512 .001(a)
Residual 17162.935 8 2145.367
Total 78332.705 9
a Predictors: (Constant), dividend b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) -129.823 53.934 -2.407 .043
dividend 57.864 10.837 .884 5.340 .001
a Dependent Variable: SP
103
Regression
Descriptive Statistics
Mean Std. Deviation N
SP 147.3470 93.29327 10
EPS 7.8370 2.14739 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .836(a) .699 .662 54.26430 2.537
a Predictors: (Constant), EPS b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 54775.794 1 54775.794 18.602 .003(a)
Residual 23556.910 8 2944.614
Total 78332.705 9
a Predictors: (Constant), EPS b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) -137.370 68.207 -2.014 .079
EPS 36.330 8.423 .836 4.313 .003
a Dependent Variable: SP
104
Regression (WEMA Bank)
Descriptive Statistics
Mean Std. Deviation N
SP 8.9480 9.15858 10
EPS .4260 .28795 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .493(a) .243 .148 8.45225 1.274
a Predictors: (Constant), EPS b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 183.393 1 183.393 2.567 .148(a)
Residual 571.524 8 71.440
Total 754.917 9
a Predictors: (Constant), EPS
b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 2.270 4.952 .458 .659
EPS 15.677 9.784 .493 1.602 .148
a Dependent Variable: SP
105
Regression (GTB)
Descriptive Statistics
Mean Std. Deviation N
SP 15.5630 13.14313 10
dividen
d .4160 .14879 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .797(a) .635 .590 8.41828 1.974
a Predictors: (Constant), dividend
b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 987.736 1 987.736 13.938 .006(a)
Residual 566.940 8 70.867
Total 1554.676 9
a Predictors: (Constant), dividend
b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) -13.727 8.285 -1.657 .136
dividend 70.410 18.860 .797 3.733 .006
a Dependent Variable: SP
106
Regression
Descriptive Statistics
Mean Std. Deviation N
SP 15.5630 13.14313 10
EPS .9740 .39359 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .846(a) .715 .679 7.44236 2.251
a Predictors: (Constant), EPS b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 1111.567 1 1111.567 20.068 .002(a)
Residual 443.110 8 55.389
Total 1554.676 9
a Predictors: (Constant), EPS b Dependent Variable: SP
Coefficients (a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) -11.939 6.575 -1.816 .107
EPS 28.236 6.303 .846 4.480 .002
a Dependent Variable: SP
107
Regression (UBA)
Descriptive Statistics
Mean Std. Deviation N
SP 23.3260 18.67564 10
dividend .6830 .23310 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .750(a) .563 .508 13.09348 1.484
a Predictors: (Constant), dividend b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 1767.501 1 1767.501 10.310 .012(a)
Residual 1371.513 8 171.439
Total 3139.015 9
a Predictors: (Constant), dividend b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) -17.736 13.442 -1.319 .224
dividend 60.120 18.724 .750 3.211 .012
a Dependent Variable: SP
108
Regression
Descriptive Statistics
Mean Std. Deviation N
SP 23.3260 18.67564 10
EPS 1.4150 .39758 10
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .612(a) .374 .296 15.67191 .690
a Predictors: (Constant), EPS b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 1174.145 1 1174.145 4.781 .060(a)
Residual 1964.870 8 245.609
Total 3139.015 9
a Predictors: (Constant), EPS
b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) -17.325 19.241 -.900 .394
EPS 28.728 13.139 .612 2.186 .060
a Dependent Variable: SP
109
Regression (Texaco)
Descriptive Statistics
Mean Std. Deviation N
SP 106.4838 56.20674 8
dividend 2.4625 .84336 8
Model Summary(b)
Model R R Square Adjusted R Square Std. Error of the Estimate Durbin-Watson
1 .346(a) .120 -.027 56.95794 1.220
a Predictors: (Constant), dividend
b Dependent Variable: SP
ANOVA(b)
Model Sum of Squares df Mean Square F Sig.
1 Regression 2649.139 1 2649.139 .817 .401(a)
Residual 19465.241 6 3244.207
Total 22114.381 7
a Predictors: (Constant), dividend
b Dependent Variable: SP
Coefficients(a)
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 49.681 66.006 .753 .480
dividend 23.067 25.527 .346 .904 .401
a Dependent Variable: SP
110
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