International Journal of Accounting and Financial Reporting Effect of Dividend Policy on Stock Price Volatility in Nigeria Stock Exchange
Effect of Dividend Policy on Stock Price Volatility in Nigeria Stock Exchange
International Journal of Accounting and Financial Reporting
2019 / 04 Vol. 9; Iss. 2
Effect of Dividend Policy on Stock Price Volatility in Nigeria Stock Exchange
Araoye, Felix Ebun, Aruwaji, Akinola Michael, OlusuyiAjayi, Emmanuel
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International Journal of Accounting and Financial Reporting
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10.5296/ijafr.v9i2.11861
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International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 2 Effect of Dividend Policy on Stock Price Volatility in Nigeria Stock Exchange Felix Ebun Araoye (Corresponding author) Internal Audit, Bells University of Technology, Ota, Ogun State, Nigeria Tel: 234-0805-770-5859 E-mail: araoyefelix@yahoo.co.uk Akinola Michael Aruwaji Department of Management and Accounting, LadokeAkintola University of Technology Ogbomosho, Oyo State, Nigeria Tel: 234-0803-949-9777 Emmanuel OlusuyiAjayi Department of Economics, Accounting and Finance, Bells University of Technology Ota, Ogun State, Nigeria Tel: 234-0802-302-3761 Received: September 14, 2017 Accepted: May 8, 2019 Published: May12, 2019 doi:10.5296/ijafr.v9i2.11861 URL: https://doi.org/10.5296/ijafr.v9i2.11861 Abstract This paper seeks to determine the effect of dividend policy and dividend payment on share price volatility in Nigeria. Several literatures have showed evidence that dividend policy vary inversely proportional with share price volatility with duration effect. The study used data from the actively trading companies listed in the Nigeria Securities Exchange for a period of ten (10) years from 2005–2014. The estimation is based on panel data analysis between dividend policy measures (dividend payout, dividend per share, earnings after tax, dividend declared and number of share) and Share price volatility. The findings from the random effects regression results showed dividend per share is the major determinants of share price volatility in NSE (β = 0.6870, ρ<0.05). Dividend payout ratio negatively affect share price 219 http://ijafr.macrothink.org International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 2 volatility (β =0.612, ρ>0.05) and earnings after tax negatively affect share price volatility (β =0.038, ρ>0.05).Thus, the higher the payout ratio the less the share price volatility, and the higher the earnings after tax lower the share price volatility. In c; onclusion, dividend per share has positive effect and inclusive relationship with market share prices. It is recommended that firms should try and improve on their financial performance that will enable consistent increase in the dividend per share for positive impact on market value. Keywords: Share price volatility, Dividend payout, Dividend per share, Dividend declared 1. Introduction 1.1 Background of the Study The significance of dividend policies on dividency cannot be underestimated in corporate organization, the going concern of an entities depend majorly on the source of their finances,and it had been the source of controversies over long periods. Brealey and Myers ( 2005) also describe dividend policy as one of the ten most difficult unsolved problems in financial management as earlier identified by Black (1976) when he summarized these confusionsamong dividend policy researchers , when he said „ the harder we look at dividend picture, the more it seems like puzzle, with piece that don‟t fit together‟. Oyinlola and Ajeigbe (2014), emphasized on the significance of dividend policy by relating same to various stakeholders such as investors, managers, lenders, financial consultants/analysis and so on specifically, they observed that dividend is more than a source of income but also a means of evaluating the company‟s performance as an investment. Khan (2012), explained that the main objective of investing in the stock market is to maximize expected returns which could be in terms of dividends or capital gains. These are determinants of maximization shareholders wealth. Dividend thus represents an immediate return to the ordinary shareholder while retained earnings have to do with deferred benefits. The importance of resolving the trade-off between dividend and retention by companies should be the way corporate results trend of dividend paying companies tend to significantly outpace those of non-paying companies. 1.2 Statement of Problem Many researches have been carried out on the issue of dividend Policy and stock price volatility both in developed and developing nations. There are still dearths of studies in Nigeria that actually focus on this area. Few studies were carried out in nigeria on effect of dividned payout, earning yield and dividend yield on the stock prices witout looking at the trend in dividend payment by companies under studies over a period of time (Okafor et al., 2011; Oyinlola and Ajeigbe, 2014; Anike, 2014; Wodung, 2014). This study will address this shortcoming by looking at the pattern of dividend policies among the sampled listed companies in Nigeria. The trend estimation shows the dividend policy on the market share prices of companies with dividend per share that determine the growth of market. This study will therefore contribute to knowledge by taken care of gaps that have been left unfilled in terms in Nigeria studies by analysing the pattern of dividend policy over the period of study. 220 http://ijafr.macrothink.org International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 2 1.3 Objective of the Study The broad objective of this study is to examine the effects of dividend policy on market value of shares of listed companies in Nigeria. The specific objectives are to; i. Determine the pattern of dividend policies among selected listed companies in Nigeria. ii. Evaluate the impact of dividend payment on share prices of selected listed firms in Nigeria. iii. Examine the relationship between dividend payout ratio and price volatility in Nigeria‟s Stock Market. 1.4 Research Hypotheses The following hypotheses, stated in Null form are proposed for this study. i. There is no significant influence in the blueprint of dividend policies of listed companies in Nigeria. ii. Dividend policy has no effect on share prices of listed firms in Nigeria. iii. There is no relationship between dividend policy and price volatility in Nigeria. 2. Literature Review 2.1 Theoretical Review 2.1.1 Dividend Irrelevance Theory Dividend policy has been a bone of contention in finance; this is evidenced by numerous studies beginning from Lintner (1956) to Modigliani and Miller (1961) to Bhattacharya (1979) and more recently DeAngelo et al (1996), Fama and French (2000) and Al-Malkawi (2007). Some of the theories of dividend policy include: Modigliani and Miller (1961) observed that “the dividend policy is irrelevant‟. The dividend policy has no effect on the price of shares and it has no impact on a shareholder‟s wealth under the Perfect Capital Market (PCM) which assumes rational investors. They therefore concluded that dividend policy has no impact on shareholder‟s wealth and that all dividend policies are equivalent. As a matter of fact, firms are continuing to pay dividend to their shareholders. According to them, the shareholder‟s wealth is affected by the income generated by the investment decisions a firm makes, and not by how it distributes that income. Modigliani and Miller further argue that regardless of how a firm distributes its income, its value is determined by its basic earning power and its investment decisions. They stated that “given a firm‟s investment policy, the dividend payout policy it chooses to follow will affect neither the current price of its shares nor the total returns to shareholders”. In order words, investors calculate the value of companies based on the capitalized value of their future earnings, and this is not affected by whether firms pay dividends or not and how firms set their dividend policies. Modigliani & Miller went further to suggest that to an investor, all dividend policies are effectively the same since investors can create “homemade” dividends by adjusting their portfolios in a way that matches their preferences. That stockholder‟s wealth is unchanged when all aspects of 221 http://ijafr.macrothink.org International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 2 investment policy are fixed and any increase in the current payout is financed by fairly priced stock sales. The assumptions of the theory include; There is 100% payout of dividend by management in every period. There exist perfect capital markets. Investors are rational and that they value securities based on the value of discounted future cash flow to investors. Managers act as the best agents of shareholders. There is certainty about the investment policy of the firm. In the light of the foregoing, Modigliani and Miller concluded that the issue of dividend policy is irrelevant. 2.1.2 RelevanceTheory of Dividend The dividend relevance group believes that under conditions of uncertainty, investors are not indifferent as to how the earnings stream is split between dividends and retained earnings. Walter (1963) argued that dividend policy should be dependent on the investment opportunity available to the company or firm. He was of the opinion that so long as there are investments opportunities from which the firm earns its rate of return (r) which is higher than the firms weighted average cost of capital (Ko) the firm should pay dividend to its shareholders. But if there are no such opportunities, the firm should payout a part of its profits. Judging Walter‟s suggestions tends to highlight the information content of dividends. That is, the payment or omission of dividend by a firm is a means of announcing to the public what the firm‟s future will look like. A firm that pays no dividend will be looked like as a weak firm with little or no future prospect and vice-versa. Going further, Walter (1963) came up with model explaining how dividend policy affects the value of a share in the stock exchange: P =D + r(E-D)K K (1) K Where: P = Market price per share K = Cost of capital E = Earnings per share D = Dividend per share I = Internal rate of return. Walter‟s Model portrays that an optimal dividend policy will depend on the relationship between the firms internal rate of return (r) and the cost of capital (k). Lintner (1956) developed a simple minded observation which is consistent with these facts and explained 222 http://ijafr.macrothink.org International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 2 dividend payments well. Here it is: suppose that a firm always stuck to its target payout ratio, and then the dividend payment in the coming year (Div1) would equal a constant proportion of earnings per share (EPS1): Div= target dividend = target ratio x EPS1 (i) The dividend change would equal: Div1 – Div0 =target change = target ratio x EPS1 – Div0 (ii) A firm that always stuck to its payout ratio would have to change its dividend whenever earnings change. 2.1.3 Bird on Hand Theory Gordon (1962), confirm the preference of shareholders to a higher dividend policy of the firm. The shareholders according to this theory will prefer payment of dividend in the present as against capital benefit from uncertainty of future investment. 2.1.4 Agency Theory Agency cost relates to conflict of interest cost that arises between agents and owners. Jensen and Meckling (1976) state that agency there will be agency cost when owner manager divest part of their holdings to outsiders. With regards to dividend policy Easterbrook (1984) argue the use of dividend policy to reduce agency cost. 2.1.5 Signalling Theory Modigliani and Miller (1961), states that there is perfect knowledge by management and investors. However, it has been confirm by many studies that this conclusion may not be valid afterall thereby creating a gap with the management using dividend policy to bridge the gap in information to the shareholders. 2.2 Empirical Review Some researches have been carried out globally on the issue of dividend and stock prices. In Nigeria, the study of Adelegan (2009) reveals a positive relationship between dividend payout and share prices. The findings of Adefila et al (2013), affirms that there is no association between dividend paid to shareholders and prices of the quoted shares. In their study Uwuigbe et al (2012), reveal a significant positive relationship between dividend payout and market value of shares. The study of Khan (2012), validate a positive association between dividend payout and share prices. The research of Zakaria et al. (2012) in Malaysia further supports the positive relationship between dividends payment announcement and stock prices. Monday et al (2014), also confirm that dividend payout ratio have a direct relationship with market prices of shares. Oyinlola and Ajeigbe (2104) concluded in their study that both dividend payout and retained earnings has a positive association with market price of shares. In Kenya, Jagongo and Ndede (2014) used OLS diagnostic test to confirm a positive association between cash dividend and share prices. Ndugu (2016) affirm in his study that share price is positively responsive to dividend announcement. However, the study 223 http://ijafr.macrothink.org International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 2 of Fawaz (2014) on dividend policy and price volatility of Jordanian stock market reveal empirical result ofsignificant negative correlation between share price volatility and dividend payout. Most of these studies especially in Nigeria however failed to look at the pattern of dividend policy of companies studied over period of studies. 3. Methodology 3.1 Population of Study The population for this study was the listed companies in Nigeria Stock Exchange, the total number of listed companies in Nigeria Stock Exchange are 188, segmented into eleven (11) sectors. Out of the eleven (11) sectors, five (5) most active sectors were selected for the sample frame. Table 1. Number of listed companies in Nigeria Stock Exchange (NSE) S/N Industries/ Sectors Number of companies No. Selected 1 Agriculture 5 2 Construction Real Estate 9 1* 3 Consumer Goods 28 3* 4 Financial services 57 6** 5 Healthcare 12 1* 6 Industrial Goods 21 7 ICT 9 8 Natural Resources 5 9 Oil and Gas 13 10 Services 23 11 Conglomerates 6 TOTAL 188 1* 12 Source: Researcher‟s compilation, 2016 224 http://ijafr.macrothink.org International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 2 Table 2. List of selected listed companies in NSE by industry/sector S/N Industry/S ector Names of Companies I II III IV V VI UBA Plc FBN Plc GTB Plc Zenith Bank Plc 1 Financial Services Access Bank Plc Diamond Bank Plc 2 Consumer Goods Cadbury Nig, Plc. Flour Mills Guinness NigPlc Nig. Plc 3 Oil Gas 4 Healthcare 5 Constructi Dangote on and real Cement Plc Estates and Mobil Nig. Plc Niemeth Nig. Plc Source: NSE, 2016. 3.2 Sampling and Sample Size Each sector in the sampling frame is expected to be sampled proportionately thus:The sample size for this study adopted proportional sampling.Companies are selected using systematic sampling approach in which an approximation of 10% of the population was selected from the sampling frame. 3.3 Data Collection Methods Data for this study was secondary data, obtained from the audited financial statements of selected companies covering ten years period (2005-2014) which also captures the period of stock market crisis that started in 2007. 3.4 Model Specification For the purpose of the study the equation and variable used are as follows; MPSnt=a+bDPSnt+ cDPRnt+ dEATnt + eDDnt+ fNSnt+Ent (i) Where, MPSnt: Market price per share, DPSnt: Dividend per share, DPRnt: Dividend payout ratio EATnt: Earnings after tax, DDnt: dividend declared, NSnt: number of shares and Ent: error term measured per company over time. The subscript „n‟ denotes companies selected from a particular industry, and all variables are measured in the „t‟ time period. 225 http://ijafr.macrothink.org International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 2 4. Results and Discussion 4.1 Analysis of the Effects of Dividend Policyand Dividend Payment on Market Share Prices of Listed Companies in Nigeria OLS Pool regression model is a panel data analysis and was used to deny the heterogeneity with the assumption that the companies are similar. The result of this analysis revealed that the model was statistically significant based on the fact that; The F-value (0.000 < 0.050) and Adj R2 = 0.6870 shows that almost 68.70% change in dependent variable is because of change in independent variables. Realistically, the model is used in assumption that all the twelve (12) companies are the same. Meanwhile, the companies were not functionally similar. Obviously, this model is not realistic in the real world, but it indicated postulation of the variables in all the difference companies as if they were the same. Dividend per share and dividend payout ratio is measure for dividend policy and is significant for explaining the market share prices. Table 3. OLS pooled regression Variables Coef. Std. Err. T P>|t| _cons 9.966 4.355 0.023 0.024 Dps 0.237 0.544 15.38 0.000** Dpr 0.450 0.470 0.10 0.924* Eat 0.561 0.381 0.15 0.883* Dd 0.998 0.715 -139 0.044** Adj R2 F-value 0.6870 0.0000 ** < 0.05, * < 0.1 4.2 Analyses of Relationship BetweenDividend Policy and Price Volatility in Nigeria The fixed effects model accepts the heterogeneity or individuality, allowing to have its own intercept value. Fixed effects are due to the fact that, although, the intercept may differ across the companies, but the intercept does not vary over time, that is, it is time invariant. Fixed effects are appropriate as alternative hypotheses. The fixed effects results show that stock market price has positive significant relationship with dividend per share. Dividend payout ratio and earnings after tax shows insignificant negative relationship with stock market price. Whereas variables like dividend declared and number of share have insignificant positive and negative relationship with stock market prices respectively. F (5,103) = 6.47 and p value 0.000< 0.050, this signifies that the model is significant, because the coefficient is greater than zero (0.7465). 226 http://ijafr.macrothink.org International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 2 Table 4. Fixed-effects (within) regression Variables Coef. Std. Err. T P>|t| _cons 19.93 7.236 0.028 0.007 Dpr -0.344 0.478 -0.72 0.473 Dps 0.146 0.026 5.65 0.000* Eat -0.023 0.039 -0.59 0.556 Dd 0.014 0.075 0.02 0.985 Ns -0.027 0.072 -0.00 0.997 F-value p-value 6.47 0.0000 *< 0.05, Significant This model determines if the companies have a common value of intercept. Random-effects GLS regression is appropriate as null hypotheses. The Random-effects model shows that dividend per share is positively significant with market share price, while dividend payout ratio, earnings after tax, dividend declared and number of share are negatively insignificant with market share price. The value of Wald chi square test (F-value) equals to 150.53. This signifies that the overall model is statistically significant. The more the Wald chi square test (F value) the more the model is considered significant. Here, Wald chi square test value is 150.53 showing that in general the model is significant with R2 = 0.6870 which shows that Table 5. Random-effects GLS regression Variables Coef. Std. Err. Z P>|z| _cons 15.123 6.370 0.024 0.018 Dpr -0.621 0.477 -0.13 0.896 Dps 0.213 0.019 11.22 0.000* Eat -0.038 0.039 -0.01 0.992 Dd -0.052 0.073 -0.72 0.471 Ns -0.038 0.049 -0.78 0.433 Wald chi2(5) P-value 150.53 0.0000 * < 0.05, Significant 227 http://ijafr.macrothink.org International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 2 Hausman test was run to make a decision between fixed and random effects, the decision of choice between fixed and random effect is based on p-value of Hausman test. If the p - value of the Hausman test is less than 0.05, we have a preference to use a fixed effects model. On the other hand if the p-value of the Hausman test is more than 0.05, we select to use random effects. However, Hausman test p value is 0.54 by implication is greater than 0.05 that shows that random effects should be considered. The findings, establish a positive relationship between market share prices and dividend per share, while other variables shows negative relationship between market share price Table 6. Hausman test model Variables Coef. Diff. (b) (B) Fe Ra Dps 0.146 0.213 -0.067 Dpr -3.443 -0.621 -2.822 Eat -0.023 -0.038 -0.022 Ns -0.027 -0.038 0.038 Dd -0.014 -0.053 0.054 H/Model chi2(2) (b-B) -0.54 b = consistent under Ho and Ha; B = inconsistent under Ha, efficient under Ho; Test: Ho: difference in coefficients not systematic 4.3 Panel Unit Root Test Ho: null hypothesis contain 12 unit roots, while Ha: alternative hypothesis are stationary at 10. Indicated that the null hypotheses are un-stationary and should be accepted. The p-value (0.000> 0.050) and statistical adjusted t* (-5.0980). In all, the tested null hypotheses are significant. The graph shows the parallel relationship of the dependent variable and the independent variable considering the yearly report of the selected 12 companies, the trend estimation of the dividend policy on the market share prices cross boarder of the selected companies were pointed on scale and graphically related. The graphs shows raisin dividend per share with increases in the growth of market share prices trend. That is, the higher the DPS the higher the MSP. 228 http://ijafr.macrothink.org International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 2 Panel graph 1 2 3 4 5 6 7 8 9 10 11 12 0 5.0e+10 1.0e+11 0 5.0e+10 1.0e+11 0 5.0e+10 1.0e+11 Selected listed 12 companies in NSE 2005 2010 2015 2005 2010 2015 2005 2010 2015 2005 2010 2015 years considered market value per share dividend per share dividend decleared earnings per share dividend payout ratio Graphs by group companies Source: Researcher‟s report, 2016. 5. Conclusion and Recommendation The study examined the effects of dividend policy and dividend payment on market price of listed companies in Nigeria and also examined the relationship between dividend policy and market share prices. The results of the panel data analyses based on random-effects within regression shows that dividend per share have significant relationship with market share prices. One percent (1%) growth in dividend per share will cause 0.213% rise in stock market price and consequently one percent (1%) decline in dividend per share will cause 0.213 % fall in stock market price. It could therefore be concluded (infered) that dividend payment has a very significant impact on the share price of quoted companies in Nigeria. The findings are consistent with the result of Oyinlola and Ajeigbe (2014) and Uwuigbe et al (2012) even though it conflicts with the work of Adefila et al (2013) and Adaramola (2012). It also agreed with the dividend relevant theory of Gordon (1959). On the other hand, variables like Dpr, Eat, Ns and Dd have insignificant negative relationship with market share prices. This indicates that these variables do not really have great influence on Company market share prices determination in Nigeria. From all indication they do not mainly influence the market share prices and therefore could be referred to as secondary determinants of market share prices. It is therefore recommended that firms should try as much as possible to improve on their financial performance that will enable consistent increase in their dividend per share that will positively impact on market value. This is necessary because according to Lintner‟s (1956) findings, decrease or non-payment of dividend could convey a wrong signal to investors on the viability or profitability of the company. References Adaramola, A. O. (2012). Information Content of Dividend: Evidence from Nigeria. Developing Country Studies, 2(2), 74-83. 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Copyright Disclaimer Copyright for this article is retained by the author(s), with first publication rights granted to the journal. This is an open-access article distributed under the terms and conditions of the Creative Commons Attribution license (http://creativecommons.org/licenses/by/4.0/) 231 http://ijafr.macrothink.org