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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

DOI:

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
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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.

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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
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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
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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
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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

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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.
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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).

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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

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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.

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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. Retrieved from http:// www.iiste.org

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International Journal of Accounting and Financial Reporting
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2019, Vol. 9, No. 2

Adefila, J. J., Oladipo, J. A., & Adeoti, J. O. (2013).The Effect of Dividend Policy on the
Market Price of Shares in Nigeria: Case Study of Fifteen Quoted Companies. Retrieved
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Adelegan, O. J. (2009). Price Reactions to Dividend Announcements on the Nigerian Stock
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