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Background on Dividends

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EVALUATION OF THE DIVIDEND PRACTICES AMONG SELECTED
NIGERIAN QUOTED FIRMS
BY
DR. S. L. ADEYEMI
DEPARTMENT OF BUSINESS ADMINISTRATION
UNIVERSITY OF ILORIN, ILORIN
AND
A. A. ADEWALE
DEPARTMENT OF ACCOUNTING AND FINANCE
UNIVERSITY OF ILORIN
ABSTRACT
Dividend policy is a pivot around which other financial policies rotate, hence central to the
performance and valuation of listed firms. This is moreso because managers as decision makers
are often confronted with the “dividend puzzle” - the problem of reconciling observed dividend
behaviour with economic incentives. This paper is motivated by the apparent dearth of empirical
works on dividend policies and practices in Nigeria and hence aims to evaluate such policies and
practices among selected Nigerian quoted firms. The result of the survey questionnaires show
that Nigerian investors’ attitudes are consistent with those of the bird-in-the-hand theorists.
Hence Nigerian managers belief that dividend payout have significant signaling effect both on
share price and future prospects of a firm. Consequently, they strive to maintain a consistent and
uninterrupted dividend payout policy.
INTRODUCTION
No doubt, one of the most important policies in corporate financing is the dividend policy. This
is not only from the viewpoint of the company, but also from that of the shareholders, the
consumers, the workers, the regulatory bodies and the government. The relative importance of
this policy stems from the fact that it is a pivotal policy around which other financial policies
rotate, hence central to the performance and valuation of firms (Bebczuk, 2004). According to

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Olowe (1998), financial managers make inter-alia three decisions pertaining to financing,
investment and dividends simultaneously. While financing decision is influenced by the dividend
decision through retained earnings, the investment decision depends on the amount of retained
earnings and the amount that can be raised externally.
Though a very important financial policy, the dividend policy remains one of the most puzzling
issues in corporate finance (Baker, Powell, and Veit, 2002: 255). According to Desai, Foley and
Hines Jr. (2001) a major impediment to understanding corporate dividend policy is the
availability of multiple plausible explanations for observed behaviour. Among the principal
explanations stressed by modern theories include agency and other informational problems
between owners and managers (Bebczuk, 2004). Thus, while the shareholders use dividends to
wrest resources from the control of managers, corporate managers on the other hand use
dividends to send credible profitability signals to the capital market.
Dividend payments reduce the free cash flows under the discretion of the corporate members [the
controlling owners and top management] and this help alleviate expropriation of minority
shareholders [Hwang, Park and Park, 2004]. Hence the need to control corporate managers is
often invoked to explain the existence of large and frequent dividend payments from
corporations to common shareholders [Desai et al, 2001]. On the other hand, information
asymmetries between managers and shareholders necessitates that the former focus attention on
the information content of dividends that are conveyed to the latter regarding future earnings or
cash flows.
The above explanation is succinctly put by Rigar and Mansouri (2003):
Policy of dividends practiced by a corporation is a robust signal of a
firm’s value, even though relationship between the two variables does not
meet unanimity of theoretical and empirical research. Indeed, generous
distribution of profits in favour of shareholders may be considered as a
signal of treasury ease as it can be interpreted as revealing obstacles at
the level of investment horizons. Similarly, maintaining profits to be
reinvested is an action that is generally less appreciated by shareholders,
and often badly interpreted by the market, especially in the case of listed
companies, but this may also be considered as a signal of strong growth
potentials.

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EVALUATION OF THE DIVIDEND PRACTICES AMONG SELECTED NIGERIAN QUOTED FIRMS BY DR. S. L. ADEYEMI DEPARTMENT OF BUSINESS ADMINISTRATION UNIVERSITY OF ILORIN, ILORIN AND A. A. ADEWALE DEPARTMENT OF ACCOUNTING AND FINANCE UNIVERSITY OF ILORIN ABSTRACT Dividend policy is a pivot around which other financial policies rotate, hence central to the performance and valuation of listed firms. This is moreso because managers as decision makers are often confronted with the “dividend puzzle” - the problem of reconciling observed dividend behaviour with economic incentives. This paper is motivated by the apparent dearth of empirical works on dividend policies and practices in Nigeria and hence aims to evaluate such policies and practices among selected Nigerian quoted firms. The result of the survey questionnaires show that Nigerian investors’ attitudes are consistent with those of the bird-in-the-hand theorists. Hence Nigerian managers belief that dividend payout have significant signaling effect both on share price and future prospects of a firm. Consequently, they strive to maintain a consistent and uninterrupted dividend payout policy. INTRODUCTION No doubt, one of the most important policies in corporate financing is the dividend policy. This is not only from the viewpoint of the company, but also from that of the shareholders, the consumers, the workers, the regulatory bodies and the government. The relative importance of this policy stems from the fact that it is a pi ...
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