Testing Dividend Irrelevance Theory: Evidence from Nigeria Non-Finance Listed Firms

Testing Dividend Irrelevance Theory: Evidence from Nigeria Non-Finance Listed Firms

Usman Olanrewaju Lawal, Dr Jimba Isiaka Kareem

Afe Babalola University, Ado-Ekiti, Nigeria

DOI : https://dx.doi.org/10.47772/IJRISS.2024.8080357

Received: 13 August 2024; Accepted: 20 August 2024; Published: 25 September 2024

ABSTRACT

The study aims to test dividend irrelevance theory: evidence from Nigeria’s non-finance listed firms. The paper reviews related concepts, a few theories, and empirical to explore dividend mechanisms, analysis, and impact on a firm’s growth. Secondary data was retrieved from annual reports of fifteen (15) non-finance listed firms in the Nigeria Stock Exchange (officially Nigeria Exchange Group; during the fiscal periods of 2010 to 2022). A judgmental research sampling design was adopted to assess the variables using a panel data regression technique via Ordinary Least Square model, to estimate the specified equation. To observe the relationship between the dependent (explained); Dividend Payout (DIP) and selected independent (explanatory) variables; Earnings Yield of Firms Value (EYV) Data, Aggregate Asset Share prices (ASP) of firms, Market Value Added Firm Value (MVAA), Tobin Performance Data (TOBQ) and Price to Revenue Firm Valuation (PRV). Prob (Fstat.) at 0.000 proves that the logged exogenous variables are significant. T-statistic values show that logmarket value (0.000000) logearnings yield (eyv; -5.45), logprv (-0.504126), and logtobq (0.000000) are insignificant (at 5%). Interestingly, the R-squared and the Adjusted R-squared result of the logged independent variables both present a 100% estimate, depicting significance in the regressed model. However, policy implications and recommendations are anchored on the need to practically improve non-finance listed firms in the NSE by addressing the problems of agency cost, high tax rates on dividends, insider- information factors, unaccountable dividend payouts, balance sheet discrepancies amongst other macro-economic indicators that can threaten the development of non-finance quoted firms. All hands (researchers, analysts, policymakers) must be on deck in the areas of share price reactions, market base and performance as well as the under-development of the stock market as arguments of dividend irrelevance will remain a puzzle in the long run be it accepted or rejected.

Keywords: Dividend Policy, Dividend Irrelevance Theory, Firm Value,

BACKGROUND

History of Dividend Policy

The phenomenon of dividends sprang during the close of the 15th century when ships of marine commanders in Great Britain and Holland took it upon themselves to sell the economic rights of gaining a share in the earnings of each journey. These earnings were later distributed among the right holders at the end of the journey thereafter, contracts were terminated (Al-Malkawi et al., 2010). The cancellation of the agreement after each journey not only protected right-holders earnings per share but also contributed to the reduction of fraudulent related activities and deception by the management board (Baskin, 1988). However, in the late sixteenth century these rights were made public (open markets) in Amsterdam and slowly repealed by proprietorship stakes (Al-Malkawi et al., 2010), making the popularity of the contracts evident and stable even as the end of every journey seemed more difficult (Baker, 2009). The outcome was that the formation of businesses as “going concern” units only distributed the earnings of the venture. The units determined what part of the business earnings would be remitted to the stakeholders, thus introducing the first dividend payment rules (Frankfurter et al., 2003) in turn, the capital requirements of these units for trading with nations overseas grew immensely and evolved into joint-stock companies (Kindleberger, 2015). As a result of these, the companies that inclined towards joint stock companies were mostly chartered trading firms (Al-Malkawi et al., 2010).

A series of events began to occur as subsequent companies were chartered and given licenses to operate and practice trading activities in Europe. For instance, Eastland Trading Company was the first in Britain and was chartered in the late 15th century with the license to practice monopoly rights to trading with the northern region of the European continent. Following this, in 1553 the Muscovy firm was chartered to trade with Russia, and in 1581, the Levant Company to trade with Turkey (Scott,1912), Dutch East India Company (1602) in Holland and was issued a license to dominate Indo-Pak subcontinent (Loon,1913) which was the company to issue the first joint-stock shares in history and the first permanently structured company (Kindleberger, 2015).

Introduction

It cannot be over-emphasized that ‘Dividend policy’ remains one of the most pertinent policies) in financial matters from the viewpoint of the company, the shareholders, the consumers, employees, regulatory bodies, and the Government of a nation (Monogbe and Ayankunle, 2015). Here, the capital goal of financial managers is to maximize the shareholder’s wealth (maximized share prices). To achieve this, management (the gatekeepers of shareholder’s interests) have to make three (3) key decisions which are serially known as; 1. Investment Decision (Investment decisions ascertain the total value and classes of assets employed by the firm) 2. Financing Decision (it determines the capital structure of the firm and forms the sources on which investment decisions are made) and 3. Dividend decisions (the management has to decide whether to distribute the profit partly or wholly among the shareholders or to retain it for reinvestment and development of the firm).

Dividends are commonly defined as the distribution of earnings (past or present) in real assets among the stockholders of the firm in ratio to their ownership. A dividend policy is a policy that the organization uses to decide how much it will pay out from the profit to shareholders in dividends. Dividend policy has two kinds: managed and residual dividend policy. A managed dividend policy is one in which management attempts to achieve a specific pattern of dividend payments i.e. it pays the same dividend until the management feels that it can maintain a different (increased) level of dividend.

Residual dividend policy is a means of calculating dividends that are based on the amount of equity that remains after capital expenditures associated with the investment have been met. This approach uses the company’s cash flow to meet its current financial obligations, then issuing dividends to investors based on the residual, or what is left after those obligations are fulfilled. The ideal dividend policy is the one that results in maximum stock price, which leads to the growth of stockholders’ wealth and increased economic growth. Managers follow dividend policy in determining the shape and magnitude of cash delivery to shareholders over time. Dividends are usually paid out of the current year’s profit and sometimes from reserves and are normally paid in cash known as cash dividends. Other options available to the company for distributing the profits are stock dividend, stock splits and share repurchases. When dividends are paid in cash, it reflects negatively on the liquidity and reserves of the firm as it reduces both (Muhammed et al. 2018).

RESEARCH PROBLEM

Since the establishment and operation of the Nigeria Stock Exchange (NSE officially Nigeria Exchange Group) on August 25^th, 1961, the array of listed and non-listed firms ranging from financial or non-financial (consumer goods, oil and gas, conglomerates and industries etc). have emphasized exponentially on the discrepancies bordering dividends of (major or minor) shareholders. Literature has recognized a series of challenges that can be traced to agency costs or information asymmetry on the part of managers of these firms.

In addition, the concept of dividend irrelevance holds that dividends are of little or no benefit to a firm’s share price as debates from relevant scholars conclude that the theory adds no form of value to investors as its payment may damage the financial image of the company in the market. This paper seeks to buttress on key theories of agency costs, pecking order, dividend policy as well as the classes of dividend irrelevance that could fill in the gap of knowledge of dividend irrelevance theory.

Objectives of the study

The aim of the research is simply to review the existing theoretical and empirical literature on dividend policy, and dividend irrelevance theory and to discover any pertinent knowledge gaps for further research. Primarily,

the direction of the objective is categorized by;

1. To examine the nexus between Aggregate Asset Share prices (ASP) of firms and the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange;
2. To evaluate the relationship between Earnings Yield of Firms Value (EYV) Data and dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange;
3. To ascertain Market Value Added Firm Value (MVAA) contribution to the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange;
4. To analyze the link between Price to Revenue Firm Valuation (PRV) and the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange.
5. To assess the contribution of Tobin Q Performance Data (TOBQ) to the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange.

Research Question

1. Is there any valid link between the Aggregate Asset Share prices (ASP) of firms and the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange?
2. Is Earnings Yield of Firm Value (EYV) impacting significantly on the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange?
3. How has Market Value Added Firm Value (MVAA) contributed to the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange?
4. What is the relationship between Price-to-price-to-revenue firm Valuation (PRV) and the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange?
5. Can Tobin Q Performance Data (TOBQ) contribute significantly to the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange?

Hypotheses

The hypotheses indicated the selected 15 non-finance listed firms to be tested in this study are stated below in their null form:

H₁: There is no significant association between the Aggregate Asset Share prices and dividend payout

H₂: There is no significant impact between the Earnings Yield of Firms Value and the dividend payout ratio.

H₃: There is no significant link between Market Value Added Firm Value and the dividend payout ratio.

H₄: There is no significant relationship between Price Revenue Firm Valuation and the dividend payout ratio.

H₄: There is no significant relationship between Tobin Q_Performance Data and the dividend payout ratio.

CONCEPTUAL FRAMEWORK

The Dividend Irrelevance of Miller and Modigliani (1961): The Federal Rules of Evidence Rule 702 (2000) and The Sarbanes-Oxley Act (2002)

Deduced from the theory of basic financial management, three (3) key decisions are drawn to maximize shareholder’s wealth, namely; the investment decision, the financing decision, and the dividend (distribution) decision. Miller and Modigliani (1961) posited that dividend policy was irrelevant. The article (page 294) of De Angelo and De Angelo (2006) asserts that Miller and Modigliani’s 1961 dividend irrelevance theorem adds to the bedrock of modern corporate finance theory(s). Upon publication of M&M’s article (1961), dividend irrelevance has since dominated the literature of corporate financial management with findings validation and interpretations.

Section 807 of the Sarbanes-Oxley Act of 2002 (SOX), which concerns penalties for crimes of defrauding shareholders of publicly quoted firms, in line with Rule 702 of the Federal Rules of Evidence of 2000, emphasizes the relevance of accurate research methodology and epistemology. The issues of compliance with the financial management of quoted industries have provisionally expanded when compared with early legislation in the 1930’s, which includes; the Securities Act (1933) and the Securities and Exchange Act (1934). Notably, for over five (5) decades, the M &M (1961) theory on dividends still comprises an integral part of corporate financial management, thus it needs further assessment on their dividend irrelevance analysis from the perspective of accurate research methodology and epistemology for the establishment of contents, to satisfy the processes of Sarbanes-Oxley Act of 2002 and Federal Rules of Evidence Rule 702 of 2000.

Concept of Dividend Policy

Rustagi, (2001) conceptualizes the term dividend as it refers to that portion of profit (after tax) that is distributed among the owners/shareholders of the firm. Dividends interact with size which is similar to the profitability factor, since large firms can obtain financial resources more easily (Padron et al. 2005), it is reasonable to assume that large firms, when issuing more dividends to their stockholders, will tend to borrow less money from banks compared to small firms will do.

Maheshwari, (1999) defined dividend as the return that a shareholder gets from the company, out of its profits, on his shareholdings. In other words, the dividend is that part of the net earnings of a corporation that is distributed to its stockholders. It is a payment made to the equity shareholders for their investment in the company.

Dividend policy therefore means the practice that management follows in making dividend pay-out decisions, or in other words, the size and pattern of cash distributions over time to shareholders (Ronald et al 2000).  In other words, dividend policy is the firm’s plan of action to be followed when dividend decisions are made. It is the decision about how much of earnings to pay out as dividends versus retaining and reinvesting earnings in the firm.

Dividend policy also means policy or guideline followed by the management in declaring of dividend. A dividend policy decides the proportion of dividends and retains earnings. Retained earnings are an important source of internal finance for the long-term growth of the company while dividend reduces the available cash funds of the company. There is a reciprocal relationship between retained earnings and dividend i.e. larger the retained earnings, lesser the dividend and smaller the retained earnings, larger the dividend.

 James (1963) says the choice of dividend policy have effects on the value of the enterprise   therefore dividend policy must be evaluated in light of the objective of the firm namely, to choose a policy that will maximize the value of the firm to its shareholders

Dividend policy determines the ultimate distribution of the firm’s earnings between retention (that is reinvestment) and cash dividend payments of shareholders (Moyer & Guigan 2001)

Types of Dividend

1. Cash dividend: Companies mostly pay dividends in cash. A Company should have enough cash in its bank account when cash dividends are declared. If it does not have enough bank balance, arrangements should be made to borrow funds. When the Company follows a stable dividend policy, it should prepare a cash budget for the coming period to indicate the necessary funds, would be needed to meet the regular dividend payments of the company. It is relatively difficult to make cash planning in anticipation of dividend needs when an unstable policy is followed.  The cash account and the reserve account of a company will be reduced when the cash dividend is paid. Thus, both the total assets and net worth of the company are reduced when the cash dividend is distributed. The market price of the share drops in most cases by the amount of the cash dividend distributed.

2. Bonus Shares or Stock Dividends: This involves the distribution of shares free of cost to the existing shareholders. Most times bonus shares are issued instead of cash dividends. Issuing bonus shares increases the number of outstanding shares of the company. The bonus shares are distributed proportionately to the existing shareholders. Hence there is no dilution of ownership. The declaration of the bonus shares will increase the paid-up Share Capital and reduce the reserves and surplus retained earnings of the company. The total net-worth (paid up capital plus reserves and surplus) is not affected by the bonus issue. Infect, a bonus issue represents a recapitalization of reserves and surplus. It is merely an accounting transfer from reserves and surplus to paid up capital. The following are advantages of the bonus shares to shareholders:

i) Tax benefit: One of the advantages to shareholders in the receipt of bonus shares is the beneficial treatment of such dividends concerning income taxes.

ii) Indication of higher future profits: The issue of bonus shares is normally interpreted by shareholders as an indication of higher profitability.

iii) Future dividends may increase:  if a Company has been following a policy of paying a fixed amount of dividend per share and continues it after the declaration of the bonus issue, the total cash dividend of the shareholders will increase in the future.

iv) Psychological Value: The declaration of the bonus issue may have a favourable psychological effect on shareholders. The receipt of bonus shares gives them a chance to sell the shares to make capital gains without impairing their principal investment. They also associate it with the prosperity of the company.

3. Special dividend: In special circumstances, the Company declares Special dividends. Generally, the company declares a special dividend in case of abnormal profits.

4. Extra-dividend: An extra dividend is an additional non-recurring dividend paid over and above the regular dividends by the company. Companies with fluctuating earnings pay out additional dividends when their earnings warrant it, rather than fighting to keep a higher quantity of regular dividends.

5. Annual dividend: When annually company declares and pays a dividend is defined as an annual dividend.

6. Interim dividend: During the year any time a company declares a dividend, it is defined as an Interim dividend.

7. Regular cash dividends: Regular cash dividends are those the company exacts to maintain every year. They may be paid quarterly, monthly, semi-annually or annually.

8. Scrip dividends:  These are promises to make the payment of dividends at a future date: Instead of paying the dividend now, the firm elects to pay it at some later date. The ‘scrip’ issued to stockholders is merely a special form of promissory note or notes payable

9. Liquidating dividends:   These dividends are those that reduce paid-in capital: It is a pro-rata distribution of cash or property to stockholders as part of the dissolution of a business

10. Property dividends: These dividends are payable in assets of the corporation other than cash. For example, a firm may distribute samples of its product or shares in another company it owns to its stockholders.

Dividend Decision

The company’s Board of Directors are responsible for making dividend decisions. They are faced with the decision of whether to pay out dividends or to reinvest the cash into new projects.  The dividend policy decision is a trade-off between retaining earnings versus paying out cash dividends.  Dividend policies must always consider two basic objectives:

1. Maximizing owners’ wealth
2. Providing sufficient financing

While determining a firm’s dividend policy, management must find a balance between current income for stockholders (dividends) and future growth of the company (retained earnings). In applying a rational framework for dividend policy, a firm must consider the following two issues:

1. How much cash is available for paying dividends to equity investors, after meeting all needs-debt payments, capital expenditures, and working capital (i.e. Free Cash Flow to Equity – FCFE)
2. To what extent are good projects available to the firm (i.e. Return on equity – ROE > Required Return)

The potential combinations of FCFE and Project Quality and the generalizations of the dividend policy to be adapted in each situation are presented below;

Dividend Decision Matrix (Authors format)

Dividend Payment Procedures

The firm’s board of directors normally meets quarterly to evaluate financial performance and decide whether, and in what amount, dividends should be paid.  The following have to be reached if the dividend is to be paid;

The declaration date is the day on which the BOD (board of directors) declares a payment of dividend.

Record Date: Here, all persons whose names are recorded as stockholders will receive the dividend.

Payment date: The dividend checks are mailed to shareholders of record.

Cum Dividend and Ex-Dividend date: This is the last say on which the buyer who buys the stock is entitled to get the dividend. Soon after, shares become ex-dividend on the date the seller is entitled to keep the dividend. This is the first date on which the buyer who buys the stock is not entitled to dividends.

Theoretical Framework and Literature Review

Theories of Dividend Policy

The theories of dividend policy will be discussed under two heading; dividend irrelevant theories and dividend relevant theories.

Dividend Irrelevance Theories

I. The Residual Theory of Dividend Policy

The residual theory of dividend policy holds that the firm will only pay dividends from residual earnings, that is dividends should be paid only if funds remain after the optimum level of capital expenditures is incurred i.e. all suitable investment opportunities have been financed.  With a residual dividend policy, the primary focus of the firm is on investments and hence dividend policy is a passive decision variable. The value of a firm is a direct function of its investment decisions thus making dividend policy irrelevant.

II. Dividend Irrelevance Theory

The inspiring effort of Miller and Modigliani (also known as MM) placed a new chapter in the history of dividends by putting forward the proposition that dividends are irrelevant to the firm value keeping in view certain assumptions. According to MM, given in a world where the behaviour of investors is not irrational i.e. the investors constantly desire to have extra wealth instead of less and don’t care whether it is in the shape of cash or capital gain and there exists “perfect certainty” on behalf of investor’s that they will invest and their returns are also certain and that the market is perfect i.e. no single entity can influence the market, the firm value does not depend upon the dividend policy, hence it is irrelevant of the firm value.

The dividend irrelevancy theory asserts that dividend policy does not affect either the price of the firm or its cost of capital.

Dividend Irrelevance Arguments

Dividend policy does not affect share price because the value of the firm is a function of its earning power and the risk of its assets. If dividends do affect value, it is only due to:

a) Information effect: The informational content of dividends relative to management’s earnings expectations

b) Clientele effect: A clientele effect exists which allows firms to attract shareholders whose dividend preferences match the firm’s historical dividend payout patterns

(c) Signalling effect: A rise in dividend payment is viewed as a positive signal whereas a reduction in dividend payment is viewed as a negative signal about the future earnings prospects of the company, thus leading to an increase or decrease in share prices of the firm. Managers use dividends as signals to transmit information to the capital market. Theoretical models by Bhattacharya (1979), Miller and Rock (1985) John and Williams (1985), and Williams (1988) tell us that dividend increases convey good news and dividend decreases convey bad news. However, this theory is based on the following assumptions:

1. There is an existence of perfect capital markets i.e. No personal or corporate taxes and no transaction costs.
2. The firm’s investment policy is independent of its dividend policy.
3. Investors behave rationally and information is freely available to them
4. Risk or uncertainty does not exist.

III.       The Bird in the Hand Theory:  By Lintner (1962) and Gordon (1963). The essence of this theory is not stockholders are risk averse and prefer current dividends due to their lower level of risk as compared to future dividends. Dividend payments reduce investor uncertainty and thereby increase stock value. This theory is based on the logic that ‘ what is available at present is preferable to what may be available in the future’. Investors would prefer to have a sure dividend now rather than a promised dividend in the future (even if the promised dividend is larger). Hence dividend policy is relevant and does affect the share price of a firm.

IV. The Tax Differential Theory (Graham and Dodd)

Propounders are Graham and Dodd in the early 1960’s.This theory simply assumes that since dividends are taxed at higher rates than capital gains, investors require higher rates of return as dividend yields increase. This theory suggests that a low dividend payout ratio will maximize firm value.

V. Percent Payout Theory

Rubner (1966) argued that shareholders prefer dividends while directors and managers requiring additional finance would have to convince the investors that proposed new investments would increase their wealth. However, to increase their job security and status in the eyes of the shareholders, companies can adopt 100 per cent payout. However, this policy is not followed in practice.

VI. Percent Retention Theory

According to Clarkson and Eliot (1969) a given taxation and transaction costs dividends are a luxury that is not afforded by shareholders as well as by companies and hence a firm can follow a policy of 100 per cent retention. Firms can thus avail of new investment opportunities that would be beneficial to shareholders too.

VII. Agency Cost Theory

Dating from Jenson and Meckling’s (1976) research, many studies have instigated debates that tie the financial activities of a firm with agency costs. It has been argued that firms pay dividends to reduce agency costs. Dividend payout keeps firms in the capital market, where monitoring of managers is available at lower cost. If a firm has free cash flows (Jensen (1986), it is better off sharing them with stockholders as dividend payout to reduce the possibility of these funds being wasted on unprofitable (negative net present value) projects.

DIVIDEND MODELS 

The various models that support the above-mentioned theories of dividend relevance and irrelevance are as follows:

Modigliani Miller approach

According to them the price of a share of a firm is determined by its earning potentiality and investment policy and not by the pattern of income distribution. The model given by them is as follows:

 Po = D1 + P1/ (1/Ke)

Where, Po = Prevailing market price of a share; Ke = Cost of equity capital; D1 = Dividend to be received at the end of period one; P1 = Market price of a share at the end of period one

According to the MM hypothesis, market value of a share before dividend is declared is equal to the present value of dividends paid plus the market value of the share after dividend is declared.

Walter’s approach

According to Walter (1963), in the long run, share prices reflect the present value of future dividends. According to him investment policy and dividend policy are interrelated and the choice of appropriate dividend policy affects the value of an enterprise. His formula for determining the expected market price of a share is as follows:

 P = D + r/k(E-D)

                 K

 Where, P = Market price of equity share; D = Dividend per share; E = Earnings per share

(E-D) = Retained earnings per share; r = Internal rate of return on investment; k = cost of capital

Gordon’s approach (Dividend Yield Basis)

The value of a share, like any other financial asset, is the present value of the future cash flows associated with ownership. On this view, the value of the share is calculated as the present value of an infinite stream of dividends.  Myron Gordon’s Dividend Growth Model explains how dividend policy of a firm is a basis of establishing share value. Gordon’s model uses the dividend capitalization approach for stock valuation. The

formula used is as follows:

Po = E1 (1-b)

           K-br

Where; Po = price per share at the end of year 0; E1 = earnings per share at the end of year 1; (1-b) = fraction of earnings the firm distributes by way of dividends

 b = fraction of earnings the firm ploughs back; k = rate of return required by shareholders

  r = rate of return earned on investments made by the firm; br = growth rate of dividend and earnings.

Pecking Order Theory

The pecking order theory suggests that firms have a particular preference order for capital used to finance their businesses (Myers and Majluf, 1984). Owing to the information asymmetries between the firm and potential investors, the firm will prefer retained earnings to debt, short-term debt over long-term debt and debt over equity. Myers and Majluf (1984) argued that if firms issue no new security but only use its retained earnings to support the investment opportunities, then asymmetric information can be addressed. That implies that issuing equity becomes more expensive as asymmetric information between insiders and outsiders increases. Firms whose information asymmetry is large should issue debt to avoid selling underpriced securities. The capital structure decreasing events such as new stock offering leads to a firm’s stock price decline.

In the presentation, the increasing capital structure events is received by the market as a welcome development as a result of financial intermediaries such as investment banks that could serve as insiders to monitor the industry’s performance. Most Managers can conceal sensitive information that the market is unaware of. Insider investors have more information about the true distribution of firm returns than outsiders. Insider investors tend to limit the use of equity to sustain the dominance of the firm (Hutchinson, 1995).

EMPIRICAL REVIEW

Objectives of the study

The aim of the research is simply to review the existing theoretical and empirical literature on dividend policy, and dividend irrelevance theory and to discover any pertinent knowledge gaps for further research. Primarily, the direction of the objective is categorized by;

1. To examine the nexus between Aggregate Asset Share prices (ASP) of firms and the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange;
2. To evaluate the relationship between Earnings Yield of Firms Value (EYV) Data and dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange;
3. To ascertain Market Value Added Firm Value (MVAA) contribution to the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange;
4. To analyze the link between Price to Revenue Firm Valuation (PRV) and the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange.
5. To assess the contribution of Tobin Q Performance Data (TOBQ) to the dividend payout ratio of 15 selected non-finance listed firms in the Nigeria Stock Exchange.

A considerable number of debates have been said as to the importance of dividend policy to the value of firms “shares. The arguments centers on whether firms do have an optimum dividend payout ratio to maximise shareholders‟ wealth. There is one school of thought that argues that dividend Policy has a strong effect on stock prices associated with (Lintner, 1956), (Walter,1963), and (Gordon, 1959) vis-a-vis others who hold the view that investors tend to prefer high dividend payout ratio all else equals – firms with relatively high payout ratio will have relatively high stock prices while on the other hand, firms with relatively low payout ratio will have relatively low stock prices (Fischer, 1976).

The other school associated with (Millers and Modigliani, 1961) popularly known as the M-M hypothesis holds that investors are indifferent as to whether the firm has a high or low payout ratio (i.e dividend irrelevance as to the share prices). Their hypothesis is based on the Irrelevance argument. The two schools are often referred to as The Dividend Preference Theory and the Dividend Irrelevance Theory respectively. It is clear from the divergent views of these theorists that there is a controversy over dividends because there are alternatives that may or may not be better.

In the work of (Griffen, 2006) “Dividend Relevance is a theory relating to the impact of dividends on organisations and individual investors. The theory propounded by (Lintner, 1956) and (Gordon,1959), established that there is a direct relationship between dividend policy of firms and its market value. Investors respond quickly to receiving actual cash returns referring to this as the “Bird in hand theory” another name for dividend Relevance (de Boyrie, 2001). According to (Griffen, 2006), (Lintner, 1956) and (Gordon, 1959), as found in the work of (Hewitt Investment Group, 2002), which assert that dividends received today are preferable to future dividends, which are subject to uncertainty. According to (Hewitt, 2002), higher certainty will cause investors to ascribe a higher risk premium to those payments, thereby increasing a firms cost of capital by decreasing the value of stock” (Gordon and Lintner, 1956) strongly believed that stockholders prefer current dividends and that this causes a positive relationship between dividends and market value.

Other related literature and analysis conducted by scholars are concisely presented in tabular form in the appendix with their methodologies, variables and findings specifically stated.

RESEARCH METHODOLOGY

To achieve the objectives of this study, secondary data collection prevailed for the analysis of variables. A judgmental sampling or non-probability or purposive sampling design is introduced to the study for the aim of targeting relevant samples from the population of interest (non-financial quoted companies). A total of 15 listed non-financial driven firms were retrieved from the Nigerian stock exchange (officially, Nigeria Exchange Group) annual reports and publications (2021).

Table 1.

Source: Nigeria Stock Exchange Publications and Annual Report (2021), (Authors computation).

This is consistent with the propositions of Salawudeen, Muhammad and Moshoud (2020) whom adopted the OLS regression technique and panel data for a population of 14 listed industrial goods companies as at 31st December 2018 and also Adnan, Farzand, Meryam (2015) used a descriptive statistic, an OLS technique and a panel data for 122 non-financial companies in the Karachi Stock Exchange (2006-2011) which all proved to be an appropriate sample size in generalizing. The choice of the sampled firms was based on the size, market capitalization, and the availability of the annual report of the sampled firms. Nevertheless, in testing the research hypothesis, the ordinary least square (OLS) will be used to estimate the regression analysis.

Model specification

Below, is the model is used to assess the link between the independent (exogeneous) and the dependent(endogenous) variables of the retrieved non-finance listed firms in Nigeria.

DIP_it= f (ASP _it, EYV _it, MVAA _it, PRV _it, TOBQ _it)                           …………… (1)

This can be explicitly restated as:

DIP_it = β_{0 t}+ β₁ ASP _it + β₂ EYV _it +β₃ MVAA _it+ β₄ PRV _it + β₅TOBQ _it + Ԑ_it……………. (2)

Where:

DIP_it= Dividend Payout ratio for non-finance listed firms i at period t (in years);

ASP _it = Aggregate Asset Share prices (ASP)i at period t (in years) for the 15 non-financial listed firms;

EYV_it= Earnings Yield of Firms Value i at time t (in years) for the 15 non-financial listed firms;

MVAA _it= Market Value Added Firm Value i at time t (in years);

PRV _it = Price to revenue Firm Valuation i at time t (in years);

TOBQ _it = Tobin Q_Performance Data is the ratio of the market value of assets to the book value of assets for firms i at time t.

Ԑ = Error or stochastic term

Empirical analysis

Table 2 is a summary of the descriptive statistics of the variables (explained /dependent and the independent/explanatory) which provides their necessary information or brief descriptive coefficients in a given dataset (Hayes,2021) and also highlights the nexus between selected variables used in the study.

Table 2: Descriptive Statistics

Source: Author’s Computation EViews (2021).

Interpretation of Results

1. Dividend payout ratio (DIP) as the dependent variable has a mean (average) of 51.276, a maximum of 332.6628 and a minimum of −155.3718. This can be interpreted to mean that on average, firms pay an average of 51 percent of their net profits as dividends.
2. Aggregate Asset Share prices (ASP) as independent /explanatory variable, has a mean of 1777, a maximum value of 1460.000, and a minimum value of 0.500000. This indicates that the selected firms 2010-2019) incur a nominal average of 102.177 on share prices of assets.
3. Earnings Yield of Firms Value (EYV) as an explanatory variable, has a mean of 711654, a maximum value of 113.8982, and a minimum value of 20.91470. This indicates that the mean firm’s Earning yield is at an average percentage of 9.7.
4. Market Value Added Firm Value (MVAA) during the period (2010-2019), has a mean average of 148641; maximum statistics of 10.77880, and minimum statistics of -0.220500. The mean statistics depict that the market value of the firms is held at 1.1%.
5. Price to Revenue Firm Valuation (PRV) during the period (2010-2019) with a mean average of 434355; maximum value of 7.146300 and a minimum price to revenue at 0.059400. This shows that the mean statistics of the price revenue and firm value is at an average of 1.4%.
6. Tobin Q_Performance Data (TOBQ) which represents the ratio of the market value of assets to the book value of assets for firms, has a mean of 007428; a maximum statistical value of 11.29860 and a minimum of 0.502400. This analysis indicates that the average ratio of the market value to book value of assets for the selected firms is at 2%.

Table 3. Panel Data Regression Model Results (Ordinary Least Square Estimate)

Dependent Variable: LDIP

Source: Author’s Computation, EViews 9(2021).

Interpretation of Results

From the computation of the OLS models, we will establish the relation between the logged explanatory variables i.e. ASP, EYV, MVAA, PRV, and TOBQ and the logged dependent (explained variable; Dividend Payout Ratio) variable.

–Coefficients: The Aggregate asset share prices; LOGASP (8.84 units) and LOGMVAA (0.000000) , LOGPRV at 1.000000 and (Log)Tobin Q performance data of 0.0000 is significant to dividend payout ratio (DIP) while LOGEYV (-5.99units) is insignificant to the dividend payout ratio(logged) of the 15 selected non -finance listed firms in the Nigeria Stock exchange.

–R-squared Stat.: the independent variables in the model, combined explained about 100% of the systematic variations in the dependent variable (dividend payout ratio) leaving zero unexplained. This depicts that the regressed model is excellent for the analysis.

Interestingly, in the Adjusted R-square, logged independent variables in the degree of freedom presented an explanatory power of 100% which has filled in the gap of knowledge proving that the variables in the analysis are econometrically significant to the dividend payout ratio.

–T-statistic: Based on the individual relevance of the model as shown by the t-Statistic values LOGASP (7.388348) and LOGPRV at 3.62, significantly impacts on LDividend Payout Ratio as the values are > 0.05 level of significance while LogMarket Value (0.000000) LOG Earnings Yield (EYV; -5.45), LOGPRV (-0.504126) and LOGTOBQ (0.000000) are insignificant (at 5%) to Log DIP of the 15 non-finance listed companies

–Prob(F-Statistics): the logged independent variables show an estimate at 0.0000 are statistically significant to the Dividend Payout Ratio (LDIP; explained variable).

The apriori expectation shows that the results are random and the next outcome cannot be deduced as its framework for the probabilities is constrained to the result. However, the Durbin-Watson test will not be considered because no correlation test on the error terms was carried out at first order difference.

POLICY IMPLICATION AND RECOMMENDATIONS

The outcome of the analysis should be a foundation for more research on dividend irrelevance theory that will be in agreement with the modern views of dividend policy, which emphasizes the role of dividend policy in resolving agency problems and thus promoting the value of shareholders.

Despite the data analysis producing compelling results MM’s irrelevance theorems on financial theory cannot be understated, as dividend policy research encounters a series of limitations. The Overview of existing literature on listed non-financial industries in the Nigeria stock exchange, is still a concern as most researchers and finance analysts aim to proffer a lasting solution to issues of insider information, lack of openness and accuracy of balance sheets of these companies, high tax rates on declared dividends, amongst macroeconomic factors such as inflation, interest rates, exchange rates index. If Non-financial listed firms retain resources in excess for productive projects (i.e., the company does not pay enough dividends), the cash retained within the business may be misused by the management. Misuse may arise from investing in projects (or paying more in managerial compensation) that will not increase shareholder wealth, resulting in overinvestment. The potential overinvestment of resources that could have been paid out as dividends is known as the “free-cash flow problem.” For instance, if too much cash is paid out in dividends, some shareholder-wealth-increasing projects may not be pursued by the company due to scarcity of capital (i.e., underinvestment may occur. Cross-listed companies are likely to pay out more of their free cash flow than non-cross-listed companies, which can prevent managers from misusing the resources in ways that may not maximize shareholder wealth.

In furtherance, paying larger dividends reduces the discretionary internal cash flow and forces the firm to seek external financing from capital markets and the scrutiny and disciplining effects of investment professionals (Easterbrook (1984)).

More importantly, the synergy between qualified professionals and state-of-the-art technology (man and machine) can aid in monitoring and checkmating imperfections in non–financial listed firms in NSE, enhancing optimal corporate policy decisions to simply deliver the full present value of free cash flows to investors.

Thence, when dividend policy is treated as a financing decision, the payment of cash dividends translates to passive residual (Walter, 1963).it is therefore recommended that dividend payment becomes relevant to shareholders of firms.

CONCLUSION

This research empirically assessed the link between dividend payout ratio (dependent variable) and share asset prices, market value, pricing valuation, earning yield and Tobin q performance data (independent) of 15 selected non-finance firms in the Nigeria Stock Exchange from 2010-2022, under the umbrella of the dividend irrelevance theory. The regressed result establishes that all the independent variables utilized in the study have a significant relationship with the dividend payout ratio. From the above findings that sprang from this work, the following recommendations must be studied and implemented for the benefit of major shareholders, potential and mature investors, policymakers and financial regulators for the promulgation of non-finance listed companies listed in the Nigerian stock exchange (officially, Nigeria Exchange Group)

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APPENDIX

Empirical Review

Source: Author’s Computation (2021)

Descriptive stat.