Moderating Effect of Dividend Policy and Share Prices of Quoted Firms in Nigeria

International Journal of Research and Scientific Innovation (IJRSI) | Volume VII, Issue II, February 2020 | ISSN 2321–2705

Moderating Effect of Dividend Policy and Share Prices of Quoted Firms in Nigeria

Eze Gbalam¹, Akwarandu Uzochukwu^2
1Department of Banking and Finance, Niger Delta University, Wilberforce Island, Bayelsa State, Nigeria
²Department of Banking and Finance, University of Africa, Toru-Orua, Bayelsa State, Nigeria

Abstract: – This study empirically investigated the moderating effect of a firm size on the relationship between dividend policy and share price among consumer firms in Nigeria by employing a sample of twelve (12) consumer companies quoted on the Nigerian Stock Exchange. The data set was collated for 12 years (2007-2018) and employed the fixed effect regression technique. The results tend to annul the theory of Miller and Modigliani (1961) which suggests that dividend are irrelevant but lends credence to the ‘Bird in Hand Dividend Theory’ supported by Fairchild (2010). This suggests that larger firms have good chances of paying dividend which will lead to improvement in share price. This finding negates the dividend irrelevant proposition that dividend does not matter to corporate value.

I. INTRODUCTION

The idea that dividend policy is a significant attribute of corporate finance and its practical implications for many firms and stakeholders (investors, managers, lenders) is not a novel issue. It is a known approach that firms which are performing well and generating more income have different channels into which they put such generated income for better use. This can be linked to the residual theory of dividend which describes a common tendency for managers to reinvest the profit of the firm due to the clientele effect accompanied by great pressure on companies to pay dividends.
In today’s world we find out that the harder we look at the dividend picture the more it seems like a puzzle, a dilemma or a mystery with pieces that just do not fit together” (Black, 1976). However, after so much research on dividend policy in corporate finance studies, three core beliefs became very evident. To the right of this argument, there are some researchers who believe that the value of the firm will significantly increase when dividend payout ratio is increased (known as conservative group). While to the left of this argument, is a radical group who believes that the value of the firm will significantly reduce due to the increase in the dividend payout ratio. And, in between these sides, are some theorist who believed that the payout policy makes no significant difference and are also known as Miller and Modigliani (MM) 1961. The irrelevance of the dividend decision in the world without taxes, transaction cost or other market fault have been hypothetically supported in a seminar paper illustrated by Miller & Modigliani, 1961. Since the breakthrough theory on dividends policies by Modigliani and Miller (1958), there has been an argument in literature as to whether dividends really matter in affecting share prices.

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