Divident policy and stock market reactions to dividend announcements in Nigeria

Abstract

The impact of dividend announcements on firm value represents one of the longest standing puzzles in the literature of modern finance. Based on either a behavioural or empirical approach, studies have provided rationales to address the issue of why companies pay dividends and whether the market response to the announcements can be predicted. However, these studies have failed to resolve the dividend puzzle, as no single convincing explanation about the observed dividend behaviour of firms has emerged. Moreover, most of these studies have been conducted in countries with developed capital markets; there is very little attention to corporate dividend policy research that addresses issues related to the development of emerging stock markets of sub-Saharan Africa, such as Nigeria. This study aims to provide additional evidence from an emerging market by investigating the managerial perspectives on dividend policy and the impact of dividend announcements on share prices of listed companies in Nigeria.
For the purpose of the research in this thesis, a mixed-method research design, consisting of both the quantitative and qualitative approaches was employed. A postal questionnaire survey was employed to investigate the perspectives of Nigerian managers on the factors that drive dividend decision and the relevance of dividend policy to firm value. This was followed by an empirical investigation of the stock market reaction to cash dividend announcements in Nigeria employing a market-based standard event study methodology. Finally, interviews were conducted with 21 financial managers of Nigerian listed companies to ascertain their views on various dividend policy as a means of validating the findings from the questionnaire survey and the event study analysis.
The findings from the questionnaire survey and interviews indicate that Nigerian listed companies’ exhibit dividend conservatism and typically focus on the level of current earnings, the stability of earnings and liquidity considerations such as the availability of cash when determining their current dividend levels. Nigerian managers believe that dividend policy affect firm valuation. Nigerian managers express strong support for the signalling explanation for paying dividends, but not for the bird-in-the-hand, tax-preference and agency cost explanations. However, majority of Nigerian listed companies do not have target payout ratios; instead, companies target the dividend per share when determining the disbursement level. Nevertheless, views regarding some of these issues differ between financial and non-financial firms. The results of the event study analysis show that the Nigerian stock market reacts significantly to cash dividend announcements, implying that dividends do convey price-sensitive information to the market. However, there is evidence of both lagging and sluggish response to cash dividend announcements, suggesting that the Nigerian stock market is not semi-strong efficient.

The thesis makes a novel contribution to the growing body of corporate finance literature by providing additional evidence on the impact of dividend announcements on share prices from the context of an emerging market. As well as being timely in view of the dearth of empirical studies on stock market reaction to cash dividend announcements in Nigeria, the research is also important because it takes account of a novel feature of the Nigerian tax environment, where personal income from dividends is taxable while capital gains are exempt from taxation during the period of this study. In addition, the study is also unique because it examined the views of managers from both the financial and non-financial firms, thereby contributing to the literature on industry-related dividend effect. The focus of the investigation is also novel in that the study is the first comprehensive investigation of the perceptions of Nigerian corporate managers on dividend policy.