ajsr_8_07 - American Journal of Scientific Research ISSN...

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American Journal of Scientific Research ISSN 1450-223X Issue 8(2010), pp.57-67 © EuroJournals Publishing, Inc. 2010 http://www.eurojournals.com/ajsr.htm A Diagnosis of the Determinant of Dividend Pay-Out Policy in Nigeria: A Factor Analytical Approach Okpara, Godwin Chigozie Department of Banking and Finance, Abia State University Uturu-Nigeria E-mail: [email protected] Abstract This paper is aimed at investigating the factors determining dividend pay-out policy in Nigeria. To do this, factor analysis technique was first employed and then alternate econometric method used on the identified critical factors to ascertain the authenticity or validity of the identified factors. The results show that three factors-earnings, current ratio and last year’s dividends impact significantly on the dividend payout and dividend yield in Nigeria. Earnings exert a negative impact on the payout ratio indicating that they are apportioned to retention (as they increase) for the growth of the firm. While current ratio and the previous year’s dividend exert a positive impact on the payout ratio and dividend yield, showing firstly that firms are more willing to pay out dividends when they have no problem with meeting their short-term needs for cash, and secondly that firms try to increase their payout ratio from its previous level. The researcher therefore concludes that the three variables, earnings, current ratio and previous year’s dividends are goods predictors of dividend payout policy in Nigeria. Introduction Corporate dividend policy has been a thing of concern to the financial managers and the firm at large. Firms are faced with dilemma of sharing dividend to stock-holders and retaining their earning with the view to ploughing it back into the business so as to foster further growth of the business. As the business grows, then earning stream of the stockholders grows over time. The decision of the firm regarding how much earnings could be paid out as dividend and how much could be retained is the concern of dividend policy decision. Researchers have asserted that firms use dividends as mechanism for financial signaling to the outsiders regarding the stability and growth prospects of the firm. On the other hand, earnings retained are the most important internal sources of financing the growth of the firm. These two objectives are in conflict. A higher retained earnings means less dividend and higher dividend rate means less retained earnings. A firm’s stock price is affected among other things by the dividend pattern. Paying out more cash dividends will tend to increase the price of the stock. However, increasing cash dividends means that less money is available for reinvestment and ploughing back fewer earnings into the business will lower the expected growth rate and invariably depress the price of the stock. The firm must therefore be very careful in deciding the allocation of earnings to these two objectives. The optimal policy is the one that strikes a balance between current
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This note was uploaded on 05/20/2010 for the course DOF AAf001-6 taught by Professor Changchungdo during the Spring '10 term at 카이스트, 한국과학기술원.

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ajsr_8_07 - American Journal of Scientific Research ISSN...

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