DIVIDEND POLICY AND STOCK MARKET REACTION TO DIVIDEND ANNOUNCEMENTS IN

271 Pages·2015·2.3 MB·English

by  Friday Kennedy Ozo

DIVIDEND POLICY AND STOCK MARKET REACTION TO DIVIDEND
ANNOUNCEMENTS IN NIGERIA

By

FRIDAY KENNEDY OZO
MSc (International Finance), BSc (Banking and Finance)
INSTITUTE OF GLOBAL FINANCE AND DEVELOPMENT
LANCASHIRE BUSINESS SCHOOL

A THESIS SUBMITTED IN PARTIAL FULFILMENT FOR THE REQUIREMENTS
FOR THE DEGREE OF DOCTOR OF PHILOSOPHY (PhD) AT THE UNIVERSITY
OF CENTRAL LANCASHIRE

OCTOBER 2014
STUDENT DECLARATION FORM

Concurrent registration for two or more academic awards

I declare that while registered as a candidate for the research degree, I have not been a
registered candidate or enrolled student for another award of the University or other
academic or professional institution

Material submitted for another award

I declare that no material contained in the thesis has been used in any other submission for
an academic award and is solely my own work

Friday Kennedy Ozo

Signature of Candidate___________________________________________________

Doctor of Philosophy (PhD)
Type of Award ______________________________________________________

Lancashire Business School (LBS)
School _______________________________________________________

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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 thesis seeks to fill this gap in the literature by investigating the factors that drive
dividend decision and the impact of dividend announcements on the share prices of listed
companies in Nigeria. The Nigerian equity market is characterised by a distinctive tax system where
personal income from dividends is taxable, while capital gains are exempt from taxation. This unique
taxation structure presents an additional motivation for research to ascertain why Nigerian listed
companies continue to pay dividends, despite the tax consequences associated with such a
disbursement.

For the purpose of the research in this thesis, a mixed-method research design, consisting of both
the quantitative and qualitative approaches was employed. The perspectives of Nigerian managers
on the factors that drive dividend decision and the relevance of dividend policy to firm value was
investigated using a postal questionnaire survey. 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 issues as a means of
validating the findings from the questionnaire survey and the event study analysis.
The findings from the questionnaire survey and the 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,
and also express strong support for the signalling explanation for paying dividends, but not for the
bird-in-the-hand, tax-preference, or agency cost explanations. However, majority of Nigerian listed
companies do not have target payout ratios; instead, companies target the dividend per share when
determining their 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.

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Table of Contents
STUDENT DECALARATION…………………………………………………………………………………………………………..i
ABSTRACT ........................................................................................................................ ii
LIST OF TABLES ............................................................................................................... vii
LIST OF FIGURES ............................................................................................................ viii
ACKNOWLEDGEMENTS .................................................................................................... ix
CHAPTER ONE: INTRODUCTION ........................................................................................ 1
1.1 Background of the Study ............................................................................................................... 1
1.2 Motivations for the Study ........................................................................................................... 11
1.3 Research Questions .................................................................................................................... 13
1.4 Research Objectives and Methodological Approach .................................................................. 13
1.5 Structure of the Thesis ................................................................................................................ 15
CHAPTER TWO: THE NIGERIAN ECONOMY AND ITS FINANCIAL SYSTEM .......................... 18
2.1 Introduction ................................................................................................................................ 18
2.2 Background Information about Nigeria ...................................................................................... 19
2.3 An Overview of the Nigerian Economy ....................................................................................... 22
2.4. The Nigerian Financial System ................................................................................................... 30
2.5 The Nigerian Capital Market ....................................................................................................... 33
2.5.1. Historical Development of the Nigerian Capital Market..................................................... 33
2.5.2. Major Participants in the Market ........................................................................................ 37
2.5.3 Liberalization of the Market................................................................................................. 43
2.5.4 The Market Crash of 2008 .................................................................................................... 45
2.5.5 Performance of the Market ................................................................................................. 48
2.5.6 Market Indices ..................................................................................................................... 52
2.6 Corporate Taxation System in Nigeria ........................................................................................ 56
2.7 An Overview of the Dividend Payout Policy ............................................................................... 57
2.7.1. Types of Cash Dividend Policy ............................................................................................. 59
2.7.2. Factors Affecting Cash Dividend Policy ............................................................................... 61
2.7.3 The Mechanics of Cash Dividend Payments ........................................................................ 63
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2.8 Conclusion ................................................................................................................................... 64
CHAPTER THREE: LITERATURE REVIEW ............................................................................ 66
3.1. Introduction ............................................................................................................................... 66
3.2 Dividend Irrelevance Hypothesis ................................................................................................ 68
3.2.1 Theory .................................................................................................................................. 68
3.2.2 Empirical Evidence ............................................................................................................... 69
3.3 Dividends and Asymmetric Information ..................................................................................... 70
3.3.1 Dividend Signalling Models .................................................................................................. 70
3.3.2 Empirical Evidence ............................................................................................................... 73
3.4 Dividends and Other Related Models ......................................................................................... 81
3.4.1. Dividends and Agency Problems ......................................................................................... 81
3.4.2 Dividends and Taxes ............................................................................................................. 87
3.4.3 Dividends and the Bird-in-the-Hand Argument ................................................................... 93
3.5 Dividend Policy and Behavioural Finance ................................................................................... 96
3.5.1 Theoretical Behavioural Models of Dividend Policy ............................................................ 96
3.5.2 Dividend Behaviour of Managers......................................................................................... 97
3.6 Industry Classification and Dividend Policy .............................................................................. 101
3.7 Dividend Research in Emerging Stock Markets ........................................................................ 102
3.7.1 Dividend Announcements and Share Prices ...................................................................... 102
3.7.2 Managerial Views about Dividends in Emerging Markets ................................................. 105
3.8 Prior Research on Dividends in Nigeria ..................................................................................... 106
3.8.1 Determinants of Dividend Policy ....................................................................................... 106
3.8.2 Relationship between Dividends and Share Prices ............................................................ 108
3.9 Empirical Studies of the Semi-strong Market Efficiency ........................................................... 109
3.10 Conclusion and Gap Identification .......................................................................................... 112
CHAPTER FOUR: RESEARCH METHODOLOGY AND METHODS ........................................ 114
4.1 Introduction .............................................................................................................................. 114
4.2. The Theoretical Framework of the Research ........................................................................... 115
4.3 Philosophical Assumptions of the Thesis .................................................................................. 116
4.4 Research Designs ...................................................................................................................... 123
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4.5. Research Methods ................................................................................................................... 128
4.5.1 The Questionnaire Survey ............................................................................................. 128
4.5.2 The Event Study .............................................................................................................. 133
4.5.3. The Interviews ................................................................................................................ 140
4.6 Triangulation of Data ................................................................................................................ 147
4.7 Conclusion ........................................................................................................................... 149
CHAPTER FIVE: NIGERIAN CORPORATE MANAGERS’ PERSPECTIVES ON DIVIDEND POLICY
.................................................................................................................................... 151
5.1 Introduction .............................................................................................................................. 151
5.2 Descriptive Statistics of Sample Firms ...................................................................................... 152
5.3. Non-Response Bias Tests ......................................................................................................... 155
5.4. Empirical Results ...................................................................................................................... 157
5.4.1. Factors influencing dividend decision ............................................................................... 157
5.4.2 The Dividend Setting Process: Benchmarking to Lintner (1956) ....................................... 160
5.4.3. Dividend policy and firm value.......................................................................................... 164
5.5. Administration of Dividend Policy ........................................................................................... 172
5.6 Conclusion ................................................................................................................................. 174
CHAPTER SIX: THE INFORMATION CONTENT OF CASH DIVIDEND ANNOUNCEMENTS IN
NIGERIA ....................................................................................................................... 176
6.1. Introduction ............................................................................................................................. 176
6.2. Research Approach and Hypotheses ....................................................................................... 177
6.3. Data and Sample Design .......................................................................................................... 178
6.4. Empirical Results ...................................................................................................................... 180
6.4.1 Share Price Reaction to Dividend Increase Announcements ............................................. 180
6.4.2 Share Price Reaction to Dividend Decrease Announcements ........................................... 182
6.4.3 Share Price Reaction to No Change in Dividends Announcements ................................... 183
6.4.4 Cumulative Abnormal Returns ........................................................................................... 185
6.4.5 Efficiency of the Nigerian stock market ............................................................................. 186
6.5 Conclusion ................................................................................................................................. 187
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CHAPTER SEVEN: CORPORATE DIVIDEND POLICY IN PRACTICE: THE VIEWS OF NIGERIAN
FINANCIAL MANAGERS ................................................................................................. 189
7.1 Introduction .............................................................................................................................. 189
7.2 Sample Companies Selected for Interviews .............................................................................. 190
7.3 Empirical Results ....................................................................................................................... 192
7.3.1 Factors that drive dividend decision .................................................................................. 192
7.3.2 Dividend conservatism ....................................................................................................... 194
7.3.3 Target payout ratio ............................................................................................................ 196
7.3.4 Residual Dividend Policy .................................................................................................... 198
7.3.5 Market Signalling ............................................................................................................... 200
7.3.6 Taxation .............................................................................................................................. 202
7.4 Conclusion ................................................................................................................................. 203
CHAPTER EIGHT: CONCLUSION ..................................................................................... 205
8.1 Introduction .............................................................................................................................. 205
8.2 Summary of Key Findings of the Thesis .................................................................................... 206
8.3 Contributions and Implications of the Thesis ........................................................................... 209
8.3.1 Contribution to knowledge ................................................................................................ 210
8.3.2 Contribution to Practice ..................................................................................................... 211
8.4 Research Limitations ................................................................................................................. 212
8.5 Future Research ........................................................................................................................ 214
APPENDIX 5.1 ............................................................................................................... 216
APPENDIX 5.2 ............................................................................................................... 217
APPENDIX 5.3 ............................................................................................................... 218
APPENDIX 6.1 ............................................................................................................... 222
APPPENDIX 7.1 ............................................................................................................. 226
APPENDIX 7.2 ............................................................................................................... 229
APPENDIX 7.3 ............................................................................................................... 230
BIBLIOGRAPHY ............................................................................................................. 231

vi
LIST OF TABLES
TABLE 2.1 Selected Market Indicators, 1986-2012……………………………………………………………..51
TABLE 2.2 Indices……………………………………………………………………………………………………………….53
TABLE 2.3 Snapshot of NSE Market Indices, 2010-2012………………………………………………………55
TABLE 4.1 Qualitative, Quantitative, and Mixed Methods Approaches…………………………….127
TABLE 5.1 Reasons Provided for Non-completion of Questionnaires………………………………..152
TABLE 5.2 Descriptive Statistics for Sampled Firms…………………………………………………………..154
TABLE 5.3 Respondents’ Corporate Positions……………………………………………………………………155
TABLE 5.4 Results of Non-Response Bias Tests…………………………………………………………………156
TABLE 5.5 Perspectives on the Factors that Drive Dividend Decision of NSE Listed Firms…163
TABLE 5.6 Perspectives on the Dividend Setting Process and the Relationship between
Dividend Policy and Firm Value for NSE Listed Firms………………………………………..166
TABLE 5.7 Perspectives on the Explanations for Paying Dividends for NSE Listed Firms……171
TABLE 5.8 Administration of Dividend Policy in Nigeria…………………………………………………….173
TABLE 6.1 Frequency of Firm-Year Observations of the Sample Firms………………………………179
TABLE 6.2 Average Daily Abnormal Returns around Dividend Increase Announcements…..181
TABLE 6.3 Average Daily Abnormal Returns around Dividend Decrease Announcements…183
TABLE 6.4 Average Daily Abnormal Returns around No Change in Dividend
Announcements……………………………………………………………………………………………….184
TABLE 6.5 Cumulative Abnormal Returns…………………………………………………………………………186
TABLE 7.1 Background Information about the Interviewees’ Companies………………………….191

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LIST OF FIGURES
FIGURE2.1 Map of Nigeria………………………………………………………………………………………………….21
FIGURE2.2 GDP Growth Rate, 2008-2012…………………………………………………………………………..29
FIGURE2.3 NSE Market Indices Performance, 2009-2011…………………………………………………..55
FIGURE4.1 Research Onion……………………………………………………………………………………………...117
FIGURE4.2 Assumptions about the Nature of Social Science Research……………………………..119
FIGURE 4.3 Triangulation………………………………………………………………………………………………….148

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ACKNOWLEDGEMENTS
No pain, no palm; no thorns, no throne; no gall, no glory; no cross, no crown.
(William Penn, 1644-1718).

First and foremost, I would like to express my profound gratitude to God Almighty for
making it possible for me to complete this research in three (3) years. Without God’s favour,
my efforts would not have been productive.

I also wish to acknowledge my supervisors, Professor Thankom G. Arun, Dr. Philip Kostov
and Dr. Godfrey C. Uzonwanne (external) for their exceptional guidance, stimulating
discussions, constructive criticisms, valuable feedback, and warm encouragement
throughout the duration of my doctoral studies. Their point of view and expertise in finance
and development widened my views.

My deep gratitude also goes to parents, Mr. Sunday Ozo and Mrs. Roseline Ogodo Ozo, who
were a constant source of encouragement in the last three years. Their prayers are a
catalyst for the timely completion of my doctoral studies. I am also indebted for life to my
fiancée, Precious (Nne Obindu) for her love, care, sacrifice, and understanding throughout
the duration of my postgraduate studies in the UK. In fact, she truly represents a perfect
definition of a virtuous woman and I am blessed to have such a rare treasure.

It is no gainsaying the fact that my childhood dream of becoming an academic scholar of
high repute was made a reality through the Ebonyi State Government of Nigeria’s Overseas
Merit Scholarship Award given to the best graduating undergraduate students of the Ebonyi
State University, Abakaliki. Thank you immensely for rewarding hard work.
My appreciation also goes to my colleagues and friends at the University of Central of
Lancashire, Preston, UK, whose continuous support and encouragement helped me to
overcome the challenges posed by this research. Finally, I am grateful to all my friends, well-
wishers, members of the Renaissance Friends Club of Nigeria (RFCN) Ebonyi State Chapter,
and members of Wesley Methodist Church Nigeria Izhia Circuit, for their moral support and
kind prayers throughout the duration of this study.
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