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Money Banks in Nigeria (A Case Study of Selected Banks)” was designed to
investigate factors that influence the dividend growth pattern of Nigerian
Deposit Money Banks. Using the confirmatory specification approach to
model development, the study estimates the relationship between three
explanatory variables – Earnings Per Share, Share Price, Inflation, and one
explained variable –Dividend Growth Pattern by means of the least squares
techniques. The population of the study is the 21 banks listed on the floor
of NSE as December, 2009. Total of 7 banks were selected based on
judgmental sampling technique adopted. Only secondary source of data was
employed and the technique utilized for data analysis is multiple regression
analysis. It was found that the three predictor variables- Earnings Per
Share, Share Price and Inflation have a significant influence on the
Dividend Growth Pattern of DMBs in Nigerian. The study also reveals that
Inflation has the highest determining ability on the Dividend Growth Pattern
of Deposit Money Banks in Nigeria followed by Earnings Per Share and
then the Share Price. The study recommends that the Management of banks
should improve their performance so as to: (1) increase earnings; (2) attract
investors in which the shares prices of the banks are expected to rise and (3)
Government policy should be directed at controlling inflation. These
recommendations are expected to positively affect Dividend Growth of
banks. Management of Deposit Money Banks should ensure persistent and
sustainable growth in their dividend payment to shareholders. This will go a
long way to retain the patronage of their existing customer while gaining the
heart of potential investors. The banks should also ensure stability in their
earnings since it is obvious that increase earnings increases growth in





Title page
Table of content
Chapter One: Introduction
1.1. Background to the Study
1.2. Statement of the Problem
1.3. Objectives of the Study
1.4. Research Hypotheses
1.5. Scope of the Study
1.6. Significance of the Study
1.7. Definition of Terms
Chapter Two: Literature Review
2.1. Introduction
2.2. The Concept of Dividend and Dividend Policy
2.2.1. Objectives of Dividend Policy
2.2.2. Forms and Types of Dividend Policy
2.2.3. Patterns of Dividend Payments
2.3. Constraints of Dividend Growth Pattern
2.4. Influence of Share pricing on Dividend Growth
2.5. Determinants of Dividend Payout policy
2.6. Relevance of Dividend Payout to the Value of the firm
2.7. Irrelevance of dividend Payout to the Value of the Firm
2.8. Controversial Issues on Dividend Policy
2.9. Dividend and Uncertainty
2.10. Dividend Policy and Shareholders Rights
2.11. Dividend Policy and Agency Theory
2.12. Theoretical Framework
2.13. Summary
Chapter Three: Research Methodology
3.1 Introduction
3.2 Research Design
3.3 Population and Sample technique
3.4 Data Collection Technique
3.5 Data Analysis techniques
3.6 Justification of the technique
3.7 Summary
Chapter Four: Data Presentation and Analysis
4.1 Introduction
4.2 Correlation Results
4.3 Presentation of Results
4.4 Interpretation of Results and hypothesis validation
4.5 Findings and Discussions
4.6 Summary
Chapter Five: Summary, Conclusions and Recommendations
5.1 Summary
5.2 Conclusions
5.3 Limitations of the Study
5.4 Recommendations
5.5 Suggestions for further Research



Dividend decision is one of the fundamental financial
decisions which corporate organizations, banks inclusive have
to make on continuous bases. This involves the determination
of the proportion of earnings to retain and the proportion to
distribute to shareholders. This concern has prompted many
studies on dividend policy. These studies focused on the
nature of dividends and such areas as the relevance or
irrelevance of dividend policy to the value of a firm; theories
and the determinants of dividend yield and dividend payout
rate. Despite extensive debate and research, the actual
motivation for paying dividends remains a puzzle. Baker &
Powell (2001).
Currently, three opposing theoretical views have emerged
on dividend policy. The first is the view of the rightists
advocated by Gordon (1976) and was supported by Adelegan
(2000) and Akuezuilo (2003). The rightists posit that a policy
of paying out more cash dividends, all things being equal, will
tend to increase the share price of a firm. This is based on the
assumption that rational investors are risk-averse and will
prefer dividends now to future dividends. The second view is
that of the leftists supported by Lichtenberger and
Ramaswamy, (1979 and 1982). The Leftists position is that a
high dividend payout is bad since it tends to reduce the share
price of a firm where dividends are taxed more heavily than
capital gains. In-between the two extremes is the middle-ofthe-
road party represented by Miller and Modigliani (1961).
They maintain that the share price of a firm is not affected by
its dividend payout policy. This is because as long as
investment and borrowing policy are held constant, a firm’s
overall cash flows are the same regardless of payment policy.
This is particularly true in a world without taxes, transaction
costs and other market imperfections.
These three schools of thought offer contradictory advice
to firms. The rightists urge firms to pay high dividend because
it increases the wealth of the shareholders. The leftists’ advice
firms to pay low dividend since dividend is often taxed more
heavily than capital gains. The middle of the roaders
encourages firms to vary dividend payment since it does not
matter whether dividend is paid or not.
In practice, retained earnings are usually considered as
the most significant source of long-term fund required to
finance the firm’s long-term growth. However, a firm is made
up of a coalition of members with somewhat conflicting
interests. Three members of the coalition are considered as the
most prominent in a firm’s dividend decision. These are the
firm (itself), the owners (shareholders) and creditors
(bondholders and others). This implies that a firm’s decision to
retain a large proportion of its earnings will adversely affect
the two other coalition members. A high retention ratio will
result in low payout ratio, which implies less current
dividends. A high retention ratio will also imply lower net cash
flow because of the relationship between dividend payment
and cash flow. A lower net cash flow reduces a firm’s
solvency, that is, its ability to pay its debts as and when due.
Thus a firm must strike a proper balance between these
conflicting interests.
The study on dividend policy carried out by Lintner
(1962) revealed that every firm, in practice, follows a particular
dividend policy. The study further showed that firms consider
the proportion of earnings to be paid out without recourse to
their investment requirement. In other words, investment
requirement is not a factor for modeling the dividend policy of
firms. Hence firms generally have a long-run dividend payout
ratio, which are usually smoothened in the process of
determining dividend changes that follow shifts in long-run
sustainable earnings.
Oyejide (1976) used a modified Lintner – Brittan model
adopted by Charitou and Vafeas (1998) to demonstrate the
applicability of Lintner’s model to firms in Nigeria. The study
revealed that the Lintner type conventional models perform
remarkable well in explaining the dividend policy of quoted
firms in Nigeria.
A survey carried out by Ramesh and Pandey (1994)
showed that the typical policy of most firms in practice is to
retain between one-third and two-third of the earnings and
distribute the remaining amount to shareholders. The Board of
directors (BODs) in this regard has a large degree of flexibility
to decide on the proportion of earnings to pay as dividend.
The decision is by no means an easy one largely because
of the alternative approaches to the establishment of dividend
policy in practice. One of the important approaches used in
establishing a dividend policy is the residual dividend
approach. Under this approach, firms generally avoid new
equity sales and rely heavily on internally generated cash flow
to finance profitable projects. Dividend is paid only from the
left over of cash after satisfying investment requirements. With
this policy, the firm’s objective as Ross et al (1977 and 1996)
indicated, is to maintain its investment needs and its desired
debt/equity ratio before paying dividend. Given this objective,
the expectation is that firms will pay a high percentage of their
earnings as dividend when investment opportunities are few
and vice-versa. Both growing and matured firms employ this
The major disadvantage of the residual dividend
approach is that it leads to unstable dividend payout, which
may create lack of confidence in he minds of shareholders. In
order to avoid this, a firm may choose between at least two
types of dividend policies. First, each quarter’s dividend can
be a fixed fraction of that quarter’s earnings. The effect of this
is that dividend will vary throughout the year. This is called a
cyclical dividend policy. Second, each quarter’s dividend can
be a fixed fraction of yearly earnings, implying that all
dividend payments would be equal. This is a stable dividend
According to Ramesh and Pandey (1994), most financial
managers agree that stable policy is in the best interest of the
firm and its shareholders. This is because it enables
shareholders to predict dividend payment. Dividend cuts in
particular are viewed as highly undesirable because such cuts
are often interpreted as a sign of financial distress.
Consequently, most companies in practice will try to maintain
a steady dividend through time, increasing the dividend only
when management is confident that is confident that the new
dividend can be sustained in the long run.
From the above discussion, it is obvious that dividend
policy has been the subject of considerable research and
scrutiny by equity analysts and financial economists in the
developed economies. This study intends to determine the
growth pattern and the reasons for the emerging pattern in the
Nigerian Banking Sector.
The importance of dividend payments as one of the
determinants of a firm’s economic performance has for long
been recognized by developing economies (Oyejide, 1976). In
Nigeria, early studies on dividend policy attempted to highlight
the dividend policy pursued by Nigerian firms during the
period of indigenization. Uzoaga and Alozienwa (1974);
Inanga (1975) and Soyode (1976). These studies fall short of
utilizing the conventional dividend models in their
investigation. Subsequent studies such as Oyejide (1976),
Izedonmi and Eriki, (1996) and Adelegan, (2000 and 2001)
have tested the application of Lintner’s model and the modified
Lintner-Britain model as adopted by Charitou and Vafeas
(1998), in an attempt to explain the dividend policy of Nigerian
firms at different periods. Most of these studies however,
recognized the dynamic nature of the Nigerian economy and
the need for further research in order to validate the
conclusion that emanated from the studies.
The Financial Sector as a catalyst to economic
development has not witnessed substantial research studies
on its dividend policy. This study develops an empirical basis
that will reveal the growth pattern and the determinants of
dividend policy in Nigerian Deposit Money Banks (DMBs). This
is expected to provide useful explanation on the dividend
policy of Deposit Money Banks (DMBs) in Nigeria based on the
explanatory variables identified from prior studies and legal
considerations. The study also examines the effect of and
relationship between dividend growth patterns and the Deposit
Money Bank’s stock valuation.
Legally, dividend decisions in Nigeria are at the discretion
of the directors, there are of course constraints that limit the
directors. Some of the constraints are imposed by legal rules
while others are imposed by financial factors. The level of
influence of these constraints and factors are been evaluated
to provide a guide to Board of directors in exercising their
discretion in respect of making sound dividend decision.
This study shall address the following questions:
1. What are the financial and managerial determinants of
dividend pay out rate of Deposit Money Banks in
2. Which factor amongst the determinants has the most
significant impact on the dividend policy of Deposit
Money Banks in Nigeria and what is the sequential
significance of the determinants?
3. To what extent can the dividend policy of Deposit
Money Banks in Nigeria affect their stock valuation
and what relationship exits between them?
Basically, this study would attempt to test these two
hypotheses: Hypothesis
I and Hypothesis II.
Ho: There is no significant relationship between the
share prices and earning per share of Nigerian
Deposit Money Banks and their dividend growth
Hi: There is significant relationship between the share
prices and earning per share of Nigerian Deposit
Money Banks and their dividend growth patterns.
Ho: There is no significant relationship between inflation
rate and the dividend growth pattern of Nigerian
Deposit Money Banks.
Hi: There is a significant relationship between inflation
rate and the dividend growth pattern of Nigerian
Deposit Money Banks.
This study is designed to achieve the following objectives:
1. To identify the financial factors that determines the
growth pattern of dividend policy of DMBs in Nigeria.
2. To determine the aggregate impact of the determinants of
dividend policy in DMBs in Nigeria.
3. To identify the determinant with the most significant
impact on the dividend policy of DMBs in Nigeria, and
consequently, the sequential significance.
4. To develop some dividend policy guide for determining
the dividend policy of DMBs in Nigeria.
To date, the theories on dividend policy in the finance
literature have remained controversial. These controversies do
not seem likely to be resolved in the nearest future. The major
defects of these theories as Brealey and Myers (1996) pointed
out are that they are too incomplete, and the premise upon
which they are built is too sensitive to minor changes in
specification to warrant any dogmatism.
However, it is obvious that firms in practice adopt
various dividend policies. The convention in Nigeria and other
parts of the world is to grant substantial latitude to the Board
of Directors to make dividend decisions subject to some legal
and financial constraints. Consequently, divergent practices
exist in the area of corporate dividend policy. The
contributions of this study will therefore permeate the
theoretical and practical dimensions of Nigerian corporate
dividend policy, with particular emphasis to DMBs.
In the theoretical arena, this study echoes the view of
the rightist school of thought. This is due to the overwhelming
evidence that demonstrate the importance of dividend to
shareholders and the reaction of stock prices to dividend
announcements. It is therefore believed that the outcome of
this study will extend the frontiers of knowledge on dividend
The practical contributions of this study are thus
manifold. First, the accounting professional bodies may find
the outcome of this study useful in the development of a
standard on dividend. A standard on dividend is essential not
only to provide clear guide to corporate bodies in formulating
dividend policies but also required to narrow the divergent
practices that presently exist in the area of dividend policy.
This will go a long way in promoting uniformity and
comparability of financial statements.
Second, the Board of Directors (BODs) of commercial
banks will benefit tremendously from the outcome of this
study. Although the BOD’s latitude in formulating dividend
policy may be reduced or eliminated, the need for guidance
cannot be overemphasized. Where specific guidance exists,
dividend policy formulation can be based on clear cut
guidance rather than relying on intuition, hunch, or untested
rules of thumb. This will go a long way in promoting
uniformity and comparability of financial statements.
Lastly, future researchers may replicate this study using
different sample and time horizon in order to validate the
application of the model and findings of this study. It is
therefore hoped that this research will stimulate further
empirical studies on dividend policy in Nigeria.
This study will examine the aggregate impact of five
predictor variables, current profits, previous dividends, cash
flow, investment and net current assts on the dividend policy
of commercial banks in Nigeria.
The remaining parts of this study have the following
organization. Chapter two reviews and appraises theoretical,
survey and empirical works on corporate dividend policy that a
re elated to this study. Chapter three discusses the
methodology of the study. Chapter four presents the empirical
results generated from the primary and secondary data
collected for the purpose of this study. Chapter five provides
the summary, conclusion and recommendations of the study.