RELATIONSHIP BETWEEN EARNING, DIVIDEND AND THE VALUE OF A COMPANY

1.1 Introduction

The dividend policy is an annual compensation for a company’s assets taken from after-tax earnings and given to shareholders. These payments are dictated by the type of dividend policy adopted by a company. It comprises of a series of decisions regarding how the firms distribute profits to their shareholders and it mostly includes basic contents about the selection of dividend policy, dividend payout ratio and payout channel etc. since the dividend policy determines whether to distribute the earnings to shareholders or self-finance through retained earnings, thus it is an important issue that receives more attention this days from both academicians and practitioners. The dividend payout and the retention ratios are, therefore, determined by the dividend policy. The company then repossesses the retention ratio as a source of finance and shareholders’ wealth.

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of technical terms.

1.2 Background of Study

A company can be defined as an “artificial person” with legal entity, perpetual succession and a common seal (Wikipedia, 2023). Similarly, a ccompany has been defined as a complex network of contract binding on various interest groups (Ilaboya, 2008:121). It takes cognizance of the stake of various interest groups in business activities of the company. These stakeholders include the shareholders (owners) of the company, investors, employees, labour unions, government and general public. These various stakeholders have different uses for the financial statement (Igben, 2005:94).

According to Statement of Accounting Standard (SAS) No.2, financial statements are the means of communicating to interested parties, information on the resources obligations and performance of the business entity. Section 21 of the Company and Allied Matters Act (CAMA) 2004, prescribed three (3) different types of companies. These are, companies limited by shares, companies limited by guarantee and unlimited companies. However, whether limited by shares, limited by guarantee or unlimited, a company can either be a private company or public company. However, for the purpose of this research work our focus will be on quoted companies.

Section 24 of the Companies and Allied Matter Act (CAMA) 2004 states that, any company other than a private company shall be a public company, and it shall be stated in its memorandum of association that it is a public company. The prescribed minimum membership of a public is seven (7) without a ceiling. Public company can raise capital through the issues of shares and such shares are transferable. They must have minimum of two directors.

The ownership and management of a public company are separated which makes the directors render adequate or proper services to the shareholders. The financial statement which is the sole responsibility of the directors to prepare must contain the financial report which enables the various stakeholders to find out the true performance of the company. It has been observed that important decisions that involve huge financial responsibility on the part of investors are made on the basis of information available on the financial report of the company. Thus, it is very important that the information contained in such financial report goes a long way in intimidating such investors of the true value of the company. The corporate value of the company is known as the value of the company. For the purpose of this research work, the market value of the company would be representing the corporate value.

The dividend irrelevance proposition suggests that a firm’s dividend policy has no effect on the value of the firm in a perfect and complete market (Stulz, 2000). Financial managers therefore, cannot alter the value of their firms by changing their dividend policy (Dhanani, 2005). The market position or observation is that a change in dividend policy is valued by the market. The valuation of firms also focuses on the relationship between dividend changes and future cash flows, that is, future earnings or dividends (Howatt et al., 2009).

The research work seeks to verify the relationship that exists between the earnings of the company, the dividend it pays out, it trading volume and the values of the company. This is because apart from the fact that a company uses the earnings to pay dividend to its shareholders, it can also plough or invest portion of such earnings back into the business. The decision of what portion of earnings to re-invest is usually made in the light of certain factors. The research work therefore seeks to find out what effect such decision has on the corporate value.

1.3 Statement of Problems

Investigation revealed that despite the numerous studies (Arnott & Asness, 2003; Farsio et al 2004 and Nissim & Ziv 2001) that have been done, dividend policy remains an unresolved issue in corporate finance. Corporate management in making capital structure decision of paying out dividends to the shareholders has always faced the dilemma of whether; the payout criterion should be effect on the value of the firm.

In Nigeria today, many investors especially in the manufacturing sectors, invest lot of money in shares with the hope of maximizing profit in form of dividend without taking in to consideration the earnings and market values of the company. Since earning and market values of a company is an important decision variable, it needs to be handled with care if an investor must maximize profit and remain in business. In view of these complexities and importance surrounding earnings, dividends, trading volume and market values of the firm. This research work has attempted to offer solutions to the problem listed in research questions.

1.4 Aim and Objectives of Study

The aim of the study is to examine the Relationship between Earnings, Dividend and Value of a Company. In achieving this aim, the following specific objectives were laid out as follows:

1. To investigate the effect of unreliability of financial data and its relationship with the firm’s dividend payout policy;
2. To establish the pattern of dividend payout and its relationship with the firm’s value;
3. To establish whether the macro economic factors play a role in payout of dividends; and
4. To determine whether firm’s riskiness exposure of its cash flows has bearing to its dividends payout and the firm’s performance and its value.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• What is the effect of unreliability of financial data and its relationship with the firm’s dividend payout policy?
• What is the pattern of dividend payout and its relationship with the firm’s value?
• What is the macro economic factors play a role in payout of dividends?
• What is the firm’s riskiness exposure of its cash flows has bearing to its dividends payout and the firm’s performance and its value?
• Does the earning yield of a company affect the market value of the firm?
• What influence do the earning of a company as reflected in the Earnings Per Share (EPS) has on the values of the company?
• What influence does the Dividend Per Share (DPS) paid by the company has on the value of the company?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: Asymmetric information of financial data does not affect firm’s value negatively.
• H1: Asymmetric information of financial data affects firm’s value negatively.

Hypothesis Two

• H0: Dividends payouts have a negative effect on total performance of the firm and its value.
• H1: Dividends payouts have a positive effect on total performance of the firm and its value.

Hypothesis Three

• H0: There is no significant relationship between dividend payout and firm’s value
• H1: There is significant relationship between dividend payout and firm’s value

Hypothesis Four

• H0: Macro-economic factors do not affect the firm’s dividend policy.
• H1: Macro-economic factors affect the firm’s dividend policy.

1.7 Significance of Study

The significance of this research will be of immense benefit to the following stakeholders:

1. Investors: To investors, it will enable them when making investment decision to take a close look at the value of the company which they are interested in investing their resources so that they can appreciate and understand the type of relation that exists between the earnings of a company and the value of such company.
2. Students: To students, it will increase their knowledge and better understanding of earning, as well as dividend of a company. Also, how the dividend pays out by a company to its shareholder affects the market value of the company.
3. Researchers: To researchers in the field, they can make use of the research project as it will serve as a guide for intending researcher in the future, bearing in mind that, this research will expose all that is, to know bout the relation that exists between the earnings of a company, other variable and its corporate values.
4. General Public: This research is beneficial to the public by providing them with an understanding of the meaning, purpose of companies earning as well as its relationship to its corporate value. In general, this study will help to expand one’s knowledge on share price movement in Nigeria. Therefore, researchers and reading public will find the work extremely useful.

1.8 Scope of Study

The scope of the research is focused on the Relationship between Earnings, Dividend and Value of a Company in Nigeria. The scope of this study covers at least ten (10) companies in the manufacturing industry from 20017 – 2022, so that a useful cross sectional analysis can be carried out.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint:The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Establishment Policies:Establishment policies posed a serious limitation as most staffs are not ready to release information needed for this project work. There were lots of information needed from the staffs of this establishment to enhance the study which took them time to release or they did not release at all for security purposes, hence the scope was reduced.
3. Research material: availability of research material is a major setback to the scope of the study.
4. Frequent power failure:This made the researcher append more money on fuel to ensure sustainable power.
5. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

1.10 Definition of Terms

Company:

It is an artificial person with legal entity, perpetual succession and a common seal (Wikipedia, 2010).

Earnings:

The profit realized after tax and interest has been deducted.

Public Quoted Companies:

Companies listed in the Nigeria Stock Exchange (NSE).

Dividend (DIV):

It is distribution, generally of assets, made by a corporation to its stockholders. The formula is given as: Total ordinary dividend / No of ordinary share.

Earnings Per Share (EPS):

This is the portion of a company’s profit allocated to each outstanding share of common stock, serving as an indicator of the company’s profitability.

Dividend Per Share (DPS):

This is an accounting ratio used to evaluate the total number of dividends declared for each share of issued stock.

Dividend Payout Ratio (DPR):

This measures the percentage of net income that is distributed to shareholders in the form of dividends during the year. It is calculated as DPR=Total Dividends/Net Income.