DIVIDEND POLICY AND MARKET VALUE OF COMPANIES IN THE HEALTH SECTOR ABSTRACT This study is motivated by a desire to examine dividend policy and market value of companies in the health sector of Nigeria. In light of the empirical review and other discussions, a number of questions arose as to whether cash dividend, share dividend, earnings per share and market of value of companies in the health sector of Nigeria. Using the Ordinary Least Square (OLS) regression technique with the aid of a computer software E-view 7.0, the empirical findings revealed among other things that, there is no significant relationship between cash dividend per share, retained earnings per share, earnings per share and market value, while there is a significant relationship between stock dividend per share and market value. We recommend among other things that, the management of the various companies is called upon to formulate and implement policies which will likely to stimulate earnings per share, cash dividend per share, stock dividend per share, retained earnings per share and other performance measure in the right direction which would positively influence the market value of their company. TABLE OF CONTENTS CHAPTER ONE: Introduction Background to the Study Statement of the Problem Objective of the Study Research Hypotheses Scope of the Study Significance of the Study Limitations of the Study Definition of Terms References CHAPTER TWO: LITERATURE REVIEW Introduction Determinants of Dividend Policy Dividend Payout and Profitability Dividend Payout and Maximizing Shareholder Value Empirical Studies Cash Dividend and Market Value Share Dividend and Market Value Earnings and Market Value References CHAPTER THREE: RESEARCH METHODOLOGY Introduction Research Design Population of the Study The Sample Size Sampling Techniques Sources of Data Measurement of Variables Model Specification Method of Data Analysis References CHAPTER FOUR: PRESENTATION AND ANALYSIS OF RESULT Introduction Presentation of Data Analysis of Data Hypotheses Testing Discussion of Findings CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS Introduction Summary of Findings Conclusion Recommendations Bibliography Appendix CHAPTER ONE INTRODUCTION BACKGROUND TO THE STUDY The dividend policy of a company determines what proportion of earnings is distributed to the shareholders by way of dividends, and what proportion is ploughed back for reinvestment purposes. Since the main objective of financial management is to maximize the market value of equity shares, one key area of study is the relationship between the dividend policy and market price of equity shares. Dividend policy connotes to the payout policy, which managers pursue in deciding the size and pattern of cash distribution to shareholders over time (Davis 2006). Since managements‟ primary goal is shareholders‟ wealth maximization, which translates into maximizing the value of the company as measured by the price of the company’s common stock. This goal can be achieved by giving the shareholders a “fair” payment on their investments. However, the impact of firm’s dividend policy on shareholders wealth is still unresolved. Capstaff, Klaeboe, and Marshall, (2004) defines dividend policy under the relevance theory as, “The dividend policy is a practical approach, which treats dividends as an active decision variable and retained earnings as the residue. Dividends are more than just a means of distributing net profit, and that any variation in dividend payout ratio could affect share prices; a firm should therefore endeavor to establish an optimal policy that will maximize shareholder’s wealth. Dividend policy has been an issue of interest in financial literature since Joint Stock Companies came into existence. Dividend policy suggests a positive attitude for, it is a deliberate policy to maintain or increase dividend at a certain level with the ultimate aim of sustaining the price of the ordinary shares on the stock exchange. This is because capital markets are not perfect, although shareholders are indifferent between dividend and retained earnings due to market imperfections and uncertainty, but they give a higher value to the current year dividend than the future dividend and capital gains. Dividend policy can be of two types: managed and residual. In residual dividend policy the amount of dividend is simply the cash left after the firm makes desirable investments using NPV rule. If the manager believes dividend policy is important to their investors and it positively influences share price valuation, they will adopt managed dividend policy. Firms generally adopt dividend policies that suit the stage of life cycle they are in. Dividend policy is one of the most complex aspects in finance. Three decades ago, Black (1976) in his study on dividend wrote, “The harder we look at the dividend picture the more it seems like a puzzle, with pieces that just don’t fit together”. Why shareholders like dividends and why they reward managers who pay regular increasing dividends is still unanswered. Dividend policy remains a source of controversy despite years of theoretical and empirical research, including one aspect of dividend policy: the linkage between dividend policy and stock price risk (Allen and Michaely, 2003). Paying large dividends reduces risk, thus influence stock price (Gordon, 1963), and is a proxy for the future earnings (Baskin, 1989). If dividend policy is stable, high dividend stocks will have a shorter duration. STATEMENT OF THE PROBLEM A study by Amidu (2007) revealed that dividend policy affects firm performance as measured by its profitability. The results showed a positive and significant relationship between return on assets, return on equity, growth in sales and dividend policy. Howatt (2009) also concluded that positive changes in dividends are associated with positive future changes in earnings per share. In contrast, Lie (2005) argues that there is limited evidence that dividend paying firms experience subsequent performance improvements. In view of the complexities and importance surrounding the dividend policy of a firm this study would attempt to solve the following problems: What is the relationship between cash dividend and market of value of companies? What is the relationship between share dividend and market of value of companies? What is the relationship between earnings per share and market of value of companies? What is the relationship between investment policy and market of value of companies? OBJECTIVE OF THE STUDY The main objective of this study is to empirically examine dividend policy and market value of companies in the health sector of Nigeria. The specific objectives are: To examine the relationship between cash dividend and market value of companies. To determine the relationship between share dividend and market value of companies. To examine the relationship between earnings per share and market value of companies. To ascertain the relationship between investment policy and market value of companies. RESEARCH HYPOTHESES The following formulated hypotheses will be tested in the study: There is no significant relationship between cash dividend and market of value of companies. There is no significant relationship between share dividend and market of value of companies. There is no significant relationship between earnings per share and market of value of companies. There is no significant relationship between investment policy and market of value of companies. SCOPE OF THE STUDY The research study focuses on dividend policy and market value of companies in the health sector in Nigeria. The population of the study is the entire quoted companies in the alternate Nigeria Stock Exchange. The sample size is some selected health sector companies quoted in the Nigeria Stock Exchange for the periods 2006 to 2011. Geographically, the study will be conducted in Benin City, Edo State. SIGNIFICANCE OF THE STUDY A lot of debates and views exist on the influence of dividend policies on market value. This study would contribute to the body of existing knowledge. This study is intended to shed more light on the issues surrounding the dividend policies and market valuation. Other interested parties that could benefit from this study are investors, investment houses, other companies which pay dividend, institutions of higher learning and future researchers wishing to research further. LIMITATIONS OF THE STUDY In conducting this research work, the following constraints are discernible. Smallness of the sample size, which is as a result of limited time and finance. DEFINITION OF TERMS Dividend: The variable return to equity shares decided by the Board of Directors of a company/corporation according to its policy on distributing its profit after taxes and all charges have been paid. Dividend Policy: Dividend policy involves the decision to payout earnings or to retain them for re-investments in the company. It involves a corporation’s choice of whether to pay its shareholders a cash dividend and, if so, how much to pay and with what frequency (annually, semi-annually or quarterly). REFERENCES Aivazian, V., Booth, L., & Clearly, S. (2003). Do emerging market firms follow different dividend policies from U.S. firms? Journal of Financial Research, 26(3), 371 – 387. Al-Haddad, W. (2011). The effect of dividend policy stability on the performance of banking sector. International Journal of Humanities and Social Science, 5(1). Alii, K.L., Khan, A.Q. & Ramirez, G.G. (1993) “Determinants of corporate dividend policy: A factorial analysis”, Financial Review, vol. 28: 523-47 Arnott, D. R., & Asness, S. C. (2003). Surprise higher dividends is higher earnings growth. Financial Analyst Journal, 70 – 87. Bajaj M. & Vijh, A. (1990) “Dividend Clienteles and the Information Content of Dividend Changes”, Journal of Financial Economics, vol.26: 183-219 DeAngelo, H., DeAngelo, L., & Stulz, R. (2006). Dividend Policy and the earned/contributed capital mix: a test of the life-cycle theory. Journal of Financial Economics, 81, 227-254. Farsio, F., Geary, A., & Moser, J. (2004). The relationship between dividends and earnings. Journal for Economic Educators, 4(4), 1 – 5. Foong, S.S., Zakaria, N.B. & Tan, H.B. (2007) “Firm Performance and Dividend-Related Factors: The Case of Malaysia”, Labuan Bulletin of International Business & Finance, vol. 5: 97-111 Howatt, B. (2009). Dividends, earnings volatility and information. Applied Financial Economics, 19(7), 551 – 562. Osaze, B.E. & Anao, A.R. (1990) Managerial Finance, Benin City: Uniben Press Ross, S.A., Westerfield, R.W. & Jaffe, J. (2002) Corporate Finance (6th ed.), McGraw-Hill Companies.
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