The effects of dividends on the price of ordinary shares in some quoted companies

CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The effect of dividends on ordinary shares value has been accorded extensive investigation by financial analyst in the literature. In the main, a company’s dividend policy could not be ignored or understand while valuing the shares of any company. Basically, it (dividend policy) is the determination by management of the proportion of earnings to be returned as a source of internal financing and how much shareholders should prudently be rewarded for their investments taking into consideration the financial requirements of the company.

Since dividend policy affects the overall financial management of a company, therefore, management has to exercise a high degree of scription in establishing a dividend pattern for their companies. Thus, a prudent board of directors will deem if fit to establish a dividend policy which can be easily implemented because the reward for shareholders investment could either be a financial package or other incentives like script issues, bond issues etc or both.

Empirical studies so far indicates a wide curiosity of dividend decision not only among industries but also among companies in the same industry. While some over jealous management will put their dividend returns on a very high plateau only to realize later that it endangers the company, others would adopt a relatively ranging reward policy which will include both cash and incentives annually, which ever policy is followed some theories believes that it will affect the value of the company. Others however, are of the view that the dividend policy adopted by a company is irrelevant to both the value of its shares and the wealth of its shareholders given the firms investment policy and the risk class, this controversy has attracted the attention of eminent analyst in the financial interaction and this is what constitute the domain of this study.

1.2    STATEMENT OF PROBLEM
The effect of a firm’s dividend policy on the price of its shares is of considerable importance not only to the corporate financial officials who most put (set) in place the policy but investors planning portfolios and economists seeking to understand and appraise the functioning of the of the capital markets. However, no consensus has yet been achieved from studies conducted on the issue. For instance Watt (1973) using annual data argued that the information content of dividends can only be trivial and thus may not have influence on ordinary share prices. In contrast to this Pettit (1972) and Lauub (1976) using quarterly data suggested that dividends announcements, conveys information beyond that already reflected in contemporizes earning numbers and consequently may affect share prices. This critical problem of not having a clear (empirical) explanation of the effect of dividends on the price of ordinary shares is what caught (attracts) our attention to this study:

1.3    THE OBJECTIVE OF THE STUDY
In Nigeria, studies have been conducted in the pattern of dividend policies pursued by Nigeria companies. These studies often seems to say little or nothing about the effect of dividends on the price of ordinary shares even in the advance countries where studies have been conducted on the issue, options are different and in addition of the studies made use Nigeria data.
According to Odite (1977) many of the models stated in the literature are more relevant to the advanced economies. Thus, most of what is obtainable here may not be applicable at least completely in Nigeria. The specific purpose of this study therefore:
(1)     To establish and explain the effect of dividends on the price of ordinary shares while other objectives are
(2)     Do shares of companies with feverous distribution policy consistently sell at a premium.
(3)     To ascertain if increase in dividends declared could lead to an increase in ordinary shares prices.
(4)     To examine if shareholders ever bother about how their earnings were distributed.
1.4    RESEARCH QUESTIONS
In the process of determining the effect of dividends on the price of ordinary shares, certain questions were raised.
(1) Is there any impact of dividends on the price of ordinary shares?
(2) Do shares of companies with feverous distribution policy consistently sell at a premium?
(3) Will an increase in dividends declared lead to an increase in ordinary shares price?
(4) Do shareholders ever bother about how their earnings were’ distributed?
These and many more questions will be answered in the course of this study.