THE DIVIDEND POLICY AND INVESTORS’ BEHAVIOUR IN NIGERIAN INSURANCE FIRMS

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY

The dividend puzzle has motivated many researchers to examine why firms pay dividend. The results from the endeavours suggest that despite the tax disadvantage of dividend in relations to capital gains, many firms continue to pay dividends and are reluctant to cut dividends even when internal funds are insufficient for good investment and opportunities. Abor, J. and Bokpin, G.A. (2010).

Dividend policies allocates  the earnings between payment to shareholders and reinvestment in the firms. Residual or retained earnings constitutes one of the most important sources of funds for financing corporate growth and stability. Dividend policy forms one of the major decisions often faced by management of corporate organization of their pursuit of maximizing the value of these organizations.

Dividend policy affects a firms cost of capital and is therefore important to shareholders wealth. The payment of dividends can also be used to reduce the cost of agency conflicts between shareholders and managers. On the other perspective, dividends are the cash flows that are receivable to shareholders. Since cash dividend payment are the opposite of retained earnings, it is therefore imperative to note that dividend policy is extricably linked to the internal financing policy of a firm.

An increase in the retained earnings of a firm will result into a decrease of shareholders dividend may be adversely affected. According to Marsh and Mclennan (2016), the financing of profitable investment opportunities with retained earnings will enhance the future earnings per share. Management decided through its dividend policy on amount of or proportion of earnings to pay out as dividend and the amount to be retained for the internal operations of the organization constitutes the source of which dividend aids.

1.2 STATEMENT OF THE PROBLEM

In the Nigerian economy, where the dividend of the corporate organizations are declared as at when due, attention will be called on why dividend policy affects the investors behaviour.

A critical step would be taken to determine how corporate taxes affect the investors profit level, thereby reducing the level of dividend to investors in Nigeria.

1.3 OBJECTIVES OF THE STUDY

This research investigation will be geared through by the following objectives;

1. To find out if dividend policy in insurance companies differ significantly from other corporate body.
2. To find out if investors in insurance companies are satisfied with the dividend policy operated.
3. To find out if tax on dividend in insurance companies differ significantly from other corporate body.
4. To find out if growth or otherwise in the insurance companies are depended on the dividend policies.
5. To find out if dividend policies in the insurance companies hinders borrowing for increased capitalization.

1.4 RESEARCH QUESTIONS

In Nigeria, dividend payments have loomed large among staggering. Thus, the insurance firms in Nigeria are not left out in what field stein called “The meanly universal policy of paying substantial dividend payments maintains a pattern particularly in view of the economy. Hence, this study intends to address the following research questions;

1. Are investors in the insurance companies satisfied with dividend policy?
2. Does dividend policy in insurance firms companies differ significantly from other corporate bodies?
3. Does government incur high tax rate on the dividend of insurance companies?
4. Does growth of insurable businesses depend on dividend policy?
5. Does dividend policy in insurance companies allow for further capitalization?

 1.5 RESEARCH HYPOTHESIS

The following hypothesis has been postulated to guide the study;

Ho1: Profit after tax has no significant relationship with dividend policy of insurance firms.

Ho2: Profit after tax has a significant relationship with dividend policy of insurance firms.

1.6 SIGNIFICANCE OF THE STUDY

1. To existing investors: Rational investors should have rejected dividend due to their tax disadvantages, some investors had a strong preference for dividends and viewed large dividends positively. The evidence for this came from studies of companies that had two classes shares; one that paid cash dividends and another that paid an equivalent among of stock dividends ; thus investors are given a choice between dividends and capital gains.
2. To potentials investors: When firms increase dividends, the biggest peril that they face is being unable to sustain these dividends, given volatile earnings. Potential investors should have the knowledge that a firm that targets a constant dividend payout ratio will pay more dividends when its earnings are high and less when its earnings are low and the signalling effect of lower dividend will be mitigated if the payout policy is clearly stated up front.
3. To consultants on investors in insurance business: When consulting for an insurance company, the consulting body should be able to prove that insurance companies will be able to distinguish themselves from their peers if they create strong governance frameworks and utilize the breadth of opportunities at their disposal to improve returns given the low yields on high quality fixed income assets in min investment.
4. To stockbrokers: Unlike other insurance providers, an insurance broker works for you rather than the insurance company. Brokers use their professional knowledge and experience to help you properly assess your insurance needs, shop for the best value in insurance coverage and help you in event of a claim. It is also very important to know that there is no extra cost to you for all the services that a broker provides, he is paid a commission through the insurance company and believes in complete transparency in this regards.
5. To the government: It is of great importance to know that the government must have vast potential to insure public infrastructures, central governments, mainly self insure government properly and activity while smaller governments subdivisions are able to find economies in pooling risks with others through private insurance. There are opportunities for states to leverage the skills and growing capacity of private insurance to allocate risks efficiently and retain only the portion that is truly uninsurable. In this way, risks become a budgeted cost and the impact of adverse events can be shared with private insurers.
6. To researchers of the similar topic or area: To researchers on the similar topic, it is important to know that dividend policy and investors’ behaviour in insurance firms are of great importance to an individual or firm who are potential investors should be able to assimilate your work and your work should be able to give guidelines as to how to invest in an insurance company.

1.7 SCOPE OF STUDY

This investigation is centred on insurance firms including the listed and those not listed on the Nigerian stock exchange. Therefore further emphasis may not be considered on organizations beyond those doing insurance business.

1.8 LIMITATIONS OF STUDY

Several challenges are set to be encountered during the period of this investigation process such as;

1. The time constraints primarily due to the fact that the analysis of the selected firm for the study is particularly vast.
2. The lack of the availability of the required fund also poses a set back to the research process.

3 .Data sourcing is particularly a large limitation considering the poor database management system within the country.

1.9 DEFINITION OF TERMS

DIVIDEND: This is the proportion of funds paid out profits (after tax) to shareholders of a firm as part of the benefits accruable to them for staking their capital worth.

DIVIDEND POLICY:  This is the determination of earnings to be distributed to shareholders and the amount to be retained for the future growth of the firms.

INVESTORS: This is the purchase or acquisition of new capital equipment like machines, buildings and other produced means of production that increases the productive capacity of economy.