CHAPTER
ONE
INTRODUCTION
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
For
owners of the firm, dividend may be a necessary reward for providers of funds.
The higher these dividends, the satisfied are these owners who see such
financial investments as rewarding, and thus attractive to non-owners to invest
in. Financial theory supports this idea for such investors to desire holding
into such stocks, and others desiring to acquire such stocks. Payment of this
rewards, dividend, and signals good prospects for firms, Finnerty (1986)
observed from his study of American firms over a 40 years period that smaller
and younger firms do not play cash dividend to their shareholders. However, he
added, at some point in life cycle of any firm it begins paying common
dividends. Continuing, he observed that between 80% and 90% of common stocks listed
on the New York stock Exchange in any year, pay cash dividends during the year.
Park (2009) observed that dividend payments are associated with firms with good
corporate governance; concluding that firms in “legal regimes that focus on
protecting investors are more likely to pay” even “higher dividends than firms
in legal regimes with less investor protection”. Determinants identified in
financial theory as affecting dividend paying behavior of firms are the
availability of cash with which to pay the dividend, amount payable, government
regulations, covenant restrictions in business transactions and the
availability of viable investment options for dividend-proposed funds. With
these, firms strive to continue regular dividend payments to keep themselves
attractive to investors; highlighting the proposed amounts when issuing
dividend declarations. Firms exhibit a strong aversion to reducing their
dividend rates (Frankfurter and Wood, 2000). Reduction in this rate is
interpreted by investors as a signal that the firms earning prospects have worsened;
though firms in periods of adversity, reduce dividends rate when factors
causing such adversities are obvious. Reductions in dividends rates adversely
affect a firm’s share price, and in such cases the share prices of firms in the
same industry as investors may interpret such reductions as industry affected.
Dividend is also often mixed with capital investment decisions. Investors’
characteristics determine whether dividend payment is necessary or not. Some prefer
current income streams with higher relative tax rates to differed income,
capital gains, with lower relative tax rates in the present inflationary
situation. Use of margin loans for equity investment purposes, require the
generation of current regular income to service and pay such cash loans. The
present harsh economic environment, high interest rate, low income, high cost
of goods, and delayed salaries make it necessary for investors to receive
current regular income to augment earned income and meet socio-economic needs.
These needs in Nigeria are basically the physiological needs enumerated by
Maslow (1954): shelter, safety, security (financial and physical) and love
(family and attendant needs). The agency theory of dividends posits that
dividends mitigate agency costs by distributing free cash flows that firm
managers would have spent on unviable investments. The likelihood of firms
seeking new funds from outside sources by the distribution of cash through
dividend payments has been accepted in finance literature as a cause for
scrutiny by the capital market. This scrutiny by the market according to
Kowalewski et al. (2007) help in alleviating opportunistic managerial
behaviours, and cost of agency. Gompers et al. (2003) in their study related
agency costs to the strength of shareholder rights; further relating them to
corporate governance. The outcome of the two agency models of dividend test by
La Porta et al. (2000) reveal that dividends are paid because minority
shareholders pressurize managers to reduce cash flow in the firms; predicting
that firms with weak shareholder rights need to establish a reputation for not
exploiting minority shareholders, concluding that such firms pay dividends more
than firms with stronger shareholder rights. Commenting, Bebczuk (2005) noted
that there is the likelihood of firms with good corporate governance practices
paying more dividends, dividend policy.
1.2 STATEMENT
OF THE PROBLEM
Reductions
in dividends rates adversely affect a firm’s share price, and in such cases the
share prices of firms in the same industry as investors may interpret such
reductions as industry affected. Dividend is also often mixed with capital
investment decisions. Investors’ characteristics determine whether dividend
payment is necessary or not. Some prefer current income streams with higher
relative tax rates to differed income, capital gains, with lower relative tax
rates in the present inflationary situation. Use of margin loans for equity
investment purposes, require the generation of current regular income to
service and pay such cash loans. The present harsh economic environment, high
interest rate, low income, high cost of goods, and delayed salaries make it
necessary for investors to receive current regular income to augment earned
income and meet socio-economic needs.
1.3 OBJECTIVES
OF THE STUDY
The
main objective of the study is to determine the effect of corporate governance
and dividend policy on conglomerate Nigeria firm. The specific objective area
as follows:
i.
To investigate the
relationship between board size and firm dividend policy.
ii.
To investigate the
relationship between board independent and firm dividend policy.
iii.
To investigate the
relationship between Chief executive officer Ownership and firm Dividend
policy.
1.4 RESEARCH
QUESTIONS
The following questions are formulated for the purpose
of this study;
i.
Do board size
significantly influence firm’s dividend policy?
ii.
Do board
independence significantly influence company’s dividend policy?
iii.
Do CEO ownership significantly
influence company’s dividend policy?
1.5 RESEARCH
HYPOTHESES
For
the successful completion of the study, the following research hypotheses were
formulated in null and alternative form;
Hypothesis One
H0:
There is no relationship
between board size and company’s dividend policy.
H1:
There is a relationship
between board size and company’s dividend policy.
Hypothesis
Two
H0: There is no relationship between board
independence and company’s dividend.
H1:
There is a relationship
between board independence and company’s dividend.
Hypothesis Three
H0: There is no relationship between CEO
ownership and company’s dividend policy.
H1: There is a relationship between CEO
ownership and company’s dividend policy.
1.6 SIGNIFICANCE OF THE STUDY
This
study will be very significant to students, firms and the general public. The
study will give a clear insight on the effect of corporate governance and
dividend policy on conglomerate Nigeria firm. The study will also serve as a
reference to other researchers that will embark on this study.
1.7 SCOPE
OF THE STUDY
The
scope of the study covers effect of corporate governance and dividend policy on
conglomerate Nigeria firm. The researcher encounters some constrain which
limited the scope of the study;
1.8 DEFINITION
OF TERMS
CORPORATE GOVERNANCE: Corporate governance broadly refers to
the mechanisms, relations, and processes by which a corporation is controlled and is directed; involves balancing
the many interests of the stakeholders of a corporation.
DIVIDEND POLICY: Dividend policy is the policy a company uses to
structure its dividend payout to
shareholders. Some researchers suggest that dividend policy may be irrelevant, in theory, because
investors can sell a portion of their shares or portfolio if they need funds.
CONGLUMERATE: A conglomerate is a
combination of multiple business entities operating in entirely different
industries under one corporate group, usually involving a parent company and
many subsidiaries. Often, a conglomerate is a multi-industry company.
Conglomerates are often large and multinational.
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Pages: 100
Format: MS-Word
Chapters: 1-5 (Complete)
