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EFFECT OF CORPORATE GOVERNANCE AND DIVIDED POLICY ON CONGLOMERATE NIGERIA

 

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)




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