The Effect Of Dividend Policy On The Growth Of Micro Finance Institution

The Effect Of Dividend Policy On The Growth Of Micro Finance Institution

Abstract

Despite years of theoretical and empirical research, dividend policy remains a source of controversy especially the aspect of the linkage between dividend policy and stock price. Its impact on shareholders wealth is still unresolved. This is in view of the fact that companies belong normally to different people or groups of people with individual views on the business and how to divide the firm’s profit which inturn affects how each of these diverse investors place value on the firm. Hence, this study investigated the relationship between earning, dividend and the value of a company. Dividend relevance and irrelevance theories were introduced in the study to capture the divergent views on the impact of dividend policy on stock price. The study adopted time series research design and secondary data drawn from the fact book of the Nigerian stock exchange and annual report of ten (10) selected Microfinance Institution was used for the study. The sample selection is based on a number of criteria employed by previous studies on dividend policy. Such criteria includes firms with the financial and market information available in the summarized reports necessary to estimate the various pooled panel data models amongst others criteria. A linear regression model was developed and statistically tested using panel least square method. The result of the empirical study carried out revealed that the earning streams of companies in Nigeria have a greater impact than their dividend payouts in shaping the price of their shares in the market. The study therefore recommends that corporate managers should strive to maintain a steady increase in earnings by maximizing return on investment. The study further recommends that firms should maintain a stable dividend payout in order to increase internal finance available to pursue further profitable investments that will help increase earnings.

Chapter One

Introduction

Micro-finance refers to financial services such as cash loans, deposit savings accounts, and insurance made available in relatively small amounts to poorer populations throughout the developing world. Microfinance basically relates to all financial intermediation services such as savings, credit, funds transfers, insurance, pension and remittances among others by financial institution in both rural and urban areas to low income earners (Robinson, 2001). Microfinance promises both to combat poverty and to develop the institutional capacity of financial systems, through finding ways to cost-effectively lend money to poor households (Morduch, 2000). Three features distinguished microfinance from other formal financial products: the smallness of loans offered or savings collected the absence of asset-based collateral and the simplicity of operations (Seyed, 2011) . Loan repayment which measured portfolio quality was an essential ingredient for sustainability of MFIs. Loan repayment indicators included Portfolio at risk (PAR), credit risk measured by the sum of the level of loans past due 30 days or more (PAR>30) is negatively and significantly related to MFI sustainability (Cooper, A. Jackson, M. J . Patterson, G. A., 2003). Increased exposure to credit risk resulted to lower MFI sustainability, given that credit granting was the principal source of revenue for these institutions. There was a positive influence of the collection of deposits from clients in form of savings and also shares. Microfinance is primarily a cash-based operation and involves member’s savings. However, to make the sorts of investment that stimulate endogenous economic growth, one needs access to financial capital that comes either from savings or from borrowing, which is difficult in environments where the formal means of either saving or borrowing are typically absent. Traditional communities had informal mechanisms for savings. For example, voluntary rotating savings and credit associations of various sorts are proliferating across Southeast Asia and Africa allowed individuals to receive periodic payouts from group contributions (Anthony, 2005).

1.1 Background of the Study

Dividend policy is the regulations and guidelines that a company uses to decide to make dividend payments to shareholders (Nissim & Ziv, 2001). Dividend, which is basically the benefit of shareholders in return for their risk and investment, is determined by different factors in an organization. Firms ought to distribute their earnings to shareholders if they cannot identify suitable investments which would bring higher returns than those expected by the shareholders Mizuno (2007) .Dividend policy also affected MFI performance in that it encouraged members to increase their deposits because in the end of the year the profits arising from the performance was shared in form of dividend. The more the savings the more dividends received. Dividend policy is the decision to pay out earnings versus retaining and reinvesting them. Dividend policy was considered to be one of the most important financial decisions that corporate managers encounter (Baker & Powell, 1999). It had potential implications for share prices and hence returns to investors, the financing of internal growth and the equity base through retentions together with its gearing and leverage (Omran & Pointon, 2004). The research seeks to investigate the effect of dividend policy on the growth of microfinance institutions.

1.2 Statement of the Problem

Dividend policy is the regulations and guidelines that a company uses to decide to make dividend payments to shareholders (Nissim & Ziv, 2001). Dividend, which is basically the benefit of shareholders in return for their risk and investment, is determined by different factors in an organization. Firms ought to distribute their earnings to shareholders if they cannot identify suitable investments which would bring higher returns than those expected by the shareholders Mizuno (2007). The amount of dividends is distributed to shareholders or members in cash. These distributions should be made from Retained Earnings. The main goal of every Microfinance Institution (MFI) is to operate profitably in order to maintain its stability and improve growth and sustainability. But this often affected by the real factor condition under which the firm operates, when there is uncertainty of earnings, unsuccessful business operations, lack of liquid resources, and fear of adverse effects of regular dividend on the financial standing of the company a policy of irregular dividends is adopted where earnings are unstable and management considers that shareholders are entitled to dividend only when the earning and liquidity positions of the banks warrant it. The larger the earning higher the dividend and vice versa .According Moh’d, Perry, and Rimbey (1995) firms with unstable earnings and market values of the company. Since earning and market values of a company is an important decision variable, it needs to be handled with care if an investor must maximize profit and remain in business.
In view of these complexities and importance surrounding earnings, dividends, trading volume and market values of the firm. This research work has attempted to offer solutions to the problem put in question form as stated below:

1. What influence do the earning of a company as reflected in the Earnings Per Share (EPS) has on the values of the company?
2. What influence does the Dividend Per Share (DPS) paid by the company has on the value of the company?
3. Does the earning yield of a company affect the market value of the firm?

1.3 Objectives of the Study

An investor’s return received from a particular company for putting his money in such a company is usually in form of dividend. Such dividend depends on the amount of earning which the company made that financial year. Such earnings help to indicate the performance of the company. Therefore, it is very important for us to establish whether there is any relationship between the earnings of a company and the corporate value.

The objectives that this research work seeks to achieve include:

1. To ascertain whether there is any relationship between the earnings of a company as reflected in the Earnings per Share (EPS) and the value of the company.
2. To determine whether there is any relationship between the amount of Dividend per Share (DPS) paid by a company to its shareholders and the value of the company.
3. To ascertain whether or not there is a relationship between Earnings Yield of a company and its market value.

1.4 Statement of Research Hypothesis

Hypothesis One

• H0: There is no relationship between earning per share of a company and its corporate value.
• H1: There is a relationship between earning per share of a company and its corporate value.

Hypothesis Two

• H0: There is no relationship between dividend payout of a company and its corporate value.
• H1: There is a relationship between dividend payout ratio of a company and its corporate value.

Hypothesis Three

• H0: There is no relationship between earnings yield of a company and corporate value.
• H1: There is a relationship between earnings yield of a company and corporate value.

1.5 Significance and Relevance of the Study

The regulatory agencies function is to ensure that environment for investments encourage investors. The quality of accounting information which the companies made available to the public for decision making is very important issue to these agencies. Hence, this study seeks to enable the following see that such information is contained in the financial statements of companies.

Investors:

To investors, it will enable them when making investment decision to take a close look at the value of the company which they are interested in investing their resources so that they can appreciate and understand the type of relation that exists between the earnings of a company and the value of such company.

Students:

To students, it will increase their knowledge and better understanding of earning, as well as dividend of a company. Also, how the dividend pays out by a company to its shareholder affects the market value of the company.

Researchers:

To researchers in the field, they can make use of the research project as it will serve as a guide for intending researcher in the future, bearing in mind that, this research will expose all that is, to know bout the relation that exists between the earnings of a company, other variable and its corporate values.

General Public:

This research is beneficial to the public by providing them with an understanding of the meaning, purpose of companies earning as well as its relationship to its corporate value.

In general, this study will help to expand one’s knowledge on share price movement in Nigeria. Therefore, researchers and reading public will find the work extremely useful.

1.6 The Scope of the Study

Ideally, this research work should cover all the Microfinance Institution but due to some obvious constrains, we have selected companies in a particular industry. The scope of this study covers at least ten (10) Microfinance Institution, so that a useful cross sectional analysis can be carried out.

1.7 Limitation of the Study

Every research work has aspect in which it falls short of idea which the researcher has established or recognizes. According to Ibrahim (2010:15), limitations are factors beyond our control which tend to impede the accomplishment of the objectives.

On this note, the following are the limitation of this study:

1. The sample may be too small in relation to the entire population.
2. Imprecise measurement of variables.
3. The sampling method adopted is not a census, because we are not researching everyone in the population.

Chapter Five

Summary, Conclusion and Recommendations

The paper empirically investigated the effect of dividend policy on the growth of micro finance institution. This is as a result of the unresolved and divergent position of several studies on the impact of firm’s dividend policy on share price. The study also conducted a sectoral analysis of the impact of dividend policy on share price to see if these impacts are sectoral specific. Literatures reviewed revealed that there is a school of thought that advocates that the higher the dividend payout ratio, the more attractive the share is to shareholders. Hence, investors place higher values on the shares of such firms. However, this is not always true as some investors view firms that retained higher proportions of their profits as firms with strategic investment opportunities. In this vein, another school of thought emanated in the literature suggesting that those firms who have viable investment opportunities should retain their profits and invest in such opportunities

The result of the empirical study carried out revealed that the earning streams of companies in Nigeria have a greater impact than their dividend payouts in shaping the price of their shares in the market. Similarly, the result of the sectoral analysis carried out also revealed that, in each of the sectors, earnings drives share prices the most. Practically, this implies that the market price of shares on the Nigerian stock exchange reacts more to earning capability of firms than they do to the dividend payout of the firms. This is in line with the M-M irrelevancy of dividend theory which posits that dividend payout ratio does not affect shareholders’ wealth. Rather, the theory hinges on the belief that the value of the firm is determined by the streams of its earnings or its pattern of investment rather than pattern of distribution of its profits. However, this is not to say that the dividend policies of firms are completely irrelevant as the result shows a positive relationship between dividend payout and share price.

Recommendation

The study therefore recommends that; (i) corporate managers should strive to maintain a steady increase in earnings by maximizing return on investment. This is in view of the fact that market price of shares in Nigeria is majorly influenced by level of earnings and, (ii) firms should maintain a stable dividend payout in order to increase internal finance available to pursue further profitable investments that will help increase earnings.

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