THE IMPACT OF DIVIDEND POLICY AND EARNINGS ON STOCK PRICES OF NIGERIA BANKS

Background of the Study

The topic of dividend policy is a highly debated issue in corporate finance, with extensive research conducted on its impact on bank stock prices in Nigeria (Amidu, 2007) Black (1976) described the complexities of the dividend landscape as a puzzling scenario, a sentiment echoed by Frankfurter and Wood (2002) and Scholes (1974), who emphasized that the dividend “puzzle” remains a significant challenge in modern financial economics Despite over four decades of study, a comprehensive theory of dividend policy remains elusive, revealing that corporate dividend practices differ not only over time but also across various firms and countries, particularly between developed and emerging financial markets.

Dividend policies in emerging markets significantly differ from those in developed markets, with payout ratios in developing countries being approximately two-thirds of their developed counterparts (Glen et al., 1995) Various scholars have defined dividend policy in distinct ways; for instance, Hamid et al (2012) describe it as the balance between retained earnings and cash payouts or new share issuance, while Booth and Cleary (2010) view it as a management decision regarding the percentage of profits distributed to shareholders versus retained for internal needs Nwude (2003) emphasizes that dividend policy serves as a guiding principle for determining the portion of net profits allocated to dividends Additionally, Emekekwue (2005) defines it as the earnings portion paid out as dividends or retained as earnings Huda and Farah (2011) note that dividend policy remains a focal point in financial literature, prompting the development of various theoretical models for guiding managerial decisions Lintner (1956) highlights that a firm's dividend payment patterns are influenced by current earnings and past dividends, while Damodaran (2002) describes dividends as free cash flows remaining after business expenses Ultimately, the dividend decision is a crucial aspect of corporate finance, relating to the timing and amount of cash payments to shareholders.

The decision regarding dividend payments is crucial for a firm, as it can significantly impact its financial structure, stock price, and the tax obligations of shareholders (Pandey, 2005) The dividend payment ratio plays a vital role in a firm's dividend policy, influencing its overall value to shareholders (Litzenberger and Ramaswany, 1982) The classical school of thought posits that dividends are essential for affecting share prices, viewing the market price of equity as a reflection of the present value of anticipated cash dividends (Gordon, 1959) Conversely, another perspective suggests that equity pricing is primarily determined by the company's earnings, arguing that dividend payouts are irrelevant in assessing equity value (Miller and Modigliani, 1961).

Retained earnings are crucial for financing long-term growth in firms, serving as the primary source for investment funding (Mayo, 2008) While paying dividends in cash reduces the available funds for reinvestment, increasing the retained portion of net earnings can lead to higher future earnings despite a decrease in current dividends for shareholders Conversely, raising dividends boosts immediate income for shareholders but may limit the firm's ability to retain earnings, potentially sacrificing future investment opportunities and earnings growth.

The corporate dividend policy has long been a significant topic in corporate finance, particularly following Miller and Modigliani's dividend policy-irrelevance proposition in 1961 Several theories have emerged to explain how companies distribute cash generated from operations, with three key factors influencing dividend decisions: free cash flows, dividend clientele, and information signaling (Pandey, 2005) According to the free-cash flow theory, firms pay dividends from surplus cash after investing in positive net present value projects However, this theory faces criticism for failing to account for the consistent dividend policies observed in real-world companies, which tend to maintain stable or steadily increasing dividends rather than fluctuating dramatically from year to year This criticism has prompted the development of alternative models to better explain dividend decisions (Brigham, 1995).

The dividend clientele model suggests that a specific pattern of dividend payments may appeal more to one type of stockholder than another, with retirees often preferring consistently high dividend yields, while high-income individuals may avoid dividends due to high marginal tax rates By catering to a particular clientele, firms may be able to maximize their stock price and minimize their cost of capital This model helps explain the consistent dividend policies of most listed companies, as investors seeking cash returns can opt to sell a portion of their holdings, especially with the advent of low-cost discount stockbrokers.

Investors interpret dividend changes as signals of a company's earning potential, as highlighted by Ezra (1983) His model indicates that dividend announcements provide crucial information about a firm's future value Historical studies show that stock prices typically rise following a dividend increase and fall with a decrease or omission This behavior suggests that when investors lack complete information, they seek additional insights into a firm's prospects Managers, possessing more information than investors, may maintain or reduce dividends when they lack confidence in future cash flows Conversely, when they foresee strong future performance, they are more inclined to raise dividends.

This study aims to conduct a cross-sectional analysis to identify the specific circumstances in Nigeria where certain hypotheses are applicable, particularly focusing on how stock prices, especially in the banking sector, respond to dividend and earnings reports as reflected by investors' ratio values.

Statement of Problem

Corporate entities aim to maximize shareholder value through strategic investment, financing, and dividend decisions Investment choices focus on selecting projects with a positive net present value, while financing decisions prioritize an optimal capital structure to minimize costs Additionally, managers regularly assess whether to distribute earnings to shareholders, addressing the agency problem identified by Jensen and Meckling (1976) However, a critical question arises: does paying dividends truly enhance shareholder value? While dividend payments provide immediate cash flow to shareholders, they can also limit the firm's available resources for future investments, creating a complex dilemma in finance literature.

Extensive research over the past few decades has explored the effects of dividend policy Theoretically, cash dividends are rewards for shareholders, representing their ownership in the company, but this is counterbalanced by a decrease in stock value In a perfect world devoid of taxes and restrictions, dividend payments would not affect shareholder value However, in reality, changes in dividend policy often lead to fluctuations in stock market value Graham and Dodd (1934) presented the economic rationale for investors' preference for dividend income, further explored by Walter (1963) and Gordon (1959).

1962) forwarded the dividend relevancy idea, which has been formalized into a theory, postulating that current stock price would reflect the present value of all expected dividend payments in the future.

Research indicates that average investors may prefer lower cash dividends if they face higher personal tax rates, suggesting an inverse relationship between optimal dividend size and personal income tax rates (Pye, 1972) While theoretical literature largely concludes that dividends do not affect shareholder value in an ideal economy, real-world scenarios reveal that dividend announcements hold significant importance for shareholders due to their tax implications and the information they convey.

This study aims to address the controversies surrounding the effects of dividend policy and earnings on the stock prices of Nigerian banks By providing empirical evidence, it focuses on investment ratios such as dividend yield, earnings yield, and payout ratio, while incorporating control variables relevant to an emerging market like Nigeria The geographical contribution of this research enhances the understanding of how these financial metrics influence stock prices in the Nigerian banking sector.

Objectives of the Study

The general objective of this study is to determine the impact of dividend policy and earnings on bank stock prices However, the specific objectives are:

1 To determine the impact of dividend yield on stock prices of Nigerian banks.

2 To determine the impact of earnings yield on stock prices of Nigerian banks

3 To determine the impact of dividend payout ratio on stock prices of Nigeria banks.

Research Questions

As a result of the objectives stated above the following research questions will be asked. These are:

1 To what extent does the dividend yield of banks listed on the Nigerian Stock Exchange have positive significant impact on their stock prices?

2 To what extent does the earnings yield of banks listed on the Nigerian Stock Exchange have positive significant impact on their stock prices?

3 To what extent does the payout ratio of banks listed on the Nigerian Stock Exchange have positive significant impact on their stock prices?

Research Hypotheses

The research questions raised above therefore led to the formulation of the following hypothetical statements These are:

1 Dividend yield does not have positive and significant impact on stock prices of Nigerian banks.

2 Earnings yield does not have positive and significant impact on stock prices of Nigerian banks.

3 Dividend payout ratio does not have positive and significant impact on stock prices of Nigeria banks.

Scope of the Study

The banking sector is crucial to the Nigerian economy, serving as the primary source of funds for its productive sub-sectors, which drives economic growth This study analyzes data from twenty banks over a five-year period from 2006 to 2010, coinciding with the reduction of banks in Nigeria to 21 following consolidation The financial statements and accounts published in 2006 provide a foundation for this analysis Notably, since 2005, the banking sector has remained the most active segment on the Nigerian Stock Exchange Data was collected from the annual statements and stock prices of these banks at year-end, highlighting their significance in the financial landscape.

Significance of the Study

This research will be particularly significant to the following groups:

Investors and potential investors are the primary beneficiaries of a firm that creates enhanced value, as reflected in share prices Their financial contributions to the promotion, incorporation, and ongoing growth of the firm should be rewarded with a premium above the risk-free rate, compensating for the time and risk involved This research aims to contribute to existing literature in finance by focusing on maximizing the objectives of investors and potential investors, particularly regarding capital gains from their investments.

This research aims to enhance the existing literature in the field of finance by exploring the intricate relationships between dividends, earnings, and stock prices Recognizing that the realm of academia is ever-expanding, this study seeks to provide valuable insights and recommendations that address the unknowns in this domain.

In large corporations, a separation exists between ownership and management, with decision-making authority resting primarily with managers Shareholders, as the owners, are the principals, while managers serve as their agents, creating a principal-agent relationship It is essential for managers to prioritize the interests of shareholders, aligning their actions with the goal of maximizing shareholder wealth This research aims to guide management in adopting dividend policies that effectively enhance shareholder value.

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CHAPTER TWOREVIEW OF RELATED LITERATURE

Dividend Policies And Earnings

Dividend policy, as defined by Nwude (2003:112), serves as the framework for deciding how much of a company's net profit after taxes will be distributed to shareholders as dividends each financial year The primary goal of this policy is to enhance shareholder wealth, which relies on both current dividends and capital gains However, Mishra and Narender (1996) discovered that not all profit-generating state-owned enterprises follow these dividend policy guidelines.

According to Emekekwue (2005:393), dividend policy plays a crucial role in deciding the allocation of a firm's earnings between dividends paid to shareholders and retained earnings for future projects Retained earnings serve as a vital source of financing for a company's initiatives, while dividends represent the portion of after-tax profits distributed to shareholders as a reward for their investment, ultimately providing them with disposable income.

According to Juma’h and Pacheco (2008), key factors influencing cash dividend decisions include profitability, liquidity, and company size In contrast, Arif et al (2011) argue that discretionary accruals have little impact on dividend policy, suggesting that earnings management may be driven by various motives beyond simply avoiding dividends Therefore, investors should not rely solely on earnings management as an indicator of dividend policy Emekekwue (2005) highlights that dividend policies differ across firms, with some adapting to business cycles while others remain stable Typically, growth firms distribute minimal dividends to shareholders, opting instead to reinvest profits to meet their financial needs.

The goal of allocating funds to strengthen reserves for financing expansion projects, servicing, and retiring existing obligations ultimately aims to boost the firm's earning potential, which contrasts with the intention of distributing disposable income to shareholders.

A high level of retained earnings reduces the disposable income available to shareholders, while excessive dividend payouts can hinder a firm's ability to meet existing obligations and reinvest in growth Retained earnings serve as a buffer for future earnings capacity; thus, a decline in these earnings can lead to a decrease in stock market value According to Basse (2009), firms tend to raise dividend payments in response to rising price levels to maintain the real value of dividend income, indicating that higher inflation significantly influences dividend increases.

Brennan and Thakor (1990) discovered that, despite capital gains receiving preferential tax treatment, most shareholders of a firm tend to favor dividend payments for smaller distributions Consequently, dividend decisions should consider the preferences of different shareholder categories, with the challenge lying in identifying a consensus among shareholders, particularly in widely held companies Additionally, the impact of taxation on both the firm and its shareholders plays a significant role in shaping dividend policy, as taxes often serve as a strong disincentive for dividend distribution Miller and Scholes (1978) noted that dividend taxes do not affect share prices.

According to a 1999 study, share prices can absorb the impact of dividend taxation, allowing corporations to distribute dividends without penalizing shareholders This suggests that dividend policy remains unaffected by dividend taxes, as the market adjusts to offset the tax burden.

The Dividend Signaling Hypothesis posits that companies utilize dividends to indicate anticipated increases in future free cash flow When managers possess private insights regarding current or future cash flow, investors interpret a rise in dividends as a sign of expected long-term growth, while a decrease suggests expectations of reduced cash flow in the future (Bhattacharya, 1979).

The Free Cash Flow Hypothesis, introduced by Jensen and Meckling in 1976, highlights agency problems in public companies where ownership and control are distinct Managers, driven by personal incentives, tend to overinvest when they have substantial free cash flows, often due to tendencies for empire building or seeking perks Increasing dividends can mitigate this issue by reducing the free cash available to managers, thereby enhancing company value In contrast, cutting dividends increases the cash at managers' disposal, exacerbating the overinvestment problem.

The Maturity Hypothesis, advanced by Grullon, et al (2002) and DeAngelo and DeAngelo

As companies mature, their investment opportunities diminish, leading to a reduction in systematic risk, as suggested by the Maturity Hypothesis This theory posits that a positive stock price reaction to dividend increases indicates the company has reached a mature stage characterized by lower profitability and risk In contrast, a decision to cut dividends signals a shift from maturity to decline, resulting in higher systematic risk and reduced profitability, which typically triggers a negative stock price response However, the Maturity Hypothesis remains a conjecture, as Grullon et al (2002) do not provide a theoretical model or a separating equilibrium that distinguishes mature companies from others.

The Catering Hypothesis, introduced by Baker and Wurgler (2003), suggests that investors exhibit a fluctuating demand for dividend-paying stocks due to institutional or psychological factors Factors such as changes in tax codes, transaction costs, and institutional investment constraints can influence this demand, as highlighted by dividend clientele theories Additionally, behavioral factors like the bird-in-the-hand and self-control arguments contribute to this variability Consequently, the market assigns a fluctuating premium to dividend-paying stocks, prompting managers to increase dividends when the premium is high and conserve cash when it is low Despite consistent differences in characteristics like size, life-cycle stage, and profitability between dividend payers and non-payers, Baker and Wurgler (2003) provide evidence that managers respond to investor sentiment, reinforcing the robustness of their findings against alternative explanations.

Despite three decades of empirical testing on dividend hypotheses, a consensus on corporate payout rationale remains elusive The evidence surrounding the Dividend Signaling Hypothesis is mixed; while Nissim and Ziv (2001) identified a positive correlation between current dividend changes and future earnings changes, other studies, including those by DeAngelo et al (2003) and Benartzi et al (1997), reported a correlation with concurrent or lagged earnings but not with future earnings Notably, companies that reduce dividends tend to experience higher future earnings compared to their peers.

The Maturity Hypothesis is corroborated by Grullon et al (2002) and DeAngelo et al (2003), who demonstrate that a significant proportion of publicly-traded industrial firms distribute dividends when retained earnings constitute a large share of total equity Conversely, this fraction diminishes to nearly zero when equity is primarily contributed rather than earned Thus, the balance between earned and contributed capital serves as a vital metric for determining a company's life-cycle stage While the Catering Hypothesis is a more recent development, it adds depth to the understanding of dividend policies in relation to firm maturity.

Li and Lie (2006) shows that the stock market reaction to dividend changes depends on the dividend premium associated with dividend-paying stocks.

According to Pandey (2005), the signaling effect of a firm's dividend decisions significantly influences investor behavior, as they adjust their buying or selling strategies based on managers’ actions; positive dividend surprises can drive stock prices up, while unmet expectations may lead to price declines This perspective aligns with the findings of Miller and Rock (1985), highlighting that managers are aware of the scrutiny surrounding dividend announcements Consequently, to avoid conveying negative signals about future performance, managers often adopt a dividend policy characterized by steady and gradually increasing payments (Bhaumik, 2007).

The dividend decision is a critical aspect of financial management, as highlighted by Pandey (2005), involving key considerations such as the availability of excess cash, investor preferences, and the potential impact on stock prices According to Patra (2005), this decision requires firms to determine the portion of earnings to distribute as dividends versus what to retain for future growth Consequently, finance managers must develop a balanced dividend policy that meets shareholder expectations while ensuring the firm's continued progress.

Types of Dividends

According to Nwude (2003:121-126), there are five primary types of dividends that companies can distribute to their shareholders: cash dividends, stock dividends or bonus issues, stock splits, reverse stock splits, and stock repurchases.

A cash dividend refers to the distribution of profits to shareholders in the form of cash, which is a standard practice for companies declaring dividends When a cash dividend is issued, it leads to a decrease in the company's cash and reserves accounts, ultimately lowering both total assets and net worth Therefore, a company declaring a cash dividend must ensure it has adequate cash reserves to fulfill its obligations.

A stock dividend, also known as a bonus issue, is when a company pays dividends to its shareholders in the form of additional shares rather than cash This process involves capitalizing the company's share premium or reserves, thereby increasing the share capital without affecting liquidity, as no cash leaves the company Shareholders benefit by receiving additional shares that can be converted into cash upon selling, but a potential downside is that an increase in the number of equity shares may lead to a decline in share price if retained earnings do not generate satisfactory returns, especially during significant sell-offs in the market Stock dividends are distributed to shareholders in proportion to their existing ownership in the company.

A stock or share split involves dividing the existing share price by two or doubling the number of shares in circulation This process effectively halves the nominal value of each share while simultaneously increasing the total number of shares available Companies implement stock splits to lower share prices, thereby encouraging greater trading activity on the stock exchange Although a stock split does not alter the overall monetary value on the balance sheet, it modifies the number of outstanding shares and their par value.

Reverse Stock Split: A reverse stock split is a financial strategy of consolidating the nominal value of an existing share issue and a corresponding decrease in the number of shares in existence.

Stock repurchase refers to a company's buyback of its own outstanding shares to hold in its treasury This strategy aims to decrease the total number of shares available, thereby boosting the earnings per share (EPS) of the remaining shares As a result, this can lead to an increase in the market price per share (MPPS) and generate capital gains for shareholders, which serve as an alternative to cash dividends.

Methods of Dividend Payment

In Nigeria, the payment of dividends is governed by existing laws, which may be amended over time According to Nwude (2003:127), Section 379(1) of the Companies and Allied Matters Decree (CAMD) 1990, now an Act, stipulates that dividends can only be declared at a general meeting based on the directors' recommendation The company may pay interim dividends as deemed appropriate by the directors, but the general meeting cannot increase the recommended amount If the directors' recommendation is altered during the meeting, this must be documented in the annual return Ultimately, dividends can only be paid to shareholders from the company's distributable profits, in accordance with the provisions of the Decree.

Section 380 provides that subject to the company being able to pay its debts as they fall due, the company may pay dividends out of the following profits:

 Profit arising from the use of the company’s property, although it is a lasting asset.

 Realized profit on a fixed asset sold, but where more than one asset is sold, the net realized profit on assets sold

In Nigeria, companies typically distribute dividends in two stages: the interim dividend and the final dividend According to Brealey and Myers (1999:418), the firm's board of directors determines the dividend amount An announcement is made indicating that payments will be issued to stockholders registered by a specific "recorded-date," and dividend cheques are subsequently mailed to these stockholders two weeks later.

Dividend Announcements and Stock Returns

One of the earliest studies in this direction was by Petit (1972) who found that the market made use of dividend change announcements in pricing securities Rozeff and Kinney

Increased information dissemination by firms in January leads to above-normal returns during this month, as noted by 1976 research Studies by Gordon (1959, 1962), Foster and Vickery (1978), and Lee (1995) confirm that dividend payment announcements typically result in positive abnormal returns However, Easton and Sinclair (1989) present a contrasting view, identifying negative abnormal returns following dividend announcements, which they attribute to the tax implications for shareholders.

In 1999, it was noted that managers preferred to avoid altering dividend rates in ways that could require reversal within a short timeframe Consequently, they typically opted for gradual adjustments toward a target payout ratio instead of implementing significant changes.

Lonie et al (1996) conducted a study on dividend announcements from 620 U.K companies between January and June 1991, revealing that investors reacted to changes in dividends, with significant average abnormal returns observed even for companies with unchanged dividends prior to announcements Similarly, Below and Johnson (1996) found evidence against the semi-strong form of market efficiency in the U.S equity market In a related analysis, Adelegan (2003) examined the impact of dividend announcements on stock prices and capital market efficiency in Nigeria, employing standard event study methodology and concluding that the Nigerian stock market exhibited inefficiencies in its semi-strong form.

Uddin and Chowdhury (2005) studied dividend announcements on the Dhaka Stock Exchange and concluded that these announcements did not lead to statistically significant abnormal returns, indicating that dividends lacked informational value for stock prices Similarly, Gunasekarage and Power (2006) found that while dividend announcements affected stock returns at the time of the announcement, their short-term impact did not translate into long-term effects In fact, companies that reduced dividends in the short term tended to generate excess returns in the long run.

Kong and Taghavi (2006) conducted an analysis of earnings announcements in the Chinese equity markets using the M-EGARCH approach, revealing a rejection of the semi-strong form of market efficiency Acker (1999) focused on dividend announcements and discovered that stock volatility notably increases, especially around final dividend announcements involving cuts Bhana (1997) found a significant rise in a company's share price at the time of announcement, indicating that this increase is not influenced by other concurrent announcements He suggested that share dividends serve as an effective signaling mechanism, particularly in scenarios characterized by information asymmetries between managers and investors, providing a cost-effective and clear means of communication.

Research by Hussain (1998, 1999), Chakraborty (2006), and Ali and Akbar (2009) explores the weak form of market efficiency in the Pakistani equity market Additionally, Ali and Mustafa (2001) assess the semi-strong form of market efficiency in the Karachi Stock Exchange (KSE) by analyzing public news from two daily newspapers alongside trade volume and stock returns Their findings indicate that public information has a minimal impact on stock return determination, as stock returns are found to be more influenced by private information.

Dividend Policy and Asymmetric Information

In a symmetrically informed market, all participants, including managers, bankers, and shareholders, have equal access to information about a firm However, when one group holds superior insights regarding the firm's current status and future potential, informational asymmetry arises Many academics and financial professionals contend that managers typically have more detailed information about their firms compared to other stakeholders.

Dividend announcements, including increases, initiations, and eliminations, are frequently reported in financial media Typically, share prices rise in response to dividend increases and initiations, while they tend to fall following dividend cuts or eliminations This relationship suggests that dividend policy is perceived as an indicator of a company's future prospects, a notion supported by the views of chief financial officers (CFOs) in large US corporations.

The prospects of a firm are often reflected in its current projects and future investment opportunities, which can be communicated to a less informed market through its dividend policy, alongside other indicators like capital expenditure announcements and insider trading Empirical research, including the Bhattacharya model (1979), John and Williams’s model (1985), and the Miller and Rock model (1985), has shown that announcements of dividend increases typically lead to significant price increases, while dividend decreases result in notable price drops Additionally, studies on large changes in dividend policy, such as those by Asquith and Mullins (1983) on dividend initiations and Healy and Palepu (1988), further support these findings.

Michaely, et al (1995) (dividend omissions)-showed that the market react dramatically to such announcements

Empirical studies, however, showed mixed evidence, using data from US, Japan and

Singapore markets A number of studies found that stock prices have a significant positive relationship with dividend payments (Gordon (1959), Oggden (1994), Stevents and Jose

Numerous studies have explored the relationship between dividends and firm earnings, with some researchers, such as Kato and Loewenstein (1995) and Lee (1995), finding a positive correlation, while others, including Loughlin (1982) and Easton and Sinclair (1989), identified a negative relationship Dividends are intended to communicate private information to the market, suggesting that predictions about a company's future earnings based on dividend data are more accurate than those made without it Research by Benartzi et al (1997) indicates that changes in dividends can signal current and past earnings levels, while Grullon et al (2002) noted that such changes are often associated with a reduction in a firm's systematic risk Despite the well-documented market reactions to unexpected dividend announcements (Asquith et al 2003), evidence does not generally support the notion that these unexpected changes reliably indicate future earnings.

Ghosh et al (2004) found a long-run equilibrium relationship between earnings per share and dividend per share, indicating that these metrics are co-integrated This framework can aid investors, corporations, and analysts in refining their investment and trading strategies Conversely, Garret and Priestly (2000) and Ali-Shah et al (2010) found no evidence that dividends signal future permanent earnings, while Ali and Chowdhury (2010) noted that dividend announcements did not significantly affect stock prices Foerster and Sapp (2006) presented weak evidence of dividends transmitting information about future earnings, alongside a correlation between stock prices and future dividends Additionally, Bessler and Nohel (2000) reported that dividend cuts lead to negative abnormal returns in non-announcing money center banks and, to a lesser extent, in large regional banks.

Information asymmetry in the stock market arises when some investors have access to private information regarding a firm's value, leaving others uninformed (Okpara, 2010) This disparity significantly influences dividend policy, as evidenced by findings that indicate a positive relationship between information asymmetry and dividend distribution Moreover, Abosede and Oseni (2011) emphasize that direct proxies for information asymmetry yield more reliable and objective results compared to those derived from manipulated data, highlighting the importance of understanding firm and market dynamics in equity pricing Additionally, Kapoor (2008) points out that Information Technology firms exhibit high liquidity, which, coupled with their substantial profitability, enables them to maintain robust dividend payouts despite fluctuations in annual earnings.

Stock Prices and Dividend Announcements

The Efficient Market Hypothesis, introduced by Fama in 1965, identifies three types of market efficiency: weak, semi-strong, and strong The weak form asserts that current stock prices reflect all past information, indicating that stock price changes are random and that no investment strategy based on historical data can achieve above-average returns, thus rendering technical analysis ineffective The semi-strong form posits that stock prices incorporate all publicly available information, meaning that only unexpected public information can influence price changes, which undermines the effectiveness of fundamental analysis Lastly, the strong form claims that insider trading is also unprofitable since current stock prices already factor in all material non-public information.

Market efficiency is not an automatic occurrence; it relies on the analytical skills and time investment of market participants in processing and disseminating price-sensitive information According to Osei (1998), the semi-strong form of market efficiency has been primarily examined through event study methodologies Various studies have explored information disclosures such as dividends, earnings announcements, macroeconomic variables, stock repurchase announcements, and mergers and acquisitions to assess the validity of the semi-strong form of market efficiency.

Research indicates that stock prices generally respond favorably to uncontaminated announcements of stock dividends and splits (Grinblatt et al., 1984) Vaughan and Williams (1998) highlighted that changes in dividends may influence future income, particularly after a reduction in the tax penalty on dividends, suggesting that companies utilize tax-based signaling when the tax disparity between distribution methods is significant Furthermore, Guay and Harford (1999) found that stock price reactions to announcements of both share repurchases and dividend increases reflect not only the payout size but also the distribution method Notably, after accounting for payout size and market perceptions of cash-flow permanence, dividend increases tend to elicit a stronger stock price response compared to repurchases.

Research indicates that changes in dividend policy can significantly signal future earnings, with unexpected increases in dividend payouts resulting in lasting positive impacts on real earnings (Fuei, 2010) Shareholders may leverage their rights to compel firms to distribute dividends, particularly when growth opportunities appear limited (Borges, 2008) The coming years will be crucial for testing these theories against new empirical data, potentially leading to a paradigm shift that could resolve the "dividend puzzle" and challenge the irrelevance proposition posited by Miller and Modigliani (1961) Additionally, findings by Yeh et al (2011) reveal that dividend cuts have notably negative announcement effects, while increases in dividends correlate positively with corporate performance Akbar and Baig (2010) further demonstrated that dividend announcements, whether cash or stock, positively influence stock prices.

Stock Prices, Dividends And Semi-Strong Market Efficiency 25

Although there is abundant theoretical and empirical research on the relevance of and relationship between stock prices and dividends, it is inconclusive Graham and Dodd

Research on dividend policy has produced mixed findings regarding its impact on stock prices While Black and Scholes (1974) concluded that dividend policy does not influence stock prices, as investors prioritize high or low yielding securities without affecting overall returns, Baskin (1989) identified an inverse relationship between stock prices and dividend policy In contrast, Miller and Modigliani (1961) argued that in a tax-free, transaction-cost-free environment, dividends hold no relevance for investors Nevertheless, empirical studies have provided evidence supporting the significance of dividends in investment decisions.

Lintner (1956) posits that management will increase dividends only if they perceive the rise as permanent Bhattacharya (1979) highlights the asymmetric information between management and shareholders, indicating that dividend changes signal critical information to investors Supporting this view, Miller and Rock (1985) and John and Williams (1985) emphasize the significance of dividends as signals Research by Brickley (1983), Healy and Palepu (1988), and Aharony and Dotan (1994) further corroborates the information content of dividends, while studies by Penman (1983) and Benartzi et al (1997) present contrasting findings Additionally, Black (1976) and Easterbrook (1984) argue that dividends help mitigate agency conflicts between management and shareholders When management increases dividends, it reflects the distribution of excess cash after funding profitable projects, leading to positive stock price changes.

The semi-strong form of market efficiency asserts that stock prices reflect all anticipated future dividends, both cash and stock, meaning that public announcements of these dividends should not lead to abnormal earnings for investors, as they are already factored into current prices Consequently, stock returns before and after such announcements should show no significant abnormality, indicating that both abnormal mean returns and cumulative abnormal mean returns within the event window are statistically equivalent to zero Additionally, this form of efficiency implies that stock prices quickly adjust to any unexpected changes in dividend information.

Stock Splits on Price And Liquidity

Stock splits are intriguing phenomena in stock price behavior and liquidity, as they are merely nominal changes that do not affect investors' equity ownership Despite this, research indicates a positive price performance following splits, with studies by Grinblatt et al (1984) and Lamoureux and Poon (1987) supporting the signaling hypothesis, suggesting that firms use splits to indicate future earnings growth Alternatively, the liquidity and trading range hypothesis posits that splits aim to lower stock prices to a desirable trading range and enhance liquidity However, empirical findings on liquidity effects are mixed; while some studies, such as those by Copeland (1979) and Conroy et al (2000), report increased bid-ask spreads indicating reduced liquidity, others, like Lamoureux and Poon (1987), show an increase in daily trades post-split Lakonishok and Lev (1997) found no effect on split-adjusted trading volume, highlighting the complexities in assessing liquidity proxies Overall, stock splits tend to occur when stock prices rise, while reverse splits are implemented during price declines.

A stock split typically enhances investor perception regarding future earnings, while a reverse stock split tends to diminish it As a significant corporate action, stock splits affect stock prices and ultimately influence stock returns Research by Johnson (1966) indicated that stock prices tend to rise after a split, with a comparison of prices 7.5 months before and 4.5 months after the event Additionally, Grinblatt et al (1984) observed abnormal returns within three days following a stock split announcement Fama et al (1969) further found that stocks exhibit a 30% abnormal return two years post-split Various studies, including those by Asquit et al., have explored the factors that impact stock returns.

(1989) observes change in EPS does not have effect to abnormal return.

Corporate Dividend Policy Determinants

In addressing dividend policy, Black (1976) famously stated, “What should the corporation do about dividend policy? We don’t know.” Various empirical studies have identified key factors influencing a firm's dividend decisions, with profits being the primary indicator of its ability to pay dividends Lintner (1956) developed a mathematical model based on a survey of established U.S firms, suggesting that current earnings and prior dividends significantly impact dividend payment patterns Fama and Babiak (1968) found that net income is a more reliable measure for dividends than cash flows or net income with depreciation Farrelly et al (1986) surveyed 318 New York Stock Exchange firms, concluding that anticipated future earnings and past dividend patterns are major determinants Pruitt and Gitman (1991) reported that the profits from the current and previous years, along with earnings variability, are crucial in shaping dividend policies among the largest U.S firms Finally, Baker and Powell (2001) indicated that dividend determinants vary by industry, emphasizing that anticipated future earnings are the most significant factor.

D’Souza (1999) identified a statistically significant negative relationship between beta and dividend policy, while also noting a positive but insignificant relationship with growth and a negative but insignificant relationship with market-to-book value Alli et al (1993) emphasized that dividend payments are more closely tied to cash flows, reflecting a company's capacity to distribute dividends, rather than to current earnings, which are subject to accounting fluctuations These findings contradict the views of Miller and Modigliani (1961), as Higgins (1972) and Fama (1974) found no interdependence between investments and dividends.

Higgins (1981) established a clear connection between business growth and the necessity for external financing, noting that rapidly expanding companies often require additional funds as their working capital demands typically surpass the incremental cash flows generated from new sales This observation has been supported by subsequent research from Rozeff (1982), Lloyd et al (1985), and Collins et al.

Research indicates a significant negative correlation between historical sales growth and dividend payout, as demonstrated by studies from 1996 Additionally, Mohammed and Joshua (2006) explored the factors influencing dividend policy among listed companies in Ghana, revealing that dividends are positively associated with profitability, cash flow, and tax, while inversely related to risk and growth.

Nishat and Irfan (2005) found a positive relationship between dividend yield, earnings, and stock price volatility, which holds true even when accounting for firm size Similarly, Naeem and Nasr (2007) revealed that Pakistani companies tend to be hesitant in paying dividends, often opting for low amounts, with their decisions influenced by prior dividends and profitability ratios Ahmed and Javid (2009) further analyzed dividend policy determinants in Pakistan, concluding that firms typically base their cash dividend payments on current and past profits, with those showing high net profits distributing larger dividends Their findings also indicated a positive correlation between market liquidity and the dividend payout ratio, a negative correlation between firm size and payouts, and no significant relationship between growth opportunities and dividend policy.

Nazir et al (2010) investigated the impact of dividend policy on stock prices in Pakistan by analyzing a sample of 73 companies listed on the Karachi Stock Exchange between 2003 and 2008 Their findings revealed that both dividend payout and dividend yield significantly influence stock prices, whereas company size and leverage have a negative and insignificant effect Additionally, earnings and growth were found to have a positive and significant impact on stock prices.

Shareholders Earnings (EPS) and the Firm

Financial structure decisions present valuable opportunities for firms to enhance shareholder value, yet many companies, particularly those with complex liquidity structures, struggle to identify and quantify the relevant factors affecting this value Corporate executives may have a general understanding of their financial structure but often lack the necessary tools to evaluate alternative liability structures, leading to decisions influenced by cosmetic considerations and adherence to rating agency guidelines Additionally, the selection of debt as a capital source poses challenges for business managers, who must choose the least costly debt option while minimizing its impact on earnings per share (EPS) It is essential to create a financial structure that optimally balances debt and equity capital However, the ideal debt proportion for maximizing EPS may be lower than necessary for optimal market valuation, as stock prices reflect long-term operational risks rather than short-term earnings performance.

Earnings per share (EPS) serves as a crucial indicator of a firm's performance and represents the return on investment for shareholders (Patra, 2005) Hyderabad (1997) emphasized that the bottom line of income statements reflects the effectiveness of a company's management Ordinary investors, often without extensive knowledge or insider information, rely heavily on EPS for their investment decisions Therefore, financial management should prioritize maximizing EPS to benefit both investors and stakeholders, as the goal of enhancing corporate value should be accurately measured by the market price of equity shares.

To maximize the value of a firm's equity share, management must strategically choose an optimal financing mix, as highlighted by Pandey (2005) and Patra (2005) An ideal financial structure involves a balanced combination of debt and equity that minimizes the overall cost of capital while enhancing the firm's value The prevailing consensus is that the optimal financial structure is defined by the maximization of the market price of equity shares, which directly correlates with the firm's overall value Thus, achieving a higher market price for equity shares serves as a key indicator of an effective financial structure and value maximization.

According to Patra (2005), the market price of equity shares should primarily depend on a firm's earnings per share (EPS), as EPS is influenced by various external factors, including government policies and economic conditions He argues that the market price does not directly affect a firm's optimal financial structure, emphasizing that financial structure decisions are internal to the firm Compsey and Brigham (1985) support this view, suggesting that maximizing EPS is essential for achieving an appropriate financial structure Furthermore, Servaes and Tufano (2006) align with this perspective, noting that while EPS may be theoretically irrelevant, it is actively managed by firms, and debt influences both the level and volatility of EPS.

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Research Design

Research design serves as a blueprint for guiding investigations and analyses, with ex-post facto research design being a key feature where the researcher cannot manipulate existing variables (Onwumere, 2009) According to Kerlinger (1970), this design, also known as causal comparative research, aims to establish cause-effect relationships between independent and dependent variables It outlines the methods and procedures for data collection, as well as the design and validation of test instruments, ensuring a systematic application of scientific methods in problem investigation This study focuses on the stock prices of Nigerian banks, specifically examining the impact of dividend policy and earnings on these prices, and adopts the ex-post facto research design due to its suitability for descriptive or explanatory surveys.

Nature and Sources of Data

This research utilized secondary data sourced from the annual reports and financial statements of selected banks listed on the Nigerian Stock Exchange The price data was obtained from the Daily Official List and Statistical Bulletin of the Nigerian Stock Exchange, covering a specified five-year period.

Population and Sample Size

The study focuses on all quoted banks in Nigeria, utilizing a research sample that represents a portion of this population According to Orji (1996), a research sample consists of a select number of respondents drawn from the larger population In this investigation, the research sample was established based on the availability of data from banks listed on the Nigeria Stock Exchange.

Model Specification

Summary statistics were calculated for the variables, utilizing panel data generalized least squares regression The initial analysis involved regressing the dependent variable, stock price, against three independent variables: dividend yield, earnings yield, and payout ratio, aligning with the methodology of Nishat and Irfan (2003) This approach offered a preliminary examination of the relationship between stock prices and dividend policy, consistent with the various hypotheses proposed.

For hypothesis one which states that dividend yield does not have positive and significant impact on stock prices of Nigerian banks It was represented as:

DY = Dividend yield a = Regression Constant b1 = Regression Coefficient e = Error Term

For hypothesis two which states that earnings yield does not have positive and significant impact on stock prices of Nigerian Banks It was represented as:

EY = Earnings yield a = Regression Constant b1 = Regression Coefficient e = Error Term

Lastly for hypothesis three which states that dividend payout ratio does not have positive and significant impact on stock prices of Nigeria banks It was represented as:

PR = Payout Ratio a = Regression Constant b1 = Regression Coefficient e = Error Term

The study hypothesized that dividend yield (DY) and payout ratio (POR) would have a negative correlation with stock price volatility (SP), while earnings yield (EY), market capitalization (MC), and book value to stock price (BKS) would show a positive correlation with SP Specifically, an increase in DY and POR is expected to lead to reduced stock price volatility, whereas firms exhibiting higher earnings volatility or leverage are likely to experience increased price volatility.

Model Justification

This research work was based on the methodology of the Nishat and Irfan (2003) who examined the impact of dividend policy and stock price volatility in Pakistan A sample of

160 listed companies in Karachi Stock Exchange was examined for a period from 1981 to

A panel data regression analysis conducted in 2000 revealed a significant relationship between stock price volatility and dividend policy, taking into account factors such as firm size, earnings volatility, leverage, and asset growth Both dividend yield and payout ratio were found to significantly influence share price volatility, supporting the arbitrage realization, duration, and information effects in Pakistan Notably, the responsiveness of dividend yield to stock price volatility increased during the reform period (1991-2000), while the payout ratio showed a significant impact only at lower significance levels Additionally, firm size and leverage positively affected stock price volatility overall, with size effects being negative pre-reform (1981-1990) and positive during the reform period Earnings volatility negatively impacted stock price volatility solely during the reform period Although the findings were less robust compared to developed markets, they aligned with emerging market behaviors This study uniquely employed earnings yield as an independent variable, contrasting with Nishat and Irfan (2003), which treated it as a control variable, reflecting the importance of earnings as a growth signal for investors.

Description of Research Variables

Dependent Variable

Stock prices represent the market value of common stocks determined during trading sessions They are calculated by aggregating the monthly stock prices over the course of a year, providing a comprehensive view of stock performance (Nishat and Irfan, 2003)

Stock Price = Stock P1 + sp2 sp + 3……… +sp12

Independent Variables

Dividend yield is the ratio of cash dividends per share to the current market price per share, reflecting the earnings on investment by considering only the total dividends declared by the company within a year (Nishat and Irfan, 2003).

Dividend Yield = Dividend Per Share

Earnings yield is the ratio of a company's earnings per share to its current market price, allowing for comparison of a stock's earnings against bond yields across various sectors or the entire market (Nishat and Irfan, 2003).

Earnings Yield = Earnings Per Share

Payout refers to the ratio of dividends per share to earnings per share, effectively managing the impact of extreme values in individual years caused by low or negative net income This approach provides a clearer understanding of a company's financial health and dividend sustainability.

The payout ratio is set to one in cases where a total dividend exceeds total cumulative profits (Nishat and Irfan, 2003).

Payout Ratio = Dividend per share

Control Variables

Control variables are essential in understanding the relationship between dividend yield and earnings yield, as they account for other factors that may influence these metrics The share price is closely linked to the inherent risks associated with the firm's product markets, while market risk can also affect the company's dividend policy Consequently, this analysis incorporates a control variable to address the fluctuations in the firm's earnings stream.

Market concentration reflects the number of firms and their production shares within a market, serving as a key indicator of competitiveness This study utilizes the market concentration ratio to assess the banking industry's output relative to the overall market in Nigeria Following Tushaj's (2010) methodology, the concentration ratio is employed as a control variable to analyze the banking sector's performance in relation to market dynamics.

Market Concentration = Total Market Capitalization of Bank A

Total Market Capitalization of all the Banks in a Year

The total assets log serves as a proxy for bank size, measuring the assets of each bank and financial institution during the reviewed years (Nishat and Irfan, 2003).

Techniques of Analysis

The hypotheses were evaluated through multiple regression models, which examine the statistical relationship between a dependent variable and one or more independent variables The primary aim of regression analysis is to estimate or predict the average value of the dependent variable based on the known values of the explanatory variables (Gujarati and Porter).

2009) The general form for a multiple regression analysis was as follows:

Y = dependent variable a = equation constant b1 … bn = coefficients of explanatory variables

X1 … Xn = independent or explanatory variables e = error term

In this equation, the constants b1…bn establish the slope of the line, while the constant term "a" indicates the Y-intercept, or the point where the line intersects the Y-axis (Gujarati and Porter, 2009).

Baskin, J (1989) ,“Dividend Policy and the Volatility of Common Stock”, Journal of

Portfolio Management, Vol 15 No 3 pp 19-25.

Gujarati, D N and Porter, D C (2009), Basic Econometrics International Edition,

Kerlinger, F N (1973), Foundations of Behavioural Research Techniques in Business and

Economics Eleventh Edition, Boston: McGraw Hill Irwin.

Nishat, M and Irfan, C M (2003),“Dividend Policy and Stock Price Volatility in

Pakistan”, Saving and Development, No.3, XVIII.

Onwumere, J U J (2005), Business and Economic Research Method, Enugu: Vagessen

Orji, J I (1996), Business Research Methodology, Enugu: Metesor Press Limited.

Tushaj, A (2010),”Market Concentration in the Banking Industry”: Evidence from

Albania, Working Paper No 73 pp 1-32.

CHAPTER FOUR DATA PRESENTATION AND ANALYSIS 4.0 INTRODUCTION

This chapter presents and analyzes data sourced from the annual reports of banks and the Daily Official List of the Nigeria Stock Exchange The collected data were systematically organized to test the hypotheses, leading to insightful deductions and logical conclusions based on the generated results.

The study conducted descriptive statistics on various variables, focusing on stock prices as the dependent variable and dividend yield, earnings yield, and payout ratio as independent variables Initially, the sample size included twenty-one banks over a five-year period from 2006 to 2010; however, it was reduced to twenty banks due to data unavailability.

The analyses utilize descriptive statistics to elucidate the behavior of our model proxies, as detailed in Table 4.1 For absolute values of these model proxies, please refer to the appendix.

SP DYIELD EYIELD POR MCONC BKSIZE

From 2006 to 2010, the average stock price of 20 Nigerian commercial banks was N11.28k, with a median of N7.79k Notably, First Bank Nigeria Plc achieved the highest annual stock price during this period, reaching N40.97k in 2006 In contrast, Unity Bank Plc recorded the lowest annual stock price at N1.07k.

From 2010, the stock prices of Nigerian commercial banks demonstrated a consistent upward trend throughout the study period The analysis indicated a positive skewness of 1.40, suggesting a distribution that deviates positively from symmetry Additionally, the Kurtosis value of 4.37, which exceeds the normal threshold of 3, revealed that the stock prices were normally distributed, clustering around the mean with a pronounced peak.

Between 2006 and 2010, the average dividend yield of 20 Nigerian commercial banks was 0.11%, with a median of 0.03% Wema Bank Nigerian Plc recorded the highest dividend yield of 4.90% in 2010 Throughout the study period, there was a consistent increase in the dividend yield of these banks Additionally, the data showed a positive skewness of 8.58, indicating a departure from symmetry, and a Kurtosis value of 78.55, which is significantly greater than the normal value of 3, suggesting that the dividend yields were normally distributed and tended to cluster around the mean.

Between 2006 and 2010, the average earnings yield of 20 Nigerian commercial banks was 1.42%, with a median of 0.09% Unity Bank Nigerian Plc achieved the highest earnings yield at 35.11% in 2010, while Bank PHB recorded the lowest earnings yield during the same period.

Between 2009 and the study's conclusion, Nigerian commercial banks experienced a consistent increase in earnings yield, despite a decline of 4.55% in 2009 The analysis, as shown in Table 4.1, indicated a positive skewness of 4.59, reflecting a distribution that deviates positively from symmetry Additionally, the Kurtosis value of 27.05, significantly greater than the normal benchmark of 3, suggests that the earnings yield was normally distributed, with values clustering around the mean.

From 2006 to 2010, the average payout ratio of 20 Nigerian commercial banks was N0.52k, with a median of N0.42k Wema Bank Nigerian Plc recorded the highest payout ratio of N3.51 in 2010, while Eco Bank reported the lowest at N0.38k in 2009 Throughout the study period, there was a consistent increase in the payout ratios of these banks Additionally, the earnings yield exhibited a positive skewness of 2.42, indicating a distribution that leans towards higher values, while a Kurtosis value of 10.64 suggests that the payout ratios were normally distributed and clustered around the mean.

Between 2006 and 2010, the average market concentration among 20 Nigerian commercial banks was N0.05k, with a median of N0.04k Fidelity Bank Nigerian Plc recorded the highest market concentration at N0.195k in 2010, while First Bank Nigeria Plc had the lowest at N0.0007k in 2007 Overall, market concentration showed a consistent increase during this period Additionally, the market concentration exhibited a positive skewness of 1.41, indicating a departure from symmetry, and a Kurtosis value of 4.40, suggesting that the distribution of market concentration ratios was normally distributed and centered around the mean.

Between 2006 and 2010, the average bank size ratio for 20 Nigerian commercial banks was N11.55k, with a median of N11.65k First Bank Nigerian Plc achieved the highest bank size ratio of N12.29k in 2010, while Union Bank Nigerian Plc recorded the lowest ratio of N8.79k in 2007.

During the study period, Nigerian commercial banks exhibited inconsistent growth trends Analysis of the data revealed a negative skewness of the bank size ratio at -2.58, indicating a departure from symmetry in the distribution Additionally, the Kurtosis value of 13.47, which exceeds the normal threshold of 3, suggests that the distribution of bank size ratios was significantly peaked, remaining close to the mean throughout the study.

This study employed a three-step approach to test the proposed hypotheses First, the hypotheses were articulated in both null and alternative forms Next, the regression results were thoroughly analyzed Finally, a decision was made based on the findings.

Step One: Restatement of Hypothesis in Null and Alternate form:

Ho 1 : Dividend yield does not have positive and significant impact on stock prices of

Ha 1 : Dividend yield have positive and significant impact on stock prices of Nigerian banks.

Step Two: Analysis Regression Result

Table 4.3 presents the regression results.

Table 4.2 Regression Result of Hypothesis One

Variable Coefficient Std Error t-Statistic Prob

Adjusted R-squared 0.637458 S.D dependent var 9.599502 S.E of regression 7.813677 Akaike info criterion 6.991687 Sum squared resid 5433.766 Schwarz criterion 7.100616

Durbin-Watson stat 1.449165 Prob(F-statistic) 0.000000Source: E-view Results

Test of Hypotheses

Test of Hypothesis One

Step One: Restatement of Hypothesis in Null and Alternate form:

Ho 1 : Dividend yield does not have positive and significant impact on stock prices of

Ha 1 : Dividend yield have positive and significant impact on stock prices of Nigerian banks.

Step Two: Analysis Regression Result

Table 4.3 presents the regression results.

Table 4.2 Regression Result of Hypothesis One

Variable Coefficient Std Error t-Statistic Prob

Adjusted R-squared 0.637458 S.D dependent var 9.599502 S.E of regression 7.813677 Akaike info criterion 6.991687 Sum squared resid 5433.766 Schwarz criterion 7.100616

Durbin-Watson stat 1.449165 Prob(F-statistic) 0.000000Source: E-view Results

The analysis indicates that dividend yield negatively and significantly affects the stock prices of commercial banks in Nigeria, with a coefficient of -3.365 and a p-value of 0.035 Additionally, the market concentration of these banks also has a negative and significant impact on stock prices, shown by a coefficient of -112.106 and a p-value of 0.000 Conversely, bank size positively influences stock prices, with a coefficient of 3.620 and a p-value of 0.019 The model's R-square value of 75.9% suggests that a substantial portion of the variations in stock prices can be attributed to the independent variables, while the adjusted R-square of 63.7% further refines this explanation.

The hypothesis testing results indicate that the null hypothesis is accepted while the alternate hypothesis is rejected, suggesting that dividend yield does not significantly influence stock prices of Nigerian banks This finding aligns with the research conducted by DeAngelo et al (2003).

Test of Hypothesis Two

Step One: Restatement of Hypothesis in Null and Alternate form:

Ho 2 : Earnings yield does not have positive and significant impact on stock prices of

Ha 2 : Earnings yield have positive and significant impact on stock prices of Nigerian banks.

Step Two: Analysis Regression Result

Table 4.3 presents the regression results.

Table 4.3 Regression Result of Hypothesis Two

Variable Coefficient Std Error t-Statistic Prob

Adjusted R-squared 0.673245 S.D dependent var 9.599502 S.E of regression 7.836515 Akaike info criterion 6.997524 Sum squared resid 5465.576 Schwarz criterion 7.106453

Durbin-Watson stat 1.147148 Prob(F-statistic) 0.000000 Source: E-view Results

The analysis indicates that earnings yield negatively and significantly affects the stock prices of commercial banks in Nigeria, with a coefficient of -0.331 and a p-value of 0.048 Additionally, the market concentration of Nigerian commercial banks also shows a negative and significant impact on their stock prices, evidenced by a coefficient of -108.481 and a p-value of 0.000 Conversely, bank size positively influences stock prices, as indicated by a coefficient of 3.842 and a p-value of 0.013 The model's goodness of fit is reflected in the R-square value of 73.4%, which is adjusted to 67.3%, demonstrating that a significant portion of the variation in stock prices is explained by the independent variables.

The hypothesis testing results indicate that the null hypothesis is accepted and the alternate hypothesis is rejected, suggesting that earnings yield does not significantly influence the stock prices of Nigerian banks This finding aligns with the research conducted by Compsey and Brigham (1985).

Test of Hypothesis Three

Step One: Restatement of Hypothesis in Null and Alternate form:

Ho 3 : Dividend payout ratio does not have positive and significant impact on stock prices of Nigeria banks.

Ha 3 : Dividend payout ratio has positive and significant impact on stock prices of Nigeria banks.

Step Two: Analysis Regression Result

Table 4.4 presents the regression results.

Table 4.4 Regression Result of Hypothesis Three

Variable Coefficient Std Error t-Statistic Prob

Adjusted R-squared 0.713051 S.D dependent var 9.599502 S.E of regression 7.956296 Akaike info criterion 7.027863

Sum squared resid 5633.935 Schwarz criterion 7.136792

Durbin-Watson stat 1.183245 Prob(F-statistic) 0.000000

The analysis from Table 4.4 indicates that the dividend payout ratio negatively affected the stock prices of commercial banks in Nigeria, with a coefficient of -1.411 and a p-value of 0.269, showing no significant impact In contrast, market concentration had a significant negative impact on stock prices, evidenced by a coefficient of -107.753 and a p-value of 0.000, while bank size positively influenced stock prices, with a coefficient of 3.842 and a p-value of 0.015 The model's goodness of fit, represented by an R-square of 82.3%, suggests that a substantial portion of the variation in stock prices is explained by the independent variables, which is adjusted to 71.3% in the Adjusted R-Square.

The results of the hypothesis testing indicate that the null hypothesis is accepted and the alternative hypothesis is rejected, suggesting that the dividend payout ratio does not significantly influence stock prices of Nigerian banks This finding aligns with the research conducted by Baker and Powel (1999).

Comparaism Of Results with Objectives

Objective One: To determine the impact of dividend yield on stock prices of Nigerian banks

Dividend yield, defined as the ratio of cash dividends per share to the current market price per share, serves as a key metric for assessing investment earnings based solely on total dividends declared by a company within a year Despite numerous empirical studies examining dividend hypotheses, findings remain inconsistent, highlighting a lack of consensus regarding the rationale behind corporate payouts.

Research by Nissim and Ziv (2001) indicates a positive correlation between current dividend changes and future earnings changes, which in turn affects stock prices However, contrasting studies by DeAngelo et al (2003) and Benartzi et al (1997) reveal a negative correlation between dividend changes and stock prices This study supports the view that dividend yields do not significantly impact stock prices, suggesting that rising stock prices may lead to reduced dividends for investors A key argument for this phenomenon is that rational investors often prioritize capital gains by selling shares when stock prices increase, aligning with the findings of Grullon et al.

Objective Two: To determine the impact of earnings yield on stock

Earnings per share (EPS) serves as a crucial indicator of a firm's performance and is a key factor for investors when making investment decisions, especially for those without extensive financial knowledge Financial management should prioritize maximizing EPS to benefit both current and potential investors, as a higher EPS enhances the firm's earnings yield This earnings yield, calculated by dividing EPS by the stock's current market price, allows for effective comparison of a stock's earnings against bond yields, sectors, or the overall market.

According to Patra (2005), the market price of equity shares primarily relies on the firm's earnings per share (EPS), which is influenced by external factors like government policies, political stability, and economic conditions Consequently, the market price of shares does not directly impact the optimal financial structure of a firm Patra also asserts that since financial structure decisions are internal, fluctuations in share prices should not be used as a criterion for determining the optimum financial structure.

Compsey and Brigham (1985) argue that Earnings Per Share (EPS) may serve as a more effective criterion for value maximization related to optimal financial structure, suggesting that firms should aim to maximize EPS to maintain a suitable financial framework However, this study reveals that EPS does not significantly influence stock prices, indicating that many Nigerian investors do not regard EPS as a crucial factor in stock valuation Supporting this perspective, Pandey (2005) notes that EPS is a book value measure of firm performance, lacking a direct correlation with market share prices.

Objective Three: To determine the impact of dividend payout ratio

The dividend policy of a firm, as outlined by Nwude (2003), plays a crucial role in deciding the portion of net profit after taxes that will be distributed to shareholders as dividends in a given financial year, aiming to maximize shareholders' wealth through both dividends and capital gains Emekekwue (2005) emphasizes the importance of determining the share of earnings allocated for dividends versus retained earnings The payout ratio, which measures dividends per share against earnings per share, helps mitigate the impact of extreme values caused by fluctuations in net income In situations where total dividends surpass cumulative profits, the payout ratio is set to one.

The relationship between dividend payout policies and stock prices is primarily evident during dividend announcements Early research, such as that by Petit (1972), demonstrated that the market reacts to dividend change announcements when pricing securities, a notion supported by Gordon (1959, 1962), Foster and Vickery (1978), and Lee (1995) However, Sinclair (1989) identified a contrary trend, noting negative abnormal returns, suggesting a negative stock price reaction to dividend announcements, often linked to the tax implications for shareholders This aligns with findings indicating that the dividend payout ratios of Nigerian commercial banks do not significantly and positively influence stock prices, consistent with the conclusions of Baker and Powell (1999) and Lonie (1996).

Baker, H K and Powell, G E (1999), “How Corporate Managers view Dividend Policy?”,

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Benartzi, S., Michaely, R and Thaler, R (1997), “Do Change in Dividends Signal the

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New York: The Dryden Press

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Emekekekwue, P E (2005), Corporate Financial Management, Congo; 5 th edition, African

Foster III, W and Vickrey, D (1978), “The Information Content of Dividend

Announcement”, The Accounting Review, Vol 53, pp 360-370

Gordon, M J (1959), “Dividend, Earning, and Stock Prices”, The Review of Economics and

Gordon, M J (1962), “The Savings Investment and Valuation of a Corporation”, The

Review of Economics and Statistics, Vol 44, pp 37-51

Grullon, G., Michaely, R and Swaminathan, B (2002), “Are Dividend Changes a Sign of

Firm Maturity?” Journal of Business, Vol 75, pp 387-424

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Journal of Financial and Quantitative Analysis, Vol 30, pp 1-22

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Summary of Findings

Specifically and based on the results of the hypothesis tested the following are summary of findings These are:

The dividend yield of Nigerian commercial banks has a negative and insignificant effect on their stock prices, as evidenced by a correlation matrix that reveals an inverse relationship between these two financial metrics during the study period.

The earnings yield of Nigerian commercial banks has been found to have a negative and insignificant impact on their stock prices, indicating an inverse relationship between these two financial metrics.

The dividend payout ratio of Nigerian commercial banks has been found to have a negative and insignificant effect on their stock prices This conclusion is reinforced by the correlation matrix, which reveals an inverse relationship between the stock prices and the dividend payout ratios of these banks.

Conclusion

Extensive research over the past few decades has examined the effects of dividend policy on shareholder value While theoretically, cash dividends represent a reward for shareholders, they can lead to a corresponding decline in stock value, suggesting that in an ideal scenario, dividend payments would not affect shareholder value However, in practice, changes in dividend policy often result in fluctuations in stock market value Notable economic theories supporting investors' preference for dividend income were proposed by Graham and Dodd (1934), Walter (1963), and Gordon (1959, 1962).

Research indicates that investors tend to prefer lower cash dividends when faced with higher personal tax rates, suggesting that the optimal dividend size is inversely related to these rates (Pye, 1972) While theoretical literature suggests that dividends do not influence shareholder value in an ideal economy, in reality, dividend announcements hold significant importance for shareholders due to their tax implications and the information they convey.

This study investigates the effects of dividend policy and earnings on the stock prices of Nigerian banks amidst ongoing controversies The findings indicate that dividend yield, earnings, and payout ratio do not significantly influence stock prices in this sector Additionally, market concentration, which assesses total output by a limited number of firms, shows a negative and non-significant impact on stock prices In contrast, bank size demonstrates a positive and significant effect on the stock prices of Nigerian banks.

Recommendations

As a result of the findings of this study, the following are recommended They are:

To mitigate agency problems, managers should prioritize the interests of investors by providing comprehensive information about the firm's dividend policies Dividend announcements are crucial as they communicate valuable insights into the company's future prospects, as noted by Ezra (1963) Consequently, stock prices typically rise following an increase in dividends, while they tend to fall when dividends are decreased or omitted.

This study emphasizes the importance of management strictly adhering to shareholder interests when formulating dividend policies aimed at maximizing shareholder value In a company, the decision-making authority rests with managers, who act as agents for the shareholders, the company's owners This principal-agent relationship necessitates that managers prioritize the wealth maximization objectives of shareholders, ensuring that only projects that contribute to the firm's growth are pursued, while those that do not should be avoided.

Nigerian banks are advised to adopt a consistent annual dividend payout policy, as this aligns with the classical theory that dividends can influence share prices Despite this theory, research shows that the current payout policies of Nigerian banks do not impact stock prices However, implementing a regular dividend distribution could attract investor interest and ultimately enhance the value of their equity.

Contributions to Knowledge

The dividend and earnings policies of firms are among the most debated topics in corporate finance, particularly regarding their impact on bank stock prices in Nigeria Despite extensive research by financial economists, the complexities of dividend policies often resemble a puzzle with mismatched pieces Notably, much of the existing literature on this subject is based on foreign contexts This study aims to fill this gap by providing insights specific to the Nigerian financial landscape.

This study explores the relationship between dividend policy, earnings, and stock prices of Nigerian banks, utilizing investment ratios such as dividend yield, earnings yield, and payout ratio By incorporating control variables, the research provides empirical evidence on how these factors influence stock prices in the context of an emerging market like Nigeria.

2 Literature by providing arguments from the Nigeria commercial banks point of view using the above mentioned variables and proxies.

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Below are the Twenty Financial Institutions

1 Access Bank of Nigeria Plc

3 Bank PHB of Nigeria Plc

4 Diamond Bank of Nigeria Plc

5 Eco Bank of Nigeria Plc

6 Fidelity Bank of Nigeria Plc

7 First Inland Bank of Nigeria Plc

8 First Bank of Nigeria Plc

9 First City Monument Bank of Nigeria Plc

10 Guaranty Trust Bank of Nigeria Plc

11 InterContinental Bank of Nigeria Plc

12 Oceanic Bank of Nigeria Plc

13 Skye Bank of Nigeria Plc

14 SIBTC Bank of Nigeria Plc

15 Sterling Bank of Nigeria Plc

16 Union Bank of Nigeria Plc

17 United Bank for Africa Plc

18 Unity Bank of Nigeria Plc

19 WEMA Bank of Nigeria Plc

20 Zenith Bank of Nigeria Plc

APPENDIX 2 Stock Prices of the 20 Selected Banks for the period 2006 - 2010

2009 JAN FEB MAR APR MAY JUN

2010 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL

BANKS YRS TMPS SP DPS Dyield EPS Eyield POR OUTSHARES MKT CON MC TOTAL ASSETS BK SIZE

TMPS = Total Market Price of the Stock from Jan to Dec divided by the 12 months, then you get the MPS

Dyield= Dividend Per Share divided by marker price of the stock

Eyield= Earnings per share divided by market price of the stock

POR= Dividend per share divided by earnings per share

MKT CON= Outstanding shares divided by market price per share, then the answer is MKT CO of BK A 2006-2010 divided by all the Bks

BK SIZE= Log of Total Assets

APPENDIX 4 Panel Data of Model Proxies

No BANKS Yr SP Dyield Eyield POR Mconc BKsize

ZENITH 2 18.6375 0.09121 0.10141 0.89947 0.01233 11.9464 ZENITH 3 39.2425 0.02166 0.08791 0.24638 0.02119 12.1285 ZENITH 4 13.5975 0.03309 0.05369 0.61644 0.0352 12.0999 ZENITH 5 14.5033 0.05861 0.07309 0.80189 0.05278 12.2527 Source: Annual Financial Statements of banks (Various Years)

SP DYIELD EYIELD POR MCONC BKSIZE

Mean 11.29757 0.112908 1.406051 0.517030 0.051349 11.55165 Median 7.841667 0.033094 0.086538 0.420543 0.040665 11.64757 Maximum 40.97333 4.895928 35.11007 3.512987 0.195020 12.29165 Minimum 1.067500 0.000000 -4.546145 -0.375000 0.000689 8.792252 Std Dev 9.599503 0.518952 4.945637 0.655808 0.043299 0.545499 Skewness 1.402819 8.628409 4.618286 2.424382 1.431634 -2.596499 Kurtosis 4.406538 79.41197 27.34995 10.63621 4.456504 13.62981

Regression Result of Hypothesis One

Variable Coefficient Std Error t-Statistic Prob

Adjusted R-squared 0.637458 S.D dependent var 9.599502 S.E of regression 7.813677 Akaike info criterion 6.991687 Sum squared resid 5433.766 Schwarz criterion 7.100616

Durbin-Watson stat 1.449165 Prob(F-statistic) 0.000000 Source: E-view Results

Regression Result of Hypothesis Two

Variable Coefficient Std Error t-Statistic Prob

Adjusted R-squared 0.673245 S.D dependent var 9.599502 S.E of regression 7.836515 Akaike info criterion 6.997524 Sum squared resid 5465.576 Schwarz criterion 7.106453

Durbin-Watson stat 1.147148 Prob(F-statistic) 0.000000Source: E-view Results