Dividends Policy and Common Stock Prices Essay Sample

The issue of how much a company should pay its shareholders. as dividend is one that has been of concern to directors for a long clip. The optimum dividend policy of a house may be defined as the 1 that increases stockholders wealth by the greatest sum. It is hence necessary. to understand the nature of the relationship between dividend and value of the house. It is in the visible radiation of this that the survey examines the possible effects of a firm’s dividend policy on the market monetary value of its common stock with mention to the Nigerian context. utilizing Nestle Nigeria Plc. as instance survey. In so making. the methodological analysis adopted include the usage of ex station facto research techniques to get informations and the usage of co-relational research techniques. which featured the simple arrested development analysis used to set up the nature of any relationship bing between the two variables. The methodological analysis besides featured the usage of Person’s Product Moment Correlation to prove the significance of any through empirical observation derived relationship between the variables based on the information that collected on the company in focal point.

The analysis led to the rejection of the void hypotheses and preparation of decision that dividend policy has an opposite relationship with common stock monetary values in the Nigerian stock market. It was. hence. recommended that Nigerian houses should take the advantage of lifting net incomes and maintain the degree of dividends at a fixed sum which would intend a decrease in the proportion of net incomes that is distributed as net income though the face value of the dividends may be fixed. The analysis besides showed a high significance in the relationship between dividend policy and common stock monetary values in the Nigerian stock market. As such. it was besides recommended Nigerian houses should see all the other factors that affect stock monetary values before explicating a dividend policy. in order to hold an optimum policy that satisfies its stockholders and other interested 3rd party.

1. 1BACKGROUND OF THE STUDY
The kernel of puting is the net incomes expected either in the signifier of grasp in value of the assets involved or from the returns created by the usage of the assets involved. These returns could be in the signifier of portion of net incomes ( dividends ) or involvement to be received for the use of money Lent. These outlooks are what drive all other investing aims. Investors who invest in stocks are extremely anticipant of dividends or capital additions. However. every publically traded company has to make up one’s mind whether to return hard currency to its shareholders at the terminal of each twelvemonth. and. if yes. how much in signifier of dividends. This is the dividend determination and is cardinal to the dividend policy of houses. Dividends are normally paid out of the current year’s net income and sometimes out of general militias. It is normally expressed as a per centum of face value of the company’s portions as stated in its articles of association or as a fixed sum per portion. The proprietors of a company stocks are entitled to dividends.

The value of the portion corresponds to the present value of the dividends that would be paid on the portion. However. some equity investors prefer capital additions to dividends while some others are interested in the income ( dividends ) . Shareholders’ don’t merely acquire returns merely from dividend payments but besides from the extra additions ensuing from any grasp in the value of the portion. Whether or non ( and the extent to which ) dividends would be paid from the net incomes of a populace limited company depends on the dividend policy adopted by its direction. In early corporate finance. dividend policy referred to a corporation’s pick of whether to pay its stockholders a hard currency dividend or to retain its net incomes. The policy besides addressed the frequence of such payments of dividends ( whether yearly. biyearly or quarterly ) and how much the company should pay if it decides to make so. The optimal dividend policy of a steadfast depends on investor’s desire for capital additions as opposed to dividends. their willingness to waive present dividends for future returns. and their perceptual experience of the hazard associated with delay of returns. In today’s corporations. dividend policy has gone beyond paying hard currency to stockholders to include such issues as whether to administer net incomes through bonus issue of portions or through other particular agencies.

This means that houses could besides pay dividends in the signifier of stocks. though stocks do non supply liquidness to the investors ; nevertheless. it ensures capital additions to the stockholders. The outlook of dividends by stockholders helps them find the portion value. As such. dividend policy is a important determination taken by the fiscal directors of any company. Other issues considered besides include how to keep and better the value of its stocks in the market and how to equilibrate the penchants of investors. Coming up with a dividend policy is disputing for the managers and fiscal directors of a company. because different investors have different positions on present hard currency dividends and future capital additions. Another confusion that pops up is sing the extent of consequence of dividends on the portion monetary value. Due to this controversial nature of a dividend policy. it is frequently called the dividend mystifier. Dividends paid by the houses are viewed positively both by the investors and the houses.

The houses which do non pay dividends are rated in oppositely by investors. This has a inclination of impacting the portion monetary value of such houses. since investors’ perceptual experience about companies influence investors’ determinations which in bend affect the company’s portion monetary values. However. any attack to dividend policy intended to be operative under existent universe conditions should see the firm’s investing chances. investors’ penchants for dividends and capital additions. and difference in the cost of retaining net incomes. declaring dividends and publishing new portions. Assorted houses adopt dividend policies depending on the company’s articles of association and the prevalent economic state of affairs. Some make high wage out. while others make low wage out and yet others pay stock dividends ( bonus issue ) in topographic point of or in add-on to hard currency dividend while others pay hard currency merely. All in a command to maximise stockholders wealth which. in this instance. is the market value of the firm’s common stock.

The dividend policy of companies has. therefore been a common topic of research over the old ages ( Litner. 1959 ; Gordon. 1959 ; Modigliani. 1982 ; etc. ) and it has been related to several critical corporate affairs runing from bureau jobs to portion rating. The statement is based upon the relevancy of dividends. Modigliani and Miller ( 1961 ) in Adefila et Al ( 2006 ) demonstrated the irrelevancy of dividend policy under a set of premise. that is. dividend policy has no consequence on stock monetary values. But. harmonizing to Adefila et Al ( op. cit. ) . when these premises are relaxed. the theory begins to fall in.

Based on the Nigerian context. nevertheless. with several fluctuations in economic variables. one might inquire what the base is of these posits put frontward by earlier research workers. In Nigeria. issues of dividends are guided by the corporate statute law provided in the Company and Allied Matters Act ( CAMA ) . 1990 which provided for declaration of dividends merely on the recommendation of the Directors and that dividend shall be collectible merely out of the distributable net income of the company ( i. e. profit-after-tax ) . The Act ( CAMA ) besides stipulated that a company shall non declare or pay dividends if after the payment would hold an inauspicious consequence on the company’s ability to run into up with its liabilities as they become due. 1. 2STATEMENT OF THE PROBLEM

Those who support relevancy of dividends clearly province that regular payment of dividends cut down the uncertainness of the stockholders ( i. e. the net incomes of the house is discounted at a lower rate ) thereby increasing the market value. However. it’s precisely face-to-face in the instance of increased uncertainness due to non-payment of dividends. The critical inquiries asked today by corporate directors are the really same 1s asked by directors in the fiftiess. Litner ( 1959 ) . in Mgbame. Mgbame and Okafor ( 2011 ) . identified these inquiries as whether dividend payments should be maintained at its current degree or changed. whether investors would prefer stable dividend payouts or those that fluctuate with net incomes. whether dividend policy should favor older or immature investors. etc. With the Nigerian economic system being characterized by several fluctuations in economic variables. inquiries can be raised therefore “does dividend policy have any consequence on the value of houses in Nigeria? If yes. to what extent? ” Consequently. this survey is measuring the impact of dividends policy on the stock monetary value motions within the Nigerian economic environment. 1. 3 OBJECTIVES OF THE STUDY

The wide aim of this survey is to critically analyze the possible effects that a firm’s dividend policy might hold on the market monetary value of its common stock. Specifically. it further efforts to place:

those factors that influence firm’s dividend policy ;
those factors that influence firm’s portion monetary values ;
the tendency of dividend payout of Nestle Nigeria Plc. from 2007 to 2011 ;
the tendency of Nestle Nigeria Plc. ’s portion monetary values from 2007 to 2011 ; and
The current degree of dividend payments in Nestle Nigeria Plc. 1. 4RESEARCH Question
The survey will be guided by the undermentioned research inquiries:
What factors influence the dividend policy of houses?
What factors influence the portion monetary values of houses?
What is the tendency of Nestle Nigeria Plc. ’s dividend payout from 2007 to 2011?
What is the tendency of Nestle Nigeria Plc. ’s portion monetary values from 2007 to 2011?
What is the current degree of dividends payment in Nestle Nigerian Plc. ? 1. 5STATEMENT OF HYPOTHESIS
H0: There is no important relationship between dividend policy of a company and the monetary values of its common stocks in the Nigerian Stock

Market. 1. 6 SIGNIFICANCE OF THE STUDY
It is besides hoped that the consequence of the survey would be of benefit to all participants in the Nigerian stock market and assistance administrations to procure a feasible evaluation among investors and other stakeholders in the fiscal environment. It will educate fiscal directors on the impact their dividend determinations on the portion monetary value and on the general evaluation placed on their company. Furthermore. the survey would be utile to the general populace that may hold entree to the work by increasing their cognition about the relationship between companies’ dividends policies and the motion of common stock monetary values in the stock exchange. Finally. it will function as beginning of information to other research workers in the sense that it will function as mention and reading stuff and contribute intellectually. therefore functioning as mention to the academic community by heightening the cognition of readers and those interested in transporting out farther on countries refering investing as a tool for economic growing. 1. 7SCOPE OF THE STUDY

This survey shall concentrate chiefly on the consequence of dividend policy on the market value of stocks with a peculiar mention to the Nigerian economic system utilizing Nestle Nigeria Plc. as the focal point of survey. The instance survey is chosen of their recorded action in the Nigerian stock market over the old ages. The survey shall be conducted on the motions in the portion monetary value of Nestle Nigeria Plc. with accent placed on periods in which dividends are declared and paid within 2007 to 2011 inclusive. The scope of old ages is chosen because it has recorded series of dividend declarations every bit good as rise in the dividends declared. 1. 8DEFINITION OF Footing

STOCKS – A unit of capital of rubric of ownership in a company. This carries the right to portion of the company’s net incomes and to vote in the company’s general meetings. DIVIDENDS – Dividends are returns to stockholders from company net incomes. A dividend is a hard currency payment from a company’s net incomes announced by a company’s board of managers and distributed among shareholders. In other words. dividends are an investor’s portion of company net incomes. given to him or her as portion proprietor of the company. DIVIDEND PAYOUT RATIO: The per centum of net incomes paid to stockholders in dividends. Payout is the ratio of entire dividends to entire net incomes.

The payout ratio is set to one in instances where a entire dividend exceeds entire cumulative net incomes. This is the entire dividend paid as a per centum of the net net income. DIVIDEND Policy: The policy a company uses to make up one’s mind how much it will pay out to stockholders in dividends. SHAREHOLDERS’ VALUE: The value delivered to stockholders because of management’s ability to turn net incomes. dividends and portion monetary value. In other words. stockholder value is the amount of all strategic determinations that affect the firm’s ability to expeditiously increase the sum of free hard currency flow over clip. INFORMATION ASSYMETRY: A state of affairs in which one party in a dealing has more or superior information compared to another. This frequently happens in minutess where the marketer knows more than the purchaser. although the contrary can go on every bit good. Chapter TWO – LITERATURE REVIEW

2. 1INTRODUCTION
All research works should seek to construct on old cognition. They may be in published signifiers in newspapers. diary. and articles and other media. This chapter entirely serves as the traveling train through which the research worker visits some related literatures which wrote on dividend policy and stock monetary values. As such. the chapter starts by giving a conceptual scrutiny of the variables under survey – dividend policies and stock monetary values. In it. the research worker went farther to reexamine the plants of yesteryear research workers which have direct bearing on the variables and the job of the survey. The chapter stopping points by a reappraisal of bing theories derived or constructed as a consequence of old research plants and which are relevant to the job under survey. 2. 2CONCEPTUAL Model

The conceptual frame work entails the background definition of footings which provides significance to the constructs or variables. including the proficient words and the placeholders used by the research worker in detecting and mensurating such constructs or variables. By such. the research worker identifies the thoughts behind the variables under survey and the methods mensurating them based on beginnings that refer to past literatures which call for new work reasoning straight for a demand for this work. This subdivision. hence. reexamine the undermentioned conceptual issues. 2. 2. 1CONCEPT OF Dividends

Pandey ( 2010 ) defines dividend as that part of a company’s net net incomes which the managers recommend to be distributed to stockholders in proportion to their shareholdings in the company. It is normally expressed as a per centum of nominal value of the company’s ordinary portion capital or as a fixed sum per portion. Oxford lexicon of accounting defines dividends as the distribution of portion of the net incomes of a company to its stockholders. The dividend is usually expressed as an sum per portion on par value of the portion. The size of the dividend payment is determined by the board of managers of a company. who must make up one’s mind how much to pay out to stockholders and how much to retain in the concern. Dividend is that portion of the net incomes of a company which is distributed amongst its stockholders. Harmonizing to Institute of Chartered Accountants. Ireland ( ICAI ) . “Dividend is a distribution to stockholders out of net incomes or militias available for this purpose” . 2. 2. 1. 1FORMS OF DIVIDEND

Cash Dividend: – This is the most common signifier of dividends payments. It consequences in hard currency escape from the house. As such. the house should hold equal hard currency resources at its disposal before declaring hard currency dividend ( Olowe. 2008 ) .

Stock Dividend: – This is a distribution of extra portions to the bing stockholders in proportion to their bing portion capital alternatively of paying them in hard currency. Stock dividend is popularly termed as issue of bonus portions ( Olowe. 2008 ) .

Chemical bond Dividend: – This is where a company issues bonds for the sum due to stockholders. The chief intent of bond dividend is postponement of payment of immediate dividend in hard currency. The bond holders get regular involvement on their bonds besides payment of the bond money on the due day of the month ( Olowe. 2008 ) . 2. 2. 1. 2DIVIDEND Decision: Dividend POLICY VS PROFIT RETENTION POLICY Harmonizing to AL-Shubri ( 2009 ) . the dividend determination of the house is important for the finance director because it determines:

The sum of net income to be distributed among the stockholders – dividend policy. and The sum of net income to be retained in the house – net income keeping policy. Dividend policy is a policy to keep dividend at a certain degree with the purpose of prolonging the monetary value of the ordinary portions on the stock exchange. ( Oxford Dictionary of Accounting. 2008 ) . Due to market imperfectnesss and uncertainness stockholders are apathetic between dividends and maintained net incomes. However. they give a higher value to the current twelvemonth dividend than the future dividend and capital additions. It holds that dividends are desirable from the stockholders point of position since it increases their current wealth. On the other manus. net income keeping policy is a policy to maintain the net incomes of the house and non administer them to stockholders ( Oxford Dictionary of Accounting. 2008 ) .

This strengthens the internal finance of the house and puts it in a better place to take chances. As such. the net net incomes of the house may be viewed as a important beginning of financing the growing of the house. Dividends paid to stockholders represent a distribution of net incomes that can non be productively reinvested by the house. Dividend pay-out reduces the sum of net incomes to be retained in the house and impact the entire sum of internal funding ( Van Horne. 1971 ) . There is an reverse relationship between hard currency dividends and maintained net incomes. While taking the dividend determination the direction takes into history the consequence of the determination on the maximization of shareholders’ wealth. Maximizing the market value of portions is the nonsubjective. Dividend payout or keeping is guided by this aim ( Olowe. 2008 ) . 2. 2. 1. 3DIVIDEND Policy

Harmonizing to Van Horne ( 1971 ) . dividend policy entails the division of net incomes between stockholders and reinvestment in the house. Retained net incomes are a important beginning of financess for financing corporate growing. but dividend constitutes the hard currency flows that accrue to stockholders. In Okafor et Al ( 2011 ) . dividend policy is a firm’s policy with respects to paying out net incomes as dividend versus retaining them for reinvestment in the house. It is the division of net income between payments to stockholders and reinvestment in the house. Dividend policy is therefore an of import portion of the firm’s long-term funding schemes. The dividend policy of a company determines what proportion of net incomes is distributed to the stockholders by manner of dividends. and what proportion is ploughed back for reinvestment intents. Since the chief aim of fiscal direction is to maximize the market value of equity portions. one cardinal country of survey is the relationship between the dividend policy and market monetary value of equity portions ( Akinsulire. 2011 )

Harmonizing to Brealey and Myers ( 2002 ) . dividend policy has been kept as the top 10 mystifiers in finance. The most pertinent inquiry to be answered here is that how much hard currency should houses give back to their stockholders? Should corporations pay their stockholders through dividends or by buy backing their portions. which is the least dearly-won signifier of payout from revenue enhancement position? Firms must take these of import determinations period after period ( some must be repeated and some demand to be revaluated each period on regular footing ) ( Okafor. There are two types of dividend policy: managed and residuary. In residuary dividend policy the sum of dividend is merely the hard currency left after the house makes desirable investings. In this instance the sum of dividend is traveling to be extremely variable and frequently zero. If the director believes dividend policy is of import to their investors and it positively influences portion monetary value rating. they will follow managed dividend policy. The optimum dividend policy is the 1 that maximizes the company’s stock monetary value. which leads to maximization of shareholders’ wealth. 2. 2. 1. 4STABILITY OF Dividends

The term stableness of dividends agencies consistence in the payment of dividends. It refers to regular payment of a certain minimal sum as dividend twelvemonth after twelvemonth ( World Wide Web. replies. com ) . Even if the company’s net incomes fluctuate from twelvemonth to twelvemonth. its dividend should non. This is because the stockholders by and large value stable dividends more than fluctuating 1s. Stable dividend can be in the signifier of:

Changeless dividend per portion
Changeless per centum
Stable naira dividend plus excess dividend
Danger OF STABLE DIVIDEND POLICY
Stable dividend policy may sometimes turn out unsafe. Once a stable dividend policy is adopted by a company. any inauspicious alteration in it may ensue in serious harm sing the fiscal standing of the company in the head of the investors ( World Wide Web. replies. com ) . 2. 2. 1. 5FACTORS THAT INFLUENCE DIVIDENDS POLICY

Harmonizing to Dinesh ( 2006 ) . a figure of considerations affect the dividend policy of a company. He put forth the undermentioned major factors:
Stability of Net incomes. The nature of concern has an of import bearing on the dividend policy. Companies with stable net incomes can hold a more consistent dividend policy than those holding an uneven flow of incomes because they can foretell easy their nest eggs and net incomes.

Age of corporation. A freshly established company may necessitate much of its net incomes for enlargement and works betterment and may follow a stiff dividend policy while. on the other manus. an older company can explicate a clear cut and more consistent policy sing dividend.

Liquid of Funds. Dividends represent hard currency escape. Availability of hard currency and sound fiscal place puts a house in a better place to pay dividends. In other words. the greater the financess and the liquidness of the house the better the ability to pay dividend. The liquidness of a steadfast depends really much on the investing and fiscal determinations of the house which in bend determines the rate of enlargement. If hard currency place is weak. stock dividend will be distributed.

Extent of portion Distribution. Nature of ownership besides affects the dividend determinations. A company with few stockholders is likely to acquire the acquiescence of the stockholders for following a conservative dividend policy. On the other manus. a company holding a good figure of stockholders widely distributed and organizing low or average income group would confront a great trouble in procuring such acquiescence because they will stress to administer higher dividend.

Needs for Additional Capital. Companies retain a portion of their net incomes for beef uping their fiscal place. The income may be conserved for run intoing the increased demands of working capital or of future enlargement. Small companies normally find troubles in raising finance for their demands of increased on the job capital for enlargement programmes. They holding no other option. utilize their ploughed back net incomes. Therefore. such Companies distribute dividend at low rates and retain a large portion of net incomes.

Trade Cycles. Dividend policy is adjusted harmonizing to the economic moving ridge. During a roar. prudent directors retain net incomes as militias for state of affairss which follow the inflationary period. Ina depression. higher rates of dividend can be used as a tool for marketing the securities. The fiscal solvency can be proved and maintained by the companies in dull old ages if the equal militias have been built up.

Government Policies. The net incomes capacity of the endeavor is widely affected by the alteration in financial. industrial. labor. control and other authorities policies. Sometimes authorities restricts the distribution of dividend beyond a certain per centum in a peculiar industry or in all domains of concern activity.

Tax Policy. High revenue enhancement reduces the net incomes of the companies and accordingly the rate of dividend is lowered down. Sometimes authorities levies dividend-tax of distribution of dividend beyond a certain bound.

Legal Requirements. In make up one’s minding on the dividend. the managers take the legal demands excessively into consideration. In order to protect the involvements of creditors and foreigners. CAMA. 1990 prescribes certain guidelines in regard of the distribution and payment of dividend.

Past dividend Ratess. While explicating the Dividend Policy. the managers must maintain in head the dividend paid in past old ages. The current rate should be around the mean past rat. If it has been abnormally increased the portions will be subjected to guess. In a new concern. the company should see the dividend policy of the rival administration.

Ability to Borrow. Well established and big houses have better entree to the capital market than the new companies and may borrow financess from the external beginnings if there arises any demand. Such companies may hold a better dividend pay-out ratio. Whereas smaller houses have to depend on their internal beginnings and therefore they will hold to construct up good militias by cut downing the dividend payout ratio for run intoing any duty necessitating heavy financess.

Policy of Control. Policy of control is another finding factor is so far as dividends are concerned. If the managers want to hold control on company. they would non wish to add new stockholders and hence. declare a dividend at low rate. Because by adding new stockholders they fear dilution of control and recreation of policies and programmes of the bing direction. So they prefer to run into the demands through retained net incomes. If the managers do non trouble oneself about the control of personal businesss they will follow a broad dividend policy. Thus control is an influencing factor in bordering the dividend policy.

Refunds of Loan. A company holding loan liability is vowed to a high rate of keeping net incomes which will of course take down down the rate of dividend. unless other agreements are made for the salvation of debt on adulthood. Sometimes. the loaners ( largely institutional loaners ) put limitations on the dividend distribution. Management is bound to honor such limitations and to restrict the rate of dividend payout.

Time for Payment of Dividend. Payment of dividend means outflow of hard currency. It is. hence. desirable to administer dividend at a clip when is least needed by the company because there are peak times every bit good as thin periods of outgo. Wise direction should be after the payment of dividend in such a mode that there is no hard currency escape at a clip when the project is already in demand of pressing fundss.

Regularity and stableness in Dividend Payment. Dividends should be paid on a regular basis because each investor is interested in the regular payment of dividend. The direction should. in malice of regular payment of dividend. see that the rate of dividend should be all the most changeless. For this intent sometimes companies maintain dividend equalisation Fund. 2. 2. 1. 6LEGAL Position OF DIVIDENDS IN NIGERIA

Harmonizing to subdivision 370. sub-section ( 1 ) of the Company and Allied Matters Act ( CAMA ) . 1990. a company may in the one-year general meeting. declare dividend merely on the recommendation of the Directors. The Company may from clip to clip wage to the members such interim dividends as appear to the managers to be justified by the net incomes of the company. Harmonizing to sub-section ( 3 ) . the general meetings shall hold power to diminish the sum of dividend recommended by the managers. but shall hold no power to increase the sum recommended. While sub-section ( 5 ) stated that. topic to the commissariats of these act. dividend shall be collectible merely out of the distributable net income of the company. Furthermore. subdivision 381 of CAMA provinces that a company shall non declare or pay dividends if there are sensible evidences for believing the company is or would be. after the payment. unable to run into up with or pay its liabilities as they become due. 2. 2. 2CONCEPT OF STOCK

Stock refers to a type of security that signifies ownership in a corporation and represents a claim on portion of the corporation’s assets and net incomes ( World Wide Web. investopedia. com ) . They refer to a security issued by a corporation such that represents an ownership right in the assets of the corporation and a right to a proportionate portion of net incomes after payment of corporate liabilities and duties. ( West’s Encyclopedia of American Law. 2008 ) . Ownerships of stocks are represented in written paperss known as stock certifications. The stocks are broken down into units called portions. Each portion represents a standard unit of ownership in a corporation. There are two chief classs of stock: common stocks and preferable stocks. An proprietor of common stocks is typically entitled to take part and vote at stockholders’ meetings. In add-on to common stock. some corporate bylaws allow for the issue of preferable stock. Preferable shareholders have precedence over common stock holders if a corporation should neutralize. Other categorizations of stocks. harmonizing to ICAI include:

Blue bit stocks are stocks traded on a securities exchange ( listed stock ) that have minimum hazard due to the corporation’s fiscal record.
Listed stock means a company has filed an application and enrollment statement with both the Securities and Exchange Commission and a securities exchange. The enrollment statement contains elaborate information about the company to help the populace in measuring the stock’s potency. Floating stock is stock on the unfastened market non yet purchased by the populace.

Growth stock is stock which is purchased for its sensed potency to appreciate in value. instead than for its dividend income.
Penny stocks are extremely bad stocks that normally cost under a dollar per portion. 2. 2. 2. 1STOCK Monetary value
A portion monetary value is the monetary value of a individual portion of a figure of salable stocks of a company. Once the stock is purchased. the proprietor becomes a stockholder of the company that issued the portion ( Oxford Dictionary of Accounting ) . The value of a portion of stock depends upon the value placed on the publishing corporation by the participants of the stock market. This value is based on profitableness and future chances. The market monetary value reflects what buyers are willing to pay based on their rating of the company’s chances. The face or stated value of a portion of stock is known as its Par value. In the instance of common stocks. par value normally does non match to the market value of a stock ( Olowe. 2008 ) . The monetary value of a stock fluctuates basically due to the theory of supply and demand.

Like all trade goods in the market. the monetary value of a stock is sensitive to demand. However. there are many factors that influence the demand for a peculiar stock. Stock monetary value may be influenced by the concern prognosiss of analysts and potencies for the company’s general market section. In economic sciences and fiscal theory. analysts use ‘random walk’ techniques to pattern behavior of plus monetary values. in peculiar portion monetary values on stock markets. currency exchange rates and trade good monetary values. This pattern has its footing in the given that investors act rationally and without prejudice. and that at any minute they estimate the value of an plus based on future outlooks. Under these conditions. all bing information affects the monetary value. which changes merely when new information comes out. By definition. new information appears indiscriminately and influences the plus monetary value indiscriminately ( Criss. 1995 ) .

The value of a portion of a company at any given minute is determined by all investors voting with their money. If more investors want a stock and are willing to pay more. the monetary value will travel up. If more investors are selling a stock and there aren’t adequate purchasers. the monetary value will travel down. However. that does non explicate how people decide the maximal monetary value at which they are willing to purchase or the lower limit at which they are willing to sell. Harmonizing to the efficient market hypothesis ( EMH ) . the monetary value of a stock at any given minute represents a rational rating of the known information. Such information might bear on the future value of the company. In other words. monetary values are the consequence of discounting expected future hard currency flows ( Criss. 1995 ) . 2. 2. 2. 2FACTORS THE AFFECT STOCK PRICES

This is the most frequent inquiry that most stock/options bargainers may hold in their heads. Stocks monetary value alterations due to market forces. i. e. purchasing and merchandising of the available stocks in the market. Harmonizing to Smith ( 2008 ) . the followers are some factors that affect or even predict the purchasing or merchandising of stock that finally affects stock monetary values of companies.

Market Sentiment.
The Performance of the Industry
The Earning Results and Earning Guidance
Take-over or Merger.
New Product Introduction to markets or debut of an bing merchandise to new markets.
New Major Contracts or Major Government Orders.

Share Buy-Back.
Dividend.
Stock Splits.
Insider Trading.
Investing Gurus / Hedge Funds Trading.
Analyst Upgrade / Downgrades.
Addition/Removal to/from Stock Index.
Others factors that affect the demand and supply of stocks include intelligence about new engineering. patent blessing. war. natural catastrophe. merchandise callbacks and cases that shall hold positive and negative impact to the relevant company stocks. The wellness or bad luck of a cardinal leader in a company may besides impact the stock monetary value of the company. 2. 2. 2. 3STOCK PRICES AND MARKET VOLATILITY

Volatility is a step related to the discrepancy of a security’s monetary value. Therefore. if a stock is labeled as volatile. its monetary value would greatly change over clip. and it is more hard to state in certainty what its future monetary value will be ( Criss. 1995 ) . The volatility of ordinary stock is the systematic hazard faced by investors who possess ordinary stock investings ( Guo. 2002 ) . From the finance literature. the operating definition of volatility is the comparative scattering of alterations in stock monetary values relative to some norm for a period ( Jones and Wilson. 1989 ) . The volatility of stock market investing can be defined as the scattering of investing returns below and above the mean. other known as the standard divergence of returns. It is used to quantify the hazard of the fiscal instrument over the specified clip period and is usually expressed in annualized footings. There is a strong relationship between volatility and market public presentation ( Criss. 1995. Guo. 2002 ) .

Normally. the greater the volatility. the greater the hazard in the short tally. Volatility tends to worsen as the stock market rises and increase as the stock market falls. When it increases. hazard additions and returns lessening and frailty versa ( Kinder. 2002 ) . Typically. the allotment of investing schemes to an investing program is based on the several volatilities of the stocks involved and whether it fits the hazard profile of the prospective investor. Investors’ penchant is for less hazard. The lesser the sum of hazard. the better the investing is ( Kinder. 2002 ) . In other words. the lesser the volatility of a given stock. the greater its desirableness to investors. Therefore. it is of import for investors to understand the restrictions and utilizations of volatility as a barometer of investing hazard. 2. 3REVIEW OF THE LITERATURE

The linkage between the dividend policy of corporations and the volatility of their stock monetary values has been explored at different times by different research workers ( Allen and Rachim. 1996 ; Baskin. 1989 ; Nishat and Irfan. 2003 ; Schwert. 1989 ) . This subdivision on literature reappraisal is focused on earlier researches that are relevant to our survey. The reappraisal of the literature is organised into the different focal points of this survey. 2. 3. 1STOCK Monetary value Determinants

In the visible radiation of the preceding literature reappraisal. many factors both micro and macro-economics. have impact on equity pricing in the stock market. the impact differs from state to state house to tauten. industry to industry. economic system to economic system and from clip to clip. But one comforting decision is that most of the factors appear to hold the same behavior regardless of clip. industry or house restraints. For case. increased rising prices and involvement rates. worsening dividends. net incomes. hapless direction leave negative impact on equity pricing and vice-versa. A lower grade of efficiency in less developed states market might be caused by common features of loose revelation demands every bit good as tenuity and discontinuity of trading ( AL- Shubiri. 2010 ) . Numerous research plants have been conducted over such factors that affect the monetary values of common stock. The most basic factors that influence monetary value of equity portion are demand and supply factors. If most people start purchasing so monetary values move up and if people start selling monetary values travel down. Government policies. firm’s and industry’s public presentation and potencies have effects on demand behavior of investors. both in the primary and secondary markets.

Al-Qenae. Li & A ; Wearing ( 2002 ) in their survey cited in Akintoye. Oseni. and Somoye ( 2009 ) of the effects of gaining ( micro-economic factor ) . rising prices and involvement rate ( macro-economic factors ) on the stock monetary values on the Kuwait Stock Exchange. discovered that the macro-economic factors significantly impact stock monetary values negatively. A old survey by Udegbunam and Eriki ( 2001 ) of the Nigerian capital market besides shows that rising prices is reciprocally correlated to stock market monetary value behavior. Al – Tamimi ( 2007 ) identified company cardinal factors ( public presentation of the company. a alteration in board of managers. assignment of new direction. and the creative activity of new assets. dividends. net incomes ) . and external factors ( authorities regulations and ordinances. rising prices. and other economic conditions. investor behaviour. market conditions. money supply. competition. uncontrolled natural or environmental fortunes ) as influencers of plus monetary values. ( Akintoye. Oseni. and Somoye. 2009 ) .

In a survey of the impact of dividend and net incomes on stock monetary values. Hartone ( 2004 ) argues that a significantly positive impact is made on equity monetary values if positive net incomes information occurs after negative dividend information. Besides. a significantly negative impact occurs in equity pricing if positive dividend information is followed by negative gaining information. A figure of surveies found that stock monetary value has a important positive relationship with dividend payments { Gordon ( 1959 ) . Oggden ( 1994 ) . Stevents and Jose ( 1989 ) . Kato and Loewenstein ( 1995 ) . Ariff and Finn ( 1986 ) . and Lee ( 1985 ) } . while others found a negative relationship like Loughlin ( 1989 ) and Easton and Sinclair ( 1989 ) . Docking and Koch ( 2005 ) besides discovered that there is a direct relationship between dividend proclamation and equity monetary value behaviour. 2. 3. 2CORPORATE Dividend Policy DETERMINANTS

The dividend constabularies of companies. among other variables. have been a common topic of research for more than half of a century ( Litner. 1959 ; Gordon. 1959 ; Modigliani. 1982 ; etc. ) and it has been related to several critical corporate affairs runing from bureau jobs to portion rating. The results of the surveies vary depending on the range of the survey. the assets and factors examined. The dividend constabularies in bend are affected by a figure of factors. Black ( 1976 ) in his survey concluded with the undermentioned inquiry: “What should the corporation do about dividend policy? We don’t know” . A figure of factors have been identified in old empirical surveies to act upon the dividend policy determinations of the house. Net incomes have long been regarded as the primary index of the firm’s capacity to pay dividends. Litner ( 1956 ) conducted a authoritative survey on how U. S. directors make dividend determinations. He developed a compact mathematical theoretical account based on study of 28 good established industrial U. S. houses. Harmonizing to him the current twelvemonth net incomes and old twelvemonth dividends influence the dividend payment form of a house.

However. Baker. Farrelly and Edelman ( 1986 ) surveyed 318 New York stock exchange houses and concluded that the major determiners of dividend payments are awaited degree of future net incomes and form of past dividends. Fama and Babiak ( 1968 ) studied the determiners of dividend payments by single houses during 1946-64. The survey concluded that net income seems to supply a better step of dividend than either hard currency flows or net income and depreciation included as separate variables in the theoretical account. Alli et Al ( 1993 ) reveal that dividend payments depend more on hard currency flows. which reflect the company’s ability to pay dividends. than on current net incomes. which are less to a great extent influenced by accounting patterns. Baker and Powell ( 2000 ) concluded from their study on the listed houses of New York Stock Exchange ( NYSE ) that dividend determiners are industry specific and awaited degree of future net incomes is the major determiner. Shapiro and Balbier ( 2000 ) submit that the undermentioned issues. based on empirical grounds and theoretical suggestions. are critical for houses to see when puting dividend policy.

What are our investing chances? Puting dividend payouts in relation to long term growing chances maximizes fiscal flexibleness and reduces the fiscal clashs associated with raising external capital. Hence. a quickly turning house. with an copiousness of positive net nowadays value undertakings. should retain a larger portion of its operating hard currency flow than a house with few profitable investing chances.

What sort of Business Risk Do We Face? A house with unstable or cyclical net incomes should put a low dividend payout rate to cut down the odds that it will be forced to cut its dividend. On the other manus. houses with stable net incomes should be more willing to pay dividends.

Who Are Our Stockholders? Dividend policy should fit the pick of the shareholders between dividends and capital additions ; though there is no grounds that one dividend patronage is better than another.

How is Our Liquidity Position? All else being equal. houses with high liquidness and good entree to the fiscal markets are in a better place to pay dividends than those houses with limited fiscal resources.

Is Control an Issue? If a firm’s proprietors or directors are concerned about retaining control. they may be loath to publish extra stock. Retained net incomes are a preferable beginning of capital for such houses. mandating low dividend payout ratio if the present debt-equity ratio is at its upper bound. Arnott and Asness ( 2003 ) based their survey on American stock markets ( S & A ; P500 ) and found that higher aggregative dividend payout ratios were associated with higher future net incomes growing. Both Zhou and Ruland ( 2006 ) . and Gwilym et. Al. ( 2006 ) supported the findings of Arnot and Asness. Zhou and Ruland examined the possible impact of dividend payouts on future net incomes growing. Their survey used a sample of active and inactive stocks listed on NYSE with positive. non- nothing payout ratio companies covering the period from 1950- 2003. Their arrested development consequences showed a strong positive relation between payout ratio and future net incomes growing.

Mancinelli and Ozkan ( 2006 ) undertook an empirical probe of the relationship between the ownership construction of companies and dividend policy utilizing 139 houses listed in Italian exchange. Their consequences suggested that the dividend payout ratio is negatively associated with the voting rights of the largest stockholders ( Kapoor. 2009 ) . Mohammed Amidu and Joshua Abor ( 2006 ) examined the factors impacting dividend payout ratios of listed companies in Ghana. The consequences of their survey showed that payout ratios were positively related to profitableness. hard currency flow and revenue enhancement but are negatively related hazard and growing ( Kapoor. 2009 ) . 2. 3. 2. 1DIVIDEND POLICY AND AGENCY PROBLEMS

Harmonizing to Kapoor ( 2009 ) . the degree of dividend payments is in portion determined by stockholders penchant as implemented by their direction representatives. However. the impact of dividend payments is borne by a assortment of claim holders. including debt holders. directors. and provider. He put frontward that bureau relationship exists between:

The stockholders versus debt holders conflict. and
The stockholder versus direction struggle
Stockholders. who are the exclusive receipients of dividends. prefer to hold big dividend payments. all things being equal ; conversely. creditors prefer to curtail dividend payments to maximise the firm’s resources that are available to refund their claims. The empirical grounds discussed is consistent with the position that dividends transfer assets from the corporate pool to the sole ownership of the stockholders. which negatively affects the safety of claims of debt holders. In footings of shareholder-manger relationships. all things being equal. directors. whose compensation ( monetary and otherwise ) is tied to the firm’s profitableness and size. are interested in low dividend payout degrees.

A low dividend payout maximizes the size of the assets under direction control. maximizes direction flexibleness in taking investings. and reduces the demand to turn to capital markets to finance investings. Stockholders. wanting managerial efficiency in investing determinations. prefer to go forth small discretional hard currency in management’s custodies and to coerce troughs to turn to capital markets to fund investings. These markets provide monitoring services that discipline directors. Consequently. stockholders can utilize dividend policy to promote directors to look after their owners’ best involvements ; higher payouts provide more monitoring by the capital markets and more managerial subject. 2. 3. 2. 2DIVIDEND POLICY AND ASYMMETRIC INFORMATION

Dividends are meant convey private information to the market. anticipations about the future net incomes of a house based on dividend information should be superior to prognosiss made without dividend information. A figure of surveies have tested these deductions of the information content of dividends which includes surveies by Benartzi. Michaely. and Thaler ( 1997 ) . Brook. Charlton. and Hendershott ( 1998 ) . Nissim and Ziv ( 2001 ) . Grullon. Michaely and Swaminathan ( 2002 ) . etc. In a symmetrically informed market. all interested participants have the same information about a house. including troughs. bankers. stockholders. and others. However. if one group has superior information about the firm’s current state of affairs and future chances. an informational dissymmetry exists. Most faculty members and fiscal practicians believe that directors possess superior information about their houses relative to other interested parties.

Dividend alterations ( additions and lessenings ) . dividend inductions ( first clip dividends or recommencement of dividends after drawn-out suspension ) . and riddance of dividend payments are announced on a regular basis in the fiscal media. In response to such proclamations. portion monetary values normally increase following dividend additions and dividend inductions. and portion monetary values normally decline following dividend cuts and dividend riddances. In Bernado and Welch ( 2000 ) cited in Kapoor ( 2009 ) . Pettit ( 1972 ) documented that proclamations of dividend additions are followed by important monetary value additions and that proclamations of dividend lessenings are followed by important monetary value beads. Information about the chances of a house may include the firm’s current undertakings and its future investing chances. Three surveies of big alterations in dividend policy—Asquith and Mullins ( 1983 ) ( dividend inductions ) . Healy and Palepu ( 1988 ) . and Michaely. Thaler. and Womack ( 1995 ) ( dividend skips ) —showed that the market reacts dramatically to such proclamations. 2. 4THEORETICAL Model

A figure of dividend theories exist that effort an account of the influence of corporate dividend policy. Assorted theoretical accounts have been developed to assist houses analyze and measure the perfect dividend policy. This subdivision is focused on the assorted theoretical accounts and theories that are relevant to our survey. The theories are organised into assorted schools of ideas on dividend policy. There is no understanding between these schools of idea over the relationship between dividends and the value of the portion or the wealth of the stockholders in other words. Their dissension is based on the relevancy of dividends. However. the EMH theoretical account and the behavioral finance theory propose about how the monetary values of stocks are affected by the determinations of the participants. 2. 4. 1. 1EFFICIENT MARKET HYPOTHESIS ( EMH ) MODEL

EMH provinces that puting is overall ( weighted by the standard divergence ) rational ; that the monetary value of a stock at any given minute represents a rational rating of the known information that might bear on the future value of the company ; and that portion monetary values of equities are priced expeditiously. which is to state that they represent accurately the expected value of the stock. as best it can be known at a given minute. In other words. monetary values are the consequence of discounting expected future hard currency flows ( Pandey. 2010 ) . The EMH theoretical account. if true. has at least two interesting effects. First. because fiscal hazard is presumed to necessitate at least a little premium on expected value. the return on equity can be expected to be somewhat greater than that available from non-equity investings: if non. the same rational computations would take equity investors to switch to these safer non-equity investings that could be expected to give the same or better return at lower hazard.

Second. because the monetary value of a portion at every given minute is an “efficient” contemplation of expected value. then—relative to the curve of expected return—prices will be given to follow a random walk. determined by the outgrowth of information ( indiscriminately ) over clip. Professional. equity investors. hence. plunge themselves in the flow of cardinal information. seeking to derive an advantage over their rivals ( chiefly other professional investors ) by more intelligently construing the emerging flow of information ( intelligence ) ( AL-Shubiri. 2009 ) . The EMH theoretical account does non look to give a complete description of the procedure of equity monetary value finding. For illustration. stock markets are more volatile than EMH would connote. In recent old ages. it has come to be accepted that the portion markets are non absolutely efficient. possibly particularly in emerging markets or other markets that are non dominated by intelligent professional investors ( Pandey. 2009 ) . 2. 4. 1. 2 BEHAVIOURAL FINANCE THEORY

Another theory of portion monetary value finding comes from the field of Behavioral Finance. Harmonizing to Behavioral Finance. worlds frequently make irrational decisions—particularly. related to the purchasing and merchandising of securities—based upon frights and misperceptions of results. The irrational trading of securities can frequently make securities monetary values which vary from rational. cardinal monetary value ratings. For case. during the engineering bubble of the late ninetiess. engineering companies were frequently bid beyond any rational cardinal value because of what is normally known as the “greater sap theory” . The “greater sap theory” holds that. because the prevailing method of recognizing returns in equity is from the sale to another investor. one should choose securities that they believe that person else will value at a higher degree at some point in the hereafter. without respect to the footing for that other party’s willingness to pay a higher monetary value. Thus. even a rational investor may bank on others’ unreason ( Pandey. 2010 ) . 2. 4. 2 DIVIDEND IRRELEVANCE PROPOSITION

The Modigliani and Miller school of idea believes that investors do non province any penchant between current dividends and capital additions. They say that dividend policy is irrelevant and is non deterministic of the market value. Therefore. the stockholders are apathetic between the two types of dividends. All they want are high returns either in the signifier of dividends or in the signifier of re-investment of retained net incomes by the house. There are two conditions discussed in relation to this attack:

determinations sing funding and investings are made and make non alter with regard to the sums of dividends received.

When an investor bargain and sells portions without confronting any dealing costs and houses issue portions without confronting any flotation cost. it is termed as a perfect capital market. Two of import theories discussed associating to the irrelevancy attack. the remainders theory and the Modigliani and Miller attack. 2. 4. 2. 1MODIGLIANI & A ; MILLER APPROACH ( 1961 )

In 1961. two baronial laureates. Merton Miller and Franco Modigliani ( M & A ; M ) showed that under certain simplifying premises. a firms’ dividend policy does non impact its value. Their theorem provinces that the division of maintained net incomes between new investing and dividends do non act upon the value of the house ( Adefila. Adeoti and Oladipo. 2002 ) . It is the investing form and accordingly the net incomes of the house which affect the portion monetary value or the value of the house ( Olowe. 2008 ) . The basic premiss of their statement is that a firm’s value is determined by taking optimum investings. The net payout is the difference between net incomes and investings. and merely a residuary. Because the net payout comprises dividends and portion redemptions. a house can set its dividends to any degree with an countervailing alteration in portion outstanding ( Olowe. 2008 ) .

They argued that. from the position of investors. dividends policy is irrelevant. because any coveted watercourse of payments can be replicated by appropriate purchases and gross revenues of equity. Thus. investors will non pay a premium for any peculiar dividend policy. M & A ; M concluded that given houses optimum investing policy. the firm’s pick of dividend policy has no impact on stockholders wealth. In other words. all dividend policies are tantamount. The most of import penetration of Miller and Modigliani’s analysis is that it identifies the state of affairss in which dividend policy can impact the house value. It could count. non because dividends are “safer” than capital additions. as was traditionally argued. but because one of the premises underlying the consequence is violated. The propositions rest on the undermentioned premises:

Information is complimentary and available to everyone every bit.
No distorting revenue enhancements exist
Flotation and transit costs are non- existent. No clip slowdown and dealing costs exist.
Non catching or bureau cost exists
There is a rational behaviour by the investors and there exists perfect capital markets.
Securities can be split into any parts i. e. they are divisible
The investing determinations are taken steadfastly and the net incomes are hence known with certainty. The dividend policy does non impact these determinations.

MODEL DESCRIPTION
The dividend irrelevance in this theoretical account exists because stockholders are apathetic between paying out dividends and puting retained net incomes in new chances. The steadfast finances chances either through maintained net incomes or by publishing new portions to raise capital. The sum used up in paying out dividends is replaced by the new capital raised through publishing portions. This will impact the value of the house in an opposite ways. The addition in the value because of the dividends will be offset by the lessening in the value for new capital elevation. 2. 4. 2. 2RESIDUALS Theory OF DIVIDENDS

This theory was foremost proposed by Miller and Modigliani in 1961. Investors prefer to hold the house retain and reinvest net incomes instead than pay them out in dividend if the return on the investing net incomes exceeds the rate of return the investors could themselves obtain on other comparative investing. Otherwise. the investors prefer dividend ( Akinsulire. 2011 ) . One of the premises of this theory is that external funding to re-invest is either non available. or that it is excessively dearly-won to put in any profitable chance. If the house has good investing chance available so. they’ll invest the maintained net incomes and cut down the dividends or give no dividends at all. If no such chance exists. the house will pay out dividends.

If a house has to publish securities to finance an investing. the being of flotation costs needs a larger sum of securities to be issued. Therefore. the wage out of dividends depend on whether any net incomes are left after the funding of proposed investings as flotation costs increases the sum of net incomes used. Deciding how much dividends to be paid is non the concern here. in fact the house has to make up one’s mind how much net incomes to be retained and the remainder can so be distributed as dividends. This is the theory of Residuals. where dividends are remainders from the net incomes after functioning proposed investings ( Akinsulire. 2011 ) . This residuary determination is distributed in three stairss:

Measuring the available investing chances to find capital outgos.
Measuring the sum of equity finance that would be needed for the investing. fundamentally holding an optimal finance mix. Cost of maintained net incomes