1

THE IMPACT OF DIVIDEND POLICY AND EARNINGS ON STOCK PRICES OF

NIGERIA BANKS

BY

ANIKE, ESTHER AMUCHE

PG/M.SC/09/53718

DEPARTMENT OF BANKING AND FINANCE

FACULTY OF BUSINESS ADMINISTRATION

UNIVERSITY OF NIGERIA

NSUKKA

FEBUARY, 2014

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THE IMPACT OF DIVIDEND POLICY AND EARNINGS ON STOCK PRICES OF

NIGERIA BANKS

BY

ANIKE, ESTHER AMUCHE

PG/M.Sc/09/53718

A DISSERTATION SUBMITTED TO THE DEPARTMENT OF

BANKING & FINANCE, FACULTY OF BUSINESS ADMINISTRATION IN

PARTIAL FULLFILLMENT OF THE REQUIREMENTS FOR THE AWARD

OF MASTER OF SCIENCE(M.Sc) DEGREE IN BANKING AND FINANCE

SUPERVISOR: PROF . C. UCHE

FEBUARY, 2014.

DECLARATION

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I, Anike Esther Amuche, with registration number PG/M.Sc/09/53718, a postgraduate

student in the Department of Banking and Finance do hereby declare that this work

embodied in this Dissertation is original and has not been submitted in part or in full for any

other diploma or degree of this or any other University.

_________________________

STUDENT

Anike, Esther Amuche

APPROVAL

4

This dissertation has been approved for the Department of Banking and Finance

By

____________________________ ___________________________

SUPERVISOR HEAD OF DEPARTMENT

Prof. C. Uche Dr. J.U.J. Onwumere

DEDICATION

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I dedicate this work to my father in heaven, the Almighty God who makes all things possible

and does things at His appointed time.To you, oh Lord, be all the glory and adoration for

your Love and Sufficiency.

ACKNOWLEDGEMENTS

It’s a thing of joy to know that someone cares for me. To this, I wish to express my

overwhelming joy to all those whose advice, encouragement, prayer, care and love have

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made me a success. First, I want to acknowledge my amiable supervisor Prof.C.Uche, for his

assistance throughout the course of this research work, particularly his patience, tolerance

and his invaluable devotion to this work. My profound gratitude also must go to Dr. Austin

Ujunwa, who created time out of his tight schedule to assess my work properly. To my

H.O.D Dr. J.U.J Onwumere and all my lecturers, Dr.Mrs O.P.Egbo, Dr.Chikeleze, Dr. Mrs

N.J Modebe, Dr. C. Nwude, who groomed me towards attaining this height, I say thank you.

I must say thanks to all the staff in the department of Banking and Finance, among who are

Mrs.Aneke, Mrs. Anakwenze, and Aunty Chika.

My big nephew, Mr. Alum Martins (Igbudu 1 na-Nike), who has been a true brother indeed,

whose anchor by the grace of God has made the sky my starting point. I will not fail to thank

the couple who God used to encouraged me, Engr and Mrs Beloved-Dan Obi-Anike, Dr.

Ekette Maurice. My family has been wonderful, for their timeless love prayers especially my

lovely Mum, Mrs Anikeokwor Josephine, my brother, Hon. Anike Eugene, my aunts

Ozo, Appolo and my sisters, Iyke-Ikpa Caroline, Anike Virginia and Okolo Nwanneka.

My typist, Blessing, who faithfully reproduced this work from mostly hand-written

manuscript as a service of love. My thanks as well go to all the Staff and Management of

Nigeria Stock Exchange Onitsha, Anambra State., whose assistance provided the data for

my analysis and findings.

Worthy of acknowledging are my friends whose encouragement gave my world a

meaning. Notable among them are: Ujunwa Angela (Mrs),Ubagwu Charles, Ageme Tony,

Anyaoku Emeka P, Nsofor Ebere, Ihuoma Ajuonuma, Mrs. Onuseluogu Oddi, Mrs.Nkwonta

Uzomaka, Imo G. Ibe, Offor Nneka, Mrs Okolo Alice to mention but a few. I love you all.

Above all, I appreciate the giver of wisdom,the Excellency, the Ever Present help in time of

need, the merciful and gracious Father. Thank YOU LORD.

ANIKE ESTHER AMUCHE

DEPARTMENT OF BANKING AND FINANCE

UNEC.

TABLE OF CONTENTS

Title Page - - - - - - i

Declaration - - - - - - ii

Approval Page - - - - - - iii

Dedication - - - - - - iv

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Acknowledgement - - - - - - v

List of Tables - - - - - - ix

Abstract - - - - - - x

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study - - - - - 1

1.2 Statement of Problem - - - - - 4

1.3 Objectives of the Study - - - - - 5

1.4 Research Questions - - - - - 6

1.5 Research Hypotheses - - - - - 6

1.6 Scope of the Study - - - - - 6

1.7 Significance of the Study - - - - - 7

References

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 Dividend Policies And Earnings - - - - 10

2.2 Types of Dividends - - - - - 17

2.3 Methods of Dividend Payment - - - - 18

2.4 Dividend Announcements and Stock Returns - - 19

2.5 Dividend Policy and Asymmetric Information - - 21

2.6 Stock Prices and Dividend Announcements - - - 23

2.7 Stock Prices, Dividends And Semi-Strong Market Efficiency 25

2.8 Stock Splits on Price And Liquidity - - - - 26

2.9 Corporate Dividend Policy Determinants - - - 27

2.10 Shareholders Earnings (EPS) and the Firm - - - 29

References

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research Design - - - - - 40

3.2 Nature and Sources of Data - - - - - 40

3.3 Population and Sample Size - - - - - 40

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3.4 Model Specification - - - - - 41

3.5 Model Justification - - - - - 42

3.6 Description of Research Variables - - - - - 43

3.6.1 Dependent Variable - - - - - 43

3.6.2 Independent Variables - - - - - 43

3.6.3 Control Variables - - - - - 44

3.7 Techniques of Analysis - - - - - 44

References

CHAPTER FOUR

PRESENTATION AND ANALYSIS OF DATA

4.1 Presentation of Data - - - - - 47

4.2. Test of Hypotheses - - - - - 50

4.2.1 Test of Hypothesis One - - - - - 50

4.2.2 Test of Hypothesis Two - - - - - 51

4.2.3 Test of Hypothesis Three - - - - - 53

4.3 Comparaism Of Results with Objectives - - - - 54

4.3.1 Objective One: To determine the impact of dividend yield on stock

prices of Nigerian banks - - - - - 54

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

prices of Nigerian banks - - - - - 55

4.3.3 Objective Three: To determine the impact of dividend payout ratio

on stock prices of Nigeria banks. - - - - - 55

Reference

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CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings - - - - - 59

5.2 Conclusion - - - - - 59

5.3 Recommendations - - - - - 60

5.4 Contributions to Knowledge - - - - - 61

Bibliography

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LIST OF TABLES

Table 4.1 Panel Data of Model Proxies - - - 47

Table 4.2 Descriptive Statistic - - - 50

Table 4.3 Regression Result of Hypothesis One - - - 52

Table 4.4 Regression Result of Hypothesis Two - - - 53

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ABSTRACT

This study examined the impact of dividend yield on stock prices of Nigerian banks; the

impact of earnings yield on stock prices of Nigeria banks and the impact of payout ratio on

stock prices of Nigeria banks. The study adopted the ex-post-facto research design and panel

data covering 5-year period 2006-2010 were collated from annual reports of banks and the

Nigeria Stock Exchange daily official list. The Ordinary Least Square Regression Model

was used to estimate the relationship between dividend yield, earnings yield, payout ratio

and stock prices. Average of daily stock prices was adopted as the dependent variable, while

the independent variables included dividend yield (DY), earnings yield (EY) and payout

ratio (POR). The result emanating from this study revealed that dividend yield had negative

and significant impact on commercial banks’ stock prices in Nigeria (coefficient of Dyield =

-3.365; p-value = 0.035). Earnings yield had negative and significant impact on commercial

banks’ stock prices in Nigeria (coefficient of Eyield = -0.331; p-value = 0.048) and dividend

payout ratio had negative and non-significant impact on commercial banks’ stock prices in

Nigeria (coefficient of Por = -1.411; p-value = 0.269). The study thus, revealed that the

dividend yield, earnings yield and payout ratio are not factors that influences stock prices

rather the bank size was found to have positive and significant impact on stock prices. The

study therefore recommends among others that managers should act in the best interest of

investor as to reduce the agency problem, thus complete information about the dividend

polices of the firm should be provided.

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The subject matter of dividend policy remains one of the most controversial issues in

corporate finance. For a very long time now, financial economists have engaged in modeling

and examining corporate dividend policy and earnings as they affect banks stock prices in

Nigeria (Amidu, 2007). Black (1976) hinted that, “The harder we look at the dividend

picture, it seems like a puzzle with pieces that don’t fit together”. In over thirty years since

then a vast amount of literature has been produced examining dividend policy.

Recently, however, Frankfurterc and Wood (2002) concluded in the same vein as Black and

Scholes (1974) that the dividend “puzzle”, both as a share value-enhancing feature and as a

matter of policy, is one of the most challenging topics of modern financial economics. Forty

years of research have not been able to resolve it. Research no dividend policy and earnings

have shown not only that a general theory of dividend policy remains elusive, but also that

corporate dividend practice varies over time, among firms and across countries. The patterns

of corporate dividend policies not only vary over time but also across countries, especially

between developed and emerging financial institutions.

Glen, et al (1995) suggested that dividend policies in emerging markets differed from those

in developed markets. They reported that dividend payout ratios in developing countries

were only about two thirds of that of developed countries. Different scholars have defined

the term dividend policy differently. Hamid, et al (2012) defined dividend policy as the

exchange between retained earning and paying out cash or issuing new shares to share-

holders. Booth and Cleary (2010) defined dividend policy as an exclusive decision by the

management to decide what parentage of profit is distributed among the shareholders or

what percentage of it retains to fulfill its internal needs. Nwude (2003:112) defined the term

as the guiding principle for determining the portion of a company’s net profit after taxes to

be paid out to the residual shareholders as dividend during a particular financial year.

Emekekwue (2005:393) defined dividend policy as the portion of firm earnings that will be

paid out as dividend or held back as retained earnings. Huda and Farah (2011) pointed out

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that dividend policy has been an issue of interest in financial literature; academics

and researchers has developed many theoretical models describing the factors that managers

should consider when making dividend policy decisions. Key factors behind the dividend

decision have been studied by numerous researchers. Lintner (1956) suggested that dividend

payment pattern of a firm is influenced by the current year earnings and previous year

dividends. In this case, dividend may be seen as the free cash flows which comprises of cash

remaining after all business expenses have been met (Damodaran, 2002). The dividend

decision in corporate finance is a decision made by the directors of a company. It relates to

the amount and timing of any cash payments made to the company’s stockholders.

The decision as stated by Pandey (2005), is an important one for the firm as it may influence

the financial structure and stock price of the firm. In addition, the decision may determine

the amount of taxations that stockholders pay. The dividend payment ratio is a major aspect

of the dividend policy of the firm, which affects the value of the firm to the share holders

(Litzenberger and Ramaswany, 1982). The classical school of thought holds this view and

they believe that dividends are paid to influence their share prices. They also believe that

market price of an equity is a representation of the present value of estimated cash dividends

that can be generated by the equity (Gordon, 1959). Another classical school of thought, on

the other hand, believes that the price of equity is a function of the earnings of the company.

They believe that dividend payout is irrelevant to evaluating the worth of equity. What

matters, they say is earnings (Miller and Modigliani, 1961).

Mayo (2008: 364-365) observed that retained earnings provide funds to finance the firms on

long term growth. It is the most significant source of financing a firm’s investment.

Dividends are paid in cash, thus the distribution of earnings utilizes the available cash of the

company. When the firm increases the retained portion on net earnings, shareholders’

current income in the form of dividends decreases, but the use of retained earnings to

finance profitable investments is expected to increase future earnings. On the other hand,

when dividends increase, shareholders’ current income will increase but the firm may be

unable to retain earnings and, thus, relinquish possible investment opportunities and future

earnings.

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The theoretical rationale for corporate dividend policy has been an important topic in

corporate finance for a very long time. After the dividend policy-irrelevance proposition by

Miller and Modigliani (1961), several theories have attempted to explain why and how

companies pay out the cash generated by their business operations as dividend. Three main

factors may influence a firm’s dividend decision. These are: - Free cash flows, Dividend

clientele and Information signaling (Pandey, 2005). Under the free-cash flow theory of

dividends, the payment of dividends is very simple: the firm simply pays out, as dividend,

any surplus cash after it invests in all available positive net present value projects. Criticism

of the theory is that it does not explain the observed dividend policies of real world

companies. Most companies pay relatively consistent dividend from one year to the next and

managers tend to prefer to pay a steadily increasing dividend rather than paying dividend

that fluctuates dramatically from one year to the next. These criticisms have led to the

development of other models that seek to explain the dividend decision (Brigham, 1995).

Under the dividend clientele, a particular pattern of dividend payments may suit one type of

stockholders more than another. A retiree may prefer to invest in a firm that provides a

consistently high dividend yield, whereas, a person with a huge income from employment

may prefer to avoid dividends due to their high marginal tax rate on income. If Clientele

exists for a particular pattern of dividend payment, a firm may be able to maximize its stock

price and minimize its cost of capital by catering to a particular clientele. This model may

help to explain the relatively consistent dividend policies followed by most listed companies

(Okafor, 1983). According to the clientele effect theory of dividend policy, investors who

would like to receive some cash from their investment always have the option of selling a

portion of their holding. This argument is even more cogent in recent times with the advent

of very low-cost discount stockholders. Thus, it remains possible that there are taxation

based clientele for certain types of dividend policies (Pandey, 2005).

Information content or signaling says that investors regard dividend changes as signals of

management earning potentials. The model was developed by Ezra (1983). It suggests that

dividend announcements convey information to investors regarding the firm’s value

prospects (Ezra, 1983). He said many earlier studies had shown that stock prices tend to

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increase when an increase in dividend is announced but tend to decrease when a decrease or

omission is announced. Therefore, Ezra pointed out that, this is likely due to when investors

have complete information about the firm, they will look for other information that may

provide a clue as to the firm’s future prospects and also managers have more information

than investors about the firm and such information may inform their dividend decision. It

could be seen, therefore, that when mangers lack confidence in the firm’s ability to generate

cash flows in the future, they may keep dividends constant or possibly even reduce the

amount of dividends payout. Conversely, managers that have access to information that

indicates very good future prospects for the firm are more likely to increase dividends (Ezra,

1963).

Hence, the purpose of this study is to perform a cross-sectional study to find the situations in

Nigeria which these hypotheses apply and also determine how stock prices react to such

dividend and earnings report as indicated by investors’ ratio values with bias to bank stocks.

1.2 STATEMENT OF PROBLEM

The goal of corporate entities is to maximize the value of shareholders’ investment in the

firm. Managers pursue this goal through their investment, financing and dividend decisions.

Investment decisions involve the selection of positive net present value projects. Financing

decisions involve the selection of a capital structure that would minimize the cost

of capital of the firm while dividend decisions of the firm determine the reward which

investors and potential investors of the firm receive from their investment in the firm. Apart

from the investment and financing decisions, managers need to decide, on regular basis,

whether to pay out of the earning to shareholders, reducing the agency problem (Jensen and

Meckling, 1976). However, the question remains whether paying out of earnings would

essentially create value for the shareholders or not. A dividend payment provides cash flow

to the shareholders but reduces firm’s recourses for investment; this dilemma is a myth in

the finance literature.

A great deal of theoretical and empirical research on dividend policy effects has been done

over the last several decades. Theoretically, cash dividend from earnings means giving

reward to the shareholders, that is, something they already own in the company; but this will

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be offset by the decline in stock value. In an ideal world (without tax and any restrictions)

therefore dividend payments would have no impact on the shareholders’ value. In the real

world, however a change in the dividend policy is often followed by a change in the market

value of stocks. The economic argument for investor’s preference for dividend income was

offered by Graham and Dodd (1934). Subsequently, Walter (1963) and Gordon (1959 and

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.

Another researcher made efforts to further understand the dividend controversy. Average

investors, subject to their personal tax rates, would prefer to have less cash dividend if it is

taxable: size of optimal dividend inversely related to personal income tax rates (Pye, 1972).

The theoretical literature on dividend effects has been well developed. Researchers largely

accepted that dividend per-se has no impact on the shareholders’ value in an ideal economy.

However, in a real world, dividend announcement is important to the shareholders because

of its tax effect and information content.

Given the above problems and the controversies surrounding the impact of dividend policy

and earnings on stock prices of Nigeria banks, the lacuna which this study seeks to fill is to

provide empirical evidence on the impact of dividend policy and earnings on stock prices of

Nigeria banks using investment ratios such as dividend yield, earnings yield, payout ratio

with the introduction of some control variables in an emerging market like Nigeria. Hence,

the contribution of this study is in terms of geography.

1.3 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.

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1.4 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?

1.5 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.

1.6 SCOPE OF THE STUDY

The banking sector represents the lending spectrum of any economy, thus responsible for the

supply of funds to the productive sub-sectors of the Nigerian economy, hence its importance

to the growth of the Nigerian Economy. The study covers a five years period (2006-2010),

and is based on reports of twenty (20) banks (Data on Spring Bank Plc was not

available). The choice becomes appropriate within the period culminated in the reduction of

banks in the country to 21 banks. However, also, the post consolidated financial statements

and accounts of these banks were published in 2006. As also observed since 2005, the

Banking sector of the Nigerian Stock Exchange has been the most active till date. Panel

data series was collated from the Annual Statements and Accounts as well as stock prices of

these banks from the Nigeria Stock Exchange at the end of the year

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1.7 SIGNIFICANCE OF THE STUDY

This research will be particularly significant to the following groups:

1) INVESTORS AND POTENTIAL INVESTORS

The major beneficiaries of an enhanced value created firm as indicated by the share prices

are investors and potential investors. Their contribution, in monetary terms in the promotion,

incorporation, continual existence to the growth of the firm must be rewarded with a

premium above their risk free rate, thus, acting as a compensation for time and risk inherent

in these firms. Therefore, this research will contribute, along with other similar literatures

available in this area of finance, to enhancing the maximization of investors and potential

investors’ objectives as concern capital gains from their investment.

2) ACADEMIC

Essentially, this research intends to contribute significantly to the volume of literature

available in this area of finance. In academics, the unknown is never exhausted, as the list

of what we do not know could go on forever. Therefore, as a contribution to this area, hints,

recommendations about dividends, earnings and stock prices will be examined.

3) MANAGEMENT

In large firms, there is a divorce between management and ownership. The decision taking

authority in a company lies in the hands of managers. Shareholders as owners of the

company are the principals and managers are their agents. Thus, there is principal-agent

relationship between shareholders and managers therefore managers should and must act in

the best interest of shareholders as consistent with shareholders’ wealth maximization

objectives of the firm. Therefore, this research will enable management to understand what

must be done in order to act in the best interest of shareholders in choosing dividend policies

that will maximize shareholders’ value.

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REFERENCES

Amidu, M. (2007), “How Does Dividend Policy Affect Performance of the Firm on Ghana

Stock Exchange?”, Investment Management And Financial Innovations, Vol. 4,

Issue 2, Pp 103-112.

Black, F. (1976), “The Dividend Puzzle”, Journal of Portfolio Management, Vol. 2, pp 5-8.

Black, F., and Scholes M. (1974), “The Effects of Dividend Yield and Dividend Policy on

Common Stock Prices and Returns”, Journal of Financial Economics, Vol. 1,

pp 1-22.

Booth, L. and Cleary, W. S. (2010), Dividend Policy. An Introduction to Corporate

Finance, Canadian: 2nd

edition, John Wiley and Sons.

Brigham, E. F. (1995), Fundamentals of Financial Management, New York: McGraw Hill.

Damodaran, A. (2002), Corporate Finance, Theory and Practice International Edition,

New York: John Wiley and Son.

DeAngelo, H. and DeAngelo, L. (2006), “The Irrelevance of the M & M Dividend

Irrelevance Theory”, Journal of Financial Economics, Vol.79, pp 293-315.

Emekekekwue, P. E. (2005), Corporate Financial Management, 5th

edition, African Bureau

of Educational Sciences.

Ezra, S. (1963), The Theory of Financial Management, New York: Columbia University

Press.

Ezra, S. (1983), The Theory of Financial Management, New York: Columbia University

Press.

Frankfurter, G. M. and Wood, B. J. (2002), “Dividend Policy Theories and their Empirical

Tests”, International Review of Financial Analysis, Vol. 11 No. 2 pp 111-138.

Glen, J. D., Karmokolias Y., Miller R. R, and Shah S. (1995), “Dividend Policy and

in Emerging Markets”, International Financial Corporation. Discussion Paper

No 26.

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

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

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

Statistics, Vol. 41 No 2 May, pp 99-105.

20

Graham, B. and Dodd, D. L. (1934), Security Analysis, lst edition, New York: McGraw-Hill.

Hamid, Z., Hanif, C.A., Ul-Malook, S. S. and Wasimullah (2012), “The Effect of Taxes on

Dividend Policy of Banking Sector in Pakistan”, African Journal of Business

Management, Vol. 6 No. 8, February, pp 2951-2954.

Huda, F. and Farah, T. (2011), “Determinants of Dividend Decision: A Focus on Banking

Sector in Bangladesh”, International Research Journal of Finance and Economics

ISSN 1450-2887 Issue 77, pp33-46.

Jensen, M. C. and Meckling, W. H. (1976), “Theory of the Firm: Managerial Behavior,

Agency Costs and Ownership Structure”, Journal of Financial Economics,

Vol. 3 No 4, pp 305-360.

Lease, R.C., John, K., Kalay, A., Loewenstein, U. and Sarig, O.H. (2000), Dividend Policy:

It’s Impact on Firm Value. Boston: Harvard Business School Press.

Lintner, J. (1956), “Distribution of Incomes of Corporations among Dividends, Retained

Earnings and Taxes”, American Economic Review, Vol. 46 No. 2, pp 97-113.

Litzenberger, R. H. and Ramaswamy, K. (1982), “The Effects Dividends on Common Stock

Prices Tax Effects or Information Effects”, The Journal of Finance, Vol. 37 No. 2

May, pp 429-443.

Mayo, H. B. (2008), Investments, Introduction International Studies: 9th

edition, Canada:

Thomson Higher Education.

Miller, M. H. and Modigliani, F. (1961), “Dividend Policy, Growth and the Valuation of

Shares,” The Journal of Business, Vol. 43 No. 4 Oct., pp 411-433.

Nwude, C. E. (2003), Basic Principles of Financial Management. A Second Course: 1st

edition Enugu: Chuke Nwude Nigeria.

Okafor, F O. (1983), Investment Decision Evaluation of Projects and Securities, Enugu:

Gostak Publishing Company Ltd.

Pandey, I. M. (2005), Financial Management, 9th

edition, New Delhi: Vikas Publishers.

Pye, G. (1972), “Preferential Tax Treatment of Capital Gains, Optimal Dividend Policy and

Capital Budgeting”, The Quarterly Journal of Economics, Vol. 86, pp 226-242.

Walter, J. E. (1963), “Dividend Policy; It Influence on the Value of the Enterprise”, The

Journal of Finance, Vol. 18 No 2 May, pp 280-291.

21

CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 DIVIDEND POLICIES AND EARNINGS

Nwude (2003:112) defines dividend policy as the guiding principle for determining the

portion of a company’s net profit after taxes to be paid out to the residual shareholders as

dividend during a particular financial year; the purpose of a dividend policy being to

maximize shareholders’ wealth, by which is dependent on both current dividend and capital

gains. Mishra and Narender (1996) found that not all profit-making state owned enterprises

have adhered to the dividend policy guidelines.

Emekekwue (2005:393), the essence of the dividend policy is to determine what portion of

firms’ earnings that will be paid out as dividend or held back as retained earnings. Retained

earnings are one of the important sources of financing of firms’ projects. Dividend, on the

other hand, is that portion of a firm’s after tax profit that is shared out to shareholders as

reward for investment while dividend, puts disposable income in the hands of shareholders.

Juma’h and Pacheco (2008) assert that, on average, profitability, liquidity and the size of

companies are important determinant of cash dividend decision. Arif, et al (2011), opines

that discretionary accruals do not significantly influence dividend policy. It means that the

practices of earnings management are not only for the sake of dividend avoidance, but there

can be several other reasons for this manipulation. The investor while making investment

decision with a hope to have dividend, should not focus on the earnings management as a

signal for the dividend policy formulation. Emekekwue (2005:393) found that dividend

policies vary among firms. Some vary with the business cycle while others do not. The so

called growth firms usually pay out paltry amounts to shareholders and use what is left to

address the financial needs of the firm.

However, the objective of providing funds to build up reserves in order to finance expansion

projects, service and retire existing obligations and, consequently, enhance the earnings

power of the firm is at variance with putting disposable income in the hands of shareholders.

A high rate of retained earnings translates to a lesser amount of disposable income to

22

shareholders. Similarly, if a large portion of corporate earnings is paid out as dividend, the

firm will not have enough to service and retire existing obligations, and of course, for re-

investment. Since retained earnings act as a buffer to the future earnings capacity of the

firm, it is generally argued that a drop in retained earnings will precipitate a drop in the

market value of stocks. Basse (2009) is of the view that firms seem to increase their

dividend payments when facing an environment of a rising price level in order to stabilize

the real value of dividend income. Therefore, higher inflation is a major driver of dividend

increases.

Brennan and Thakor (1990) found that despite the preferential tax treatment of capital gains

for individual investors, majority of a firm’s shareholders may support dividend payment for

small distributions. The directions in making dividend decisions should therefore give some

consideration to the preference of the various categories of shareholders, and the problem is

usually to identify the consensus preference of shareholders, especially in the case of widely

held companies. The incidence of taxation on the firm and the shareholders has a bearing on

dividend policy. Tax is a strong fiscal disincentive on dividend distribution. Miller and

Scholes (1978) observed that dividend taxes do not influence share prices. Harris, et al

(1999) found that if share prices absorb the effect of dividend taxation, then corporations

could distribute dividends without imposing a penalty on shareholders at the margin, that is,

dividend policy would be unaffected by dividend taxes.

The Dividend Signaling Hypothesis argues that dividends are used by companies to signal

higher than expected future free cash flow, if managers have private information about the

future or current cash flow, then investors will interpret a current dividend increase

(decrease) as a signal that managers expect permanently higher (lower) future free cash flow

levels (Bhattacharya, 1979).

The Free Cash Flow Hypothesis, first explained by Jensen and Meckling (1976), argues that

agency problems arise in companies where ownership and control are separated, such as in

public companies with disperse shareholding. Managers have an incentive to over invest

relative to their first best optimal level in companies with sizable free cash flows or cash

reserves. The overinvestment stems from the empire building or perks-prone attributes

23

embedded in the managers' utility function. An increase in dividend reduces the free cash

flow available to managers and, therefore, limits the overinvestment problem, creating value

for the company. Conversely, a dividend cut augments the cash on hand to the managers and

aggravates the overinvestment problem.

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

(2006), argues that, as a company matures, its investment opportunity set shrinks with a

consequent decline in systematic risk. A positive price reaction to a dividend increase

suggests that the company has entered a mature life cycle stage of lower profitability and

lower risk. According to the Maturity Hypothesis, reactions to news about systematic risk

reduction dominate reactions about lower future profits and, therefore, the stock price

response to a dividend increase announcement is positive. Conversely, the decision to

decrease dividends signals the transitioning from a mature to a decline stage with higher

systematic risk and even lower profitability. The stock price response to a dividend decrease

announcement is, therefore, negative. The Maturity Hypothesis is a conjecture, because

Grullon, et al (2002) do not develop a theoretical model and, therefore, do not propose a

separating equilibrium in which other companies cannot mimic mature companies.

Also the Catering Hypothesis, proposed by Baker and Wurgler (2003), assumes that for

either institutional or psychological reasons, some investors have an uninformed and

perhaps time-varying demand for dividend-paying stocks. For instance, dividend clientele

theories argue that changes in tax code, transaction costs or institutional investment

constraint can lead to changes in the demand for dividend paying stocks. Behavioural

explanations, such as the bird-in- the-hand or self-control arguments, could also lead to a

time-varying demand for dividend paying stocks. The market, therefore, assigns a time-

varying premium to dividend paying stocks. Managers cater to this premium by paying out

more dividends when the dividend premium is high, and by holding cash inside the company

when the dividend premium is low. Although dividend payers and non-payers are

consistently different in many characteristics, such as size, life-cycle stage and profitability,

Baker and Wurgeler (2003) provide some evidence that managers cater to investor

sentiment and their conclusions are robust to a variety of alternative explanations.

24

Despite extensive empirical testing of the above dividend hypotheses over the last 30 years,

the conclusions are surprisingly varied, and a wide consensus on the corporate payout

rationale is still lacking. The empirical evidence on the Dividend Signaling Hypothesis

is mixed at best. On one hand, Nissim and Ziv (2001) found that using a particular model of

earnings expectations, current dividend changes are positively correlated to future earnings

changes hence the stock prices. On the other hand, other studies (among others, Deangelo,

et al 2003 and Benartzi, et al 1997) found positive correlation between dividend changes and

concurrent or lagged earnings changes, but no correlation with future earnings changes.

Even more interesting, they find that companies that cut dividends have higher earnings in

the future relative to comparable companies.

The Maturity Hypothesis is supported not only by Grullon, et al (2002), but also by

DeAngelo, et al (2003). In their paper, they show that the fraction of publicly-traded

industrial firms that pay dividends is high when retained earnings are a large portion of total

equity and falls to near zero when most equity is contributed rather than earned. The

earned/contributed capital mix is therefore a critical parameter to classify the life-cycle stage

of a company. Although the Catering Hypothesis has been formulated only recently,

Li and Lie (2006) shows that the stock market reaction to dividend changes depends on the

dividend premium associated with dividend-paying stocks.

In buttressing the signaling effect of dividend decision of the firm, Pandey (2005) says

investors can use the knowledge about managers’ behavior to inform their decision to buy or

sell the firm’s stock, bidding the price up in the case of positive dividends surprise or scaling

it down when dividends do not meet expectations. This view was supported by Miller and

Rock (1985). Thus, this, in turn, may influence the dividend decision as managers know that

stockholders closely watch dividend announcements looking for good or bad news. As

managers tend to avoid sending a negative signal to the market about the future prospects of

their firms, this also tends to lead to a dividend policy of a steady, gradually increasing

payment (Bhaumik, 2007).

25

In general, as stated by Pandey (2005), the dividend decision is usually taken by

considering, at least, the three questions of: How much excess cash is available? What do

our investors prefer?, And what will be the effect on our stock prices of announcing the

amount of the dividend? Therefore, as confirmed by Patra (2005), the dividend decision is

the major decision area of financial management. A firm is to decide what portion of

earnings would be distributed to the shareholders by way of dividend and what portion of

the same (earnings) would be retained in the firm for its future growth. Therefore, Patra

concludes that dividend and retention are desirable but they are conflicting with each other.

From the forgoing, a finance manager should be able to formulate a suitable dividend policy

that will satisfy the shareholders without hampering the progress of the firm.

In finance, there are various theories that attempt to explain the relationship between a

firm’s dividend policy and common stock. These are: Dividend Relevance Theory, Optimal

Dividend Theory (policy) and Dividend Irrelevance Theory. Walter (1963) argue that the

choice of dividend policies almost always affect the value of the firm. His model, one of the

earliest theoretical works, shows the importance of the relationship between the firm’s rate

of return and its cost of capital in determining the dividend policy that will maximize the

wealth of shareholders. Walter’s model was based on the following assumptions, according

to Francis (1972): (1) the firm finances all investments through retained earnings, that is,

debt or new equity is not issued, (2) The firm’s rate of return and its cost of capital are

constant (3) all earnings are either distributed as dividends or reinstated internally

immediately (4) there is a constant EPS and DPS and (5) the firm has a very long or

indefinite life (Pandey, 2005). According to Ezra (1963), in Walter’s model, dividend policy

is a financial decision and when the dividend policy of a firm is treated as a financing

decision, the payment of cash is a passive residual.

Another relevance model was developed by Myron Gordon which explicitly relates the

market value of the firm to dividend policy (Gordon, 1962). Gordon’s model was based on

the following assumptions: the firm is an equity firm and it has no debt; no external

financing is available; the internal rate of return of the firm is constant; the firm and its

streams of earnings are perpetual; the appropriate discount rate for the firm remains

26

constant; corporate taxes do not exist; constant retention and the cost of capital is greater

than its growth rate. Gordon model’s conclusions about the dividend policy are similar to

that of Walter’s model. This similarity, according to Pandey (2005), is due to the similarities

the of assumptions that underline both model, thus, Gordon’s model suffers from the same

limitations as Walter’s model. To underline, the relevance of dividend policy, is the bird-in-

hand argument of Krishman (1933). This view is based on the assumption that under

conditions of uncertainty, investors tend to discount near dividends at a higher rate than they

discount future dividends. Investors thus behaving rationally are risk averse and, therefore,

have a preference for near dividends to future dividend (Pandey, 2005).

The logic underlining these bird-in-hand arguments can be captured in the words of

Krishman (1933), when he said “if two stocks with identical earnings record and prospects,

but the one paying a larger dividend than the other, the former will undoubtedly command a

higher price merely because stockholders prefer present to future values. Myopic vision

plays a part in the price making process. Stockholders often act upon the principle that a

bird-in-hand is worth two in the bush and, for this reason, are willing to pay a premium for

the stock with the higher dividend rate, just as they discount the one with the lower rate”

(Pandey, 2005:284).

Gordon, (1962) also expresses the bird-in-hand argument more convincingly and in formal

terms. According to him, uncertainty increases with futurity, that is the further one looks

into the future, the more uncertain dividend becomes. Accordingly, when dividend policy is

considered in the context of uncertainty, the appropriate discount rate cannot be assumed to

be constant (Pandey, 2005). In fact, according to him, it increases with uncertainty and

investors prefer to avoid uncertainty and would be willing to pay higher price for the share

that pays the greater current dividend, all other things held constant.

Miller and Modigliani (1961), are the chief advocates of the dividend irrelevance argument.

For them under a perfect market situation, the dividend policy of a firm is irrelevant, as it

does not affect the value of the firm. They argue that the value of the firm depends on the

firm’s earnings that result from the investment policy; when the investment decision of the

27

firm is given, dividend decision, which is the split of earnings between dividend and

retained earnings, is of no significance in determining the value of the firm. Francis (1972)

asserts that the M and M hypothesis of irrelevance is based on the following

assumptions: the firm operates in a perfect market where investors behave rationally and

information is freely available to all, and transaction and flotation costs do not exist; no

taxes exist; the firm has a fixed investment policy and risk of uncertainty does not exist.

Thus, the M and M (1961) dividend irrelevance proposition states that changes in dividends

are offset one-for-one by changes in proceeds from net new issues of securities, so that

investment and earnings are unaffected or does not affect equity valuation.

These irrelevance propositions have been questioned by De Angelo and DeAngelo (2006)

who assert that dividends payout rules, like investment plans, can be sub optimal. They

specifically claimed that the dividend irrelevance proposition is true only in environments

that are simplified in a way that is not generally appreciated. They assert that in a more

general setting, the dividend policy is relevant in exactly the same sense as investment

policy is relevant. In another strand of finance-literature on asset pricing, analysts take the

view that paying low level of dividend does not result in under-valuation of the firm; the

value of a firm with a given current capital is the same under low or zero future dividends as

high future dividend. This view is known as the Neutrality of dividend policy and is held by

Black (1976). Black and Scholes (1974) observed that shareholders trade-off the benefits of

dividend against the tax losses. Based on this trade off, shareholders are classified into three

clienteles: a clientele that considers dividend as always good; clientele that considers

dividends as always bad and clientele flat are indifferent to dividend.

As explained by Pandey (2005), most shareholders in high tax brackets may belong to high

payout clientele since, in their case, the tax advantage may outweigh the benefit of

dividends. On the other hand, shareholders in low tax bracket may fit into low payout

clientele as they may suffer marginal tax disadvantages of dividend while tax-exempt

investors are indifferent between dividends and capital gains, since they pay no taxes on

their income. So, the supply of dividends and demand for dividend matched, there will be no

gain if a firm changes its dividend policy since the investors have already made their choices

28

or there exist opportunities for shareholders to shift from one firm to another (Pandey,

2005). In a bid to satisfy these two objectives, management is put in serious dilemma as they

must come up with policies that will address their needs for reserves and disposable income

to shareholders.

2.2 TYPES OF DIVIDENDS

Nwude (2003:121-126) points out that there are five types of dividends that payout. These

consist of cash dividend, stock dividend or bonus issues, stock or share split, reverse stock

split and stock repurchase.

Cash Dividend: Cash dividend is payment of dividends in cash. This is customary for any

company that declares dividends to pay in cash. When a cash dividend is paid the

implication of the balance sheet is that the company’s cash account and reserves account

will be reduced, thus reducing both the total assets and the net worth of the company. A

company that declares cash dividend must ensure that it has sufficient cash to meet it

requirements.

Stock Dividend or Bonus Issue: Stock dividend is the payment of dividend in the form of

issue of additional shares to the residual owners of the firm. It involves capitalizing the

company’s share premium or reserves and increasing the share capital account by the same

amount capitalized from the reserves account Liquidity is preserved as no cash leaves the

company. The advantage to the shareholders is that they receive a dividend which they can

convert into cash whenever they wish to sell their share while the disadvantage is that as the

number of equity shares is increased, if the retained earnings do not yield a satisfactory rate

of return, the share price can fall, especially when there is massive off-loading by the

shareholders in the capital market. Stock dividend is issued to each shareholder in

proportion to his or her existing shareholding in the company.

Stock or Share Split: This means the division of the existing share price by two or

multiplication of the existing number of shares by two. The effect of stock split is that it

reduces the prevailing par or nominal value of shares by half and doubles the existing

number of shares. Management uses stock split to lower the price of its shares to attract

increased trading activity on the shares on the stock exchange. Stock split does not affect

29

either side of the balance sheet in terms of Naira amount, but changes the figure and book

entry of the number of shares outstanding as well as the 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: This is the acquisition of a company’s outstanding shares by the

company itself for warehousing in the stock treasury. The purpose of stock repurchase may

be to reduce the number of outstanding shares in order to increase the earnings per share

(EPS) of the remaining shares which will consequently increase the market price per share

(MPPS), and thus, general capital gains to shareholders. The capital gains substitute the cash

dividends.

2.3 METHODS OF DIVIDEND PAYMENT

In Nigeria, the payment of dividend is predicated on the existing legislations which could be

amended from time to time. Nwude (2003:127) points out that section 379(1) of the

Companies and Allied Matters Decree (CAMD) 1990 now Act, states that a company may

in general meeting, declare dividends in respect of a year or other period only on the

recommendation of the directors. The company shall pay, from time to time to the members

such interim dividends as appear to the directors to be justified by the profits of the

company. The general meeting shall have the power to declare the amount of dividend

recommended by directors, but shall have no power to increase the recommended amount.

Where the recommendation of the directors of a company with respect to the declaration of a

dividend is varied in accordance with subsection (3) of this section by the company in

general meeting, a statement to that effect shall be included in the relevant annual return.

Subject to the provisions of this Decree, dividends shall be payable to the shareholders only

out of the distributable profits of the company.

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:

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

• Revenue Reserves.

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

realized profit on assets sold.

In Nigeria, dividends are often paid twice: the first is the interim dividend and the final

dividend. Brealey and Myers (1999:418) assert that dividend is set by the firm’s board of

directors. The announcement states that the payment will be made to all those stockholders

who are registered on a particular “recorded-date”. Two weeks later, dividend cheques are

mailed to stockholders.

2.4 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

(1976) explain that since firms release more information to the public in the month of

January, above-normal returns in the month of January can be attributed to this

increased inflow of information by firms to the market. Gordon (1959, 1962), Foster and Vic

-kery (1978) and Lee (1995) confirm positive abnormal returns to dividend payment

announcements. Contrary to the above studies, Easton and Sinclair (1989) find negative

abnormal returns, that is, a negative reaction by stock prices to dividend announcements;

this is normally attributed to the tax effect of dividends for shareholders. Baker and Powell

(1999) point out that manager sought to avoid making changes in their dividend rates that

might have to be reversed within a year or so. Therefore, they (managers) tended to make

partial adjustments towards a target payout ratio rather than dramatic changes.

Lonie, et al (1996) investigates the dividend announcements of 620 U.K companies from

January to June 1991 using event study and interaction tests. They found that investors

responded to increase or decrease in dividends. However, their findings also reveal that,

even for companies with no change in dividends, the average abnormal returns one day prior

to the announcements were significantly different from zero as indicated by the statistic.

Below and Johnson (1996) also fail to support the semi-strong form of market efficiency for

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the US equity market. Adelegan (2003) conducted a study to analyze the reaction of stock

prices to dividend announcements and capital market efficiency in Nigeria. He uses the

standard event study methodology to test the semi-strong form of market efficiency and

finds that the Nigerian stock market was inefficient in its semi-strong form.

Uddin and Chowdhury (2005) investigated dividend announcements on the Dhaka Stock

Exchange. They find that there were no statistically significant abnormal returns and that

dividend had no information content for stock returns and prices in the Dhaka Stock

Exchange. Gunasekarage and Power (2006) also found that dividend announcements

influence stock returns at the time of announcements, but that the short-term influence of

dividend announcements had no long-term implications. In the long run, firms with current

reductions in dividends earned excess returns.

Kong and Taghavi (2006) analyze earnings announcements for the Chinese equity markets.

They use the M-EGARCH approach to model changes in stock returns with event study

methodology and reject the semi-strong form of market efficiency on the basis of their

findings. Acker (1999) investigates the impact of dividend announcements on stock

volatility rather than stock returns and finds that stock volatility increases around dividend

announcements, particularly final dividend announcement when there is a dividend cut.

Bhana (1997) suggested that there is a significant increase in a company’s share price at the

announcement and that, in general, this upward revision of the company’s value cannot be

attributed to other contemporaneous announcements, share dividends may be an effective

signaling device and, in the presence of information asymmetries between managers and

investors, share dividends provide a relatively inexpensive and unambiguous signaling

device.

Hussain (1998, 1999), Chakraborty (2006), and Ali and Akbar (2009) investigate the weak

form of market efficiency in the Pakistani equity market. Ali and Mustafa (2001) examine

the semi-strong form of market efficiency in the Karachi Stock Exchange (KSE) by

analyzing public news in two daily newspapers and the changes in trade volume and stock

returns. They conclude that public information did not play an important role in the

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determination of stock returns since stock returns appeared more sensitive to private

information.

2.5 DIVIDEND POLICY AND ASYMMETRIC INFORMATION

In a symmetrically informed market, all interested participants have the same information

about a firm, including managers, bankers, shareholders, and others. However, if one group

has superior information about the firm’s current situation and future prospects, an

informational asymmetry exists. Most academics and financial practitioners believe that

managers possess superior information about their firms relative to other interested parties.

Dividend changes (increases and decreases), dividend initiations (first time dividends or

resumption of dividends after lengthy break), and elimination of dividend payments are

announced regularly in the financial media. In response to such announcements, share prices

usually increase following dividend increases and dividend initiations, and share prices

usually decline following dividend cuts and dividend eliminations. The idea that dividend

policy can signal a firm’s prospects seems to be well accepted among the chief financial

officers (CFOs) of large US corporations (Amihud and Li, 2005).

Information about the prospects of a firm may include the firm's current projects and its

future investment opportunities. The firm's dividend policy, either exclusively or in

combination with other signals such as capital expenditure announcements or trading by

insiders, may communicate this information to a less informed market. Empirical studies

in this area, including Bhattacharya model (1979), John and Williams’s model (1985), and

Miller and Rock Model (1985), documented that announcement of dividend increases are

followed by significant price increase and that announcements of dividend decrease are

followed by significant price drops. These studies of large changes in dividend policy-

Asquith and Mullins (1983) (dividend initiations), Healy and Palepu (1988), and

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

such announcements

33

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

(1989), Kato and Loewenstein (1995), Ariff and Finn (1986), and Lee (1995), while others

Loughlin (1982) and Easton and Sinclair (1989) found a negative relationship. Dividends are

meant to convey private information to the market; predictions about the future earnings of a

firm based on dividend information should be superior to forecasts made without dividend

information. A number of studies (Benartzi, et al 1997, etc) have tested these implications of

the information content of dividends and suggested that dividend changes provide

information about current and past levels of earnings. (Grullon, et al 2002) observed that

consistent with changes in dividend signaling a decrease in the firm’s systematic risk.

Although it is well known that stock prices react when firms unexpectedly announce

changes in dividends (Asquith, et al 2003), the evidence generally does not support the idea

that unexpected changes in dividends provide information about future earnings.

Ghosh, et al (2004), in their study, investigated those earnings per share and dividend per

share series are tested for the existence of an equilibrium long-run relationship. They

observed that earnings per share are co-integrated with dividend per share. It is believed that

investors, corporations, analysts and others can benefit by using this frame work in

developing their investment, financing, portfolio management and trading strategies. Garret

and Priestly (2000), and Ali-Shah, et al (2010) found no evidence to support the notion that

dividends can signal future permanent earnings. Ali and Chowdhury (2010) observed that

announcement of dividend generated no significant impact on the movement of the stock

prices. Foerster and Sapp (2006) found weak evidence that information regarding future

earnings is transmitted by dividends, as well as evidence of a relationship between prices

and future dividends. Bessler and Nohel (2000) found that dividend cuts induce negative

abnormal returns in the stocks of non-announcing money center banks and, to a lesser

extent, in the stock of large regional banks.

Okpara (2010) is of the view that information asymmetry in the stock market occurs when

one or more investors posses private information about the firm’s value while other

34

investors are uninformed. The study investigated the long-run effect of this dichotomy of

information on dividend policy and found that dividend policy is a positive and significant

function of information asymmetry. Abosede and Oseni (2011) noted that direct proxies of

information asymmetry produce verifiable and less subjective outcomes than proxies

derived from data manipulation; therefore, identifying and selecting the firm and market

specific proxies require the understanding of the firm and market dynamics that impact

significantly on equity pricing. Kapoor (2008) observed that Information Technology firms

have a very high liquidity and it is an important determinant of dividend policy. Since the

profitability of the companies is also very high, even if there is year to year variability in the

earnings of the firms, they can easily pay huge dividends.

2.6 STOCK PRICES AND DIVIDEND ANNOUNCEMENTS

The Efficient Market Hypothesis proposed by Fama (1965) suggests three types of market

efficiency: (i) weak, (ii) semi-strong, and (iii) strong. The weak form of market efficiency

proposes that current stock prices reflect all past information. It also suggests that changes in

stock prices are random and no investment strategy that is based on past information can

yield above average returns to the investor. This implies that technical analysis will not be re

warded with above average returns. The semi-strong form of market efficiency (information

efficiency) proposes that current stock prices incorporate material public information and

changes in stock prices will only lead to unexpected public information. This suggests that

fundamental analysis will not be rewarded with above average returns. Finally, the strong

form of market efficiency proposes that insider trading will not be rewarded as current stock

prices incorporate all material non-public information (Reilly and Brown, 2006).

Market efficiency, however, does not simply occur by itself or because information is freely

and timely available in the market. As Osei (1998) suggests, it depends heavily on the

analytical and interpretational abilities of those who trade in the market, and the time they

have and are ready to devote to obtaining and spreading price-sensitive information. The

semi-strong form of market efficiency has mostly been investigated using event

study methodology. Information disclosures related to dividends and earnings

announcement, macroeconomic variables, stock repurchase announcements, mergers

35

and acquisitions, etc; have been investigated in different studies to test the semi-strong form

market efficiency.

Grinblatt, et al (1984) provide evidence that stock prices, on average, react positively to

stock dividend and stock split announcements that are uncontaminated. Vaughan and

Williams (1998) suggested that dividend changes in future income after the reduction in the

tax penalty on dividends and an evidence that firms engage in tax-based signaling when the

tax wedge between distribution methods is sufficiently high. Guay and Harford (1999)

observed that stock price reactions to the announcements of both repurchase and dividend

increases indicate that information in a payout announcement is not only the size of the

payout, but also the method used to distribute the cash. Controlling for the size of the payout

and the markets assessment of the permanence of the cash-flow shock, dividend increases

are associated with a higher stock price reaction than repurchases.

Fuei (2010) pointed out that changes in dividend policy provide statistically significant

information about future earnings, with unanticipated increases in dividend payout leading

to positive and permanent increases in future real earnings. Borges (2008) suggested that

shareholders use their rights to force firms to pay dividends, especially if they believe that

growth opportunities are low. In the next few years, it will be very interesting to see if these

theories agree with new empirical evidence. If they do, then, may be, we have found the new

paradigm that will replace the irrelevance proposition of Miller and Modigliani (1961) and

definitely resolve the “dividend puzzle”. Yeh, et al (2011) results indicate that, the

announcement effects are significantly negative when firms cut their dividends, future

operating performance, research and development of a cash dividend decrease is lower than

those of a cash dividend increase and announcement effects of increasing or decreasing cash

dividends have a positive relationship between corporate performance and cash dividend

changes. Akbar and Baig (2010) studied the effect of dividend announcement on stock

prices. Results of their study showed that announcement of dividends either cash dividend or

stock dividend or both, have positive effect on stock prices.

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2.7 STOCK PRICES, DIVIDENDS AND SEMI-STRONG MARKET

EFFICIENCY

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

(1951) point towards the relevance of and, hence, investors’ preference for dividends, Black

and Scholes (1974) studied the effect of dividend policy on stock prices and found that

dividend policy does not affect stock prices. It depends on the investors’ decision to keep

either high or low yielding securities; returns earned by them in both cases remain the same.

Baskin (1989) found an inverse relation between stock prices and dividend policy. Contrary

to this, Miller and Modigliani (1961) propose that, in a world of no taxes and transaction

costs, dividends are irrelevant to investors. However, empirical research has revealed

findings that support the relevance of the dividend proposition.

In his seminal investigation of dividends policy, Lintner (1956) suggests that a firm’s

management will resort to increasing dividends if it believes that the increase will be

permanent. Bhattacharaya (1979) explains that there exists asymmetric information between

a firm’s management and its shareholders: hence, an increase or decrease in dividends

conveys price-sensitive information to shareholders and prospective investors. Miller and

Rock (1985) and John and Williams (1985) also support the signaling or information content

proposition. Brickley (1983), Healy and Palepu (1988), and Aharony and Dotan (1994) find

support for the information content of dividend hypothesis while Penman (1983) and

Benartzi, et al (1997) fail to do so. Black (1976) and Easterbrook (1984) propose that

dividends play a role in decreasing or increasing agency conflict between management and

shareholders. When a firm’s management increases dividends to shareholders, it pays out

any excess cash that is left with the firm after funding all projects that have positive net

present values. Therefore, positive changes in stock prices occur as a result of an increase in

the dividend payment and vice versa.

Given this background on the relevance of dividend-for-stock prices, the semi-strong form

of market efficiency postulates that stock prices incorporate all expected future dividends

(cash and stock) and that, hence, their public announcement should not result in abnormal

earnings for any investor because such dividends are fully accounted for in current stock

37

prices. This implies that stock returns prior to the announcement date and after the

announcement date should not exhibit abnormality. Therefore, both abnormal mean returns

and cumulative abnormal mean returns in the event window should be statistically not

different from zero. Also the semi-strong form suggests that stock prices rapidly adjust to

any unexpected material (in this context, unexpected increases or decreases in dividends)

information

2.8 STOCK SPLITS ON PRICE AND LIQUIDITY

Stock splits remain one of the puzzling anomalies in the behavior of stock prices and stock

liquidity since they are only nominal changes in stock price denominations that have no

impact on investors’ fraction of equity ownership. However, previous studies have

documented positive price performance subsequent to splits. Grinblatt, et al (1984) and

Lamoureux and Poon (1987) supported the signaling hypothesis that firms use stock splits to

signal future positive earnings. The alternative liquidity and trading range hypothesis comes

from management claims that the motivation for split activities is to bring stock prices down

to a preferred trading range and improve liquidity. Yet existing empirical research, finds that

the impact of split on liquidity is mixed. Copeland (1979), Conroy, et al (2000), and Desai, e

t al (1998), find that bid ask spreads increase, indicating worsened liquidity. Other

authors (Lamoureux and Poon (1987), Muscarella and Vetsuypens (1996) show that number

of trades per day increases subsequent to splits. Lakonishok and Lev (1997) find that splits

have no impact on split-adjusted trading volume. The inconclusive evidence reflects the

challenge in the selection and in the interpretation of the liquidity proxy. Some researchers

find that stock split will increase the stock price around the announcement date. Companies

conduct stock split when the stock price increases but, on the other hand, reverse stock split

is conducted when the stock price decreases.

Stock split increases the investor perception about the future earning, and reverse stock split,

on the other hand decreases. As a corporate action, stock split will influence the stock price

and finally have impact to the stock return. Johnson (1966) found increasing stock price

after stock split. He compares the stock price 7.5 months before split and 4.5 months after

split. Grinblatt, et al (1984) found abnormal return 3 days after stock split announcement.

38

Fama, et al (1969) found that stocks returns give 30% abnormal return two years after stock

splits. Some researchers observed the variables that influence stock returns. Asquit, et al

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

2.9 CORPORATE DIVIDEND POLICY DETERMINANTS

Black (1976), in his study, concluded with the following question and answer: “What should

the corporation do about dividend policy? We don’t know”. A number of factors have been

identified in previous empirical studies to influence the dividend policy decisions of the

firm. Profits have long been regarded as the primary indicator of the firm’s capacity to pay

dividends. Lintner (1956) conducted a classic study on how U.S. managers make dividend

decisions. He developed a compact mathematical model, based on a survey of 28 well-

established industrial U.S. firms, which is considered to be a finance classic. According to

him the current year earnings and previous year dividends influence the dividend payment

pattern of a firm. Fama and Babiak (1968) studied the determinants of dividend payments by

individual firms during 1946-64. The study concluded that net income seems to provide a

better measure of dividend than either cash flows or net income and depreciation included as

separate variables in the model. Farrelly, et al (1986) surveyed 318 New York stock

exchange firms and concluded that the major determinants of dividend payments are

anticipated level of future earnings and pattern of past dividends. Pruitt and Gitman (1991)

asked financial managers of the 1000 largest U.S. firms and reported that current and past

year’s profits are important factors influencing dividend payments. They also found that risk

(year- to-year variability of earnings) also determine the firms’ dividend policy. Baker and

Powell (2001) concluded from their survey of NYSE-listed firms that dividend determinants

are industry-specific, and that anticipated level of future earnings is the major determinant.

In other studies, D’Souza (1999) also found statistically significant and negative relationship

between beta and dividend policy. He however showed a positive but insignificant

relationship in the case of growth and negative but insignificant relationship in case of

market to book value. Alli, et al (1993) reveal that dividend payments depend more

on cash flows, which reflect the company’s ability to pay dividends, than on current

39

earnings, which are less heavily influenced by accounting practices. The results however, do

not support the views of Miller and Modigliani (1961). Higgins (1972), Fama (1974)

documented no interdependence between investments and dividends.

Higgins (1981) indicated a direct link between growth and financing needs: rapidly growing

firms have external financing needs because working capital needs normally exceed the

incremental cash flows from new sales. Rozeff (1982), Lloyd, et al (1985) and Collins et al.

(1996) all show significantly negative relationship between historical sales growth and

dividend payout. Mohammed and Joshua (2006) examined the factors affecting dividend

policy of listed compsanies in Ghana. Their results showed that dividends were positively

related to profitability, cash flow and tax, but are negatively related risk and growth.

Nishat and Irfan (2005) studied the effect of dividend policy on stock price risk and found

that dividend yield and earnings are positively related to the share price volatility. This

relation remains the same even after controlling for firm size. Another study conducted by

Naeem and Nasr (2007) observed the determinants and trends of dividend policies. Results

of their study show that Pakistani companies are either reluctant to pay dividends or pay

very low amount as dividends and their current dividend decisions depend on previous year

dividends and profitability ratio. The study conducted by Ahmed and Javid (2009) in which

they analyzed the factors that determine dividend policy in the economy of Pakistan showed

that most of the Pakistani companies decide their cash dividend payment on the basis of

their current and previous year profits. The firms having high net profit pay larger dividends

to their shareholders. Their results showed that market liquidity is positively related to the

dividend payout ratio and negative relationship was found between the firm size and

payouts, while there is no relationship between growth opportunities and dividend policy.

Nazir, et al (2010) explained the role of dividend policy in Pakistan by taking a sample of 73

companies listed on the Karachi Stock Exchange from the period of 2003 2008. Result of

their study showed that dividend payout and dividend yield have significant effect on stock

prices while size and leverage have negative insignificant affect. Earnings and growth have

positive significant affect on stock prices.

40

2.10 SHAREHOLDERS EARNINGS (EPS) AND THE FIRM

As submitted by Opler, et al (1997), the financial structure decisions offer opportunities for

firms to create value for shareholders, yet, these opportunities are often neglected because of

the difficulty, especially for companies with complex liquidity structures, in identifying and

quantifying the factors on the left hand side of the balance sheet that affect shareholders

value. They note that corporate executives often have a general sense of whether the overall

financial structure is “about right” but lack the tools that would enable them assess

alternative liability structure, thus, as a practical matter, liability decisions are often based on

partly cosmetic consideration and insistence on strict adherence to all rating agency

guidelines, benchmarking against competitors and concern about the effect of financing on

EPS. Hyderabad (1997) agreed that the use of debt as a source of capital presents significant

problems to business managers through, firstly, they must select that form of debt with the

lowest explicit cost and least damaging impact on the firm and its stockholders through

variability in EPS and, secondly, they must assemble a total financial structure which is

composed of the least cost mix of both debt and equity capital. However, Patra (2005) sates

that the proportion of debt in the optimal financial structure will be less than the proportion

of debt needed to maximize earnings per share because the market valuation of the stock

considers the risk associated with the firm’s operations expected well into the future and

EPS is only based on the firm’s operations expected for the next few years.

Earnings per share (EPS) can be described as the reward of an investor for making his

investment and it is the best measure of performance of firm (Patra, 2005). The above

definition of EPS and its importance were highlighted by Hyderabad (1997) when he said

that the bottom line of income statements are as indicators of performance of think tank or

top level management of the company. Ordinary investors lacking in-depth knowledge and

inside information mainly based their decisions on EPS to make their investment decision,

so it should be the objective of financial management to maximize the EPS from the point of

view of both the investor and invitee. Thus, to him, the objective of financial management of

maximization of value measured in terms of market price of equity share of a corporate

entity is misplaced.

41

Pandey (2005) stated that given the objective of the firm to maximize the value of equity

share of the firm, management should select a desired combination of financing mix or

financial structure that will achieve the goal as stated by Patra (2005). Theoretically,

optimum financial structure implies that combinations of debt and equity should be at the

level where overall cost of capital is low and the value of the firm is high. Therefore, the

prevailing view is that the value maximization criterion as a criterion of optimal financial

structure is measured in terms of market price of equity share, that is, the value of the firm is

maximized when the market price of equity share is maximized. According to this view,

maximization of the market price of equity share, leading to the maximization of value of

the firm, is a criterion for optimum financial structure.

Contrary to the above view, according to Patra (2005), is that the market price of equity

share should basically depend on the firm’s earnings per share as the EPS valuation depends

to a great extent, on many external factors such as government monetary and economic

policies, political stability, state of the economy, speculative trends, etc. Thus, it may be

contended that market price of share has no direct bearing on the optimum financial

structure. He also agreed that since the financial structure decision is an internal decision of

the firm, an increase in market price of shares should not be a criterion for optimum

financial structure. Compsey and Brigham (1985) agreed with the above argument and assert

that EPS may be a better substitute as a criterion of value maximization in respect of

optimum financial structure. As such, maximizing EPS should be the main aim of a firm in

order to realize the objective of maintaining an appropriate financial structure. Compsey and

Brigham (1985) totally agree with the above argument and assert that EPS may be a better

substitute as a criterion of value maximization in respect of optimum financial structure.

Servaes and Tufano (2006) supported Patra (2005) and Compsey and Brigham (1985) view

when they declared that earnings per share, while irrelevant from a strictly theoretical

perspective, are often actively managed by firm and debt has an impact on the level and

volatility of EPS.

42

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Rozeff, M. S. and Kinney, R. (1976), “Capital Market Seasonality: The Case of Stock

Returns”, Journal of Financial Economics, Vol. 3 pp 379-402.

Servaes, H. and Tufano, P. (2006), “The Theory and Practice of Corporate Capital

Structure”, Deutsche Bank Liability Strategies Group Publishers.

Shleifer, A. and Vishny, R. W. C. (1997), “A Survey of Corporate Governance”, Journal of

Finance, Vol. 52 No. 2, April, pp 1-38.

Stevens, J. L. and Jose, M. L. (1992), “The Effect of Dividend Payout, Stability and

Smoothing on Firm Value”, Journal of Accounting Auditing and Finance,

Vol. 7, pp 195-216.

Uddin, M. H. and Chowdhury, G. M. (2005), “Effect of Dividend Announcement and

Shareholders’ Value: Evidence from Dhaka Stock Exchange”, Journal of Business

Research, Vol.7, pp 61-72.

Vaughan, M. D. and Williams, M. G. (1998), “Dividends, Stock Repurchases and Signaling:

Evidence from US Panel Data”, Working Paper, Federal Reserve Bank of St. Louis,

May, pp 1-26.

Walter, J. E. (1963), “Dividend Policy; It influence on the Value of the Enterprise”, Journal

of Finance, Vol. 1 May, pp 280-291.

Yeh, C. T., Liou, Y. H. and Lin, H. K. (2011), “The Information Content of Dividend

Change at the Annual Shareholders Meeting”, International Research Journal of

Finance and Economics, ISSN 1450-2887 Issue 70, pp 68-80.

51

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 RESEARCH DESIGN

Research design is a kind of blueprint that guides the researcher in his or her investigation

and analyses. The researcher’s inability to manipulate already existing variables is a basic

feature of ex-post facto research design (Onwumere, 2009). Kerlinger (1970) posit that the

ex-post facto research design is also called causal comparative research and is used when the

researcher intends to determine cause-effect relationship between an independent and

dependent variables with a view to establishing a causal link between them. It contains a

description of methods and procedure employed in data collection, design and validation of

test instrument. It x-rays the format employed by the researcher in order to systematically

apply the scientific methods in problem investigation. The domain of this study is the stock

prices. The study focuses on the impact of dividend policy and earnings on the stock prices

of Nigeria Banks. Therefore, this study adopts the choice of the ex-post facto research

design. This type of research design can be useful where survey is descriptive or

explanatory. These research techniques have been employed because of its suitability in

research survey of this nature.

3.2 NATURE AND SOURCES OF DATA

This study relied extensively on secondary data which was handpicked from the annual

report and statement of account of selected banks listed on the Nigerian Stock Exchange for

the period. Price data was taken from the Daily Official List and Statistical Bulletin of the

Nigerian Stock Exchange over earlier specified five-year period.

3.3 POPULATION AND SAMPLE SIZE

The population of the study consists of all the quoted banks in Nigeria. A research sample is

a representative number of respondents taken from a population (Orji, 1996). The research

sample in this study was determined on the availability of data from the quoted banks in the

Nigeria Stock Exchange.

52

3.4 MODEL SPECIFICATION

Summary statistics for the variables was calculated. The analysis utilized panel data

generalized least squares regression. The most basic test involved regresssing the

dependent variable, stock price against the three independent variables: dividend yield,

earnings yield and payout ratio in line with works of Nishat and lrfan (2003. This provided a

crude test of the relationship between stock prices and dividend policy. Thus, in line with the

various hypotheses stated, the models were as follows:

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:

SP= a + b1DY + e……………………………................................................... (i)

where

SP = Stock Prices

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:

SP= a + b1EY + e…………………………….................................................. (ii)

where

SP = Stock Prices

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:

SP= a + b1 POR + e……………………………................................................. (iii)

where

SP = Stock Prices

PR = Payout Ratio

a = Regression Constant

b1 = Regression Coefficient

e = Error Term

53

The expectation was that the DY, and POR variables would be negatively related to SP

whilst EY, MC and BKS and would be positively related to SP. That is, increases in

dividend yield and payout ratio will be associated with a decrease in the volatility of the

firm’s stock price. By contrast, firms with relatively higher earnings volatility or higher

leverage will tend to display higher price volatility.

3.5 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

2000. The empirical estimation was based on a panel data regression analysis of the

relationship between stock price volatility and dividend policy after controlling for firm size,

earning volatility, leverage and asset growth. Both dividend policy measures (dividend yield

and payout ratio) have significant impact on the share price volatility. The relationship was

not reduced even after controlling for the above mentioned factors. This suggests that

dividend policy affect stock price volatility and it provides evidence supporting the arbitrage

realization effect, duration effect and information effect in Pakistan. The responsiveness of

the dividend yield to stock price volatility increased during reform period (1991-2000).

Whereas payout ratio measure was having significant impact only at lower level of

significance, in overall period the size and leverage had positive and significant impact on

stock price volatility. The size effect was negative during the pre-reform period (1981-1990)

but positive during the reform period. The earnings volatility impact was negative and

significant only during the reform period. Although the results were not robust enough as in

the case of developed markets, it was consistent with the behavior of emerging markets. In

this work, earnings yield was used as one of the independent variable unlike in Nishat and

Irfan (2003) where it was used as a control variable. The justification was based on the

perception of investors on the importance of earnings as a signal of growth (Baskin, 1989).

54

3.6 DESCRIPTION OF RESEARCH VARIABLES

The variable for this are divided into dependent and independent variables.

3.6.1 Dependent Variable

Stock Price (SP)

Stock prices refer to market price of the common stock as determined at the dealing

session. Stock prices were measured by summing up all the stock prices for each month for a

year by the stock price in a year. (Nishat and Irfan, 2003)

Stock Price = Stock P1 + sp2 + sp3………..+sp12

12

3.6.2 Independent Variables

Dividend yield (DY)

This is the ratio of cash dividend per share to the current market price per share. Dividend

yield was used to calculate the earnings on investment (shares) considering only the returns

in the form of total dividends declared by the company during the year (Nishat and Irfan,

2003).

Dividend Yield = Dividend Per Share

Market Per Share

Earning Yield (EY)

This is the ratio of the earnings per share to the current market price of the stock. The

earnings yield can be used to compare the earnings of a stock, sector or the whole market

against bond yields (Nishat and Irfan, 2003).

Earnings Yield = Earnings Per Share

Market Price Share

Payout Ratio (POR)

Payout is the ratio of dividends per share to earnings per share. The use of this procedure

controls the problem of extreme values in individual years attributable to low or possibly

negative net income.

55

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

Earnings per share

3.6.3 Control Variables

Control Variables are other factors that are likely to influence both dividend yield and

earnings yield. Share price should be related to the basic risks encountered in the firm's

product markets. Market risk may also have impact on the firm's dividend policy. Therefore,

this work included a control variable to account for the variability in the firm's earnings

stream.

Market Concentration (MC)

Market concentration is a function of the number of firms and their respective shares of the

total production in a market. The market concentration ratio is a measure of the total output

produced in an industry by a given number of firms in the industry and it was used in this

study as a sign of the nature of the banking industry degree of competitiveness vis a vis the

market in Nigeria. In line with the works of Tushaj (2010), the concentration ratio of the

banking industry as a proportion of the overall performance of the market were adopted as a

control variable.

Market Concentration = Total Market Capitalization of Bank A

Total Market Capitalization of all the Banks in a Year

Bank Size (BZ)

The log of total assets was used to proxy bank size and it measured the assets of each bank

or the financial institutions for the years under review (Nishat and Irfan, 2003).

3.7 TECHNIQUES OF ANALYSIS

The hypotheses stated were tested using the multiple regression models. The idea behind

regression analysis is the statistical dependence of one variable, the dependent variable, on

one or more variables, the independent or explanatory variables. The objectives of such

analysis are to estimate or predict the mean or average value of the dependent variable on

the basis of the known or fixed values of the explanatory variables (Gujarati and Porter,

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

56

Y= a + b1X1+ b2X2 + b3X3 + b4X4…bnXn + e…………………………… (3)

where

Y = dependent variable

a = equation constant

b1 … bn = coefficients of explanatory variables

X1 … Xn = independent or explanatory variables

e = error term

In this particular equation, the constant b1…bn determines the slope or gradient of that line

and the constant term “a” determines the point at which the line crosses the Y-

axis, otherwise known as the Y-intercept (Gujarati and Porter, 2009).

57

REFERENCES

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,

Singapore: McGraw-Hill.

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

Limited.

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.

58

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.0 INTRODUCTION

In this chapter, data for the study, sourced from the annual report of banks and the Daily

Official List of the Nigeria Stock Exchange were presented, tested and analysed. The data

collected were organized and used for testing the hypotheses. From the analysis and results

generated, deductions and logical conclusions were obtained.

Descriptive statistics of all the variables were also presented and analysed. The variables for

the study include stock prices, as the dependent variable and dividend yield, earnings yield

and payout ratio as the independent variables. The sample size which was twenty-one (21)

banks for five (5) years 2006-2010 was reduced to twenty (20) banks due to unavailability of

data (see, appendix).

4.1 DATA ANALYSIS

The analyses are based on the descriptive statistic of our model. Table 4.1 is used to explain

the behavior of our model proxies (see, appendix for the absolute values of the model

proxies).

Table 4.1 Descriptive Statistics

SP DYIELD EYIELD POR MCONC BKSIZE

Mean 11.29757 0.112908 1.406051 0.51703 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 0.19502 12.29165

Minimum 1.0675 0 -4.54615 -0.375 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 -2.5965

Kurtosis 4.406538 79.41197 27.34995 10.63621 4.456504 13.62981

Jarque-Bera 38.16856 23779.27 2628.157 313.6517 39.98886 542.345

Probability 0 0 0 0 0 0

Observations 93 93 93 93 93 93

Source: E-view Results

Note:

SP = Stock Price

Dyield = Dividend Yield

Eyield = Earnings Yield

Por = Payout Ratio

Mconc = Market Concentration

Bksize = Bank Size

59

As indicated in tables 4.1 above, the mean value of stock prices of the 20 Nigerian

commercial banks from 2006 to 2010 was N11.28k, while, the medium was N7.79k. As

revealed in table 4.1, First Bank Nigeria Plc recorded the highest annual stock prices within

the period of this study. The stock price of First Bank Nigeria Plc in 2006 was N40.97k

while Unity Bank Plc had the lowest annual stock price of N1.07k which was observed in

2010. Overall the stock prices of Nigerian commercial banks within the period of this study

showed consistent increase over the period of the study. As revealed from table 4.1, there

was a positive skewness of stock prices (1.40) indicating that the degree of departure from

symmetry of a distribution was positive, also Kurtosis value 4.37 > 3 which is the normal

value revealed that the degrees of peakedness of stock prices within the period of this study

were normally distributed as it tends to hover around the mean.

As indicated from tables 4.1, the mean value of dividend yield of the 20 Nigerian

commercial banks from 2006 to 2010 was 0.11%, while, the medium was 0.03%. The

maximum dividend yield of 4.90% within the period of this study was recorded by Wema

Bank Nigerian Plc in 2010. Overall the dividend yield of Nigerian commercial banks within

the period of this study showed consistent increase over the period of the study. As revealed

from table 4.1, there was a positive skewness of dividend yield (8.58) indicating that the

degree of departure from symmetry of a distribution was positive, also Kurtosis value of

78.55 > 3 which is the normal value revealed that the degrees of peakedness of dividend

yield within the period of this study were normally distributed as it tends to hover around the

mean.

As indicated from tables 4.1, the mean value of earnings yield of the 20 Nigerian

commercial banks from 2006 to 2010 was 1.42%, while, the medium was 0.09%. The

maximum earnings yield of 35.11% within the period of this study was recorded by Unity

Bank Nigerian Plc in 2010, while the least earnings yield was recorded by Bank PHB in

2009 (-4.55%). Overall the earnings yield of Nigerian commercial banks within the period

of this study showed consistent increase over the period of the study. As revealed from table

4.1, there was a positive skewness of earnings yield (4.59) indicating that the degree of

departure from symmetry of a distribution was positive, also Kurtosis value of 27.05 > 3

60

which is the normal value revealed that the degrees of peakedness of earnings yield within

the period of this study were normally distributed as it tends to hover around the mean.

As revealed from table 4.1, the mean value of payout ratio of the 20 Nigerian commercial

banks from 2006 to 2010 was N0.52k, while, the medium was N0.42k. The maximum

payout ratio of N3.51 within the period of this study was recorded by Wema Bank Nigerian

Plc in 2010, while the least payout ratio was recorded by Eco Bank in 2009 (N-0.38k).

Overall the payout ratio of Nigerian commercial banks within the period of this study

showed consistent increase over the period of the study. As revealed from table 4.1, there

was a positive skewness of earnings yield (2.42) indicating that the degree of departure from

symmetry of a distribution was positive, also Kurtosis value of 10.64 > 3 which is the

normal value revealed that the degrees of peakedness of payout ratio within the period of

this study were normally distributed as it tends to hover around the mean.

For the control variables, it was revealed from table 4.1 that the mean value of market

concentration of the 20 Nigerian commercial banks from 2006 to 2010 was N0.05k, while,

the medium was N0.04k. The maximum market concentration of N0.195k within the period

of this study was recorded by Fidelity Bank Nigerian Plc in 2010, while the least market

concentration was recorded by First Bank Nigeria Plc in 2007 (N0.0007k). Overall the

market concentration of Nigerian commercial banks within the period of this study was

consistent increase over the period of the study. As revealed from table 4.1, there was a

positive skewness of market concentration (1.41) indicating that the degree of departure

from symmetry of a distribution was positive, also Kurtosis value of 4.40 > 3 which is the

normal value revealed that the degrees of peakedness of market concentration ratio within

the period of this study were normally distributed as it tends to hover around the mean.

Lastly it was revealed from table 4.1 that the mean value of bank size ratio of the 20

Nigerian commercial banks from 2006 to 2010 was N11.55k, while, the medium was

N11.65k. The bank with the highest bank size ratio of N12.29k within the period of this

study was recorded by First Bank Nigerian Plc in 2010, while the least bank size ratio was

recorded by Union Bank Nigerian Plc in 2007 (8.79k). Overall the bank size ratio of

61

Nigerian commercial banks within the period of this study was not consistent increase over

the period of the study. As revealed from table 4.1, there was a negative skewness of bank

size ratio (-2.58) indicating that the degree of departure from symmetry of a distribution was

negative, also Kurtosis value of 13.47 > 3 which is the normal value revealed that the

degrees of peakedness of bank size ratio within the period of this study were normally

distributed as it tends to hover around the mean.

4.2. TEST OF HYPOTHESES

For this study, three steps were adopted to test the hypotheses stated. In step one, the

hypotheses was stated in null and alternate forms. In step two, the regression results were

analysed and step three, the decision.

4.2.1 Test of Hypothesis One

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

Ho1: Dividend yield does not have positive and significant impact on stock prices of

Nigerian banks.

Ha1: 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

Dependent Variable: SP

Method: Least Squares

Included observations: 93

Variable Coefficient Std. Error t-Statistic Prob.

DYIELD -3.365192 1.575960 -2.135328 0.0355

MCONC -112.1061 19.18778 -5.842579 0.0000

BKSIZE 3.620401 1.520690 2.380762 0.0194

C -24.38751 17.80417 -1.369764 0.1742

R-squared 0.759063 Mean dependent var 11.29757

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

Log likelihood -321.1134 F-statistic 16.61970

Durbin-Watson stat 1.449165 Prob(F-statistic) 0.000000

Source: E-view Results

62

As revealed from table 4.2, dividend yield had negative and significant impact on

commercial banks’ stock prices in Nigeria (coefficient of Dyield = -3.365; p-value = 0.035).

Also, for the control variables, market concentration of Nigerian commercial banks had

negative and significant impact on stock prices of Nigerian commercial banks (coefficient of

Mconc = -112.106; p-value = 0.000), while bank size had positive and significant impact on

stock prices of Nigerian commercial banks (coefficient of Bksize = 3.620; p-value 0.019).

The coefficient of determination which measures the goodness fit of the model as revealed

by R-square (R2) indicates that 75.9% of the variations observed in the dependent variable

were explained by variations in the independent variable. This was adjusted by the Adjusted

R-Square to 63.7%, indicating that the dependent variable was explained in variations in the

independent variable.

Step Three: Decision

Based on the result of the hypothesis tested, the null hypothesis is accepted while the

alternate hypothesis rejected. Thus, dividend yield does not have positive and significant

impact on stock prices of Nigerian banks. This is in line with the works of DeAngelo, et al

(2003).

4.2.2 Test of Hypothesis Two

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

Ho2: Earnings yield does not have positive and significant impact on stock prices of

Nigerian banks.

Ha2: 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.

63

Table 4.3 Regression Result of Hypothesis Two

Dependent Variable: SP

Method: Least Squares

Included observations: 93

Variable Coefficient Std. Error t-Statistic Prob.

EYIELD -0.331065 0.165221 -2.003771 0.0481

MCONC -108.4813 19.18598 -5.654195 0.0000

BKSIZE 3.842394 1.522954 2.522988 0.0134

C -27.05250 17.81388 -1.518619 0.1324

R-squared 0.734310 Mean dependent var 11.29757

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

Log likelihood -321.3849 F-statistic 16.35031

Durbin-Watson stat 1.147148 Prob(F-statistic) 0.000000

Source: E-view Results

As revealed from table 4.3, earnings yield had negative and significant impact on

commercial banks’ stock prices in Nigeria (coefficient of Eyield = -0.331; p-value = 0.048).

Also, for the control variables, market concentration of Nigerian commercial banks had

negative and significant impact on stock prices of Nigerian commercial banks (coefficient of

Mconc = -108.481; p-value = 0.000), while bank size had positive and significant impact on

stock prices of Nigerian commercial banks (coefficient of Bksize = 3.842; p-value 0.013).

The coefficient of determination which measures the goodness fit of the model as revealed

by R-square (R2) indicates that 73.4% of the variations observed in the dependent variable

were explained by variations in the independent variable. This was adjusted by the Adjusted

R-Square to 67.3%, indicating that the variation in the dependent variables was succinctly

explained by variations in the independent variable.

Step Three: Decision

Based on the result of the hypothesis tested, the null hypothesis is accepted while the

alternate hypothesis rejected. Thus, earnings yield does not have positive and significant

impact on stock prices of Nigerian banks. This is in line with the works of Compsey and

Brigham (1985).

64

4.2.3 Test of Hypothesis Three

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

Ho3: Dividend payout ratio does not have positive and significant impact on stock prices

of Nigeria banks.

Ha3: 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

Dependent Variable: SP

Method: Least Squares

Included observations: 93

Variable Coefficient Std. Error t-Statistic Prob.

POR -1.411019 1.269427 -1.111540 0.2693

MCONC -107.7532 19.50537 -5.524283 0.0000

BKSIZE 3.841548 1.546538 2.483966 0.0149

C -26.82391 18.08687 -1.483060 0.1416

R-squared 0.823545 Mean dependent var 11.29757

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

Log likelihood -322.7956 F-statistic 14.97518

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

Source: E-view Results

As revealed from table 4.4, dividend payout ratio had negative and non-significant impact

on commercial banks’ stock prices in Nigeria (coefficient of Por = -1.411; p-value = 0.269).

Also, for the control variables, market concentration of Nigerian commercial banks had

negative and significant impact on stock prices of Nigerian commercial banks (coefficient of

Mconc = -107.753; p-value = 0.000), while bank size had positive and significant impact on

stock prices of Nigerian commercial banks (coefficient of Bksize = 3.842; p-value 0.015).

The coefficient of determination which measures the goodness fit of the model as revealed

by R-square (R2) indicates that 82.3% of the variations observed in the dependent variable

were explained by variations in the independent variable. This was adjusted by the Adjusted

65

R-Square to 71.3%, indicating that variations in the dependent variable were explained by

variations in the dependent variable.

Step Three: Decision

Based on the result of the hypothesis tested, the null hypothesis is accepted while the

alternate hypothesis rejected. Thus, dividend payout ratio does not have positive and

significant impact on stock prices of Nigerian banks. This is in line with the works of Baker

and Powel (1999).

4.3 COMPARAISM OF RESULTS WITH OBJECTIVES

In this section, the objectives of this study are compared with the findings of the hypotheses

tested as well as in line with studies in this area of finance.

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

Nigerian banks

Dividend yield is the ratio of cash dividend per share to the current market price per share

and is used to calculate the earnings on investment (shares) considering only the returns in

the form of total dividends declared by the company during the year. Despite extensive

empirical testing of the above dividend hypotheses over the years, the conclusions are

surprisingly varied, and a wide consensus on the corporate payout rationale is still lacking.

On one hand, Nissim and Ziv (2001) found that using a particular model of earnings

expectations, current dividend changes are positively correlated to future earnings changes

hence the stock prices. On the other hand, other studies by Deanglo et. al. (2003) and

Benartzi, et al (1997) has found negative correlation between dividend changes and stock

prices. The findings of this study support the opposite view that dividend yields do not have

positive and significant impact on stock prices. This indicates that an increase in stock prices

reduces the dividend accruable to investors. A common argument which must lead to this

result is the tendency of rational investors to cash in on the increase in stock prices for

capital gain through sales of shares. This is consistent with the works of Grullon, et al

(2002) and DeAngelo, et al (2003).

66

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

Nigerian banks

One of the best measures of reward to investors for making an investment in a firm is the

earnings per share as a measure of performance of firm. The importance of EPS is

highlighted by the income statements of firms. Ordinary investors lacking in-depth

knowledge and inside information mainly based their decisions on EPS to make their

investment decision, so it should be the objective of financial management to maximize the

EPS from the point of view of both the investor and potential investors. Thus, a higher EPS

improves the earnings yield of the firm. Earnings yield is the ratio of the earnings per share

to the current market price of the stock and is used to compare the earnings of a stock, sector

or the whole market against bond yields.

According to Patra (2005), the market price of equity share should basically depend on the

firm’s earnings per share as the EPS valuation depends to a great extent, on many external

factors such as government monetary and economic policies, political stability, state of the

economy, speculative trends, etc. Thus, it may be contended that market price of share has

no direct bearing on the optimum financial structure. He also agreed that since the financial

structure decision is an internal decision of the firm, an increase in market price of shares

should not be a criterion for optimum financial structure.

Compsey and Brigham (1985) agreed with the above argument and assert that EPS may be

a better substitute as a criterion of value maximization in respect of optimum financial

structure. Therefore, maximizing EPS should be the aim of the firm in order to realize the

objective of maintaining an appropriate financial structure. The findings of this study

however reveals that EPS does not have positive and significant impact on stock prices

revealing that most Nigerian investors does not consider EPS as an important determinants

of stock prices. According to Pandey (2005) EPS is a book value measure of the firm

performance and as such does not have direct bearing on the market prices of shares.

Therefore, the findings of this study support the views of Pandey (2005)

4.3.3 Objective Three: To determine the impact of dividend payout ratio on stock

prices of Nigeria banks.

According to Nwude (2003), the dividend policy of the firm guides the firm in determining

the portion of a company’s net profit after taxes to be paid out to the residual shareholders as

dividend during a particular financial year; the purpose of a dividend policy being to

67

maximize shareholders’ wealth, by which is dependent on both current dividend and capital

gains. Thus the essence according to Emekekwue (2005), is to determine what portion of

firms’ earnings that will be paid out as dividend or held back as retained earnings. Payout is

the ratio of dividends per share to earnings per share. The use of this procedure controls the

problem of extreme values in individual years attributable to low or possibly negative net

income. The payout ratio is set to one in cases where a total dividend exceeds total

cumulative profits.

The transmission mechanism through which the dividend payout policies of firms are

reflected on the stock prices is during announcement of dividend. 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 (see also, Gordon, 1959, 1962), Foster and

Vickery (1978), Lee (1995). However, contrary to the above studies, Sinclair (1989) find

negative abnormal returns, that is, a negative reaction by stock prices to dividend

announcements; this is normally attributed to the tax effect of dividends for shareholders.

This supports the findings of this study which indicates that dividend payout ratios of

Nigerian commercial banks do not have positive and significant impact on stock prices. This

is also in line with the works of Baker and Powell (1999), Lonie (1996).

68

REFERENCE

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

Quarterly Journal of Business and Economics, Vol. 38 No 2, pp 17- 35

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

Future of the Post”, Journal of Finance, Vol. 52 No.3, July, pp1007-1034

Compsey, B. J. and Brighman, E.F.C. (1985), Introduction to Financial Management,

New York: The Dryden Press

DeAngelo, H., DeAngelo, L. and Skinner, D. J. (2003), “Are Dividend Disappearing?

Dividend Concentration and the Consolidation of Earnings”, Journal of Financial

Economics, March, pp 1-30

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

edition, African

Bureau of Educational Sciences

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

Statistics, Vol. 41, pp 99-105

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

Lee, B. S. (1995), “The Response of Stock Prices to Permanent and Temporary Shocks,

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

Lonie, A. A., Gunasekarage, A., Power, D. M. and Sinclair C. D. (1996), “The Stock Market

Reaction to Dividend Announcements: A UK Study of Complex Market Signals”,

Journal of Economic Studies, Vol. 23, pp 32-50

Nissim, D. and Ziv, A. (2001), “Dividend Changes and Future Profitability”, The Journal of

Finance, Vol. 61 No. 6 Dec., pp 2111-2134

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Pandey, I. M. (2005), Financial Management, 9th

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69

Petit, R. (1972), “Dividend Announcements, Security Performance and Capital Market

Efficiency”, Journal of Finance Vol. 27 No. 5, pp 993-100

Sinclair, H. (1989), “The Effect of Dividend Payout, Stability and Smoothing on Firm

Value”, Journal of Accounting Auditing and Finance, Vol. 7, pp 195-216

70

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS

5.1 SUMMARY OF FINDINGS

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

findings. These are:

1. Dividend yield of Nigerian Commercial banks does not have positive and significant

impact on stock prices of Nigerian banks. This was further supported by the

correlation matrix which indicates that there was a negative relationship between

stock price and dividend yield of commercial banks in Nigeria within the period of

this study.

2. Earnings yield of Nigerian commercial banks does not have positive and significant

impact on stock prices of Nigerian banks. Again, it was revealed that there was a

negative relationship between stock prices and earnings yield and

3. Dividend payout ratio of Nigerian commercial banks does not have positive and

significant impact on stock prices of Nigerian banks. This was further supported by

the correlation matrix which indicates that there was a negative relationship between

stock price and dividend payout ratio of commercial banks in Nigeria.

5.2 CONCLUSION

A great deal of theoretical and empirical research on dividend policy effects has been done

over the last several decades. Theoretically, cash dividend from earnings means giving

reward to the shareholders, that is, something they already own in the company; but this will

be offset by the decline in stock value. In an ideal world therefore dividend payments would

have no impact on the shareholders’ value. In the real world, however a change in the

dividend policy is often followed by a change in the market value of stocks. The economic

argument for investor’s preference for dividend income was offered by Graham and Dodd

(1934); Walter (1963) and Gordon (1959 and 1962).

Another researcher made efforts to further understand the dividend and earnings controversy

on stock prices reveals that on the average investors, subject to their personal tax rates,

71

would prefer to have less cash dividend if it is taxable: size of optimal dividend inversely

related to personal income tax rates (Pye, 1972). The theoretical literature on dividend and

earnings effect effects has been well developed. Researchers largely accepted that dividend

per-se has no impact on the shareholders’ value in an ideal economy. However, in a real

world, dividend announcement is important to the shareholders because of its tax effect and

information content.

Thus, given the above problems and the controversies surrounding the impact of dividend

and earnings on stock prices, this study examined the impact of dividend policy and earnings

on stock prices of Nigeria banks. The results emanating from this study reveal that dividend

yield, earnings and payout ratio of Nigerian Commercial banks does not have positive and

significant impact on stock prices of Nigerian banks. Also, the result reveals that market

concentration which measure total output produced in an industry by a given number of

firms in the industry was found to be negative and non-significant impact on stock prices of

Nigerian Banks while, bank size was found to have positive and significant impact on stock

prices in Nigeria.

5.3 RECOMMENDATIONS

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

1. This study recommends managers should act in the best interest of investor as to

reduce the agency problem, thus complete information about the dividend polices of

the firm should be provided. It is argued that dividend announcements convey inform

ation to investors regarding the firm’s value prospects (Ezra, 1963). Thus, stock

prices tend to increase when an increase in dividend is announced but tend to

decrease when a decrease or omission is announced.

2. This study recommends also that strict adherence to interest of shareholders in

choosing dividend policies that will maximize shareholders’ value by management.

The decision taking authority in a company lies in the hands of managers.

Shareholders as owners of the company are the principals and managers are their

agents. Thus, there is principal-agent relationship between shareholders and

managers therefore managers should and must act in the best interest of shareholders

72

as consistent with shareholders’ wealth maximization objectives of the firm. This

will ensure that project will enhance the growth of the firm should be undertaken

while those that will not should not undertaken.

3. It is again recommended that Nigerian firms especially banks should follow a

dividend payout policy that will constantly involve paying dividends annually.

According to the classical school of thought who believes that dividends are paid to

influence their share prices and that market price of equity is a representation of the

present value of estimated cash dividends that can be generated by the equity,

However, the result from this study indicates that the payout policies of Nigerian

banks do not influence stock prices, thus, This will attract the interest of investors

thereby enhancing the worth of equity.

5.4 CONTRIBUTIONS TO KNOWLEDGE

The subject matter of dividend policy and earnings policies of firms has remained one of the

most controversial issues in corporate finance. For a very long time now, financial

economists have engaged in modeling and examining corporate dividend policy and

earnings as they affect banks stock prices in Nigeria. The harder one look at the dividend

picture, it seems like a puzzle with pieces that don’t fit together. However, most literature in

this area of finance as revealed from literature examined in this study are foreign based.

Therefore, this study contributes to;

1. Geographically to knowledge by providing empirical evidence on the impact of

dividend policy and earnings on stock prices of Nigeria banks using investment ratios

such as dividend yield, earnings yield, payout ratio with the introduction of some

control variables in 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.

73

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Walter, J. E. (1963), “Dividend Policy; It influence on the Value of the Enterprise”, Journal

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74

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85

APPENDIX 1

Below are the Twenty Financial Institutions

1. Access Bank of Nigeria Plc

2. Afri Bank 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

86

APPENDIX 2

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

2006 JAN FEB

MAR APR

MAY JUN

JULY AUG

SEPT OCT NOV DEC

TOTAL

ACCESS

2.70

2.56

2.55

2.22

2.34

2.80

2.50

3.25

2.99

6.90

7.30

6.98 45.09

AFRI

9.10

9.10

9.10

9.10

7.50

6.58

6.60

7.93

11.51

11.51

11.51

11.51 111.05

PHB

2.60

2.60

2.60

2.60

2.60

2.60

1.98

2.65

21.31

2.39

1.96

3.12 49.01

DIA

7.75

7.75

7.75

7.75

7.75

5.38

4.32

5.93

5.90

5.90

5.90

7.47 79.55

ECO

-

-

-

5.53

8.88

9.45

5.54

7.50

5.95

5.60

4.95

5.01 58.41

FIDEL

2.93

2.93

2.93

2.93

2.93

2.93

2.93

2.63

2.12

2.14

2.08

2.15 31.63

FIRST

33.12

37.50

37.00

42.61

48.99

51.60

62.90

42.77

34.80

36.90

29.99

33.50 491.68

FCMB

5.11

6.11

3.89

4.02

3.67

4.00

43.37

4.19

5.22

4.25

4.00

4.05 91.88

FIN

1.81

1.81

1.81

2.30

1.81

6.80

4.44

3.59

3.72

3.17

2.99

3.61 37.86

GTB

13.98

13.70

16.09

16.99

12.70

14.01

13.99

18.34

18.50

16.60

15.60

18.15 188.65

INTER

8.45

11.40

10.10

10.30

10.70

10.70

13.19

16.13

16.13

16.13

14.53

13.60 151.36

OCEAN

5.80

5.61

6.08

6.50

7.81

7.30

9.20

12.46

12.86

14.18

13.63

15.39 116.82

IBTC

-

-

-

5.28

4.93

4.98

4.70

5.40

6.64

6.90

6.30

7.05 52.18

SYKE

3.06

3.06

3.06

3.06

3.06

3.06

3.06

-

3.06

3.06

5.58

14.13 47.25

SPRING

-

-

-

-

-

-

-

-

-

-

7.16

7.16 14.32

STERL

-

-

-

-

-

-

-

-

2.80

6.45

4.53

4.00 17.78

87

UBA

11.90

11.80

12.81

12.57

13.48

15.00

14.84

20.50

23.69

26.50

22.00

25.31 210.40

UNION

25.48

25.48

26.28

26.48

23.48

30.00

27.80

29.32

24.10

24.50

22.00

22.92 307.84

UNITY

2.50

2.50

2.50

2.50

2.50

2.50

2.50

2.50

2.50

2.50

2.50

2.50 30.00

WEMA

3.74

3.74

3.74

3.74

3.74

3.06

2.28

3.52

2.67

2.97

2.89

3.20 39.29

ZENITH

19.64

19.64

19.64

19.64

19.64

21.23

27.00

23.67

25.01

24.00

22.39

24.40 265.90

2007 JAN FEB MAR APR

MAY

JUNE

JULY AUG

SEPT OCT NOV DEC TOTAL

ACCESS 6.50 6.47 6.45 6.34 6.40 6.62 6.30 7.15 6.98 8.80 9.20 9.00 86.21

AFRI 7.78 7.78 7.50 7.73 7.45 5.85 5.89 8.01 9.98 9.98 9.98 9.75 97.68

PHB 3.50 3.50 3.50 3.60 3.60 3.60 2.40 2.71 19.60 2.39 1.96 3.05 53.41

DIA 8.00 7.20 8.90 7.30 7.48 8.15 7.76 6.10 8.00 7.89 7.81 7.39 91.98

ECO 7.20 7.20 7.18 8.20 6.99 5.91 5.82 5.72 5.89 5.10 5.00 5.15 75.36

FIDEL 3.06 3.06 3.04 3.06 3.06 3.06 3.01 2.71 2.48 2.25 2.17 2.26 33.22

FIRST 30.06 35.30 35.00 41.80 45.85 47.30 50.80 30.73 28.71 31.52 39.72 35.60 452.39

FCMB 6.15 6.15 3.50 4.00 3.72 4.28 4.57 4.29 5.10 4.38 4.91 5.10 56.15

FIN 3.10 3.10 3.10 2.90 2.99 4.54 5.01 4.68 4.79 4.20 3.87 3.38 45.66

GTB 14.00 14.80 17.20 18.00 12.40 13.95 13.82 17.45 17.60 15.94 15.96 16.99 188.11

INTER 6.30 7.10 7.82 7.79 7.90 7.90 12.91 15.84 15.85 15.85 12.99 12.39 130.64

OCEAN 5.48 5.42 5.99 6.48 7.67 7.01 8.77 10.88 11.98 14.18 12.86 14.89 111.61

IBTC 3.10 3.10 3.10 5.01 5.00 5.44 5.62 5.70 5.98 6.40 6.42 6.98 61.85

SYKE 3.12 3.12 3.12 3.12 3.12 3.12 3.12 3.00 3.12 3.12 4.99 16.01 52.08

SPRING 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 2.85 2.51 6.88 6.88 27.92

STERL 1.01 1.01 1.01 1.01 1.01 1.01 1.01 1.01 2.74 3.95 3.68 3.40 21.85

UBA 10.4 10.4 10.45 11.8 13.32 14.89 14.75 18.8 18.99 21.98 25.02 25.49 196.29

88

UNION 23.28 23.27 24.31 24.31 24.31 29.79 26.78 30.01 21.76 21.91 19.88 20.3 289.91

UNITY 2.50 2.50 2.50 2.50 2.50 2.30 2.30 2.30 2.30 2.30 2.30 2.30 28.60

WEMA 2.99 2.99 2.99 3.50 3.50 3.38 2.01 3.69 3.30 3.01 3.0 3.40 37.76

ZENITH 14.64 14.64 14.64 14.64 14.91 18.98 19.48 17.54 23.8 23.69 23.04 23.65 223.65

2008 JAN FEB MAR APR

MAY JUN

JULY AUG

SEPT OCT NOV DEC TOTAL

ACCESS

23.99

24.96

24.01

19.00

19.18

17.64

15.98

13.30

11.63

7.99

7.41

7.07 192.16

AFRI

26.00

26.98

26.50

24.89

25.10

24.24

25.50

25.70

21.77

15.48

11.01

9.61 262.78

PHB

28.99

31.86

28.80

28.55

16.00

15.73

16.83

12.14

12.71

8.89

7.81

8.59 216.90

DIA

21.50

21.50

18.50

19.00

17.99

16.86

15.90

12.78

11.51

7.91

7.85

7.46 178.76

ECO

7.95

7.95

7.95

7.95

9.22

7.87

7.10

5.60

9.32

27.96

27.96

27.96 154.79

FIDEL

11.20

11.80

10.70

10.99

10.00

10.20

8.80

8.12

7.33

4.98

5.05

4.69 103.86

FIRST

40.91

50.00

47.24

41.02

41.90

42.77

43.68

32.05

27.76

20.10

22.23

21.11 430.77

FCMB

19.59

19.50

18.50

17.30

16.85

14.95

16.50

13.19

11.15

7.81

5.89

6.00 167.23

FIN

13.30

13.30

10.80

10.98

9.43

8.34

7.60

6.61

7.04

5.01

5.96

4.45 102.82

GTB

34.45

36.50

34.99

33.95

32.00

28.11

25.30

23.15

21.36

14.61

15.52

12.90 312.84

INTER

40.97

45.00

45.50

45.55

24.71

25.01

23.80

20.46

20.03

13.70

13.00

12.05 329.78

OCEAN

27.00

28.51

27.30

26.05

23.00

29.92

20.98

17.75

16.41

11.58

8.89

10.24 247.63

I

89

BTC 22.56 22.50 22.33 18.05 44.65 34.06 32.71 28.94 24.73 17.06 12.90 12.94 293.43

SYKE

16.84

16.84

17.40

16.90

5.59

5.59

5.59

5.59

5.59

5.59

5.59

5.59 112.70

SPRING

5.59

5.59

5.59

5.59

18.00

16.39

14.55

12.14

11.88

8.56

10.50

10.90 125.28

STERL

7.28

7.28

7.28

7.28

7.64

6.61

6.65

6.65

5.45

4.13

3.09

2.42 71.76

UBA

49.55

50.75

50.10

54.70

57.00

32.99

31.95

28.72

25.45

17.39

17.40

13.15 429.15

UNION

43.01

44.00

43.50

36.99

38.06

36.36

42.00

42.00

42.00

29.79

17.10

15.20 430.01

UNITY

8.11

9.02

8.20

6.95

6.21

5.31

5.25

3.92

4.48

3.17

3.21

2.86 66.69

WEMA

15.00

15.00

15.00

15.00

15.00

15.00

15.00

15.00

15.00

14.29

14.29

14.29 177.87

ZENITH

46.09

50.00

48.00

46.99

47.00

43.45

41.05

41.67

36.66

25.02

22.98

22.00 470.91

2009 JAN FEB MAR APR MAY JUN

JULY AUG

SEPT OCT NOV DEC

TOTAL

ACCESS 3.72

5.52

4.85

5.65

10.34

8.62

6.41

6.29

6.13

6.49

6.67

7.60 78.29

AFRI 6.30

7.74

5.61

5.18

8.97

7.20

6.60

5.22

3.10

2.66

2.12

2.55 63.25

PHB 3.44

5.30

5.73

5.23

8.87

6.10

5.49

3.42

3.51

2.29

1.96

1.32 52.66

DIA 4.14

5.64

4.76

4.85

9.95

8.19

7.97

6.27

9.10

7.60

6.75

7.40 82.62

ECO 27.96

27.96

27.96

27.96

27.96

27.96

27.96

27.96

22.80

18.59

14.42

10.63 290.12

FIDEL 3.36

3.14

2.86

2.30

4.41

3.30

2.77

2.04

1.80

2.15

2.41

2.31 32.85

90

FIRST 14.38

17.20

15.80

15.49

23.68

20.98

16.00

14.25

14.89

14.85

14.00

14.00 195.52

FCMB 4.15

4.45

3.90

5.75

7.67

8.11

6.92

5.45

6.38

6.45

6.95

7.06 73.24

FIN 2.73

2.55

2.22

2.30

3.13

2.67

1.96

1.58

1.03

1.01

0.70

0.51 22.39

GTB 8.66

11.30

9.92

12.76

13.53

13.35

14.04

13.87

14.20

15.50

15.29

15.07 157.49

INTER 6.04

8.04

6.50

8.20

12.65 9.57

6.45

6.93

4.05

2.94

2.28

1.54 75.19

OCEAN 6.20

7.53

4.27

6.90

10.46

7.02

6.27

4.94

2.95

2.51

2.10

1.61 62.76

IBTC 5.55

7.22

6.30

4.00

6.81

7.06

8.37

7.45

7.00

7.80

7.13

7.12 81.81

SYKE 5.59

5.59

5.59

5.59

5.59

6.42

6.20

4.30

4.48

4.98

5.46

5.40 65.19

SPRING 4.27

5.39

5.30

6.25

9.97

5.59

5.59

5.59

3.32

1.55 1.02

0.79 54.63

STERL 1.49

1.97

1.11

1.60

2.65

1.96

1.50

1.45

1.28

1.20

1.20

1.19 18.60

UBA 6.67

9.80

8.00

10.71

16.59

12.91 12.8

11.40

14.69

12.20

11.10

10.70 137.57

UNION 9.78

13.28

10.10

11.40

18.82

17.07

13.96

12.60

6.59

7.30

6.07

5.72 132.69

UNITY 1.78

1.70

1.05

1.31

2.82

2.03

1.63

1.22

1.17

1.06

0.90

0.80 17.47

WEMA 14.29

9.04

4.70

2.09

4.00

3.59

2.13

1.70

1.12

1.32

1.05

0.89 45.92

ZENITH 12.10

15.00

11.77

14.40

26.46

3.64

14.50

11.83

12.71

14.30

13.07

13.39 163.17

91

2010 JAN FEB MAR APR MAY JUN

JULY AUG

SEPT OCT NOV DEC TOTAL

ACCESS 8.23 9.10 10.18 8.78 8.13 8.10 9.09 8.14 8.38 8.38 9.21 7.60 103.32

AFRI 2.82 2.70 2.83 2.19 2.13 1.96 2.08 1.89 1.34 2.17 2.50 2.18 26.79

PHB 2.22 1.91 1.73 1.3 1.52 1.33 1.49 1.18 0.95 1.4 1.97 1.75 18.75

DIA 8.40 9.35 9.80 7.70 7.77 7.55 7.51 6.30 6.36 7.90 7.96 7.50 94.10

ECO 8.24 5.99 7.04 5.50 5.29 4.70 4.60 4.50 3.59 3.70 3.60 3.60 60.35

FIDEL 2.51 14.56 3.48 2.71 2.85 2.67 2.53 2.31 2.28 2.4 2.48 2.69 43.47

FIRST 14.72 14.56 15.91 15.50 14.32 13.17 13.40 12.90 11.0 12.90 12.95 13.73 165.06

FCMB 8.85 9.20 9.00 7.37 7.76 8.30 7.89 6.50 5.53 6.95 7.90 7.50 92.75

FIN 0.77 0.69 0.73 0.59 0.52 0.52 0.58 0.51 0.50 0.66 0.87 0.73 7.67

GTB 17.79 18.06 20.94 18.14 17.25 16.85 16.80 15.40 14.59 17.00 15.50 17.76 206.08

INTER 2.30 2.00 1.99 1.63 1.80 1.58 2.25 1.72 1.29 1.98 2.26 2.16 22.96

OCEAN 2.30 2.06 2.02 1.72 1.63 1.65 1.97 1.54 1.08 2.31 2.52 2.50 23.30

IBTC 8.30 8.45 11.09 8.57 10.85 10.07 9.10 8.93 7.50 9.00 9.20 9.20 110.26

SYKE 6.79 7.36 8.30 7.38 8.29 8.05 7.30 7.10 7.54 7.30 8.30 8.80 92.51

SPRING 1.12 0.96 0.95 1.02 0.86 0.63 0.66 0.84 0.56 0.75 1.04 0.91 10.30

STERL 1.69 1.73 2.55 1.85 2.00 1.83 2.16 1.95 1.45 1.87 2.19 2.34 23.61

UBA 12.45 13.01 14.91 11.22 11.05 10.78 10.50 9.13 9.45 9.00 8.80 9.15 129.45

UNION 8.45 6.05 6.09 5.69 5.56 4.98 5.63 4.95 3.63 4.09 4.59 4.20 63.91

UNITY 1.00 1.15 1.04 0.99 1.11 1.11 1.11 1.06 0.70 1.09 1.25 1.20 12.81

WEMA 1.13 1.15 1.05 1.11 1.17 0.99 1.08 0.89 0.84 1.17 1.39 1.29 13.26

ZENITH 15.31 15.71 19.01 14.70 13.50 13.80 14.31 12.57 12.36 13.17 14.59 15.01 174.04

92

APPENDIX 3

MODEL

PROXIES

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

ACCESS 1 45.09 3.76 0

0 0.7

5.3714 0.0000 13,956,321,723 3,711,787,691.00

0.0199 174,553,866,000

11.2419

2 87.21 7.27 0

0 0.87

8.3563 0.0000 6,978,160,860 959,857,065.00

0.0051 328,615,194,000

11.5167

3 192.2 16.01 0.4

40.025 0.17

94.1765 0.4250 16,142,501,847 1,008,276,192.00

0.0054 1,043,465,021,000

12.0185

4 78.29 6.52 0.65

10.031 1.41

4.6241 2.1692 16,214,258,437 2,486,849,452.00

0.0133 674,865,041,000

11.8292

5 103.3 8.61 0.20

43.05 0.72

11.9583 3.6000 17,888,251,478 2,077,613,411.00

0.0111 726,960,580,000

11.8615

AFR 1 111.1 9.25 6.50

1.4231 0.13

71.1538 0.0200 5,108,433,332 552,263,063.00

0.0199 138,047,000,000

11.1400

2 97.68 8.14 0.70

11.629 1.19

6.8403 1.7000 5,108,433,332 627,571,663.00

0.0034 187,079,000,000

11.2720

3 262.8 21.90 0.45

48.667 2.46

8.9024 5.4667 6,130,119,998 279,914,155.00

0.0015 352,270,000,000

11.5469

PHB 1 49.01 4.08 6.50

0.6277 0.13

31.3846 0.0200 19,305,974,000 4,731,856,373.00

0.0253 158,861,195,000

11.2010

2 53.41 4.45 0.70

6.3571 1.19

3.7395 1.7000 6,435,024,000 1,446,072,809.00

0.0077 378,949,309,000

11.5786

3 216.9 18.08 0.45

40.178 2.46

7.3496 5.4667 15,154,993,500 838,218,667.00

0.0045 1,036,586,074,000

12.0156

4 52.66

4.39 0

0 -20

-0.2201 0.0000 20,104,994,000 4,579,725,285.00

0.0245 558,043,831,000

11.7467

DIAMD 1 79.55 6.63 0.36

18.417 0.57

11.6316 1.5833 7,603,608,000 1,146,848,869.00

0.0061 223,047,862,000

11.3484

2 91.98 7.67 0.55

13.945 0.89

8.6180 1.6182 9,399,914,000 1,225,542,894.00

0.0066 312,249,721,000

11.4945

3 178.8 14.9 0.56

26.607 1.10

13.5455 1.9643 13,159,313,000 883,175,369.00

0.0047 603,326,540,000

11.7806

4 82.62 6.89 1.64

4.2012 0.48

14.3542 0.2927 14,475,244,000 2,110,906,241.00

0.0113 650,891,836,000

11.8135

5 94.1 7.84 0.96

8.1667 0.45

17.4222 0.4688 14,475,244,000 1,846,332,143.00

0.0099 548,402,560,000

11.7391

ECO 1 58.41 4.87 0

0 0.27

18.0370 0.0000 21,654,226,926 4,446,453,166.00

0.0238 132,091,706,000

11.1209

2 75.36 6.28 0.24

26.167 0.34

18.4706 1.4167 21,654,226,926 3,448,125,306.00

0.0185 311,395,894,000

11.4933

3 154.8 12.9 0.7

18.429 0

0.0000 0.0000 7,218,075,141 559,540,709.00

0.0030 432,466,245,000

11.6360

4 290.1 24.18 0.24

100.75

-

0.64 -37.7813 -2.6667 7,218,075,642

298,514,295.00

0.0016

355,662,000,000

11.5510

5 60.12 5.03 0.15

33.533 0.12

41.9167 0.8000 13,879,951,642 2,759,433,726.00

0.0148 454,239,000,000

11.6573

FIDTY 1 31.63 2.64 0.22

12 0.19

13.8947 0.8636 16,463,686,588 6,236,244,917.00

0.0334 119,985,801,000

11.0791

93

2 33.22 2.77 0.32

8.6563 0.25

11.0800 0.7813 16,463,686,588 5,943,569,162.00

0.0318 217,144,465,000

11.3367

3 103.9 8.67 0.60

14.45 0.45

19.2667 0.7500 28,962,585,691 3,340,551,983.00

0.0179 533,122,233,000

11.7268

4 32.85 2.74 0.5

5.48 0.8

3.4250 1.6000 28,962,585,691 1,057,028,675.00

0.0057 504,163,720,000

11.7026

5 43.47 3.62 0.14

25.857 0.20

18.1000 1.4286 28,962,585,691 8,000,714,279.00

0.0429 478,020,000,000

11.6875

FIN

1 37.86 3.16 0.11

28.727

-

1.07 -2.9533 -9.7273 9,688,630,000

2,396,354,430.00

0.0128

33,846,000,000

10.5295

2 45.66 3.81 0

0 0.27

14.1111 0.0000 9,688,630,000 2,542,947,507.00

0.0136 181,308,208,000

11.2584

3 102.8 8.57 0

0 0.10

85.7000 0.0000 6,789,750,500 1,130,528,588.00

0.0061 444,193,935,000

11.6476

FIRST 1 491.7 40.97 1.00

40.97 2.69

15.2305 2.6900 5,237,930,699 127,847,955.00

0.0007 538,145,000,000

11.7309

2 452.4 37.7 1.20

31.417 1.56

24.1667 1.3000 1,047,769,537 27,792,295.00

0.0001 762,881,000,000

11.8825

3 430.8 35.9 1.35

26.593 2.23

16.0987 1.6519 1,988,841,297 55,399,479.00

0.0003 1,165,461,000,000

12.0665

4 195.5 16.29 0.10

162.9 1.41

11.5532 14.1000 2,486,462,869 152,637,377.00

0.0008 1,667,422,000,000

12.2220

5 165.1 13.75 0.60

22.917 0.83

16.5663 1.3833 3,263,184,395 237,322,502.00

0.0013 1,957,258,000,000

12.2916

FCMB 1 91.88 7.66 0.13

58.923 0.36

21.2778 2.7692 9,502,430,142 1,240,526,128.00

0.0066 106,611,289,000

11.0278

2 56.15 4.68 0.35

13.371 0.61

7.6721 1.7429 9,502,430,142 2,030,433,791.00

0.0109 262,805,890,000

11.4196

3 167.2 13.94 0.50

27.88 1.23

11.3333 2.4600 16,271,192,202 1,167,230,430.00

0.0063 465,210,901,000

11.6676

4 73.24 6.1 0.50

12.2 0.21

29.0476 0.4200 16,271,192,202 2,667,408,557.00

0.0143 514,409,614,000

11.7113

5 92.75 7.73 0.50

15.46 0.45

17.1778 0.9000 16,271,192,202 2,104,940,776.00

0.0113 530,073,488,000

11.7243

GTB 1 188.7 15.72 0.70

22.457 1.45

10.8414 2.0714 6,000,000,000 381,679,389.00

0.0020 305,080,565,000

11.4844

2 188.1 15.68 1.03

15.223 1.63

9.6196 1.5825 8,000,000,000 510,204,082.00

0.0027 47,836,306,100

10.6798

3 312.8 26.07 0.75

34.76 1.73

15.0694 2.3067 13,679,415,650 524,718,667.00

0.0028 717,999,797,000

11.8561

4 157.5 13.12 1.00

13.12 1.28

10.2500 1.2800 18,653,748,614 1,421,779,620.00

0.0076 1,019,911,536,000

12.0086

5 206.1 17.17 1.00

17.17 1.57

10.9363 1.5700 23,317,185,766 1,358,018,973.00

0.0073 1,066,762,763,000

12.0281

INTER 1 151.4 12.61 0.45

28.022 1.10

11.4636 2.4444 10,723,586,000 850,403,331.00

0.0046 360,903,483,000

11.5574

2 130.6 10.89 0.65

16.754 1.38

7.8913 2.1231 10,723,586,000 984,718,641.00

0.0053 663,547,099,000

11.8219

3 329.8 27.48 0.75

36.64 1.83

15.0164 2.4400 17,900,000,000 651,382,824.00

0.0035 1,331,404,000,000

12.1243

OCEAN 1 116.8 9.74 0.42

23.19 103

0.0949 244.3571 9,313,606,000 956,222,382.00

0.0051 371,626,044,000

11.5701

94

2 111.6 9.30 1.02

9.1176 147

0.0632 144.2843 11,642,006,000 1,251,828,602.00

0.0067 1,030,440,887,000

12.0130

3 247.6 20.64 0

0

-

10.9 -1.9006 0.0000 22,221,370,000

1,076,616,764.00

0.0058

1,007,475,862,000

12.0032

4 62.76 5.23 0

0

-

4.07 -1.2850 0.0000 22,221,370,000

4,248,827,916.00

0.0228

869,319,176,000

11.9392

5 23.3 1.94 0

0 1.14

1.7018 0.0000 22,221,370,000 1,145,431,443.00

0.0061 929,895,133,000

11.9684

SYKE 1 47.25

3.94 0

0 32.8

0.1200 0.0000 7,504,000,000 1,904,568,528.00

0.0102 115,793,630,700

11.0637

2 52.08 4.34 2.86

1.5175 73.5

0.0590 25.7063 7,504,000,000 1,729,032,258.00

0.0093 446,114,000,000

11.6494

3 112.7 9.39 1.08

8.6944 173

0.0544 159.7500 11,584,000,000 1,233,652,822.00

0.0066 784,878,000,000

11.8948

4 65.19 5.43 0.5

10.86 9.76

0.5564 19.5200 11,584,000,000 2,133,333,333.00

0.0114 497,731,200,000

11.6970

5 92.51 7.71 0.40

19.275 70.4

0.1095 176.0250 13,218,000,000 1,714,396,887.00

0.0092 674,064,000,000

11.8287

SIBTC 1 52.18 4.35 0.20

21.75 0.57

7.6316 2.8500 12,129,411,760 2,788,370,520.00

0.0149 120,575,000,000

11.0813

2 61.85 5.15 0.30

17.167 0.63

8.1746 2.1000 4,685,500,000 909,805,825.00

0.0049 157,148,000,000

11.1963

3 293.4 24.45 0.40

61.125 0.49

49.8980 1.2250 18,750,000,000 766,871,166.00

0.0041 345,731,071,000

11.5387

4 81.81 6.82 0.30

22.733 0.33

20.6667 1.1000 18,750,000,000 2,749,266,862.00

0.0147 331,796,000,000

11.5209

5 110.3 9.19 0.39

23.564 0.42

21.8810 1.0769 18,750,000,000 2,040,261,153.00

0.0109 372,612,000,000

11.5713

STERL 1 17.78 1.48 0.10

14.8 0.9

1.6444 9.0000 10,552,846,000 7,130,301,351.00

0.0382 111,197,074,000

11.0461

2 21.85 1.82 0.10

18.2 0.6

3.0333 6.0000 10,552,846,000 5,798,267,033.00

0.0311 145,974,674,000

11.1643

3 71.76 5.98 0.10

59.8 0.52

11.5000 5.2000 12,563,090,000 2,100,851,171.00

0.0113 236,502,923,000

11.3738

4 18.6 1.55 0

0

-

0.53 -2.9245 0.0000 12,563,090,000

8,105,219,355.00

0.0434

164,512,661,600

11.2162

5 23.61 1.97 0

0 0.33

5.9697 0.0000 12,563,090,000 6,377,203,046.00

0.0342 259,579,523,000

11.4143

UNION 1 307.8 25.65 0.69

37.174 1.60

16.0313 2.3188 9,022,823,649 351,767,004.00

0.0019 845,231,000,000

11.9270

2 289.9 24.16 1.00

24.16 1.26

19.1746 1.2600 9,623,809,524 398,336,487.00

0.0021 619,800,000

8.7923

3 430 35.83 0.02

1791.5 2.14

16.7430 107.0000 11,580,000,000 323,192,855.00

0.0017 907,074,000,000

11.9576

4 132.7 11.06 0.02

553

-

5.26 -2.1027 -263.0000 13,510,000,000

1,221,518,987.00

0.0065

1,106,779,000,000

12.0441

5 63.91 5.33 0

0 8.74

0.6098 0.0000 13,510,000,000 2,534,709,193.00

0.0136 845,231,000

8.9270

UBA 1 210.4 17.53 1.00

17.53 1.86

9.4247 1.8600 7,060,000,000 402,738,163.00

0.0022 567,494,000,000

11.7540

95

2 196.3 16.36 1.20

13.633 2.41

6.7884 2.0083 11,496,000,000 702,689,487.00

0.0038 1,102,348,000,000

12.0423

3 429.2 35.76 1.00

35.76 3.05

11.7246 3.0500 17,244,000,000 482,214,765.00

0.0026 1,520,093,000,000

12.1819

4 137.5 11.46 0.10

114.6 0.60

19.1000 6.0000 21,556,000,000 1,880,977,312.00

0.0101 1,120,703,200,000

12.0495

5 129.5 10.79 0.05

215.8 0.8

13.4875 16.0000 25,868,000,000 2,397,405,005.00

0.0128 1,432,632,000,000

12.1561

UNITY 1 30

2.50 0

0 12.3

0.2036 0.0000 43,505,712,779 1,740,288,511.00

0.0093 131,031,671,000

11.1174

2 28.6 2.38 0

0 5.85

0.4068 0.0000 14,501,904,000 6,093,236,975.00

0.0326 203,234,002,000

11.3080

3 66.69 5.56 0

0 4.97

1.1187 0.0000 14,501,904,000 2,608,256,115.00

0.0140 364,080,837,000

11.5491

4 17.47 1.46 1.50

0.9733

-

1.01 -1.4455 -0.6733 15,952,094,000

1,092,609,178.00

0.0059

256,798,086,000

11.4096

5 12.81 1.07 0.50

2.14 37.5

0.0285 74.9600 33,287,177,238 3,110,951,143.00

0.0167 305,221,933,000

11.4846

WEMA

1 39.29 3.27 0

0

-

0.68 -4.8088 0.0000 9,923,016,000

3,034,561,468.00

0.0163

120,109,067,000

11.0796

2 37.76 3.15 0.09

35 0.25

12.6000 2.7778 10,069,943,000 3,196,807,302.00

0.0171 165,081,532,000

11.2177

3 177.9 14.81 0.05

296.2

-

5.73 -2.5846 -114.6000 10,069,943,000

679,942,134.00

0.0036

128,906,575,000

11.1103

4 45.92 3.83 0.05

76.6

-

1.16 -3.3017 -23.2000 10,069,943,000

2,629,227,937.00

0.0141

110,981,613,000

11.0453

5 13.26 1.11 5.41

0.2052 1.54

0.7208 0.2847 12,821,249,880 1,155,067,557.00

0.0062 203,144,627,000

11.3078

ZENITH 1 265.9 22.16 1.10

20.145 1.91

11.6021 1.7364 9,173,488,900 413,966,106.00

0.0022 608,505,175,000

11.7843

2 223.7 18.64 1.70

10.965 1.89

9.8624 1.1118 9,265,524,300 497,077,484.00

0.0027 883,940,926,000

11.9464

3 470.9 39.24 0.85

46.165 3.45

11.3739 4.0588 16,744,796,686 426,727,744.00

0.0023 1,344,241,604,000

12.1285

4 163.2 13.60 0.45

30.222 0.73

18.6301 1.6222 25,117,195,029 1,846,852,575.00

0.0099 1,258,556,800,000

12.0999

5 174 14.50 0.85

17.059 1.06

13.6792 1.2471 31,396,493,786 2,165,275,433.00

0.0116 1,789,458,000,000

12.2527

186,713,988,239.00

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

96

APPENDIX 4

Panel Data of Model Proxies

No BANKS Yr SP Dyield Eyield POR Mconc BKsize

1 ACC 1 3.7575 0 0.01863 0 0.08333 11.2419

ACC 2 7.2675 0 0.11971 0 0.0238 11.5167

ACC 3 16.0133 0.02498 0.10803 0.23121 0.05007 12.0185

ACC 4 6.52417 0.09963 0.21612 0.46099 0.0474 11.8292

ACC 5 8.61 0.02323 0.08362 0.27778 0.05064 11.8615

2 AFR 1 9.25417 0.00702 0.01405 0.5 0.0124 11.14

AFR 2 8.14 0.086 0.14619 0.58824 0.01556 11.272

AFR 3 21.8983 0.02055 0.11234 0.18293 0.0139 11.5469

3 PHB 1 4.08417 0.01592 0.03183 0.5 0.10623 11.201

PHB 2 4.45083 0.15727 0.26737 0.58824 0.03586 11.5786

PHB 3 18.075 0.0249 0.1361 0.18293 0.04163 12.0156

PHB 4 4.38833 0 -4.5461 0 0.0873 11.7467

4 DIAMD 1 6.62917 0.05431 0.08598 0.63158 0.02575 11.3484

DIAMD 2 7.665 0.07175 0.11611 0.61798 0.03039 11.4945

DIAMD 3 14.8967 0.03759 0.07384 0.50909 0.04386 11.7806

DIAMD 4 6.885 0.2382 0.06972 3.41667 0.04024 11.8135

DIAMD 5 7.84167 0.12242 0.05739 2.13333 0.045 11.7391

5 ECO 1 4.8675 0 0.05547 0 0.09982 11.1209

ECO 2 6.28 0.03822 0.05414 0.70588 0.08551 11.4933

ECO 3 12.8992 0.00543 0 0.02779 11.636

ECO 4 24.1767 0.00993 -0.0265 -0.375 0.00569 11.551

ECO 5 5.02917 0.02983 0.02386 1.25 0.06726 11.6573

6 FIDTY 1 2.63583 0.08347 0.07208 1.15789 0.14 11.0791

FIDTY 2 2.76833 0.11559 0.09031 1.28 0.1474 11.3367

FIDTY 3 8.655 0.06932 0.05199 1.33333 0.16589 11.7268

FIDTY 4 2.7375 0.01826 0.02922 0.625 0.02015 11.7026

FIDTY 5 3.6225 0.03865 0.05521 0.7 0.19502 11.6794

7 FIN 1 3.155 0.03487 0.33914 0.1028 0.0538 10.5295

FIN 2 3.805 0 0.07096 0 0.06306 11.2584

FIN 3 8.56833 0 0.01167 0 0.05614 11.6476

8 FIRST 1 40.9733 0.02441 0.06565 0.37175 0.00287 11.7309

FIRST 2 37.6992 0.03183 0.04138 0.76923 0.00069 11.8825

FIRST 3 35.8975 0.03761 0.06212 0.60538 0.00275 12.0665

FIRST 4 16.2933 0.00614 0.08654 0.07092 0.00291 12.222

FIRST 5 13.755 0.04362 0.06034 0.72289 0.00578 12.2916

9 FCMB 1 7.65667 0.01698 0.04702 0.36111 0.02785 11.0278

FCMB 2 4.67917 0.0748 0.13037 0.57377 0.05035 11.4196

FCMB 3 13.9358 0.03588 0.08826 0.4065 0.05796 11.6676

FCMB 4 6.10333 0.08192 0.03441 2.38095 0.05084 11.7113

FCMB 5 7.72917 0.06469 0.05822 1.11111 0.05131 11.7243

97

10 GTB 1 15.7208 0.04453 0.09223 0.48276 0.00857 11.4844

GTB 2 15.6758 0.06571 0.10398 0.6319 0.01265 10.6798

GTB 3 26.07 0.02877 0.06636 0.43353 0.02606 11.8561

GTB 4 13.1242 0.0762 0.09753 0.78125 0.0271 12.0086

GTB 5 17.1733 0.05823 0.09142 0.63694 0.0331 12.0281

11 INTER 1 12.6133 0.03568 0.08721 0.40909 0.01909 11.5574

INTER 2 10.8867 0.05971 0.12676 0.47101 0.02442 11.8219

INTER 3 27.4817 0.02729 0.06659 0.40984 0.03235 12.1243

12 OCEAN 1 9.735 0.04314 10.5424 0.00409 0.02147 11.5701

OCEAN 2 9.30083 0.10967 15.8233 0.00693 0.03104 12.013

OCEAN 3 20.6358 0 -0.5263 0 0.05346 12.0032

OCEAN 4 5.23 0 0.7782 0 0.08099 11.9392

OCEAN 5 1.94167 0 0.58712 0 0.02792 11.9684

13 SKYE 1 3.9375 0 8.34032 0 0.04276 11.0637

SKYE 2 4.34 0.65899 16.9401 0.0389 0.04288 11.6494

SKYE 3 9.39167 0.115 18.3695 0.00626 0.06126 11.8948

SKYE 4 5.4325 0.0092 1.79659 0.00512 0.04066 11.697

SKYE 5 7.70917 0.05189 9.13328 0.00568 0.04179 11.8287

14 SIBTC 1 4.34833 0.04599 0.13108 0.35088 0.0626 11.0813

SIBTC 2 5.15417 0.05821 0.12223 0.47619 0.02256 11.1963

SIBTC 3 24.4525 0.01636 0.02004 0.81633 0.03808 11.5387

SIBTC 4 6.8175 0.044 0.0484 0.90909 0.05241 11.5209

SIBTC 5 9.18833 0.04245 0.04571 0.92857 0.04973 11.5713

15 STERL 1 1.48167 0.06749 0.06074 1.11111 0.16007 11.0461

STERL 2 1.82083 0.05492 0.03295 1.66667 0.14379 11.1643

STERL 3 5.98 0.01672 0.08696 0.19231 0.10433 11.3738

STERL 4 1.55 0 0.34194 0 0.1545 11.2162

STERL 5 1.9675 0 0.16773 0 0.15545 11.4143

16 UNION 1 25.6533 0.0269 0.06237 0.43125 0.0079 11.927

UNION 2 24.1592 0.04139 0.05215 0.79365 0.00988 8.79225

UNION 3 35.8342 0.00056 0.05972 0.00935 0.01605 11.9576

UNION 4 11.0575 0.00181 -0.4757 -0.0038 0.02328 12.0441

UNION 5 5.32583 0 1.64106 0 0.06178 8.92698

17 UBA 1 17.5333 0.05703 0.10608 0.53763 0.00904 11.754

UBA 2 16.3575 0.07336 0.14733 0.49793 0.01743 12.0423

UBA 3 35.7625 0.01678 0.08528 0.19672 0.02395 12.1819

UBA 4 11.4608 0.00873 0.05235 0.16667 0.03585 12.0495

UBA 5 10.7875 0.00463 0.00742 0.625 0.05844 12.1561

18 UNITY 1 2.5 0 4.912 0 0.03907 11.1174

UNITY 2 2.38333 0 2.45455 0 0.15111 11.308

UNITY 3 5.5575 0 0.89429 0 0.12952 11.5612

UNITY 4 1.45583 1.03034 0.69376 1.48515 0.02083 11.4096

UNITY 5 1.0675 0.46838 35.1101 0.01334 0.07583 11.4846

19 WEMA 1 3.27417 0 0.20769 0 0.06812 11.0796

WEMA 2 3.14667 0.0286 0.07945 0.36 0.07928 11.2177

98

WEMA 3 14.8225 0.00337 0.38657 0.00873 0.03377 11.1103

WEMA 4 3.82667 0.01307 0.30314 0.0431 0.05012 11.0453

WEMA 5 1.105 4.89593 1.39367 3.51299 0.02816 11.3078

20 ZENITH 1 22.1583 0.04964 0.0862 0.57592 0.00929 11.7843

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)

Date: 06/07/13 Time: 11:15

Sample: 93 Descriptive Statistic

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

Jarque-Bera 38.16856 23779.27 2628.157 313.6517 39.98886 542.3450 Probability 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000

Observations 93 93 93 93 93 93

99

APPENDIX 5

Regression Result of Hypothesis One

Dependent Variable: SP

Method: Least Squares

Included observations: 93

Variable Coefficient Std. Error t-Statistic Prob.

DYIELD -3.365192 1.575960 -2.135328 0.0355

MCONC -112.1061 19.18778 -5.842579 0.0000

BKSIZE 3.620401 1.520690 2.380762 0.0194

C -24.38751 17.80417 -1.369764 0.1742

R-squared 0.759063 Mean dependent var 11.29757

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

Log likelihood -321.1134 F-statistic 16.61970

Durbin-Watson stat 1.449165 Prob(F-statistic) 0.000000

Source: E-view Results

Regression Result of Hypothesis Two

Dependent Variable: SP

Method: Least Squares

Included observations: 93

Variable Coefficient Std. Error t-Statistic Prob.

EYIELD -0.331065 0.165221 -2.003771 0.0481

MCONC -108.4813 19.18598 -5.654195 0.0000

BKSIZE 3.842394 1.522954 2.522988 0.0134

C -27.05250 17.81388 -1.518619 0.1324

R-squared 0.734310 Mean dependent var 11.29757

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

Log likelihood -321.3849 F-statistic 16.35031

Durbin-Watson stat 1.147148 Prob(F-statistic) 0.000000

Source: E-view Results

100

Regression Result of Hypothesis Three

Dependent Variable: SP

Method: Least Squares

Included observations: 93

Variable Coefficient Std. Error t-Statistic Prob.

POR -1.411019 1.269427 -1.111540 0.2693

MCONC -107.7532 19.50537 -5.524283 0.0000

BKSIZE 3.841548 1.546538 2.483966 0.0149

C -26.82391 18.08687 -1.483060 0.1416

R-squared 0.823545 Mean dependent var 11.29757

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

Log likelihood -322.7956 F-statistic 14.97518

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

Source: E-view Results