A Test of Miller and Modigliani Dividend Policy Irrelevance Theory in Nigerian Stock Market
Keywords:
Expected dividend, Expected earnings, Share price, Mediation, Relevance, Irrelevance
Abstract
This study empirically tests for the validity of Miller and Modigliani’s dividend irrelevance proposition in the Nigerian Stock Exchange (NSE). Secondary data were obtained from the Nigerian Stock Exchange fact book and firms’ annual audited financial statements for fifteen years (2001-2015). Mediation Analyses, was used to measure the direct and indirect effects of dividend on stock price. Correction of the anomalous use of current dividend and current earnings by the use of naive expectation of dividend and earnings revealed that the direct effect of expected dividend on share price is significant but the indirect effect of expected dividend on share price through earnings is not significant. The implication of these results is that expected dividend has its unique (direct) effect on share price beyond the effect on share price which it shares with expected earnings (indirect effect). This conclusion suggests that dividend policy is relevant in valuation of shares in NSE. It was therefore recommended that company management should treat dividend as an active corporate finance decision-making variable and should employ dividend in information signalling to capital market investors.
References
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Abdullahi, A. (2014).Dividend policy and its impact on stock price: A study on commercial banks listed in Dhaka Stock Exchange. Global disclosure of Economics and Business, 3 (1), 9-17.
Abor, J. (2008). Determinants of capital structure of Ghanaian firms. African Economic Research Consortium Biannual Workshop (AERC) Research paper 176, Nairobi, Kenya.
Abubakhar, S. (2012). Dividend payout ratio and share price movement of listed Non-service firms in Nigeria: Empirical study. www.abu.edu.ng/publications/2012-04-11-163138_1156.docx
Adediran, S.A., & Alade, S.D. (2013). Dividend policy and corporate performance in Nigeria. American Journal of Social and Management Sciences, 4(2), 71-77.
Adefila, J.J., Oladipo, J.A., & Adeoti, J.O. (2004). The Effect of dividend policy on the market price of shares in Nigeria: Case study of fifteen quoted companies. International Journal of Accounting. University of Ado-Ekiti, 2 (1), 1-10
Adesina, K., Uwuigbe, U., Uwuigbe, O.R., Asiriuwa, O. & Oriabe, S. (2017). Dividend policy and share price valuation in Nigerian banks. EuroEconomica, 36(1), 1-10
Adesola, W.A., & Okwong, A.E. (2009). An empirical study of dividend policy of quoted companies in Nigeria. Global Journal of Social Sciences, 8 (1), 85-101.
Adeyemi, S.L., & Adewale A. A. (2010). Evaluation of the dividend practices among selected Nigerian quoted firms. Maiduguri Journal of Accounting and Finance, 8 (1).
Aharony, J., & Swary, I. (1980). Quarterly dividend and earnings announcements and stockholder’s returns: An empirical analysis. Journal of Finance, 35(1), 1-12.
Amadasu, D.E. (2011).Dividend is relevant: A restatement. African Research Review Journal, 5(4), 60-72
Anil, K., & Kapoor, S. (2008). Determinants of dividend payout ratios- A study of Indian information technology sector, The International Research Journal of Finance and Economics, 15(2), 63-71
Arslan, I., Farooq, A., & Ali Raja, S. (2014).The effect of dividend bubble on share price: Evidence from KSE-30 index. Research Journal of Finance and Accounting, 5(13), 83-87.
Baker, H.K., & Weigand, R. (2014). Corporate dividend policy revisited. Journal of Managerial Finance, 4(2), 126-144. doi.10.1108/MF-03-2014-0077.
Baron, R.M. & Kenny, D.A. (1986).The moderator- mediator variable distinction in social psychological research: Concept, strategic and statistical considerations. Journal of personality and social psychology, 51(6), 1173-1182.
Bernstein, P.L. (1996). “Dividend: The puzzle”, Journal of Applied Corporate Finance, 9, 16-22
Black, F. (1976). The dividend puzzle. Journal of portfolio management. 2(2), 5-8.
Bougatef, K. (2014). How do dividend payments affect stock prices: The case of Tunisian firms. The Journal of Commerce. 3(2), 21-25
Bringham, E.F and Houston, J.F (1999). Fundamentals of financial management. Second Edition. The Dryden Press, Florida, U.S.A
Budagaga, A. (2017).Dividend payment and its impact on the value of firms listed on Istanbul Stock Exchange: A residual income approach. International Journal of Economics and Financial Issues, 7(2), 370-376. http.www.econjournals.com
Chirima, D.T. (2015). The Impact of dividend payments on stock prices in a developing economy: The case study of services firms listed on the Zimbabwe Stock Exchange. Case Studies Journal, 4(5), 126-133
De-Angelo, H., & De-Angelo, L. (2006). The irrelevance of the MM dividend irrelevance theorem. Journal of Financial Economics, 79(2), 293-315.
Edward, A.B. (2014). The Impact of Dividend payment on share prices of some selected listed companies on the Ghana Stock Exchange. International Journal of Humanities and Social Sciences, 4(1), 179-190
Egbeonu, O.C., Edori, I.S., & Edori, D.S. (2016). Effect of dividend policy on the value of firms: Empirical study of quoted firms in Nigeria Stock Exchange. Research Journal of Finance and Accounting, 7(3), 17-24
Fields, A. (2012). Discovering statistics using IBM SPSS Statistics. London, Sage publications Limited.
………….. (2013). Discovering statistics using IBM SPSS Statistics (4th Edition) London, U.K: Sage Publication Limited.
Franc-Dabrowska, J. (2009). Does dividend policy follow the capital structure theory? Managing Global Transitions, 7(4), 367-382.
Hakeem, S.A., & Bambale, A.J. (2016).Mediating effect of liquidity on firm performance and dividend payout of listed manufacturing companies in Nigeria. Journal of Economics Development, Management, IT, Finance and Marketing, 8(1), 15-35.
Huda, F., & Farah, T. (2011). Determinants of dividend decision: A focus on banking sector in Bangladesh. International Research Journal of Finance and Economics, 77, 33-46
Husan-Aldin, N.A., Rafforty M, and Pillqar, R. (2010). Dividend policy: A review of theories and empirical evidence, International Bulletin of Business Administration, 9, 171-200.
Iftikhar, A.B., Raja, N.J., & Sehran, K.N. (2017). Impact of dividend policy on stock prices of firms. International Scientific Journal Theoretical and Applied Science, 3(47), 32-37.
Iqbal, A., Ahmed, F., & Shafi, A.R. (2014). The effect of dividend bubble on share price: Evidence from KSE-30 index. Research Journal of Finance and Accounting, 5(13), 83-87
Inyiama, O.I., & Ugah, H. (2015). Interactions between earnings and dividend payout rate in the oil and gas sector: Evidence from Nigeria (2004-2014). International Journal of Finance and Accounting, 4(5), 253-261
James, L.R., & Brett, J.M. (1984). Mediators, moderators and tests for mediation. Journal of Applied Psychology, 69, 307- 321.
Judd, C.M., & Kenny, D.A. (1981).Process analysis: Estimating mediation in treatment evaluations. Evaluation Review, 5(5), 602-619.
Kanwal, I.K. (2012). Effects of dividends on stock prices: A case of Chemical and Pharmaceutical Industry of Pakistan. Journal of Management, 2(5), 141-148.
Khalid, H., Chijioke, O.M., & Aruoriwo, M.C. (2010).Dividend policy and share price volatility: United Kingdom evidence. Journal of Risk Finance, 12(1), 57-68
Khan, K.I. (2012). Effect of dividends on stock prices– A case of chemical and pharmaceutical industry of Pakistan. Journal of Management, 2(5), 141-148. Available at doi: 10.5923/j.mm.20120205.02.
Lintner, J. (1956). Distribution of income among dividends retained earnings and taxes. American Economic Review, 46(2) 97-113.
Majanga, B.B. (2015). The dividend effect on stock price: An empirical analysis of Malawi listed companies. Accounting and Finance Research Journal, 4(3), 99-105. www.sciedupress.com/afr
Miller, M., & Modigliani, F. (1961). Dividend policy, growth and the valuation of shares. Journal of Business, 34(4), 411-433.
Musa, I.F. (2009).The Dividend policy of firms quoted on the Nigerian Stock Exchange: An empirical analysis. African Journal of Business Management, 3(10), 555-566.
Nnadi, M.A., & Akpomi, M.E. (2005).The effect of taxes on dividend policy of banks in Nigeria. International Research Journal of Finance and Economics, 19(1), 48-55. http://dx.doi.org/10.2139/ssrn 873828
Oduwole, O. (2015).Earnings or dividends, which had more predictive power? Research Journal of Finance and Accounting.6 (8), 54 – 60.
Ojeme, S., Mamidu, A.I., & Ojo, J.A., (2015).Dividend policy and shareholders’ wealth in Nigerian quoted banks. Canadian Social Science Journal, 11(1), 24-29.
Ordu, M.M., Enekwe, C.I., & Anyanwaokoro, M. (2014).Effect of dividend payment on the market price of shares: A study of quoted firms in Nigeria. IOSR Journal of Economics and Finance, 5(4), 49-62.
Oyinlola, O.M., & Ajeigbe, K.B. (2014).The impact of dividend policy on stock prices of quoted firms in Nigerian. International Journal of Economics, Commerce and Management, 2(9), 1-17.
Ozuomba, C.N, Okaro, S.C., & Okoye P.V.C. (2013). Shareholders value and firm’s dividend policy: Evidence from public companies in Nigeria. Journal of Management Sciences, 2(12), 26-28.
Preacher, K.J., & Hayes, A.F. (2004). SPSS & SAS procedures for estimating indirect effects in simple mediation models. Behaviour Research Methods, Instruments and Computers, 36(4), 717-731
Preacher, K.J., & Kelly, K. (2011). Effect size measures for mediation models: Quantitative strategies for communicating indirect effects. Psychological Methods.16 (1), 93-115.
Rabindra, J. (2012). Effects of dividends on stock prices in Nepal. NRB Economic Review, 24 (2), 61-75
Rubinstein, M. (1976). The irrelevancy of dividend policy in an arrow- Debreu economy. Journal of Finance, 31, 1229-1230.
Shrikant, P., & Yuserrie, Z. (2015). Dividend policy decisions: Theoretical views and relevant issues. Reports on Economics and Finance, 1(1), 43-58. http://dx.doi.org/10.12988/ref.2015.596
Sobel, M.E. (1982). Asymptotic confidence intervals for indirect effects in structural equation models.in Sociological Methodology, Leinhardt (Ed.) San Franscisco CA: Jossey- Bass, 290-312.
Suwabe, T. (2006). Dividend policy that boosts shareholders value. Security Analysts Journal, 44(7), 1-18
Toby, A.J. (2014). Empirical test of the dividend policy irrelevance hypothesis in the Nigerian context. Research Journal of Finance & Accounting, 5(6), 167-178.
Udobi, P.I. (2016). An empirical analysis of Miller & Modigliani dividend policy irrelevance theory: Evidence from the Nigerian Stock Market. Unpublished Ph.D Thesis, University of Lagos.
…………..,Iyiegbuniwe,W.I., & Ezike, J.E.(2018). Empirical analysis of the impact of current dividend policy on share price: Evidence from Nigeria. Unilag Journal of Business, 4(2),133-160
Walter, J.E. (1962). Dividend Policy: It’s influence on the value of the enterprise. Journal of Finance, 18(2), 280-291.
Abdullahi, A. (2014).Dividend policy and its impact on stock price: A study on commercial banks listed in Dhaka Stock Exchange. Global disclosure of Economics and Business, 3 (1), 9-17.
Abor, J. (2008). Determinants of capital structure of Ghanaian firms. African Economic Research Consortium Biannual Workshop (AERC) Research paper 176, Nairobi, Kenya.
Abubakhar, S. (2012). Dividend payout ratio and share price movement of listed Non-service firms in Nigeria: Empirical study. www.abu.edu.ng/publications/2012-04-11-163138_1156.docx
Adediran, S.A., & Alade, S.D. (2013). Dividend policy and corporate performance in Nigeria. American Journal of Social and Management Sciences, 4(2), 71-77.
Adefila, J.J., Oladipo, J.A., & Adeoti, J.O. (2004). The Effect of dividend policy on the market price of shares in Nigeria: Case study of fifteen quoted companies. International Journal of Accounting. University of Ado-Ekiti, 2 (1), 1-10
Adesina, K., Uwuigbe, U., Uwuigbe, O.R., Asiriuwa, O. & Oriabe, S. (2017). Dividend policy and share price valuation in Nigerian banks. EuroEconomica, 36(1), 1-10
Adesola, W.A., & Okwong, A.E. (2009). An empirical study of dividend policy of quoted companies in Nigeria. Global Journal of Social Sciences, 8 (1), 85-101.
Adeyemi, S.L., & Adewale A. A. (2010). Evaluation of the dividend practices among selected Nigerian quoted firms. Maiduguri Journal of Accounting and Finance, 8 (1).
Aharony, J., & Swary, I. (1980). Quarterly dividend and earnings announcements and stockholder’s returns: An empirical analysis. Journal of Finance, 35(1), 1-12.
Amadasu, D.E. (2011).Dividend is relevant: A restatement. African Research Review Journal, 5(4), 60-72
Anil, K., & Kapoor, S. (2008). Determinants of dividend payout ratios- A study of Indian information technology sector, The International Research Journal of Finance and Economics, 15(2), 63-71
Arslan, I., Farooq, A., & Ali Raja, S. (2014).The effect of dividend bubble on share price: Evidence from KSE-30 index. Research Journal of Finance and Accounting, 5(13), 83-87.
Baker, H.K., & Weigand, R. (2014). Corporate dividend policy revisited. Journal of Managerial Finance, 4(2), 126-144. doi.10.1108/MF-03-2014-0077.
Baron, R.M. & Kenny, D.A. (1986).The moderator- mediator variable distinction in social psychological research: Concept, strategic and statistical considerations. Journal of personality and social psychology, 51(6), 1173-1182.
Bernstein, P.L. (1996). “Dividend: The puzzle”, Journal of Applied Corporate Finance, 9, 16-22
Black, F. (1976). The dividend puzzle. Journal of portfolio management. 2(2), 5-8.
Bougatef, K. (2014). How do dividend payments affect stock prices: The case of Tunisian firms. The Journal of Commerce. 3(2), 21-25
Bringham, E.F and Houston, J.F (1999). Fundamentals of financial management. Second Edition. The Dryden Press, Florida, U.S.A
Budagaga, A. (2017).Dividend payment and its impact on the value of firms listed on Istanbul Stock Exchange: A residual income approach. International Journal of Economics and Financial Issues, 7(2), 370-376. http.www.econjournals.com
Chirima, D.T. (2015). The Impact of dividend payments on stock prices in a developing economy: The case study of services firms listed on the Zimbabwe Stock Exchange. Case Studies Journal, 4(5), 126-133
De-Angelo, H., & De-Angelo, L. (2006). The irrelevance of the MM dividend irrelevance theorem. Journal of Financial Economics, 79(2), 293-315.
Edward, A.B. (2014). The Impact of Dividend payment on share prices of some selected listed companies on the Ghana Stock Exchange. International Journal of Humanities and Social Sciences, 4(1), 179-190
Egbeonu, O.C., Edori, I.S., & Edori, D.S. (2016). Effect of dividend policy on the value of firms: Empirical study of quoted firms in Nigeria Stock Exchange. Research Journal of Finance and Accounting, 7(3), 17-24
Fields, A. (2012). Discovering statistics using IBM SPSS Statistics. London, Sage publications Limited.
………….. (2013). Discovering statistics using IBM SPSS Statistics (4th Edition) London, U.K: Sage Publication Limited.
Franc-Dabrowska, J. (2009). Does dividend policy follow the capital structure theory? Managing Global Transitions, 7(4), 367-382.
Hakeem, S.A., & Bambale, A.J. (2016).Mediating effect of liquidity on firm performance and dividend payout of listed manufacturing companies in Nigeria. Journal of Economics Development, Management, IT, Finance and Marketing, 8(1), 15-35.
Huda, F., & Farah, T. (2011). Determinants of dividend decision: A focus on banking sector in Bangladesh. International Research Journal of Finance and Economics, 77, 33-46
Husan-Aldin, N.A., Rafforty M, and Pillqar, R. (2010). Dividend policy: A review of theories and empirical evidence, International Bulletin of Business Administration, 9, 171-200.
Iftikhar, A.B., Raja, N.J., & Sehran, K.N. (2017). Impact of dividend policy on stock prices of firms. International Scientific Journal Theoretical and Applied Science, 3(47), 32-37.
Iqbal, A., Ahmed, F., & Shafi, A.R. (2014). The effect of dividend bubble on share price: Evidence from KSE-30 index. Research Journal of Finance and Accounting, 5(13), 83-87
Inyiama, O.I., & Ugah, H. (2015). Interactions between earnings and dividend payout rate in the oil and gas sector: Evidence from Nigeria (2004-2014). International Journal of Finance and Accounting, 4(5), 253-261
James, L.R., & Brett, J.M. (1984). Mediators, moderators and tests for mediation. Journal of Applied Psychology, 69, 307- 321.
Judd, C.M., & Kenny, D.A. (1981).Process analysis: Estimating mediation in treatment evaluations. Evaluation Review, 5(5), 602-619.
Kanwal, I.K. (2012). Effects of dividends on stock prices: A case of Chemical and Pharmaceutical Industry of Pakistan. Journal of Management, 2(5), 141-148.
Khalid, H., Chijioke, O.M., & Aruoriwo, M.C. (2010).Dividend policy and share price volatility: United Kingdom evidence. Journal of Risk Finance, 12(1), 57-68
Khan, K.I. (2012). Effect of dividends on stock prices– A case of chemical and pharmaceutical industry of Pakistan. Journal of Management, 2(5), 141-148. Available at doi: 10.5923/j.mm.20120205.02.
Lintner, J. (1956). Distribution of income among dividends retained earnings and taxes. American Economic Review, 46(2) 97-113.
Majanga, B.B. (2015). The dividend effect on stock price: An empirical analysis of Malawi listed companies. Accounting and Finance Research Journal, 4(3), 99-105. www.sciedupress.com/afr
Miller, M., & Modigliani, F. (1961). Dividend policy, growth and the valuation of shares. Journal of Business, 34(4), 411-433.
Musa, I.F. (2009).The Dividend policy of firms quoted on the Nigerian Stock Exchange: An empirical analysis. African Journal of Business Management, 3(10), 555-566.
Nnadi, M.A., & Akpomi, M.E. (2005).The effect of taxes on dividend policy of banks in Nigeria. International Research Journal of Finance and Economics, 19(1), 48-55. http://dx.doi.org/10.2139/ssrn 873828
Oduwole, O. (2015).Earnings or dividends, which had more predictive power? Research Journal of Finance and Accounting.6 (8), 54 – 60.
Ojeme, S., Mamidu, A.I., & Ojo, J.A., (2015).Dividend policy and shareholders’ wealth in Nigerian quoted banks. Canadian Social Science Journal, 11(1), 24-29.
Ordu, M.M., Enekwe, C.I., & Anyanwaokoro, M. (2014).Effect of dividend payment on the market price of shares: A study of quoted firms in Nigeria. IOSR Journal of Economics and Finance, 5(4), 49-62.
Oyinlola, O.M., & Ajeigbe, K.B. (2014).The impact of dividend policy on stock prices of quoted firms in Nigerian. International Journal of Economics, Commerce and Management, 2(9), 1-17.
Ozuomba, C.N, Okaro, S.C., & Okoye P.V.C. (2013). Shareholders value and firm’s dividend policy: Evidence from public companies in Nigeria. Journal of Management Sciences, 2(12), 26-28.
Preacher, K.J., & Hayes, A.F. (2004). SPSS & SAS procedures for estimating indirect effects in simple mediation models. Behaviour Research Methods, Instruments and Computers, 36(4), 717-731
Preacher, K.J., & Kelly, K. (2011). Effect size measures for mediation models: Quantitative strategies for communicating indirect effects. Psychological Methods.16 (1), 93-115.
Rabindra, J. (2012). Effects of dividends on stock prices in Nepal. NRB Economic Review, 24 (2), 61-75
Rubinstein, M. (1976). The irrelevancy of dividend policy in an arrow- Debreu economy. Journal of Finance, 31, 1229-1230.
Shrikant, P., & Yuserrie, Z. (2015). Dividend policy decisions: Theoretical views and relevant issues. Reports on Economics and Finance, 1(1), 43-58. http://dx.doi.org/10.12988/ref.2015.596
Sobel, M.E. (1982). Asymptotic confidence intervals for indirect effects in structural equation models.in Sociological Methodology, Leinhardt (Ed.) San Franscisco CA: Jossey- Bass, 290-312.
Suwabe, T. (2006). Dividend policy that boosts shareholders value. Security Analysts Journal, 44(7), 1-18
Toby, A.J. (2014). Empirical test of the dividend policy irrelevance hypothesis in the Nigerian context. Research Journal of Finance & Accounting, 5(6), 167-178.
Udobi, P.I. (2016). An empirical analysis of Miller & Modigliani dividend policy irrelevance theory: Evidence from the Nigerian Stock Market. Unpublished Ph.D Thesis, University of Lagos.
…………..,Iyiegbuniwe,W.I., & Ezike, J.E.(2018). Empirical analysis of the impact of current dividend policy on share price: Evidence from Nigeria. Unilag Journal of Business, 4(2),133-160
Walter, J.E. (1962). Dividend Policy: It’s influence on the value of the enterprise. Journal of Finance, 18(2), 280-291.
Published
2018-06-13
How to Cite
Philomina I, U., & Wilfred I., I. (2018). A Test of Miller and Modigliani Dividend Policy Irrelevance Theory in Nigerian Stock Market. American Finance & Banking Review, 2(2), 1-13. https://doi.org/10.46281/amfbr.v2i2.132
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2018 Udobi, Philomina I. , Iyiegbuniwe, Wilfred I.
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