THE IMPACT OF DIVIDEND AND CORPORATE EARNINGS ON STOCK PRICES

ABSTRACT

This study was carried out to determine the effects of dividends and earnings on stock price movement in Nigeria. This was done by examining the significance of cash dividend and corporate earnings on stock prices in the Nigerian Exchange Group (NGX) for a period of ten years from 2015 to 2024. The data sourced from Nigerian Exchange Group (NGX) reports and company annual reports were analyzed using the regression tool. After the process of experimentation using this regression tool, the researcher observed that stock price movement is more significantly related to dividend than corporate earnings. Secondly, the optimization of corporate earnings influences positively stock price movement as many investors look at it as a significant factor for their choice of stock investment. This drive for such stock and the market price adherence to the law of demand and supply influences the stock price. Nevertheless, it is also observed that there is an auto-correlation of the three variables, dividend, earnings per share and stock price in choice of stocks for investment. It is recommended, therefore, that Management should optimize their corporate earnings and devise a dividend and retention policy decision in an optimum manner to achieve the objective of maximizing the wealth of shareholders since the interrelationship of these decisions have a significant impact/effect on equity share price.

It is also recommended that further works on this should be carried out in order to improve the body of existing knowledge in those areas. In addition, a longitudinal study that will cover a time horizon of more than ten years should be conducted as this may enable a proper test of the relationship between dividends and earnings. Management of firms with this kind of investors should develop policies that will satisfy the investors and thus, enhance their firm's value.

There should be a dividend pay-out ratio that companies need to maintain so that they can enhance the value of their firms. The study further brings to the knowledge of all that investors in Nigeria are dividend-driven and would therefore be willing to pay higher prices for stocks that pay more dividends, consistent with the signaling theory of dividends.

Finally, although factors like the Efficient Market Hypothesis (EMH), volume of equity traded, and the law of demand and supply influence investor decisions, available evidence indicates that Nigerian investors are dividend-driven, as shown in the stock price movement and trend over the period under review.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In a competitive economy, it is clear that investments are undertaken due to the available benefits perceived or which they provide to the investors. Investments in securities are for the purpose of earning income, which could be in the form of dividends, profits or capital gains. With this in mind, it could be said that no right-thinking investor will put his funds into a venture if he does not expect some form of returns. Apart from income-earning motives, prestige, power, and control could also be cited as additional reasons; however, the primary motive remains the expectation of returns.

Stocks or securities are documentary evidence of ownership or entitlement to claim upon the income and assets of the issuing organization, which may be a publicly or privately owned institution. Investments in securities are carried out through a market known as the stock market, commonly referred to as the stock exchange, the hallmark of which in Nigeria is the Nigerian Exchange Group (NGX) the centre of the Nigerian Capital Market (NCM). Yakubu (2023) describes capital markets as crucial forums for exchanging medium- and long-term funds, connecting savers with investors and matching the demand for funds with the supply of funds.

The stock exchange, as the hallmark constituency of the capital market, serves multiple functions simultaneously. It is a place where debt and equity securities of varying types are traded transparently. It is a market that facilitates capital mobilization and allocation, as both governments and companies can raise funds through the market on long-term and prudent terms through the offer of shares (by companies) and bonds (by companies and governments). Adamu and Sanni (2023) affirm that stock market development is the primary driver of the finance-led growth hypothesis in Nigeria, underscoring the market’s pivotal role in economic development.

The Securities and Exchange Commission (SEC) is the apex regulatory institution of the Nigerian capital market and is charged, among other things, with the responsibility of maintaining investor protection and ensuring market integrity. Nwatu, Arum and Chime (2024) argue that a well-structured realignment of securities regulations in Nigeria is essential for boosting the effectiveness of the country’s securities market and retaining market participants. The principal objective of SEC in regulating the market is to protect the investing public, particularly the unsophisticated investors who may not fully understand the nature and operation of companies.

Economic analysts have identified a number of factors affecting stock prices on the stock market. Among the key factors are:

- Dividend policy of a company

- Corporate earnings

- Volume of equity traded

There has been a longstanding controversy in academic circles as to which of these variables has the greater impact on security prices. The dividend payment ratio is a major aspect of the dividend policy of the firm, which affects the value of the firm to the stockholders. The classical school of thought holds that dividends are paid to influence share prices and that the market price of equity is a representation of the present value of estimated cash dividends that can be generated by the equity. The new classical schools of thought, on the other hand, believe that the price of equity is a function of the earnings of the company, as represented by the Dividend Irrelevance Theory of Modigliani and Miller (Okorie, cited in Odoemelam & Obiora, 2023).

Retained earnings provide funds to finance the firm’s long-term growth and constitute the most significant source for financing a firm’s investment. Dividends, on the other hand, are paid in cash; thus, the distribution of earnings utilizes the available cash of the company. When the firm increases the retained portion of 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 and share value. Conversely, when dividends are increased, shareholders’ current income increases but the firm may be unable to retain sufficient earnings, thereby relinquishing possible investment opportunities. Al-Malkawi, Bhatti and Magableh (2022) observe that the primary objective of dividend policy is to balance the dual interests of rewarding shareholders while maintaining adequate resources for business sustainability and growth.

Management, therefore, is in a dilemma: it must devise a dividend and retention policy that divides corporate earnings between dividends and retained earnings in an optimum manner to achieve the objective of maximizing the wealth of shareholders. The interrelation of these decisions and their impact on equity share prices in the Nigerian capital market is the focus of this paper. Studies such as that of Obeyagbona and Akinuli (2024) have confirmed that dividend policy has a significant influence on firm financial performance among quoted consumer goods companies in Nigeria.

Attempts will also be made to explain stock price movements through the “Efficient Market Hypothesis (EMH)”. This hypothesis holds that security prices adjust rapidly to new information released to the market. Ehiedu and Obi (2022) applied the EMH to the Nigerian stock exchange in the context of global financial crises, reaffirming Fama’s (1970) foundational assertion that prices of financial assets in a liquid market are fully reflected by all available information. The hypothesis assumes that no stock price can remain improperly priced for a very long time, and there is almost instantaneous adjustment to new information. Further research by Abdulrahman, Nageri, Lawal and Ibrahim (2023) examining the NGX All-Share Index demonstrated that while volatility persistence declined after periods of crisis, the restoration of full weak-form market efficiency remains a gradual process.

Having mentioned this, in Nigeria, the question of dividend payments by companies has evolved considerably. Although dividend payments were once regulated by ceilings set by earlier decrees, they have since been liberalized. The levels of distributable dividends are now at the discretion of individual companies, subject to the provisions of the Companies and Allied Matters Act (CAMA) and the guidelines of the Securities and Exchange Commission. The Nigerian Exchange Group (NGX), which replaced the Nigerian Stock Exchange (NSE) following its demutualization in 2021, has adopted structural reforms including digital platforms such as NGX Invest (launched in 2024) to enhance investor participation and market transparency.

The Securities and Exchange Commission evaluates new issues principally by the maintainable annual earnings method. This method takes into recognition the profit of the time and the assets of the firm. It is considered that when a firm’s assets are judiciously used, earnings are increased, which in turn enhances the value of the firm. Conversely, losses reduce the value of a firm in the eyes of the investing public. A study covering listed industrial goods companies in Nigeria from 2014 to 2023 found that dividend per share and dividend payout ratio had a significant positive effect on market share price, with dividend policy variables jointly explaining about 78% of the variation in market share prices (Goodwood Publishers, 2025). This makes the question of what constitutes the relevant impact of dividends and earnings on security price movements in Nigeria particularly compelling.

Therefore, in critically analyzing the impact of dividend and corporate earning policy decisions on equity share prices in the Nigerian capital market, a theoretical framework of the effect of dividend policy decisions on the value of the firm will be considered, drawing on both dividend relevance and irrelevance theories as well as signaling theory (Owualah, Ogbebor & Moseri, 2024; Odoemelam & Obiora, 2023).

1.2 STATEMENT OF THE PROBLEM

The volatility of the stock market and its attendant upward and downward swings in share prices have continued to confound critics and observers of the capital market. There have been diverse views as to the various reasons why share prices move the way they do. Various schools of thought hold differing opinions about the factors that influence share price movement. The Nigerian Exchange Group’s All-Share Index recorded a remarkable 19.98% return in 2022, making it the world’s fourth-best performing index. By 2024, the NGX sustained a 37.65% year-to-date performance, fueled partly by favorable earnings reports from large-cap and mid-cap stocks reinforcing the link between corporate earnings announcements and stock price behavior (African Markets, 2024).

There is a contention in deciding which of dividend payments and corporate earnings more significantly affects share price movements at the Nigerian Exchange Group. At the Nigerian stock market, share price movements are everyday occurrences and have become synonymous with the market. Owualah, Ogbebor and Moseri (2024), in a study covering Nigerian manufacturing firms from 2013 to 2022, found that dividend per share (DPS) emerged as a significant positive predictor of share price, while earnings per share (EPS) did not exhibit statistical significance in the model, suggesting the complexity of the dividend-earnings-price nexus in the Nigerian context.

In the Nigerian context, the average investor in the capital market places a high emphasis on dividend payments, as most investors tend to be medium- to long-term holders of stock. However, a large part of the investing public also lacks in-depth knowledge of the various indices and variables at play in the market and therefore cannot fully appreciate the requisite analysis of corporate earnings and dividend policies (SEC Nigeria, 2022; Adegbite & Ayoola, 2023). The market further suffers from low liquidity, weak investor confidence, and regulatory inefficiencies, often attributed to governance issues, macroeconomic instability, and inconsistent policy environments. This study critically appraises this problem.

1.3 OBJECTIVES OF THE STUDY

The broad objective of this study is to assess whether the stock exchange market is able to reflect the widely held belief that the market price of shares depends on streams of expected future dividends or corporate earning policy decisions. In other words, to determine whether market prices of shares reflect fundamental values as contained in information released to the public through dividend and earnings policies.

The specific objectives of the study are as follows:

i. To identify the various variables at play in stock price movement at the Nigerian Exchange Group.

ii. To determine the effects of dividend and corporate earning policy decisions on share price movements at the Nigerian stock market.

iii. To determine the relationship among the three variables: dividend, corporate earnings, and stock prices.

To accomplish the above objectives, the study is designed to critically examine the contention that stock prices bear a specific relation to dividends and earnings, as advanced by studies such as that of Owualah, Ogbebor and Moseri (2024) and Afolabi, Ogunleye and Nwachukwu (2022).

1.4 RESEARCH QUESTIONS

The research study will attempt to address the following questions:

iv. What are the effects of dividend payment decisions on stock price movements?

v. What is the relationship between stock prices and corporate earnings?

vi. What are the relationships among the three variables: dividend, corporate earnings, and stock prices?

1.5 HYPOTHESES OF THE STUDY

The hypotheses of the study are as follows:

H₀₁: There is no positive correlation between dividend declaration and stock prices.

H₀₂: Corporate earnings of quoted companies do not have a significant positive effect on share price movements at the stock exchange.

H₀₃: There is no positive relationship among dividend, corporate earnings, and stock prices.

1.6 SCOPE AND LIMITATIONS OF THE STUDY

The fact that only the stock prices of companies quoted on the Nigerian Exchange Group (NGX) are subject to public disclosure requirements makes it imperative that this study is limited to such quoted companies. The study covers a ten-year period from 2015 to 2024 and is based on reports of ten companies drawn from both financial and non-financial institutions. These are companies that filed all their returns with the exchange during this period. Data used for the study were obtained from records maintained by the NGX in respect of share prices and dividend declarations of these ten companies, as well as their published annual reports.

The scope necessarily excludes unlisted companies and is further limited by the availability and completeness of data. The NGX witnessed significant structural transformation during the study period, including its demutualization and rebranding from the Nigerian Stock Exchange (NSE) to the Nigerian Exchange Group (NGX) in 2021 and the subsequent launch of digital market access tools. These structural changes may introduce some degree of data non-uniformity across the study period, which is acknowledged as a limitation.

1.7 SIGNIFICANCE OF THE STUDY

This study will prove to be significant in the following ways:

It is believed that this work will add to the growing body of knowledge on the behavior of stock prices, particularly in the context of an evolving emerging market like Nigeria. It will enable management to shape their dividend policy and increase their earnings when they understand the degree of influence expected from these two variables. The findings of Owualah, Ogbebor and Moseri (2024), for instance, suggest that manufacturing firms should prioritize transparency of earnings reporting and clear communication regarding financial performance to build investor confidence.

It will be a contribution to the already established “Information Content” of dividend hypothesis and the ability of prices in efficient capital markets to reflect fundamental values. Ehiedu and Obi (2022) demonstrated that despite global financial crises, the Nigerian stock exchange has maintained a degree of weak-form efficiency, meaning security prices partially reflect publicly available information, including dividend and earnings announcements.

Moreover, the study will contribute to our understanding of the level of efficiency of the Nigerian Exchange Group and will help assess the issue of rational behavior of investors. Research by Oxford Business Group (2024) on capital market development in Nigeria noted that attracting blue-chip companies to list on the NGX and expanding retail access channels are key drivers for sustaining momentum in Nigeria’s capital market. This study contributes to that discourse by examining how corporate financial decisions affect the attractiveness of listed equities.

There is an unconfirmed belief that investors and dealers in shares hardly undertake rigorous analysis before investment decisions are made. Perhaps, at the end of this study, more light will be shed on this, or the belief will remain unfounded. The study will also be of value to policymakers and regulatory bodies such as the SEC, which continues to prioritize investor protection and market development (Nwatu, Arum & Chime, 2024).

1.8 OPERATIONAL DEFINITION OF TERMS

Securities as used herein refer to equities, popularly referred to as ordinary shares. Owners of those shares are called shareholders. They receive dividends in cash or in kind after all fixed-interest-bearing securities and taxes have been satisfied. Dividends as used in this study take cognizance only of dividends paid in cash. Bonus issues, which increase shareholders’ holdings in companies, are not included because such increases are not a conscious investment by the shareholders; hence, they are excluded. Earnings shall refer only to income earned from trading; therefore, extraordinary items shall be excluded in treating earnings.

Some core concepts used in the study are further defined and simplified below to reflect the context in which they are used:

Price: This refers to the market price of common stock as determined at the dealing session on the NGX. It may also be referred to as a quotation.

Earnings Per Share (EPS): This is the per-share value of the amount remaining after tax and all fixed obligations in terms of interest-bearing assets (e.g., preference shares, loan stock, debentures) have been deducted. It is given by the ratio of profit after tax to the number of ordinary shares in issue.

Dividend: Dividends are payable to shareholders in proportion to the company’s shares they hold. A dividend is a portion of the net profit that has been officially declared by the Board of Directors for distribution to shareholders. Dividend is paid at a fixed amount per share held by the shareholder. As stated above, only cash dividends are recognized in this study, and bonus issues are excluded. Consistent with William, Adeoye and Moseri (2023), dividend relevance to firm value is assessed strictly through cash distributions.

Stock: The interest is in equity or common stocks. Bonds, debentures, preferred shares, and loan stocks are excluded.

Exchange: This refers to the Nigerian Exchange Group (NGX), formerly the Nigerian Stock Exchange (NSE), where the trading of stocks takes place.

Capital Market: This is an institution that facilitates the transfer of medium- and long-term funds from the surplus sector to the deficit sector of the economy. It is concerned with channeling medium- and long-term funds to the productive sectors of the economy for developmental purposes. It encompasses both primary markets (for distributing new securities from issuing firms to the public) and secondary markets (for trading outstanding securities). As affirmed by Uche and Nweze (2024), the capital market plays a crucial role in bridging gaps in access to finance by providing a platform for investors to deploy their funds in productive ventures, ultimately fostering economic growth.

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