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

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 a 5-year period (2019–2024) 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 influence stock prices; rather, 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 investors so as to reduce the agency problem, and thus complete information about the dividend policies of the firm should be provided.

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. Over many decades, financial economists have engaged in modelling and examining corporate dividend policy and earnings as they affect bank stock prices, including those in Nigeria. Oubahou and El Ouafa (2024) confirm that the topic has become a focal point of interest and debate within financial theory, with contemporary empirical studies producing diverse and sometimes conflicting results regarding the factors that influence dividend policies. Black (1976) famously observed that "The harder we look at the dividend picture, it seems like a puzzle with pieces that don't fit together." This observation has proven remarkably enduring. A systematic bibliometric review by Matos et al. (2023), drawing on 270 articles from the Scopus database spanning 1981 to 2022, confirmed that the dividend puzzle remains unresolved, and concluded that dividend policy is, and will continue to be, a hot research topic. Ivașcu (2024), using machine learning approaches to understand dividend behaviour, also affirmed that the puzzle persists, with company size emerging as the most informative determinant of dividend payment likelihood. Kilincarslan (2019), echoed more recently by multiple scholars, similarly concluded that no general consensus has been reached despite extensive research across decades and jurisdictions.

Research on dividend policy and earnings has 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 differ not only across time but also between developed and emerging financial markets. In a global dividend survey, Janus Henderson (2024) observed that emerging markets delivered record dividend payouts for the third year running in 2023, reaching $166.1 billion, yet underlying dividend growth was flat due to divergences across regions. This confirms the observation by earlier scholars that dividend payout ratios and practices in emerging economies follow trajectories different from those in developed markets.

Different scholars have defined the term dividend policy differently. Mohapatra and Panda (2022) defined dividend policy as the internal yardstick a company uses to decide how much of its income it will distribute to shareholders, and identified it as one of the core decisions in corporate finance. Leary and Nukala (2023), in the Handbook of Corporate Finance, examined corporate dividend policy in depth, reinforcing the view that dividend decisions involve a complex trade-off between retaining earnings for investment and distributing cash to shareholders. Ajiboye, Bosun-Fakunle, and Olowookere (2024), studying Nigerian listed deposit money banks over the period 2011 to 2022, described dividend policy as encompassing the quantum, timing, and consistency of earnings distributed to shareholders, noting that these decisions directly influence market value. Yahaya (2024), in a study of Nigerian deposit money banks, measured dividend policy through dividend payout ratio and dividend yield and found significant positive effects on shareholders' wealth and stock prices.

Huda and Farah (2011) had earlier pointed out that dividend policy has been an issue of interest in financial literature, with academics and researchers developing many theoretical models describing the factors that managers should consider when making dividend policy decisions. This remains equally true today. Lintner (1956) suggested that the dividend payment pattern of a firm is influenced by the current year's earnings and the previous year's dividends, a model whose applicability to recent emerging markets has been confirmed by De Souza Junior et al. (2024) studying G20 emerging economies and by Kanojia and Bhatia (2023) studying emerging economies including India, Brazil, China, and Taiwan. In this context, dividends may be seen as the free cash flows remaining after all business expenses have been met. The dividend decision in corporate finance is made by the directors of a company and relates to the amount and timing of cash payments made to stockholders.

The decision, as long established in the literature, is an important one for the firm as it may influence the firm's financial structure and stock price. The dividend payment ratio is a major aspect of the dividend policy of the firm, which affects the value of the firm to shareholders. The classical school of thought holds that dividends are paid to influence share prices and that the market price of equity represents the present value of estimated future cash dividends the so-called bird-in-hand argument rooted in Gordon (1959). Kowerski and Haniewska (2022) revisited the Miller–Modigliani (1961) dividend irrelevance theorem, noting that while in an ideal perfect market dividend policy would not affect firm value, in reality dividend announcements carry information that can materially influence investor perceptions and stock prices. This aligns with empirical findings by Oge and Olaoye (2024), who studied twelve Nigerian banks and found that both dividend per share (DPS) and earnings per share (EPS) have statistically significant positive impacts on share prices, with DPS exerting a stronger influence than EPS.

Retained earnings provide funds to finance the firm's long-term growth and represent the most significant internal source of investment financing. Dividends are typically paid in cash, meaning distribution of earnings utilises the firm's available liquidity. When a firm increases the retained portion of net earnings, shareholders' current dividend income decreases, but the use of retained earnings to finance profitable investments is expected to increase future earnings and capital gains. On the other hand, when dividends increase, shareholders' current income rises but the firm may relinquish investment opportunities and future earnings growth. This fundamental tension remains a key consideration in corporate payout decisions (Dabboussi, 2024).

The theoretical rationale for corporate dividend policy has been an important topic in corporate finance for a very long time. Following the dividend policy-irrelevance proposition of Miller and Modigliani (1961), several theories have attempted to explain why and how companies pay out the cash generated by their business operations as dividends. Three main factors may influence a firm's dividend decision: free cash flows, dividend clientele, and information signalling (Leary & Nukala, 2023). Under the free-cash flow theory of dividends, the firm simply pays out as dividend any surplus cash after investing in all available positive net present value projects. Dabboussi (2024), studying 120 firms on the Saudi Stock Exchange from 2011 to 2021 and using a Generalised Least Squares regression model, confirmed that the presence of agency costs of free cash flows can limit the funds available for dividend payments, and that long-term debt plays a moderating role in making more prudent use of free cash flow. A criticism of the free cash flow theory is that it does not explain the relatively consistent dividend policies observed in practice, as most companies tend to pay steadily increasing dividends rather than dividends that fluctuate dramatically from year to year.

Under the dividend clientele theory, a particular pattern of dividend payments may suit one type of stockholder more than another. A retired investor may prefer a firm providing consistently high dividend yield, while an investor with a high employment income may prefer to avoid dividends due to their higher marginal tax rate on income. If clientele exist for a particular dividend payment pattern, a firm may be able to maximise its stock price and minimise its cost of capital by catering to a particular clientele. Recent evidence by Chatterjee, Dutta, and Basu (2024), studying stock price behaviour around dividend announcements in an emerging market, confirmed that dividend clientele effects and information signalling both play roles in investor reaction. They found that firms with higher promoter shareholding gain less on dividend announcements, providing nuanced support for clientele theory in the context of an emerging market capital environment.

Information content, or signalling theory, holds that investors regard dividend changes as signals of management's assessment of the firm's future earnings potential. Kanojia and Bhatia (2023), examining signalling effects across 4,630 company-year observations in four emerging economies from 2010 to 2020, found that the Indian market shows particularly strong intensity in dividend signalling, though the pattern differed across Brazil, China, and Taiwan. This cross-country heterogeneity reinforces the importance of institutional context. A study published in the Review of Quantitative Finance and Accounting (2023) provided further evidence supporting the signalling hypothesis in emerging markets, finding a strong association between dividend increases and future earnings. Singh (2024), examining listed Indian non-financial firms using panel data from 2001 to 2022, found that dividend-paying firms exhibit lower earnings management than non-payers, and that dividend size and continuity signal higher reported earnings quality consistent with the core premises of signalling theory. Moreover, Hando and Dima (2024) provided evidence of the connection between market information efficiency and corporate payout signalling, reinforcing that dividend announcements convey material information to investors pricing stocks.

Hence, the purpose of this study is to perform a cross-sectional empirical investigation into how these theoretical propositions apply in the Nigerian context, and to determine how stock prices of Nigerian banks react to dividend and earnings information, as reflected in investor ratio values such as dividend yield, earnings yield, and payout ratio.

1.2 STATEMENT OF PROBLEM

The goal of corporate entities is to maximise 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 minimises the firm's cost of capital, while dividend decisions determine the reward that investors receive from their shareholding. Apart from investment and financing decisions, managers must decide, on a regular basis, whether to pay out earnings to shareholders, partly to reduce the agency problem inherent in the separation of ownership and control (Jensen and Meckling, 1976). Dabboussi (2024) confirmed that agency cost considerations continue to play a central role in shaping dividend distribution decisions, particularly in concentrated ownership environments. However, the question remains whether paying out earnings essentially creates value for shareholders or not.

A great deal of theoretical and empirical research on dividend policy effects has been conducted over the last several decades. The economic argument for investor preference for dividend income dates back to Graham and Dodd (1934), and was formalised into the dividend relevance school of thought by Walter (1963) and Gordon (1959; 1962). The opposing viewpoint that dividend policy is irrelevant in a perfect capital market was advanced by Miller and Modigliani (1961). The enduring tension between these perspectives was vividly illustrated by Kowerski and Haniewska (2022), who tested the M-M dividend irrelevance theorem on the Warsaw Stock Exchange and found that results varied by year, with partial support for the theory in some periods and significant anomalies in others, particularly during the COVID-19 period. Similarly, Nguyen et al. (2024), comparing M-M's dividend irrelevance theory in Vietnam and Singapore from 2018 to 2022 using fixed-effects regression, found a statistically significant relationship between dividend policy and firm market value negative in Vietnam but positive in Singapore demonstrating that market context fundamentally conditions how dividend policy affects stock prices.

In the Nigerian context, recent empirical studies have generated similarly divergent findings. Ajiboye et al. (2024) found that dividend payout had a positive and significant influence on the market value of Nigerian deposit money banks over the period 2011 to 2022. Conversely, Oge and Olaoye (2024), focusing on the same banking sector, found that both DPS and EPS significantly and positively affect share prices, with dividend per share exerting a dominant role. The comprehensive determinants study by Ebi et al. (2024), covering Nigerian banks from 1987 to 2022, found that bank size, profitability, and liquidity are positive drivers of dividend payout ratio, while macroeconomic volatility introduces negative pressures. These studies collectively suggest that the relationship between dividend policy, earnings, and stock prices in Nigerian banks is nuanced, context-dependent, and not fully resolved.

Given the above problems and the ongoing controversies surrounding the impact of dividend policy and earnings on stock prices of Nigerian banks, the lacuna which this study seeks to fill is to provide empirical evidence using investment ratios such as dividend yield, earnings yield, and payout ratio with the introduction of control variables in an emerging market context. Hence, the contribution of this study is both in terms of geography and methodological breadth.

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.

1.4 RESEARCH QUESTIONS

As a result of the objectives stated above the following research questions will be addressed:

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

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

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

1.5 RESEARCH HYPOTHESES

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

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

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

3. Dividend payout ratio does not have a 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 and is responsible for the supply of funds to the productive sub-sectors of the Nigerian economy, hence its importance to overall economic growth. Udoh, Ukpe, and Abam (2025) confirmed through an ARDL model covering 1993 to 2023 that capital market development and banking sector performance are significantly co-integrated in the long run, underscoring the systemic role of Nigerian banks in the capital market. The study covers a five-year period (2019–2024). This period reflects the post-consolidation era and captures recent developments in the Nigerian banking sector. The financial statements and accounts of these banks were published annually from 2019. Panel data series were collated from the Annual Statements and Accounts as well as stock prices of these banks from the Nigeria Stock Exchange at the end of each year.

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 firm value as indicated by share prices are investors and potential investors. Their monetary contributions to the promotion, incorporation, and growth of the firm must be rewarded with a premium above the risk-free rate, compensating them for both time and risk. Yahaya (2024) demonstrated in the Nigerian banking context that dividend policy significantly affects shareholders' wealth, confirming the relevance of dividend decisions to investor objectives. Therefore, this research will contribute, alongside other available literature in this area of finance, to enhancing the maximisation of investors' and potential investors' objectives as they concern capital gains.

2) ACADEMIC

This research intends to contribute significantly to the volume of literature available in this area of finance, specifically in the Nigerian and West African context. Matos et al. (2023) noted in their bibliometric review of dividend policy literature that the United States dominates dividend research, leaving a significant gap in studies from African and other emerging economies. This study addresses that gap. As a contribution to this area, insights and recommendations on dividends, earnings, and stock prices will be examined in a manner that advances understanding of an important but underexplored institutional setting.

3) MANAGEMENT

In large firms, there is a divorce between management and ownership. Decision-making authority lies in the hands of managers, yet shareholders as owners are the principals and managers are their agents. This principal-agent relationship generates the agency problem identified by Jensen and Meckling (1976), which remains central to understanding corporate financial decisions. Dabboussi (2024) confirmed that reducing agency costs through appropriate dividend policy is a key motivation for payout decisions in modern corporations. Therefore, this research will enable management to understand how to act in the best interest of shareholders when choosing dividend policies that maximise shareholders' value, reduce informational asymmetry, and strengthen investor confidence in the Nigerian banking sector.

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