firm size, profit after tax and dividend policy of quoted manufacturing companies in nigeria
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INTRODUCTION
About 50 years ago, Melton Miller and Franco Modigliani (1961) started a controversy that up
to the present, the issues seem as if they were muted yesterday. A search in many finance
journals local and international will immediately reveal that the concept of dividends and
dividend p olicy are on the hot pen of finance and economic researchers/academicians.
The debate initially was whether the proclamation of Miller and Modigliani (MM) in 1961 that
dividend policy is irrelevant under certain contestable assumptions holds.
At first, the issue was and still is on the relationship between dividend payout policy and the
value of the firm. In the process of determining the nature of this relationship, issues as to
whether dividend policy impacts on the capital structure and investment decisions of firms
arose.
At a point, in recognition of the fact that in reality investors can not wish away: taxes,
transaction costs, information asymmetry, agency costs, and many more factors that MM based
their assumptions on, researchers started in search of factors/determinants of dividend payout
policy of firms. Several factors such as: firm size, profitability, investment policy, past dividend
payout, corporate governance/ agency costs, taxation, ownership structure, leverage, growth,
risk, cash flow and others were examined.
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With time, several theories came on stream to explain why and how companies pay dividend.
Mention is made here of theories like:
Dividend irrelevance theory,
The life-cycle theory,
The catering theory,
The pecking order theory,
Agency theory,
Separation theory etc.
These discussions on dividends and dividend policy have also produced insights as to what firms
do with respect to dividend payout policy. Every finance student passes through such
pedagogical issues like:
Full payout policy
A bird in the theory
Constant payout ratio
Small plus extra dividend policy
Clientele effect
Stock dividends
Stock repurchases
And many more concepts geared towards the explanation of firms dividend behavior.
However, Fisher (1976) overwhelmed by the growing number of issues and magnitude of the
debate wrote in his dividend policy puzzle article that the debate has turned into a puzzle and
asked: what should corporations do about dividend policy?
To resolve the puzzle according to Frankfurter and Wood (1997), dividend policy of firms
should be seen as a cultural phenomenon that changes continuously according to environment
and time. Thus, dividend behavioral models must necessarily be continuously modified to
capture those factors that are peculiar to a particular period and environment. After all, as
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Adelgan (2003) indicate, the assumption of constant response coefficient is unrealistic. This is
because the response coefficient is affected by firm-specific, industry-specific and economic
factors which are dynamic in nature.
Possibly because of this understanding, several researchers are concentrating on individual
country analysis and/or regional analysis while a few are concerned with industry and firm
specific analysis. For instance, Manoj (2004) dwelt on the factors influencing dividend policy
decisions of corporate India, Kaczynski (2005) studied the determinants of capital structure of
Japanese companies. Also, Eriotis and Vasiliou (2005) investigated the effect of distributed
earnings and size of firm to its dividend policy in Greece. Von Eije and Magginson (2006)
studied the dividend policy of firms in the European Union while Kenwal (2008) wrote on the
determinants of dividend payout ratios of the Indian information technology sector. More
researchers like Sexena (2009) wrote on the determinants of dividend payout policy of regulated
and unregulated firms. Bancel et al (2009) concentrated on the cross-country determinants of
payout policy of European firms while Musa (2009) analyzed the dividend policy of firms in
Nigeria. Furthermore, Hafeez and Attiya (2009) studied the determinants of dividend policy in
Pakistan with Kapoor (2009) dwelling on the impact of dividend policy on shareholders value
in India while Okpara (2010) diagnosed the determinants of dividend policy in Nigeria using
factor analytical approach. Other studies include: Gil and Joseph (2005), Walter et al (2006),
DeAngelo and DeAngelo (2007), Baker(2009), Magni and Velozpareja (2009), Franc-Dabroska
(2009), Jungsub lee (2009), Kumari et al (2009), Tamule and Rambo (2009), not forgetting
Brave et al (2005) who wrote on payout policy in the 21 st century.
All these efforts however, have not yielded the desired resolution. According to Sexena (2009),
the issue as to why firms pay dividend is as yet unresolved. There is lack of unanimity among
researchers though everyone agrees that the issue is important as dividend payment is one of the
most commonly observed phenomenon in corporations worldwide.
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These studies also purposed to study the capital market as a whole even as they made general
conclusions on the factors affecting dividend policy decisions not minding that countries differ,
industries differ, even companies differ whether in same sectors or not.
Therefore, the present study, though a study on dividend policy is an exclusive analysis of the
dividend policy of quoted manufacturing companies on the Nigerian Stock exchange. The study
investigates the impact of firm size, past dividend and earnings after tax on dividend policy
decisions of manufacturing companies in Nigeria.
Following from the above introduction, the next section explores related Literature review -
conceptual and empirical. Next we present the methodology adopted in this study. This will be
followed by the analysis of data and interpretation of findings and finally concluding remarks
are presented.
REVIEW OF RELATED LITERATURE
Many researchers have provided insights, theoretical as well as empirical into the dividend
policy puzzle. However, the issue as to why firms pay dividends is yet unresolved.
Pontifications for a corporate dividend policy have been proposed in the literature, but there is
no agreement among researchers. Everyone however, agrees that the issue is important as
dividend payment is one of the most commonly observed phenomenons in corporations
worldwide. Thus, the importance of dividend policy cannot be over emphasized.
Researchers have found that firms use dividends as a mechanism for financial signaling to
investors regarding the stability and growth prospects of the firm. Again, dividends play an
important role in a firms capital structure. Yet s ome studies have established relationships
between firm dividend and investment decisions. According to the residual dividend theory, a
firm will pay dividends only if it does not have profitable investment opportunities, i.e. positive
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net present value projects. Further, a firms stock price is affected, among other things, by the
dividend pattern. Firms usually do not like to reduce or eliminate dividend payments
(Woodridge and Gosh, 1988, 1991); hence, they make announcements of dividend initiation or
increase only when they are confident of keeping up with their good performance. Indeed, the
market value of a firm is dependent upon its stock price. One of the most popular models for
stock valuation (the dividends discounting models) relies upon the assumption that the firm will
pay dividends until eternity.
Black (1976) in his study posed this question: What should the corporation do about dividend
policy? Researchers have proposed many different theories about the factors that influence a
firms dividend policy. A number of factors have been identified in previous empirical studies to
influence the dividends policy decisions of firms. These include:
Profitability
Risk
Cash flows
Agency costs
Growth
Ownership
Taxes
Price earning ratio
Leverage
Size of firm etc
EMPIRICAL FRAMEWORK
Profits have long been regarded as the primary indicator of the firms capacity to pay dividends.
Lintner (1956) concluded a classic study on how U.S managers make dividend decisions. He
developed a compact mathematical model based on survey of 28 well established industrial U.S
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firms which is considered to be a finance classic. According to him, the dividend payout pattern
of a firm is influenced by the current year earnings and previous year dividend. Baker, Farelly
and Edelman (1986) surveyed 318 New York stock Exchange ( NYSE) firms and concluded that
the major determinants of dividend payments are anticipated level of future earning 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 profits are important factors influencing dividend
payments. Baker and Powell (2000) conclude from their survey of New York Stock Exchange
(NYSE) listed firms that dividend determinants are industry specific and anticipated level of
future earnings is the major determinant. Pruitt and Gitman (1991) find that risk (year to year
variab ility of earnings) also determine the firms dividend policy. A firm that has relatively
stable earnings is often able to predict approximately what its future earnings will be. Such a
firm is more likely to pay a higher percentage of its earnings than firms with fluctuating
earnings. In other studies, Roseff (1982), Lloyd et al (1985) and Collins et al (1996) used beta
value of a firm as an indicator of its market risk. They found statistically significant and negative
relationship between beta and dividend payout. Their findings suggest that firms having higher
level of market risk will payout dividends at lower rate. D Souza (1999) also finds statistically
significant and negative relationship between beta and dividend payout. The liquidity or cash
flow position is also an important determinant of dividend payouts. A poor liquidity position
means less generous dividends due to shortage of cash. Alli et al (1993) reveal that dividend
payments depends more on cash flows, which reflect the companys ability t o pay dividends
than on current earnings, which are less heavily influenced by accounting practices. They claim
that current earnings do not really reflect the firms ability to pay dividends. Green et al (1993)
questioned the irrelevance argument and investigated the relationship between the dividends and
investments and financing decisions. Their study showed that dividend payout levels are not
totally decided after a firms investment and financing decisions have been made. Dividend
decision is taken along with investment and financing decisions. Partington (1983) revealed that
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firms use target payout ratios, firms motives for paying dividends and the extent to which
dividends are determined are independent of investment policy. Higgins (1981) indicates 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.
Higgins (1972) shows that payout ratios are negatively related to firms needs to finance growth
opportunities. Rozeff (1982), Lloyd et al (1985) and Colions et al (1996) all show significantly
negative relationship between historical sales growth and dividend payout. D Souza (1999)
however shows a positive but insignificant relationship in the case of growth and negative but
significant relationship in the case of market to book value. Crutchley and Hansen (1989)
examine the relationship between Ownership, dividend policy and leverage and conclude that
managers make financial policy trade offs to control for agency costs in an efficient manner.
Smith and Watts (1992) investigated the relations among executive compensation corporate
financing and dividend policies. They conclude that a firms dividend policy is affected by its
other corporate policy decisions. In addition, Jensen, Solberg and Zorn (1992) linked the
interaction between financial policies and insider ownership to information asymmetries
between insiders and external investors. They employed a simultaneous system of equation and
found that corporate financial decisions and insider Ownership are interdependent. Atul and
Saxena (2009) conclude that a firms dividend policy will depend upon its past growth rate,
future growth rate, systematic risk, the percentage of common stocks held by insiders, and the
number of common stockholders. However, the established relationships were all negative
except for number of common stockholders.
Uzoaga and Alozieuwa (1974) investigated the pattern of dividend policy pursued by a sample
of 13 companies in Nigeria within four years (1969-1972). The study concludes that the change
in the level of dividend paid by companies could best be explained by fear and resentment rather
than the conventional factors used in the Lintners mode l. This conclusion was challenged by
later studies such as Inanga (1975, 1978), Soyode (1975), and Oyejide (1976). They criticize the
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study for its failure to empirically test the contribution of conventional factors to change in
dividend of the affected companies. I think Inanga, Soyede and Oyejide missed their argument.
Note that the period (1969 -1972) was a war time period in Nigeria. The question is what
statistical tests will a study that covered only four years produce? Four years is not enough for a
company to go one cycle and using results from such test will not compare favourably or do I
say reasonably with Lintners model that used data spanning several years and the number of
companies included in the study far outnumber that of Uzoaga and Alozieuwa. Similarly,
Inanga (1975) and Soyode (1975) also failed to empirically investigate the extent to which
Lintners model could be used to explain the dividend policy of the companies in Nigeria. The
two studies rather advanced both conventional and non-conventional factors such as excess
liquidity resulting from the infusion of new capital and the unrealistic pricing policy of the
Capital Issues Commission (CIC) as explanation for the change on dividend behaviour of their
sampled companies.
Oyejide (19 76) empirically tested Lintners Model as modified by Britain (1966). His study
covered 8 years (1968-1976) and included 19 companies. The study found strong support for
Lintners model in Nigeria. Oyejide (1976) found support in later studies of Izedonmi and Eriki
(1996) and Adelagan (2003). Adelagans study is more interesting as it covered a period of 13
years (1984-1997) against 5 years for Izedonmi and Eriki. Adelegan (2003) re-evaluated the
incremental information content of cash flow in the modified L intners model. Musa (2005)
Criticized both Lintners and Rozeffs Model with their modifications on the basis of the fact
that the model was predicated on the assumption of constant response coefficient implying that
investors react identically to all explanatory indices of firms. As Adelagan (2003) and others
indicate, the assumption of constant response coefficient is unrealistic. This is because the
response coefficient is affected by firm specific, industry- specific and economic factors which
are dynamic in nature.
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Well, since according to Frankfurter and Wood (1997) dividend policy of firms is a cultural
Phenomenon that changes continuously according to environment and time, dividend behavioral
models must necessarily be continuously modified to capture those factors that are peculiar to a
particular period and environment.
Musa (2005) claimed to have developed a different model. He called it the parsimonious
approach. However, according to Lee (2002) and others, his parsimonious approach does not
guarantee a conclusion and if based on incorrect working hypotheses or interpretations of in-
complete data, may even strongly support a false conclusion. Considering the fact that he
admitted to have manipulated his sample selection of firms, the result of his study cannot be
relied upon. To expanciate, he selected firms with positive earnings, firms that paid dividend
during the period under study, those with record of cash flows and those firms with record of
capital spending.
This study however, adopts the Lintners Model as modified. The study among other objectives
will establish the firms specific and industry- specific nature of dividend policy decisions
among manufacturing companies in Nigeria
METHODOLOGY
The objective of this study is to investigate the dividend policy of manufacturing companies in
Nigeria. The population of this study comprises all the quoted manufacturing companies at the
Nigerian stock exchange (1989- 2005). These are spread across the different sectors based on the
Nigerian Stock Exchange (NSE) classifications. They also cut across different types of
production / products. A total number of 17 companies entered into the analysis in this study.
All the data used were sourced from the Nigerian stock exchange (NSE) fact book several
issues.
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MODEL SPECIFICATION AND MEASUREMENT OF VARIABLES
MODELS OF DIVIDEND POLICY
John Lintner (1956) in a study of 600 firms out of which he chose to interview and survey 28
focused on how corporate managers decide on dividend policies of their companies. Out of the
many observations Lintner made, one important conclusion is that companies have a long-run
target dividend payment ratio ( Nikolaos (2005) ).
In his analysis, Lintner developed a partial adjustment model that captures his
findings.
According to Lintner in Eriotis (2005), each firm has a target dividend payout ratio
(r i). Using this payout ratio, Lintner computed the expected target dividend at time
t (D it) as a proportion of the real earnings of the firm i at time t (E it ). That is:
D it = r iEit-------------- (1)
However, as observed by Eriotis (2005), in the real world the dividend which the
firm finally pays at time t, D it differs from the expected one D* it. Therefore, he
suggested that it is more reasonable to model the change between the actual
dividend at time t and time t-i, instead of the actual dividend at time t only.
Furthermore, taking the change in actual dividend into account, it is realistic and
consistent with the long- run target payout ratio, to assume that the actual change
in dividend at time t, (D it- D i t-I) equals to a constant portion (D i) Plus the speed
with which the dividend at time t-I, has adjusted to the target dividend at time t
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(D it- D it-i). Since the expected dividend at time t is a proportion of the real earnings
at time t, the final model is given as:
D it - D it-I = i + C iriEit - C iD it-i . (2 )
Where:
D it = Actual dividend at time t
E it = Earnings of the firm during time t
Ci
= the adjustment factor (measures the speed of adjustment of dividend
to optimal target dividend at time t)
ri = the target payment ratio
To estimate this theoretical model, the economic model below is applied.
D it = i + 1E it + 2D it-I + E it.. (3 ) Where
D it = Change in dividend from time t-I to time t for firm i
1 = C i x r i in equation 2 2 = variable C i in equation 2E it = the error term
Lintner reported an 85% explanatory power when the above model was applied.
Thus dividend changes in his sampled companies is explained 85% of the time by
the independent variables of earnings and past dividend.
Fama and Babiak (1968) reviewed the performance of Lintners model. Using 392
companies over a period of 18 years (1946- 1964), they tested Lintners model wit h
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their data and methodology and found that it performed well but noted that it can
perform better by introducing the lag of earnings and removing the constant term.
Another way to derive equation 3 above as used in the Literature is the adaptive
expectations model. This model assumes that the dividend at time t is given by a
proportion (K i) of the long-run expected earnings at time t (E it) Plus a disturbance
term (v it).
D it = K i E it + V it (4 )
In addition, the model assumes that the changes at time t in long-run expected
earnings (E it*-E it-i) can be expressed as a proportion i of the change between the
actual earnings at time t and the expected long- run earnings at time t-I (E it E it*)
That is
E*it E*
it-I = iE it E*
it-i (5 )
However, if the successive earnings changes are independent, the optimal value of
i is one (full adjustment). The assumption here is that the change in dividend (D it
D it-i) is equal to a constant portion i plus the proportion K i of the actual earnings
E it minus the dividend at time t-I .
D it D it-I = i + K iEit - D it-I + V it (6 )
Nevertheless, Fama and Babiak (1968) suggest that the adaptive expectations
model appears to be an inappropriate specification to their sample.
Joannos and Filippas (1997) examined the dividend policy of 34 companies listed
in the Athens stock exchange during the period 1972-1988. Their results conclude
that Lintners model best describes the dividend policy of the firms. They
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identified current profits as the most important variable that tends to influence
changes in dividends while the previous dividends also significantly influence the
changes in the dividend policy of firms.
Eriotis and Vasiliou (2003) and Vasilious and Eriotis (2005) test the model of
Lintner and suggest two different versions that they say improves on the Lintners
model.
Their firs model considered as dependent variable the change in dividend between
time t and time t-1 and as independent variables, the change in earning of the firm
between time t and t-1 and the change in dividend between time t-1 and t-2.
D it = i + 1 E it + 2 D i,t-1 +u it.(7 )
Where:
D it = the dividend of the firm i at time t
E it = Net income of firm i available for stockholders at time t
D it = Change between dividend at time t and time t-1 ie (D it-D it-1)
E it = Change in net income at time t (E it- E it-1 )
u it = error term.
The second variant of their model considers the variables but without the change
or rather their lags.
D it = i + 1E it + 2D it-i + E it.. (8 )
Their findings in (2003) suggest that dividend payout of firms depend upon the
firms long -run target dividend that is adjusted according to the net earnings of the
firm.
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Vasilious and Eriotis (2005) extended their 2003 study by introducing Size as
measured by sales of the firm along Earnings and the lags of dividend and
earnings. According to them, sales include both the risk of company and the
related bankruptcy cost. They observe that large companies are more independent
and less risky than small firms which make them more attractive to investors.
They use data between 1996 and 2001 and a sample of 49 companies resulting to a
Panel data with 718 observations excluding some missing data.
They employ econometric methods designed for Panel data in the analysis of their
data. The use of Panel data models is a powerful research instrument, since it
combines the cross- sectional data with time series data, and provides results that
could not be estimated and studied if only time series or cross- sectional data were
used. A general model for panel data that allows the researcher to estimate panel
data with great flexibility and formulate the difference in the behaviour of the
cross- section elements is theoretically given as:
Y it = x it + Z it + E it.. (9 )
Where:
Y it = is the dependent variable
X i = is the matrix with the independent variables
Z i = is a matrix of constants terms and a set of individual or group specific
variables which may be observed or unobserved.
If the matrix Zi
can be observed, for individuals, then the least square method
gives efficient and consistent estimators
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Three considerations are pertinent in this analysis of panel data.
1. The pooled regression considers that Z i contains only a constant term. In this
case, the ordinary least square method provides an efficient and consistent
estimate for the and the coefficients.
2. If Z i is unobserved and correlated with the independent variables, then the
least squares estimator of is biased and inconsistent, as a result of an
omitted variable. The Fixed effects method takes tho se problems into
account and gives an unbiased and consistent estimate of and .
3. If the unobserved individual effects can be formulated and under the
assumption that these observations are uncorrelated with the independent
variables, the econometric model can be estimated by the random effects
method. Vasilious and Eriotis (2005).
The findings of Vasilious and Eriotis (2005) conclude that firm earnings and size
are capable of explaining 95.4% of the dividend policy decision of firms when
cross- sectional weights are considered.
Following previous studies starting with Lintner (1956) through Eriotis and
Vasilious (2005), Dividend in this study is measured by the Naira Payment as
recorded in the companies annual accounts. In this study, dividend is the
dependent variable and is hereby referred to as DIV.
Other variables in this study include
Profit after Tax PAT
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Size SIZ
Previous Dividend DIV t-I
Size is used here to represent
A) the cost of issuing new equity and
B) Increases in Investment opportunity
Deriving from the above discussion, the model for estimation in this study is given
as follows:
DIV= F (PAT, SIZ, DIV t -1) .. (10)
Where :
DIV, PAT, SIZ and DIV t-I, are as defined above.
This study tests the explanatory power of a model based on the profit after tax
(PAT) of the firm and its size (SIZ) and introduces the lags of PAT and Dividend.
Thus:
D it = i + 1 PAT it + 2 SIZ it + 3DIV it-1 + 4PAT it-1 +E it . (11)
EMPIRICAL RESULTS
The econometric model specified above is estimated by using the common, the
fixed effects and the random effect model and are presented below:
TABLE 1: RANDOM EFFECTS MODEL
Model D it = i + 1 PAT it + 2 SIZ it + 3DIV it-1 + 4PAT it-1 +E it
Mothod Random effect (GLS, Variance Components
Coefficient T-Stat Prob. (t.Stat) Stand. ErrorConstant 0313.15 0.997470 0.3195 10339.31PAT it 0.569208 10.50597 0.0000 0.054180
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as a factor determining dividend policy of manufacturing firms. All other variable
were significant at the 95% confidence level. Overall, we can conclude that the
random effects model has great explanatory power but there seems to be the
presence of individual effects that made the constant term insignificant in our
estimations. Therefore we test for fixed effects model.
TABLE 3: FIXED EFFECTS MODEL
Model D it = i + 1 PAT it + 2 SIZ it + 3DIV it-1 + 4PAT it-1 +E it
Method FIXED EFFECTS (GLS CROSS SECTION WEIGHTSCoefficients Stand. Error T-Stat Prob
SIZ 0.002487 0.002584 0.962267 0.3369PAT 0.359490 0.038049 9.448067 0.0000DIV(-1) 0.783641 0.095409 8.213502 0.0000PAT(-1 - 0.162841 0.033311 -4.888571 0.0000R2 adj. 0.938489f-stat 1298.459S.E 286359.3
The results of the fixed effects model slightly improved our earlier estimation
results. The explanatory power of the fixed effects model increased to 0.943 and
0.938 for R 2 and R 2 adjusted respectively. Nevertheless, the coefficient of size
remained insignificant but with a positive sign. Apart from size, all other
coefficients are significant at the 95% confidence level and maintained their signs.
Going by the result of the three different estimations in this study, profit after tax
is statistically significant and maintained a positive sign throughout. Thus, the
greater the profit after tax, the more the dividend payout and vice versa.
The variable size showed mixed results. It was statistically significant when
Random effects (GLS variance components) model was used. This model however
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established or rather confirmed our expectation that size has a negative
relationship with dividend payout. The higher the size of a firm, the greater the
need to finance its assets with earnings and thus the lower the dividend payout.
Using common coefficients (Gls Cross- Section Weights) model, size was
insignificant but maintained its negative sign. On the other hand, the estimation
using fixed effects (Gls Cross- Section weights) model produced a positive
relationship between Size and dividend payout but the relationship was statistically
insignificant. This positive relationship can be explained when size is seen as a
measure of the cost of issuing new equity. Obviously, the larger the size of a firm
the more appeal it has for investors. In terms of risk, the bigger the firm, the less
risky investors perceive it to be and thus the cost of issuing new equity by bigger
firms are lesser than that of small firms.
Borrowing from Eriotis and Vasilious (2005), the test for long- run target dividend
payout ratio shows that for past dividends, there is a positive and significant
relationship with dividend payout. Thus manufacturing companies considers past
dividend in determining what dividend to pay at time t. Past profit after tax
however showed a negative and significant relationship with dividend payout.
Eriotis and Vasilious (2005) explained this phenomenon by implying that a
positive change in profit after fix has a negative impact on dividend payout
because even though firms are increasing their earning, they try not to change their
dividend policy, at least for the short- run.
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HAUSMAN TEST
Apart from the common effects model, two important approaches were used in this
analysis; the random effects model and the fixed effects model. However, the
question of which approach best suites our purpose arises. To take a decision on
which one best fits our model, we conducted the Hausman Test.
A widely used class of tests in econometrics is the Hausman test. The underlying
idea of the Hausman test is to compare two sets of estimates, one of which is
consistent under both the null and the alternative and another which is consistent
only under the null hypothesis. A large difference between the two sets of
estimates is taken as evidence in favor of the alternative hypothesis.
The null is that the two estimation methods are both OK and that therefore they
should yield coefficients that are "similar". The alternative hypothesis is that the
fixed effects estimation is OK and the random effects estimation is not; if this is
the case, then we would expect to see differences between the two sets of
coefficients.
Again, the random effects estimator makes an assumption that the fixed effects
estimator is not ok. If this assumption is wrong, the random effects estimator will
be inconsistent, but the fixed effects estimator is unaffected. Hence, if the
assumption is wrong, this will be reflected in a difference between the two set of
coefficients. The bigger the difference (the less similar are the two sets of
coefficients), the bigger the Hausman statistic.
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A large and significant Hausman statistic means a large and significant
difference, and leads to the rejection of the null that the two methods are OK in
favour of the alternative hypothesis that one is OK (fixed effects) and one isn't
(random effects). The full test result using Eviews 7.0 is presented below.
The result of the Hausman test from table 4 above is inconclusive. We fail to reject
both models, and conclude that the data do not provide enough information to
discriminate between the two models.
CONCLUSIONS
This study analyzed the aggregate impact of profit after tax (PAT), Size (measured
by total assets), Past dividend and past PAT on the dividend policy of quoted
manufacturing companies in Nigeria.
Table 4: CORRELATED RANDOM EFFECTSHAUSMAN TEST
Test cross-section random effects
Test SummaryChi-Sq.Statistic Chi-Sq. d.f. Prob.
Cross-section random 0.000000 4 1.0000
Cross-section random effects test comparisons:
Variable Fixed Random Var(Diff.) Prob.
DIV?(-1) 0.587161 0.942951 0.020194 0.0123PAT? 0.558543 0.566684 -0.025305 NAPAT?(-1) -0.088121 -0.346252 -0.032065 NASIZ? -0.014911 -0.025963 -0.000031 NA
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23
The empirical findings of the model estimated in this study suggest that profit
after tax and size of the firm play a significant role in the determination of
Manufacturing Companies dividend policy. This is because the model provides a
significant estimation with explanatory power of 94.3% when cross- section
weights and characteristics groups are taken into account.
Thus the study concludes that manufacturing Companies in Nigeria have a
dividend policy to distribute each year, dividend according to their target payout
ratio, which is adjusted given the level of profit after tax and size of the firm.
Finally, no one model can successfully exhaust all the issues in a research of this
nature. Therefore, this study suffers from the disadvantage of confirmatory
specification as it has the tendency of omitting other important variables.
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24
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