TABLE OF CONTENT
Title page
Approval page
Dedication
Acknowledgment
Abstract
Table of content
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
1.2 Statement of problem
1.3 Objective of the study
1.4 Research Hypotheses
1.5 Significance of the study
1.6 Scope and limitation of the study
1.7 Definition of terms
1.8 Organization of the study
CHAPETR TWO
LITERATURE REVIEW
CHAPETR THREE
3.0 Research methodology
3.1 sources of data collection
3.3 Population of the study
3.4 Sampling and sampling distribution
3.5 Validation of research instrument
3.6 Method of data analysis
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS AND INTERPRETATION
4.1 Introductions
4.2 Data analysis
CHAPTER FIVE
5.1 Introduction
5.2 Summary
5.3 Conclusion
5.4 Recommendation
Appendix
Abstract
Corporate governance (CG) safeguards shareholders’ portfolios and ensures optimal returns in terms of dividend policy (DPs) on investment. The association between CG and DPs could be significant in relation to risk exposure, operational and financing activities across firms and sectors. The relationship between CG and DPs has been well documented, however; the role of industry classification on the relationship has not been given adequate consideration in the literature. This study, therefore, examines the moderating effects of sector classification of CG on DPs on listed insurance in Nigeria. Agency theory underpins the model which captures the effects of CG on DPs. Governance indicators (number of independent directors, institutional investors, board size and managerial shareholding) and dividend per share of listed insurance companies in Nigeria.
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
One of the main fundamental issues in corporate finance has been the dividend payout decision of firms, which has always been studied in relation to a firm’s financing decisions. According to Uwuigbe (2012), dividend policy remains one of the most salient financial decisions not only from the viewpoint of firms, but also from that of the shareholders, consumers, employees and regulatory institutions. It is one of the salient components of firm policies and has been viewed as an interesting issue in the literatures. Firms’ decisions related to dividend policy have been a subject of debate in the financial literatures. It remains one of the most controversial topics and researched areas of corporate finance. According to Black (1976), the harder we look at the concept of dividend, the more it seems like a puzzle, with pieces that just do not fit together. Economics and finance researchers have long wondered why firms pay dividends even though cash allotments are less advantageous from a tax perspective than cash retention (Black, 1976). Dividend policy has been analyzed for many decades, but no universally accepted explanation for companies’ observed dividend behavior has been established. Brealey and Myers (2005) described dividend policy as one of the top ten most difficult unsolved problems in financial economics. Dividends as the term implies can be described as the reward for providing finances to a firm. According to Uwuigbe (2012), without any dividend payout, shares would not have any value. Nevertheless, dividend policy in the context of this study, relates to firm’s dividend payout policy that an organisation imbibes in deciding the pattern and size of cash distribution to shareholders over time. For firms, it is a key policy around which other financial policies rotate (Alii et al., 1993; Uwuigbe, 2013). Profit distribution decisions remain one of the key decision areas in economic and finance since it tends to ascertain the amount that flows to investors and the amount that is retained by firm for investment (Ross et al., 2002). Thus, Lintner (1956) opined that firms in developed markets target their dividend payout with the help of current earnings and past dividends. In order to reach such target, various modifications are made in the dividend decisions of firms, and hence firms should maintain stable dividend policies. Miller and Modigliani (1961) on the other hand opined that dividend policy decisions were irrelevant in determing the present value of shares considering the illogical assumptions of market perfections, zero transaction costs, perfect certainty and indifferent behaviour of investors. However, Miller and Scholes (1982) argued that in the real world firms’ dividend decision is inspired more by high taxes on dividends than capital gains and market imperfections. More so, series of theoretical models and explanations describing the factors that managers of organisations should consider when making dividend policy decisions have been developed by academics and researchers. Since then, a number of controversial judgments have been advanced to ascertain the factors which affect the dividend policy decisions of firms (Al-Malkawi, 2007; Uwuigbe, 2013).
In advanced economies, only firms who have relatively grown in size and need more capital for operations approach capital markets for finance, implying that their ownership would be diffused and enlarged. To attract more investors, corporate governance standards that could protect the interests of shareholders need to be enforced (Kowalewski, Stetsyuk and Talavera, 2007). This phenomenon is relatively new in Nigeria, since firms, formerly owned by colonial allies and administrators were transferred to some Nigerians as a result of the indigenisation policy of 1970s. Another major economic transition in the economy in the last three decades (1980’s) is the privatisation (an offshoot of Structural Adjustment Programme–SAP) of public enterprises. Privatisation is a programme of divestiture of public enterprises introduced within the framework of macroeconomic reforms. It is one of the International Monetary Fund’s (IMF) policies to bail her out of economic crisis. It was meant to reduce absolute reliance of commercially oriented parastatals on the treasury for funding and to encourage them to approach the stock market for capital. This reform has made ownership of public limited liability companies in Nigeria, highly concentrated. In Nigeria, the issue of corporate governance (CG) gained importance in the post-SAP era. This period witnessed the growth of listed companies. The country witnessed a very high rate of corporate failures because of the weak corporate culture in these institutions (Anya, 2003). Financial scandals and scams, poor management and weak internal control systems accounted for some of the lapses in the operations of some corporate organisations. Moreover, technical mismanagement involving inadequate policies, lack of standard practices, poor lending, mismatching of assets and liabilities; weak and ineffective internal control systems as well as poor and lack of strategic planning were prevalent in the Nigerian corporate industry (Babatunde and Olaniran, 2009; Ebhodaghe, 2014). To regain the confidence of the public and in response to the need for international CG practices in Nigeria, the Securities and Exchange Commission (SEC) and Corporate Affairs Commission (CAC) aligned CG in Nigeria with international CG best practices; spelt out the code of best practices in CG in Nigeria in 2003 for firms that are quoted on the Nigerian Stock Exchange. This was followed by a similar code by the Central Bank of Nigeria in 2006 (CBN, 2006) and a revised Code of CG (SEC/CAC, 2011) in Nigeria to address CG lapses in Nigeria. Emphasis is placed on CG as a result of the high profile of corporate scandals locally and internationally. Anya (2003) contends that lack of transparency2 obscured the way economic activities were conducted and consequently, contributed to the alarming proportion of economic/financial crimes in the financial industry. The financial fraud witnessed in Nigerian corporate sector most especially in Cadbury Nigeria PLC in 2007 shook investors’ confidence in the Nigerian capital market and the efficacy of existing CG practices in promoting transparency and accountability The use of funds of others in a business requires that returns be given on such funds in addition to the repayment of initial funds obtained for use in the firm. For owners of the firm, dividend may be a necessary reward for providers of funds. The higher these dividends, the satisfied are these owners who see such financial investments as rewarding, and thus attractive to non-owners to invest in. Financial theory supports this idea for such investors to desire holding into such stocks, and others desiring to acquire such stocks. Payment of this rewards, dividend, signals good prospects for firms, Finnerty (1986) observed from his study of American firms over a 40 years period that smaller and younger firms do not play cash dividend to their shareholders. However, he added, at some point in life cycle of any firm it begins paying common dividends. Continuing, he observed that between 80% and 90% of common stocks listed on the New York stock Exchange in any year, pay cash dividends during the year. Park (2009) observed that dividend payments are associated with firms with good corporate governance; concluding that firms in “legal regimes that focus on protecting investors are more likely to pay” even “higher dividends than firms in legal regimes with less investor protection”. Determinants identified in financial theory as affecting dividend paying behavior of firms are the availability of cash with which to pay the dividend, amount payable, government regulations, covenant restrictions in business transactions and the availability of viable investment options for dividend-proposed funds. With these, firms strive to continue regular dividend payments to keep themselves attractive to investors; highlighting the proposed amounts when issuing dividend declarations. Firms exhibit a strong aversion to reducing their dividend rates (Frankfurter and Wood, 2000). Reduction in this rate is interpreted by investors as a signal that the firms earning prospects have worsen; though firms in periods of adversity, reduce dividends rate when factors causing such adversities are obvious. Reductions in dividends rates adversely affect a firm’s share price, and in such cases the share prices of firms in the same industry as investors may interpret such reductions as industry affected. Dividend is also often mixed with capital investment decisions. Investors’ characteristics determine whether dividend payment is necessary or not. Some prefer current income streams with higher relative tax rates to differed income, capital gains, with lower relative tax rates in the present inflationary situation. Use of margin loans for equity investment purposes, require the generation of current regular income to service and pay such cash loans. The present harsh economic environment, high interest rate, low income, high cost of goods, and delayed salaries make it necessary for investors to receive current regular income to augment earned income and meet socio-economic needs. These needs in Nigeria are basically the physiological needs enumerated by Maslow (1954): shelter, safety, security (financial and physical) and love (family and attendant needs).
1.2 STATEMENT OF THE PROBLEM
Due to the peculiarity of dividend problems around the world, few studies in developed countries that have tried to assess the impact of corporate governance on dividend policy on listed insurance firm. Cook and Jeon (2006) conducted their study in korea, Mancilleni and Ozkan (2006) also carried out their study on Italian firms, Mollah, Rafiq and Sharp (2007) equally conducted their study in Bangladesh, and Obema, El-Masry and Elsegini (2008) conducted their study using Egyptian listed companies. Nigeria as an emerging economy differs from those developed countries and inadequacy of data on this research area stimulates a gap in the literature which needs to be filled. This study employed the corporate governance framework to investigate the relationship between corporate governance and dividend policy. On one hand, it is important to take dividend decisions by financial managers, and on the other hand, it is important for corporate investors to understand the firm’s dividend policy. These facts stimulated the researcher to investigate this relationship between corporate governance and dividend policy of quoted Conglomerates in Nigeria.
1.3 OBJECTIVE OF THE STUDY
The main objective of this study is to investigate corporate governance and dividend policy on listed insurance company in Nigeria. But for the successful completion of the study, the researcher intends to achieve the following specific objective:
- i) To examine the effect of corporate governance on dividend policy of listed insurance company
- ii) To ascertain if there is any relationship between corporate governance and dividend policy of listed insurance companies
iii) To examine the effect of board size on dividend payout ratio
- iv) To proffer suggested solutions to the challenges of dividend policy and corporate governance in insurance sector.
1.4 RESEARCH HYPOTHESES
The following research hypotheses were formulated by the researcher to aid the completion of the study
H0: there is no significant relationship between corporate governance and dividend policy of listed insurance companies
H1: there is a significant relationship between corporate governance and dividend policy of listed insurance companies
H0: corporate governance does not have any effect on dividend policy of listed insurance company
H2: corporate governance does have an effect on dividend policy of listed insurance company
1.5 SIGNIFICANCE OF THE STUDY
This study aims to provide additional insights into the relationship between governance mechanism and firm dividend policy. Our focus is on the measurement of corporate governance, abstract from other dimension such as incentive scheme. It is hoped that the evidence would serve as important quantitative information into the cauldron of policy as well as add to the existing body of empirical literature from a developing stock exchange such as that of Nigeria. The need for a study of this kind is characterized by growing all for effective corporate governance particularly for public liability companies.
At the level of firm, it offers the promise of a fair return on capital invested through improved efficiency. It also has some implication for the on-going privatization that the government of Nigeria is currently undertaken Grass-field (2002) citing the works of other scholars, indicated that the effectiveness of privatization is greater. When corporate governance works well, moreover by helping to promote firm performance and the protection of stakeholder’s interest, corporate governance encourages investment and stock market development. Dimirgue-kunt and Levine (1996) have associated with improved micro-economic growth. Further recent evidence in the works of klappers and love (2002)suggest that the firm level corporate governance provisions matters more in countries with weak legal (regulatory) environments implying that the firm can partially compensate for ineffective laws and enforcement by establishing good corporate governance and providing credible investor protection.
1.6 SCOPE AND LIMITATION OF THE STUDY
The scope of the study covers corporate governance and dividend policy on listed insurance company, but in the cause of the study, there are some factors that limit the scope of the study;
- a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
- b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
- c) Finance: the finance at the disposal of the researcher is a major constrain to the scope of the study, as the researcher could not cover more grounds for the study.
1.7 OPERATIONAL DEFINITION OF TERMS
Management
Management (or managing) is the administration of an organization, whether it is a business, a not-for-profit organization, or government body.
Corporate Governance
The methods by which suppliers of finance control managers in order to ensure that their capital cannot be expropriated and that they earn a return on their investment.
Dividend policy
Dividend policy is the set of guidelines a company uses to decide how much of its earnings it will pay out to shareholders. Some evidence suggests that investors are not concerned with a company's dividend policy since they can sell a portion of their portfolio of equities if they want cash
1.8 ORGANIZATION OF THE STUDY
This research work is organized in five chapters, for easy understanding, as follows. Chapter one is concern with the introduction, which consist of the (background of the study), statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study etc. Chapter two being the review of the related literature presents the theoretical framework, conceptual framework and other areas concerning the subject matter. Chapter three is a research methodology covers deals on the research design and methods adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study.
