THE IMPACT OF DIVIDEND AND CORPORATE EARNINGS ON STOCK PRICES
This study was carried out to determine 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 Stock Exchange for a period of ten years from 1999 – 2008. The data sourced from Nigeria Stock Exchange reports and the 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 for 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 autocorrelationship 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 derive a dividend and retention policy decision in an optimum manner to achieve the objective of maximizing the wealth of shareholders since the interrelationship of there decision 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 to a longitudinal study that will cover a time horizon of more than ten years should be conducted as this may enable a proper test on dividends and earnings. Management of 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. Nevertheless, the study brings to the knowledge of all and sundry that investors in Nigeria are dividend driven and would therefore be willing to pay higher prices for stock that pay more dividend.
Finally, although factors like efficient market hypothesis, volume of equity, traded law of demand and supply etc influence investors decisions, but, suffice it to say that with available evidence, Nigeria investors are dividend driven as shown in the stock price movement/trend over the years.
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. Investment in securities are for the purpose of earning income which could be in form of dividends, profits or/capital gains. With this in mind, it could be said that no right thinking investor will put his funds if he does not expect some form of returns. Apart from the above reasons, prestige, power, control etc. could also be adduced, but primarily, the motive is to earn some form of returns.
Stocks or securities are documentary evidence of ownership or entitlement to claim upon the income and the 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, an example of which is the Nigerian stock exchange and it is the centre point of the Nigerian Capital Market (NCM).
The stock exchange as the hallmark constituency of the capital market is many things at the same time. 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 and most prudent terms through the offer of shares (by companies) and bonds (by companies and governments) http://www.tritune.com.ng/izii2007/managment.html
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 approving the price at which securities of all companies quoted on the stock market are to be listed. The principal objective of vesting this role on the SEC is to protect the generality of the investing public who are unsophisticated and therefore cannot understand the nature and operation of companies sufficiently to be able to appropriate value on their securities.
Economic analysts have discovered a number of factors affecting stock prices on the stock market. Among the factors affecting stock prices are:
Dividend policy of a company
Corporate earnings and
Volume of equity traded.