ABSTRACT
The most debated issue or controversy in the field of
finance is over the impact of dividend policy on the performance of a company
(Brealey and Myers 2002). Different views exist regarding the impact of
dividend policy on the performance of firms. Some empiricists argue for
dividends irrelevance while others take the opposite view and maintain that
dividends do have relevance. This current study has been undertaken aiming at
evaluating the impact of dividend policy on performance in the context of
selected rural banks in Ghana. Seven rural banks were selected in Ghana. The
study has covered secondary data and primary data. Quantitative tools such as
percentages, averages, tables and chats were used in the analysis of the
findings. At the end, it revealed that there is a positive correlation between
dividend policy and rural banks performance. Also, the rural banks with a
higher dividend payout have their performance or share value higher. Besides,
the study recommends that dividend paying firms should continue to maintain a
steady growth in dividends unless there is a very good reason to make profit
and expand. Also, because there are different shareholders preferences, firms
should find out from their shareholders what suit their preferences before
dividends policy decisions are made.
CHAPTER ONE
INTRODUCTION
Dividend policy can be of two types: managed and residual. If
the manager believes dividend policy is important to their investors and it positively
influences share price valuation, they will adopt managed dividend policy. The
optimal dividend policy is the one that maximizes the company’s stock price,
which leads to maximization of shareholders’ wealth. Whether or not dividend
decisions can contribute to the value of firm is a debatable issue in recent
studies.
Background to the Study
The issue of dividend policy is one of the very essential
elements in economics and business that it cannot be overlooked. Dividend
policy is the regulations and guidelines that a company relies upon in making
decisions concerning dividend payments to shareholders (Nissim & Ziv,
2001). The dividend policy decisions of firms are the primary element of
corporate policy. Dividend, which is basically the benefit shareholders receive
in return for their risk and investment, is determined by different factors in
an organization. Basically, these factors include financing limitations,
investment chances and choices, firm size, pressure from shareholders and
regulatory regimes. However, the dividend pay-out of firms is not only a source
of cash flow to the shareholders but it also offers information relating to
firm’s current and future performance.
Enhancing shareholders’ wealth and profit making are the major
objectives of a firm (Pandey, 2005). Shareholder’s wealth is mainly influenced
by growth in sales, improvement in profit margin, capital investment decisions
and capital structure decisions (Azhagaiah & Priya, 2008).
Firm performance in this case can be viewed as how well a firm enhances its
shareholders’ wealth and the capability of a firm to generate earnings from the
capital invested by shareholders. Dividend policy can affect the value of the
firm and in turn, the wealth of shareholders (Baker & Powell, 2001).
Dividend or profit allocation decision is one of the four
decision areas in finance. Dividend decisions are important because they
determine what funds flow to investors and what funds are retained by the firm
for investment (Ross, Westerfield & Jaffe, 2002). More so, they provide
information to stakeholders concerning the company’s performance. Firm
investments determine future earnings and future potential dividends, and
influence the cost of capital (Foong, Zakaria & Tan, 2007). Dividend policy
is therefore, considered to be one of the most important financial decisions
that corporate managers encounter (Baker & Powell, 1999). It has potential
implications for share prices and hence returns to investors, the financing of
internal growth and the equity base through retentions together with its
gearing and leverage (Omran & Pointon, 2004). There has been emerging
consensus that there is no single explanation of dividends. According to Brook et
al. (1998) there are many determinants of corporate divided policy.
Frankfurtet and McGoun (2000) posited that the dividend
puzzle, both as a share value-enhancing feature and as a matter of policy is
one of the most challenging topics of modern financial economics. Mizuno (2007)
agrees to the fact that a firm ought to pay dividends to shareholders if it
cannot identify suitable investments which would bring higher returns than
those expected by the shareholders. Dividend distribution to shareholders varies in
cash or by issue of additional shares. Whether to pay cash dividend or issue
further shares would depend on the level of the company’s unappropriated profit
or excess cash. Payment of dividend is usually met by the company from its
earnings and cash flow (Ahmed &Javid, 2009).
The proportion of dividend paid to the total earnings is
technically referred to as payout ratio. A high payout ratio shows management’s
confidence in the stability and growth of future earnings while a low payout
ratio suggests that management is not confident of the stability of earnings or
sustainability of earnings growth (Arnott & Asness, 2003). The larger the
proportion of dividend paid, the fewer funds are retained for investments and
the more the company would have to shift to alternative sources of funds such
as issue of additional shares and or debt capital to finance selected viable
projects (Sindhu, 2014). Therefore, the decision between paying dividend and
retaining earnings is taken seriously by both investors and management and has
been the subject of considerable research by economists for some years back
(John & Muthusamy, 2013).
Statement of the Problem
Corporate dividend policy is an area that has attracted
attention of management scholars and economists culminating into theoretical
modelling and empirical examination. Thus, dividend policy is one of the most
complex aspects in finance. Black (1976) posited in his study on dividend that
the harder we look at the dividend picture, the more it seems like a puzzle,
with pieces that just don‘t fit together. Over three decades since when numerous studies
have been produced in examining dividend policy to gain an insight to this
puzzle.
Recently, however, Frankfurter et al. (2002) concluded in the
same vein as Black and Scholes (1974) that: The dividend “puzzle”, both as a
share value-enhancing feature and as a matter of policy, is one of the most
challenging topics/issues of modern financial economics. Research into dividend
policy 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 and even between developed, developing and emerging
capital markets (Amidu, 2007).
Despite the contradicting views on the relationship between
corporate dividend policy and firms’ performance globally, few empirical
evidence exist in Ghana and even those that exist are limited to few firms such
as banking and manufacturing firms and they examine the determinants of
dividend pay-out ratios of listed firms (Amidu & Abor, 2006; Amidu, 2007),
and few were also conducted long before (old or archaic) firms adopted the international
standards for financial reporting by focusing on dividend policy and share
price volatility (Asamoah, 2010). Therefore, this study seeks to examine the
relationship between dividend policy and the performance of selected rural
banks in Ghana.
Objectives of the Study
The main objective of the study is to determine the impact of
dividend policy on the performance of some selected Rural Banks in Ghana. To
wholly address the overall goal of the study, the following sub-purposes have
been crafted:
To examine the various dividend payout policies of some
selected rural banks in Ghana over the years.
To examine the relationship between performance and dividend
payout of selected rural banks in Ghana.
To assess the value shareholders place on dividend payout
amount.
Research Questions
What are the dividend payout policies of selected rural banks
in Ghana?
What is the relationship between performance and dividend
payout policy of selected rural banks in Ghana?
What is the value shareholders place on the amount of
dividend payout?
Hypotheses
The following hypotheses were developed for testing:
H0: There is no significant impact of dividend policy on the
performance or share value of a firm.
HA: There is a significant impact of dividend policy on
performance or share value of a firm.
Significance of the Study
Most of the pertinent literatures on the relationship between
dividend policy and performance of companies are related to foreign companies
and markets.
Therefore, it is hoped that the study, first, addresses
issues from the Ghanaian perspective to determine whether the relationship
between dividend policy and firm’s performance is applicable to Ghanaian
situation.
Second, the study helps help companies to know the effect of
their dividend policies on their performance or share value.
Third, it assists shareholders (both existing and
prospective) to evaluate effects of dividend policies of companies on their
earnings both present and future.
Finally, it helps shareholders to make an informed decision
on whether to maintain or withdraw their investment and invest in other
companies depending on the company’s dividend policies.
Delimitation
For the study to have general representation and it findings and recommendations accepted to represent the true nature of
Rural Banks in Ghana, seven Rural Banks in Kumasi were chosen out of twenty-eight
Rural Banks in Ashanti Region as the scope of the study. This project limits
itself on dividend policy and the impact on performance of Rural Banks in Ghana.
Limitations
This study is not without limitations due to the following
reasons:
The level of inflation in the country differs from year to
year; therefore, comparison of yearly results would be difficult. This would
make it difficult to determine whether increase in values were due to improved
performance by the companies or general rise in prices.
The study could not include the effect of external influences
such as governmental policies on business and the level of economics activities
on the performance of companies.
There are various variables that affect a firm’s performance
but only dividend policy could be taken as the main factor for the purpose of
the study.
Organization of the Study
The study is grouped under five chapters. Chapter one started
with general introduction of the study which includes the background, statement
of the problem, the objectives of the study, research questions, hypotheses,
significance of the study, delimitation, limitations and organization of the
study. Chapter two reviewed related studies and literatures. That is, the
various models and theories written on the relationship between dividend policy
and firm’s performance were discussed. The chapter three focused on the
research methods while the chapter four covered the presentation and analysis
of the data collected. The summary, findings, conclusions and recommendations
of the study were presented in chapter five.
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