Effect of Dividend Policy on Market Price of Ordinary Shares of Quoted Manufacturing Firms in Nigeria

Abstract

Understanding the micro-issue of relationship between financial policy variables and market price is crucial towards appreciating value-generating dynamics among economic sectors. This study investigates the effect of dividend policy on market price of ordinary shares of quoted manufacturing companies in Nigeria. The research focused on three specific policy variables namely: dividend payout ratio, dividend yield, and retained earnings. Ex-post facto research design and panel regression analysis were utilized to explore the relationships. Consistent with traditional right views, the study found significant relationship between the dividend variables and market price, indicating that higher payouts positively influence share prices. However, the analysis did not find evidence that retained earnings have a significant effect on share prices. This is a surprising result. The study recommends that manufacturing companies consider active use of dividend policy variables in maximizing shareholders wealth.  Equally, companies should reassess the strategy of using retained earnings to finance operations.

Keywords: Dividend pay-out ratio, Dividend yield, Manufacturing Sector, Panel data regression, Retained earning