Relationship Between Earning, Dividend and the Value of a Company
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Chapter One of Relationship Between Earning, Dividend and the Value of a Company
BACKGROUND TO THE STUDY
A company can be defined as an “artificial person” with legal entity, perpetual succession and a common seal (Wikipedia, 2010).also, accompany has been defined as a complex network of contract binding on various interest groups (Ilaboya, 2008:121). It takes cognizance of the stake of various interest groups in business activities of the company. These stakeholders include the shareholders (owners) of the company, investors, employees, labour unions, government and general public. These various stakeholders have different uses for the financial statement. The financial, statement of a company is the annual report and account, including the balance sheet and profit and loss account, prepared by the company and duly audited by the company’s external auditor(s), copies of which are presented to shareholders, the tax authorities, the Corporate Affairs Commission and other relevant persons/bodies (Igben, 2005:94). According to Statement of Accounting Standard (SAS) No.2, financial statements are the means of communicating to interested parties, information on the resources obligations and performance of the business entity.
Section 21 of the Company and Allied Matters Act (CAMA) 2004, prescribed three (3) different types of companies. These are, companies limited by shares, companies limited by guarantee and unlimited companies. However, whether limited by shares, limited by guarantee or unlimited, a company can either be a private company or public company. However, for the purpose of this research work our focus will be on quoted companies.
Section 24 of the Companies and Allied Matter Act (CAMA) 2004 states that, any company other than a private company shall be a public company, and it shall be stated in its memorandum of association that it is a public company. The prescribed minimum membership of a public is seven (7) without a ceiling. Public company can raise capital through the issues of shares and such shares are transferable. They must have minimum of two directors.
The ownership and management of a public company are separated which makes the directors render adequate or proper services to the shareholders. The financial statement which is the sole responsibility of the directors to prepare must contain the financial report which enables the various stakeholders to find out the true performance of the company.
It has been observed that important decisions that involve huge financial responsibility on the part of investors are made on the basis of information available on the financial report of the company. Thus, it is very important that the information contained in such financial report goes a long way in intimidating such investors of the true value of the company. The corporate value of the company is known as the value of the company. For the purpose of this research work, the market value of the company would be representing the corporate value. The research work seeks to verify the relationship that exists between the earnings of the company, the dividend it pays out, it trading volume and the values of the company. This is because apart from the fact that a company uses the earnings to pay dividend to its shareholders, it can also plough or invest portion of such earnings back into the business. The decision of what portion of earnings to re-invest is usually made in the light of certain factors. The research work therefore seeks to find out what effect such decision has on the corporate value.
STATEMENT OF THE RESEARCH PROBLEM
In Nigeria today, many investors especially in the manufacturing sectors, invest lot of money in shares with the hope of maximizing profit in form of dividend without taking in to consideration the earnings and market values of the company. Since earning and market values of a company is an important decision variable, it needs to be handled with care if an investor must maximize profit and remain in business.
In view of these complexities and importance surrounding earnings, dividends, trading volume and market values of the firm. This research work has attempted to offer solutions to the problem put in question form as stated below:
What influence do the earning of a company as reflected in the Earnings Per Share (EPS) has on the values of the company?
What influence does the Dividend Per Share (DPS) paid by the company has on the value of the company?
Does the earning yield of a company affect the market value of the firm?
OBJECTIVES OF THE STUDY
An investor’s return received from a particular company for putting his money in such a company is usually in form of dividend. Such dividend depends on the amount of earning which the company made that financial year. Such earnings help to indicate the performance of the company. Therefore, it is very important for us to establish whether there is any relationship between the earnings of a company and the corporate value.
The objectives that this research work seeks to achieve include:
To ascertain whether there is any relationship between the earnings of a company as reflected in the Earnings per Share (EPS) and the value of the company.
To determine whether there is any relationship between the amount of Dividend per Share (DPS) paid by a company to its shareholders and the value of the company.
To ascertain whether or not there is a relationship between Earnings Yield of a company and its market value.
THE SCOPE OF THE STUDY
Ideally, this research work should cover all the companies quoted on the Nigerian Stock Exchange but due to some obvious constrains, we have selected companies in a particular industry. The scope of this study covers at least ten (10) companies in the manufacturing industry from 1996 – 2009, so that a useful cross sectional analysis can be carried out.
SIGNIFICANCE AND RELEVANCE OF THE STUDY
The regulatory agencies function is to ensure that environment for investments encourage investors. The quality of accounting information which the companies made available to the public for decision making is very important issue to these agencies. Hence, this study seeks to enable the following see that such information is contained in the financial statements of companies.
Investors: To investors, it will enable them when making investment decision to take a close look at the value of the company which they are interested in investing their resources so that they can appreciate and understand the type of relation that exists between the earnings of a company and the value of such company.
Students: To students, it will increase their knowledge and better understanding of earning, as well as dividend of a company. Also, how the dividend pays out by a company to its shareholder affects the market value of the company.
Researchers: To researchers in the field, they can make use of the research project as it will serve as a guide for intending researcher in the future, bearing in mind that, this research will expose all that is, to know bout the relation that exists between the earnings of a company, other variable and its corporate values.
General Public: This research is beneficial to the public by providing them with an understanding of the meaning, purpose of companies earning as well as its relationship to its corporate value.
In general, this study will help to expand one’s knowledge on share price movement in Nigeria. Therefore, researchers and reading public will find the work extremely useful.
STATEMENT OF RESEARCH HYPOTHESIS
H0: There is no relationship between earning per share of a company and its corporate value.
H1: There is a relationship between earning per share of a company and its corporate value.
H0: There is no relationship between dividend payout of a company and its corporate value.
H1: There is a relationship between dividend payout ratio of a company and its corporate value.
H0: There is no relationship between earnings yield of a company and corporate value.
H1: There is a relationship between earnings yield of a company and corporate value.
LIMITATION OF THE STUDY
Every research work has aspect in which it falls short of idea which the researcher has established or recognizes. According to Ibrahim (2010:15), limitations are factors beyond our control which tend to impede the accomplishment of the objectives. On this note, the following are the limitation of this study:
The sample may be too small in relation to the entire population.
Imprecise measurement of variables.
The sampling method adopted is not a census, because we are not researching everyone in the population.
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