Share Price Volatility and Dividend Policy of Firms in Nigeria

Share Price Volatility and Dividend Policy of Firms in Nigeria

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Chapter one on Share Price Volatility and Dividend Policy of Firms in Nigeria

INTRODUCTION

Background of the Study

All corporate organization, banks inclusive, have three major decisions to make if they must work in the interest of achieving their fundamental objectives of maximizing their shareholders’ wealth. These decisions are on the kind of investment to undertake (investment decisions) how to finance this investment (Financing decisions) and what to do with the profit realized (dividend decision) i.e. what amount of profit to be paid out as dividend to shareholders and what amount to retain for further investment purpose (Duke et’ al 2015).

Investment decision determines the total value and types of assets an organization utilizes. Financial decision determines the capital structure of the firm and forms the source on which investment decisions are made. The third decision, dividend decision, which forms the focus of this study has to do with the determination of the dividend payout policy adopted by the firm in determining the amount of cash that is given to shareholders. These decisions are depending on whether the potential investors and shareholders alike have a preference for capital gain as opposed to income.  Therefore, corporate organization adopt dividend policy that have major aim of maximizing shareholders’ wealth or, put in better perspective, increasing their share price­­­/value. The financial managers for instance to decide on whether to adopt a high payout ratio and turn around to borrow funds from the capital market for investment purposes or adopt a low payout ratio and used the retained earnings in financing the investment opportunities prevalent at that time (Oye, 2014).

The volatility of ordinary stock is the systematic risk faced by investors who possess ordinary stock investments (Guo, 2002) it is a measure used to define risk, and represents the rate of change in the price of a security over a given time. Usually: the greater the volatility, the greater the chances of a gain or loss in investment in a short period of time. Volatility is a measure related to the variance of a securities price. Thus, if a stock is labeled as volatile, its price would greatly vary over time, and it is more difficult to say in certainty what its future price will be (Criss, 1995). Investor’s preference is for less risk the lesser the amount of risk, the better the investment is.

In other words: the lesser the volatility of a given stock, the greater its desirability to investors. (Okafor, 2011). It is against this background that this study attempted to empirically investigate the share price volatility and dividend policy of firm in Nigeria with focus on banking industry specifically Guarantee Trust Bank Jalingo.

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