THE IMPACT OF DIVIDEND POLICY ON THE PERFORMANCE OF RURAL BANKS IN GHANA

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.

For more Business Administration & Mgt. Projects Click here
===================================================================
Item Type: Ghanaian Project Material  |  Attribute: 64 pages  |  Chapters: 1-5
Format: MS Word  |  Price: GH50  |  Delivery: Within 30Mins.
===================================================================

Share:

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.

Search for your topic here

See full list of Project Topics under your Department Here!

Featured Post

HOW TO WRITE A RESEARCH HYPOTHESIS

A hypothesis is a description of a pattern in nature or an explanation about some real-world phenomenon that can be tested through observ...

Popular Posts