DETERMINANTS OF DIVIDEND CUT IN NIGERIA
ABSTRACT
In this study we investigated the determinants of dividend cut of selected non-financial companies in Nigeria. To carry out this study a more recent data for the period 2012 – 2014 was reviewed and a model with the necessary variables constructed. For seeking out the dividend cut relationship sales growth, earnings per share growth, leverage, capital expenditure and cash flow from operations were chosen. The sample size of 70 was split into 35 dividend cutters and 35 dividend non-cutters using an equal sampling technique. A probit binary regression and a Jarque-bera test was adopted in the study.
The results revealed that companies with high fixed asset investment, growing earning per share and also companies that use borrowed money to finance their fixed asset expansion are significant dividend cutters. It we therefore conclude that company would not cut their dividend but the dividend payout would be insignificant. There should be a compulsory policy on the minimum percentage in which companies should pay as dividend.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1    Background to the Study            
1.2    Statement of the Research Problem    
1.3    Objectives of the Study            
1.4    Research Hypotheses            
1.5    Scope of the Study                
1.6    Significance of the Study            
1.7    Limitations of the Study                
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction                    
2.2    Conceptual Framework                
2.2.1     Dividend                            
2.2.2     Dividend Policy            
2.2.3     Dividend Payout            
2.2.4    Sales Growth                    
2.2.5    Cash Flow from Operations                
2.2.6    Capital Expenditure                    
2.2.7    Leverage (debt)                
2.2.8    Earnings per Share                
2.3     Empirical Framework
2.3.1    Introduction                
2.3.2     Sales Growth and Dividend Cut            
2.3.3     Leverage (debt) and Dividend Cut                
2.3.4    Cash Flow from Operations and Dividend Cut    
2.3.5    Capital Expenditure and Dividend Cut            
2.3.6    Earnings per Share Growth and Dividend Cut        
2.4    Theoretical Literature
2.4.1     The Bird in Hand Theory                
2.4.2     Clientele Theories                                                                     
2.4.3     Signalling Theories             
2.4.4    Free Cash Flow Theory/Agency Theories            
2.4.5    Theory on Self Control                
2.4.6    Mental Accounting                        
2.4.7    The Inertia-Based Explanation For Dividends        
2.4.8    Dividends as a Valuation Yardstick                      
2.4.9    Dividends as a Social Norm                    
CHAPTER THREE: METHODOLOGY
3.1    Introduction                            
3.2    Research Design                        
3.3    Population of the Study                
3.4    Sample Size                            
3.5    Source of Data                        
3.6    Method of Data Analysis                
3.7    Model Specification                        
3.8    A-priori Expectation                            
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1    Introduction                
4.2    Descriptive statistics                                  
4.3    Regression Results                                   
4.3.1     Insignificant Result                                                        
4.3.2    Significant Result                        
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1    Introduction                        
5.2    Summary of Findings                        
5.3    Conclusion                            
5.4    Recommendations                    
5.5    Suggestion for Further Studies            
5.6    Contribution of Knowledge                    
BIBLIOGRAPHY                            
APPENDIX                                    
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The dividend behaviour of firms is one area that has puzzled researchers. The issue of dividend cut continues as one of the most challenging and controversial issues in corporate finance and financial economies. Research into dividend cut has shown not only that a general theory of dividend cut remains elusive, but also that corporate dividend varies over time between firms. This description is consistent with Black (1976) who stated that “The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that don’t fit together”. For a firm, which encounters financial difficulties, reliance is placed on retained earnings which consequently results in lower payout ratios. However, shareholders have enthusiasm in the outcome of their investments; these outcomes are expressed in terms of dividend and capital gains.
Dividend is the return that accrues to shareholders as a result of the money invested in acquiring the stock of a given company (Eriki & Okafor 2002). A dividend represents the cash distribution of a company’s earnings, and any direct payment by a company to the shareholders is considered part of a dividend policy (Ross & Westerfield, 1988).
Dividend is not just a source of income for shareholders, but an indicator of the performance of the firm (Al-Malkawi, Rafferty and Pillai 2010). Once a firm initiates dividend, it is expected to continue paying dividends and to build credibility of paying regular dividends in the fourth coming periods (Subramanian & Ramesh 2013). The decision whether or not to pay dividend rests in the hands of the board of directors of a company. Presumably, for companies that pay dividend, investors can ascertain a proper level of dividend payout by measuring the ratio of dividends to earnings. From this ratio they are able to determine when a dividend reduction has occurred.
    A stable dividend payout is in the interest of both investors and the company. The reason for this is that investors are thought to assign informational content to a company’s dividend policy (Keown, Martin Scott and William. 1991). Investors tend to discount a company’s stock price when there are no visible signs of financial distress that warrant the conservation of cash (Jensen 1989), but if optimal dividends are paid then the company’s shares reflect their intrinsic value.
Another reason for an investor preferring a stable dividend is the potential need for current income as many investors rely upon dividends to satisfy personal needs. The attainment of a stable dividend payout all the time, however, is predicated on stability of income streams as well as outlay of investment (capital expenditure). Other reasons why dividend payout may be unstable include leverage position of the company, sales growth and of the resultant earnings per shares.
    It might become inevitable therefore, for dividend to be cut at some point in time by managers because of the reasons stated above. It follows that dividend cut is a reality no matter the reluctance of managers to hold back cash dividend. This study examines the factors that determine dividend cut among some Nigerian listed companies over a specific time frame
1.2 Statement of the Research Problem
    This study differs in several ways from previous studies. Most of the studies reviewed focused on whether to cut dividend or not to cut dividend (Laarni, 2010). In Nigeria no researcher has empirically provided studies on dividend cut of firms as previous studies concentrated on dividend payout and dividend policy. The present study is an attempt to fill this existing gap in the literature by examining dividend cut of 20 quoted companies in the Nigerian stock exchange. In this paper, we revisit the question of why firms cut their regular cash dividend. On this issue the following questions are raised;
1.    What is the relationship between sales growth and dividend cut in Nigerian companies?
2.    What is the relationship between capital expenditure and dividend cut in Nigeria?
3.    What is the relationship between cash flow from operations and dividend cut in Nigeria?
4.    What is the relationship between earnings per share growth and dividend cut in Nigeria?
5.    What is the relationship between leverage and dividend cut in Nigeria?
1.3 Objectives of the Study
    The main purpose of this study is to review, and to add to, the evidence on the determining factors of dividend cut among Nigerian quoted companies. Against this backdrop the following research objectives are stated:  
1.    To establish the relationship between sales growth and dividend cut among Nigerian companies;
2.    To establish the relationship between capital expenditure (CAPEX) and dividend cut;
3.    To establish the relationship between cash flow from operations and dividend cut;
4.    To establish the relationship between Earnings per share growth and dividend cut; and
5.    To establish the relationship between leverage and dividend cut.
1.4 Research Hypotheses
The following hypotheses are stated in their null forms;
H01: There is no significant relationship between sales growth and dividend cut among Nigerian companies.
H02: There is no significant relationship between capital expenditure (CAPEX) and dividend cut.
H03: There is no significant relationship between cash flow from operations and dividend cut.
H04: There is no significant relationship between earnings per share growth and dividend cut.
H05: There is no significant relationship between leverage and dividend cut.
1.5 Scope of the Study
    The primary emphasis of this research work is to identify the factors that influence the dividend cut by Nigerian quoted firms between 2012 and 2014. Basically analysing 70 quoted non- financial companies with consistent dividend paying history.    
1.6 Significance of the Study
While we find numerous studies on the dividend payout behaviour of firms in various countries across the globe, we still fail to identify very specifically as to what factors distort the payout behaviour in the corporate world. Upon careful review of the literature on the subject I found very scanty studies focusing on the dividend payout behaviour of Nigerian firms.
    No study in the past has taken the variables used in this study. This paper will also help us to better understand why firms cut their dividend, what kinds of firms cut their dividend, and why other firms don’t cut their dividend. Overall, this study documents new findings that help explain the motivations behind dividend reductions and furthers our understanding of dividend policy.
1.7 Limitations of the Study
Since dividend cut became an area of serious inquiry by researchers in corporate finance, so many factors/determinants have been identified. In a study being undertaken at undergraduate project level, it may be unmanageable to test for all the variables together as far as the Nigeria environment is concerned, as it would need large scale statistical equations well beyond the capacity of the project.
So this project primed its focus on testing five hypotheses in establishing the core and major determinants of dividend cut by firms in Nigeria. This study used the data of listed companies for 3 year i.e. 2012-2014 and also used a sample size of 70. Therefore future researchers can conduct study with same variables for more than 3 years and further more increase the sample size. Also, the results of this research can only be generalized to firms that are similar to those that were included in the study i.e. financial firms where not study
    In addition, is the limitation of data availability to test for some variables like board independence and firm size which would have required far more time and resources in the assessment of various company boards.