




































 American Finance & Banking Review; Vol. 2, No. 2; 2018 

                   ISSN 2576-1226  E-ISSN 2576-1234 

                        Published by Centre for Research on Islamic Banking & Finance and Business, USA 

 

 

1 

A Test of Miller and Modigliani Dividend Policy Irrelevance Theory 

in Nigerian Stock Market 
 

Udobi, Philomina I.
1 
& Iyiegbuniwe, Wilfred I.

1 

 

1
Department of Finance, Faculty of Management Sciences, University of Lagos, Akoka, Lagos, Nigeria 

Correspondence: Udobi, Philomina I. ,Department of Finance, Faculty of Management Sciences, University of 

Lagos, Akoka, Lagos, Nigeria,Email:udobiphil@yahoo.com 

 

 

Received: May 19, 2018                Accepted: May 25, 2018                  Online Published: June 13, 2018  

 

 

 

 

Abstract 

This study empirically tests for the validity of Miller and Modigliani’s dividend irrelevance proposition in the 

Nigerian Stock Exchange (NSE). Secondary data were obtained from the Nigerian Stock Exchange fact book and 

firms’ annual audited financial statements for fifteen years (2001-2015). Mediation Analyses, was used to measure 

the direct and indirect effects of dividend on stock price. Correction of the anomalous use of current dividend and 

current earnings by the use of naive expectation of dividend and earnings revealed that the direct effect of expected 

dividend on share price is significant but the indirect effect of expected dividend on share price through earnings is 

not significant.  The implication of these results is that expected dividend has its unique (direct) effect on share price 

beyond the effect on share price which it shares with expected earnings (indirect effect). This conclusion suggests 

that dividend policy is relevant in valuation of shares in NSE. It was therefore recommended that company 

management should treat dividend as an active corporate finance decision-making variable and should employ 

dividend in information signalling to capital market investors. 

 

Keywords: Expected dividend, Expected earnings, Share price, Mediation, Relevance, Irrelevance. 

 

1. Introduction 

Dividend policy is a major tool in decision making by corporate managers. It has received keen interest from 

scholars and researchers worldwide and this has led to the formulation of many theoretical models and testing of 

various variables. Huda and Farah (2011) affirmed that the development of theoretical models and variables has 

helped in determining the factors that assists managers in dividend policy decision making. Adesina, Uwuigbe, 

Uwuigbe, Asiriuwa and Oriabe (2017) suggested that corporate managers should use dividend as a vital tool in their 

firm’s decision making. This suggestion is contrary to the finding of their study that dividend does not have 

influence on firm’s value. 

The dividend relevance theory posited by Lintner (1956) and dividend irrelevance theory posited by Miller and 

Modigliani (1961) are the major contending theories on dividend policy and its impact on share price. The 

arguments and assertions of these theories did not rule out the influence of earnings on firms’ share prices. The 

dividend relevance theory agrees that despite the direct relationship between dividend and share price, there is still a 

possibility of an indirect effect of dividend on share price through earnings while the dividend irrelevance theory 

argues that the relationship that dividend tends to have on share price is as a result of its relationship with firms’ 

future earnings. Thus, the impact of dividend on share price is not direct but only indirect. 

In the light of the above arguments, various studies’ all over the world’s stock market has tried to test for the validity 

of dividend policy irrelevance with no consensus. Some of the challenges in the previous empirical tests of the 

effects of dividend on share price include the inaccurate measurement and definition of the earnings variable which 

is the unobservable but key variable in MM (1961) dividend irrelevance proposition. Amadasun, (2011); Toby, 

(2014) stated that the use of current dividend and current earnings in some previous tests of dividend irrelevance 

gave erroneous results that led to the conclusion that dividend is irrelevant in the valuation of share price. Udobi 

(2016) asserted that the use of current dividend and current earnings is flawed because share price is determined by 



 
 

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ex-ante (expected/future) information on determinant variables including dividend and earnings and not ex-post 

(current) information such as current dividend and current earnings. 

Another limitation in previous studies is the methodology used and its inability to decompose the total effect of 

dividend on share price into direct and indirect effects. In particular, is the inability of a methodology to isolate the 

direct effect from the indirect effect which it shares with earnings? This study revisits the Miller and Modigliani’s 

(1961) dividend irrelevance proposition. It objective is to overcome some of the limitations in previous studies and 

to determine if an M&M dividend irrelevance proposition is applicable in the Nigerian Stock Market. 

2. Review of Existing Literature Dividend Relevance 

Miller and Modigliani (1961) arguments emphasized that the impact that dividend has on share price is due to its 

information contents about future earnings which is the real determinant of share price. Black and Scholes (1974) 

investigated the impact of dividend policy on firm’s value of companies listed in New York Stock Exchange. 

Capital Asset Pricing Model (CAPM) was used to analyze five years secondary data (Share prices and dividend) of 

twenty five quoted firms. They concluded that dividend policy of firms has no impact on their stock price. On the 

contrary, Aharony and Swary (1980) applied the Naïve Expectation model of quarterly dividend and earnings and 

found that share prices react to increase in dividend payment, coincident with earnings announcement. Their finding 

corroborates dividend relevance proposition. DE Angelo and DE Angelo (2006) also found that the information 

content of dividend is highly relevant. 

Adefila, Oladipo and Adeoti (2004) examined the effect of dividend policy on the market price of shares. The 

methodology used was Pearson’s product moment correlation of dividend with share price of fifteen companies. The 

study found that the correlation coefficients are statistically insignificant for most of the fifteen companies. It also 

found that the correlation between net profits (earnings) and share prices are statistically insignificant for all the 

companies analysed. The study concluded that there is no significant relationship between dividends and share 

prices, there is no significant relationship between net profits and share prices. This study was poorly designed and 

the use of correlation analyses to test dividend relevance is inadequate. Hence, the conclusion reached by this study 

is suspicious. 

Abor (2008) found out that there is a relationship between corporate earnings and dividend payout and concluded 

that both past and current earnings have impact on a firms’ dividend policy. Musa (2009) investigated the impact of 

dividend policy on the share prices of 53 quoted firms in Nigeria, applying parsimonious multiple regression model 

which employed five variables: current earnings, previous dividend, cash flow, investment and net current asset and 

three non-metric variables, growth, firm size and industry classification. The study found that the five metric 

variables have impact on dividend policy of firms in Nigeria. 

Adesola and Okwong (2009) tested the relevance of dividend theories of share prices in Nigeria with cross sectional 

data on twenty-seven companies for the period 1996 to 2006. They commented that their finding of positive and 

significant effect of dividend on share prices for the sample of Nigerian companies indirectly cast some doubt on the 

empirical validity of dividend irrelevance. 

Khalid, Chijioke and Aruoriwo (2010) investigated the impacts of dividend yield and dividend payout ratio on 

changes in share price of companies listed on the United Kingdom Stock Exchange. A regression model was used to 

analyze the data which revealed positive relationship between dividend yield and stock prices and revealed that 

dividend payout is statistically insignificant. 

Amadasun (2011) attempted to test the hypothesis that dividend does not increase stock price in Nigeria, using First 

Bank (Nig) plc. as a case study. The study used a regression model that included  Dividend Per Share, Earnings Per 

Share, Return on Capital Employed, Retained Earnings and Price Earnings Ratio as explanatory variables of price 

per share. The results of the study had statistically insignificant regression coefficients for both dividend per share 

and earnings per share. Though this study concluded that “dividend does not lead to increase in stock value”, and 

thus purportedly lends support to Miller-Modigliani thesis of dividend irrelevance, the conclusion is consistent with 

the statistical insignificance of the dividend variables in the regression results. Furthermore,  the study has the 

following deficiencies: -   (1) it used a case study of a bank rather than cross sectional or  panel data; and the 

regression model included four earnings variables; earning per share, return on capital employed, retained earnings 

and price earnings ratio. It therefore would have the problem of multi-collinearity. These observations indicate that 

the results and conclusion of the study are not reliable. 

Khan (2012) sampled of twenty-nine companies to explicate the effect of dividend on stock prices for the period 

2001 to 2010. The study used Fixed and Random Effect Model on panel data and found that dividend policy has 

positive effect on share prices after controlling for the effects of earnings per share, profit after tax, and return on 

equity and concluded that dividend irrelevance theory is not applicable in case of Pakistan Stock Market.  

 



 
 

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Abubakhar (2012) examined the influence of dividend pay-out ratio on the share prices of listed non-service firms in 

Nigeria with a probabilistic sample of twenty-six firms using multiple regression models. The study found a 

statistically significant relationship between dividend pay-out and share prices. It also found that the size of the 

listed non-service firms significantly explains share prices in Nigeria. Both dividend pay-out and size of the firms 

had positive impact on share prices. The findings of the study do not however constitute valid test of the dividend 

irrelevance proposition became it did not consider the effect of earnings and dividend in the model. 

Rabindra (2012) examined the impact of dividend on stock price in Financial and non-Financial institutions of Nepal 

Stock Exchange, analyzing the secondary data with a regression model. Stock price being the dependent variable 

while Dividend Per Share (DPS), Retained Earnings Per Share, Lagged Price Earnings Ratio and Lagged Market 

Price Per Share are the explanatory variables. The result showed that dividend has impact on share prices more than 

retained earnings. 

Kanwal (2012) studied the impact of dividend on stock prices of chemical and Pharmaceutical companies in 

Pakistan Stock Exchange for the period 2001-2010. Secondary data of five variables: Stock dividend, Earning Per 

Share (EPS), Profit After Tax (PAT), Retention Ratio and Return on Equity (ROE) were analyzed with panel 

regression model. The study showed that Stock dividend, (EPS), (PAT) are statistically significant. In other words, 

these variables have positive impact on stock prices while Retention Ratio and Return on Equity have negative 

impact on share prices. The study asserted that changes in dividend policy provide statistically significant 

information content which can be used to make predictions about future stock prices”, and that the findings support 

the informational content of dividend hypothesis. These findings’ assertions indicate that changes in dividend 

payment merely create occasions for changes in stock prices and that there was no sufficient evidence to suggest that 

stock price changes are caused by dividend payments. The study did not include earnings in its analyses. Hence, its 

findings cannot be quite conclusive as to the impact of dividend on share price given the effect of earnings. 

Ozuomba, Okaro and Okoye (2013) carried out research to test the effect of dividend policy on shareholder’s wealth 

of public firms in Nigeria for a period of twelve years (2000-2011). Secondary data of ten randomly selected firms 

out of two hundred and sixteen public limited firms were analysed with multiple regression model using dividend 

per share as the dependent variable while earning per share (EPS) and market price per share (MPS) are the 

independent variables. The results showed that the EPS and MPS of eight firms are both statistically significant  and 

have impact on shareholder’s wealth  of the quoted firms while that of two firms are not statistically significant at 

10% confidence interval. The model of this study is wrong as it used dividend as the dependent variable instead of 

share price to represent shareholders wealth as stated in its objective. The data on EPS, DPS and MPS are not 

synchronized. Data used is also scanty because instead of using panel data, it did the analyses as time series of 

individual companies, and therefore its findings are very misleading. 

Ordu, Enekwe and Anyanwaokoro (2014) conducted a study to find out the effect of dividend payment on the 

market share prices in Nigeria. Seventeen quoted firms were considered for a period of twelve years (2000-2011). 

Using the Ordinary Least Squares technique, positive effect was found between Market Share Price (MPS) and 

Dividend per Share (DPS). This result supports the dividend relevance theory, confirming that dividend increase 

results to an increase in market share price. Dada, Malomo and Ojediran (2015) support this argument and 

concluded that investors prefer dividend payment to future growth. 

 Iqbal, Ahmed and Shafi (2014) looked at the effect of dividend bubble on share prices of thirty quoted firms in 

Karachi Stock Exchange for a time frame of eleven years. Time series data of the thirty listed firms were analysed 

with linear regression model. The result showed that Earning Per Share, Return on Equity, retention ratio are 

positively correlated with share price while Dividend yield and Price earnings ratio have a negative impact on share 

price. The study however concluded that dividend has a strong positive impact on share prices of KSE and thus, 

supports the dividend relevance theory. This study is faulted because of the use of time series of thirty firms for a 

period of eleven years. A panel data would have been more appropriate in order to get valid findings and conclusion. 

Oyinlola and Ajeigbe (2014) examined the impact of dividend policy on stock prices of  quoted firms in Nigeria, 

using 22 companies listed on the Nigerian Stock Exchange over the period 2009 – 2013. It used panel regression 

model to determine the impact of dividend per share and retained earnings per share  on share price. The results 

indicate that both dividend and retained earnings significantly impact on share price. In addition, Granger causality 

tests indicate that dividend per share granger cause share price.  

Toby (2014) studied the relevance of dividend policy in share price determination in the Nigerian Stock Market with 

a sample of twenty stocks within the period 2005-2012 with regression analyses of dividend and retained earnings 

time series data on individual companies. The study found that there is no significant relationship between change in 

dividend policy and change in share price. This surprising result differs from the extant literature on the impact of 

dividend on share price. The result carried out the analysis on company basis (separate regression analyses for each 



 
 

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stock in the sample) rather than use cross-sectional or panel data which will capture inter-company variations. 

Furthermore, the study did not include appropriately defined earnings variable in the analyses. It instead used 

retained earnings. In the results neither dividend nor retained earnings was a statistically significant determinant of 

share price. The conclusion of the study that “the results agree with the earlier research works which argue that 

dividend policy is irrelevant in determining enterprise value” is therefore very suspect and invalid. 

Edward’s (2014) investigated the effect of dividend on share price of some selected quoted firms in Ghana Stock 

Exchange for a period 2005-2009 using descriptive analyses on the primary data, found that dividend is highly 

correlated with share prices in Ghana. Ojeme, Mamidu and Ojo (2015) studied the impact of dividend policy on 

shareholders wealth in Nigerian quoted banks before and after the global financial meltdown within the period of 

four years (2007 – 2010). Secondary data of all 21 quoted banks during this period were gathered from NSE and 

firm’s published annual reports. The study concluded that positive correlation between average market value of 

share and dividend paid by banks is an indication that payment of dividend is relevant and the amount paid affect the 

market value of banks’ shares. This is not a valid test of dividend irrelevance theory. It used only correlation 

analysis and four years data. It did not consider the influence of earnings on share price as posited by the dividend 

irrelevance theory. 

Oduwole (2015) evaluated and compared the predictive power of earnings and dividends in Nigeria for a period of 

fourteen years (2001-2014). The quarterly data of the variable used (EPS, interim and final dividends) were 

collected from the Nigerian stock market. The study used portfolio evaluation measures (Sharpe ratio and Jensen 

alpha) to assess the investment performance of portfolio based on dividend yield and earnings yield, respectively. 

The results indicate that a portfolio formed using a market capitalization weighted approach for the highest quartiles 

of dividend yield outperformed buy the market and hold policy while similar portfolio based on earnings yield did 

not outperform the market. This is not a test of dividend irrelevance theory. 

Chirima (2015) investigated the impact of dividend pay-out on stock prices of quoted service firms of Zimbabwean 

Stock Exchange for a period of five years (2008-2012). The data were analysed with chi-square and regression 

model. The result showed a statistically significant relationship between dividend announcements and share prices. 

Egbeonu, Edori and Edori (2016) examined the weighted average of five year financial summary data of twelve 

listed firms from the various sectors of the Nigerian Stock Exchange in order to measure the impact of dividend 

policy on firms’ value. The study reported that internal rate of return is inversely insignificant, Dividend per share is 

inversely significant while earning per share is positively significant to share price.  

Adesina, Uwuigbe, Uwuigbe, Asiriuwa and Oriabe (2017) examined the impact of dividend policy on share price 

valuation in Nigeria. Data of four out of twenty two banks were analysed during ten years’ timeframe (2006-2016). 

They observed in their study that earning per share has a strong impact on share price while there is significant 

impact of dividend yield and retention ratio on share price. It was however concluded that there is need for Nigerian 

firms to consider dividend policy in other to increase the firm’s earnings and future performance. 

Iftikhar, Raja and Sehran (2017) established that dividend has a positive statistical influence on stock price after they 

investigated the impact of dividend policy on five state banks of the Karachi stock Exchange (KSE) for a period of 

ten years. They concluded that dividend is relevant in KSE. Budagaga’s (2017) study supported the dividend 

relevance theory after observing the effect of dividend payment on forty-four firms’ value of Istanbul Stock 

Exchange for duration of nine years. 

Udobi, Iyiegbuniwe & Ezike (2018) examined the impact of current dividend on market shares prices of the 

Nigerian Stock Exchange. The study analysed fifteen years (15) secondary data of NSE quoted firms with mediation 

analysis. Stock prices is the dependent variable while current dividend, current earnings, Asset-growth, sales-

growth, insider-shareholding and Leverage are the independent variables. The findings indicate that current dividend 

has a direct (Unique) effect on share price, and at the same time has indirect effect on share price through current 

earnings. It concluded that current earnings partially mediate the effect of current dividend on quoted Nigerian 

firms. 

3. Research Methods 

The purpose of this study is to test the validity of Miller and Modigliani dividend irrelevance theory in Nigeria by 

defining dividend and earnings as expected dividend and expected earnings. This study is based on all the shares 

listed on the Nigerian Stock Exchange (NSE). It covers a period of Fifteen years, (2001-2015). This time period is 

chosen because of the availability of data, to accommodate the pre and post consolidation of Nigerian’s financial 

institutions. It was further reduced because of firms with incomplete data points were deleted. Stock price data were 

obtained from the daily official price list of the Nigerian Stock Exchange. Data on earnings per share, dividend per 

share, insider-shareholding, assets, and sales turnover were collected from the Nigerian Stock Exchange Fact Book 

and published annual reports of the listed companies that constitute the sample of this study. Assets-growth (Proxy 



 
 

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for investment opportunity), sales-growth (proxy for investment growth), and leverage (proxy for risk) variables 

were computed from the earnings, sales turnover, and total assets data. The study uses a panel study to measure the 

impact of expected dividend and expected earnings on share price in Nigeria. 

3.1. Model Specification 

Mediation analysis, a new methodology in finance adapted from the field of social psychology is used to determine 

the irrelevance of expected dividend on share price. it is imperative to estimate the direct effect of expected dividend 

on share price which is beyond the effect of expected dividend on share price that is due to the relationship between 

dividend and a mediator (such as earning).  

Mediation refers to a situation when the relationship between a predictor variable (expected dividend) and an 

outcome variable (share price), can be explained by their relationship to a third variable called the mediator (for 

example, expected earnings). Mediation is said to have occurred, if the strength of the relationship between the 

predictor variable (expected dividend) and the outcome variable (share price) is reduced by including the mediator 

variable (expected earnings). In the case of perfect or complete mediation, the effect of the predictor is completely 

wiped out by including the mediator. 

Baron and Kenny (1986), Judd and Kenny (1981),  James and Brett (1984) discussed three models in establishing 

Mediation, These three models are needed in investigating the mediation of the effect of a predictor 

variable(dividend) on an outcome variable(share price) by  a mediating variable(earnings): 

 Model 1 is to determine that the predictor (expected dividend) is correlated with the mediating variable 

(expected earnings). This step requires the regression of earnings on dividend to confirm that dividend is a 

significant predictor of earnings. 

The regression model is: 

 

M = β1 + β2 X1 + ei                                                                                                                                                               (1)  

Where:  

β1  = intercept 

β2 = Coefficient of the relationship between dividend and the mediating variable   (earnings)     

X  = Dividend 

M =  Earnings 

 ei  = Error term 

 

 Model  2 is to determine that the predictor variable (expected dividend) is correlated with the outcome variable 

(share price). In other words, regress outcome variable (share price) on the predictor variable to confirm that 

dividend is a significant predictor of share price. The regression model is; 

Y = λ1 + λ2 Xi + ei                                                                                                                    (2) 

Where:  

Y = outcome variable   

λ1 = intercept;  

λ2 = total effect of dividend on share price 

Xi = predictor variable;    

 ei  = error term  

  

The value of the coefficient “λ2” is the total effect of expected dividend on share price. This step establishes that 

there is a dividend effect on share price that may be mediated. 

 

 Model 3 is to determine that the mediating variable (Expected earnings) affects Share Price. The regression 

model is  

Y = ɤ1 +  ɤ2 X + ɤ3M + ei                                                                                                          (3) 

 

Where:  

ɤ1  = intercept;  

ɤ2 = The direct effect of expected dividend on share price 

ɤ3 =  The direct effect of expected earnings on share price 

Y = Share price;  

 X = dividend;   

M = Earnings;   



 
 

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ei = error term,  

Equation (3) produces the direct effect of expected dividend on share price, ɤ2, and the direct effect of expected 

earnings on share price, “ɤ3”. The model controls for the influence of earnings on the effect of dividend on share 

price by establishing the effect of earnings on share price 

As suggested by Baron and Kenny (1986), Judd and Kenny (1981), Mediation analysis can be done through a series 

of regression analyses which reflect the above conditions necessary to demonstrate mediation. Fields 

(2012),however affirmed that by far, the best way to tackle mediation analyses is to use the PROCESS custom 

dialog box written by Hayes (2012) to wrap the Preacher and Hayes(2004, 2008a) mediation and moderation tools in 

a convenient menu and dialog box interface in IBM Statistical Package for Social Sciences statistical software 

(SPSS). This software was employed to do mediation analysis in this study. 

3.2. Estimation Technique 

Field (2012) states that the three models discussed earlier (equations 1, 2 and 3) above test the four conditions of 

mediation: 

 Expected dividend must significantly predict Expected earnings in model 1 (equation 1). 

 Expected dividend must significantly predict share price in model 2 (equation 2). 

 Expected earnings must significantly predict share price in model 3 (equation 3). 

 Expected dividend must predict share price less strongly in model 3 than in model 2. 

To establish that earnings completely mediates the dividend-share price relationship, in model 3 (equation 3), the 

effect of dividend on share price after controlling for earnings (coefficient ɤ2) should not be significantly different 

from zero. Such result will uphold dividend irrelevance proposition. But if in model 3 (equation 3) the coefficient c' 

is significantly different from zero and the coefficient ɤ3 is not significantly different from zero, dividend irrelevant 

proposition is refuted. 

But if in model 3 (equation 3), the coefficient, ɤ2, is significantly different from zero and coefficient “β1” in model 

1(equation 1)  and “ɤ3” in model 3(equation 3), are significantly different from zero, then earnings has partial 

mediation effect on dividend, suggesting that dividend has both indirect (mediation) effect (through earnings) and 

direct effect on share price.  

Field (2012) further observed that although Baron and Kenny (1986) advocated looking at the size of the regression 

parameters, in practice, people tend to look for a change in significance. So mediation would occur, if the 

relationship between the predictor (dividend) and outcome (share price) was significant (P< 0.05) when looked at in 

isolation (model 1) but not significant (P > 0.05), when the mediator (for example, earnings) is included (Model 3). 

Where the coefficient of the predictor (dividend) is significant in both models 1 and 2, mediation can exist, if there 

is a reduction in the size of the coefficient of relationship between the predictor(dividend) and outcome (share price) 

in model 3, as compared to model 1. In other words, the predictor variable (dividend) predicts the outcome variable 

(share price) less strongly in model 3 than in model 1. Field (2012) remarked that the problem with Baron and 

Kenny (1986) test of mediation is the question of how much of a reduction is necessary to intermediation. 

4. Data Analysis and Interpretation 

Descriptive Statistics and Correlation 

Table 1. Descriptive Statistics 

 N Minimum Maximum Mean Std.Deviation 

Earnings 609 -20.000 28.000 2.065 3.724 

Dividend 602 0.00 24.000 1.293 2.658 

Share Price 608 0.50 1056.65 38.14 78.827 

Insider -holdings (%) 612 5 88 54.44 20.317 

Asset- Turnover (Nm) 592 57.04 3186128 34443 148532 

Sales -Turnover (Nm) 596 93.17 673181 50580 84363 

Change in Earnings 559 -20.00 25.00 0.133 2.287 

Change in Dividend 548 -7.00 8.30 0.073 1.255 

Change in Share Price 558 -214.02 483.43 4.115 32.254 

Sales –Growth (%) 541 -97.44 3254.45 28.877 155.903 

Leverage 423 -1460.01 803.67 -1.954 85.695 

Asset Growth (%) 535 -3785.49 6091.16 40.546 332.678 

Source: Author’s Computation, 2016. 

 



 
 

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4.1. Correlation of Expected Dividend, Expected Earnings, and Share Price   

A necessary condition for use of mediation analysis is that expected dividend is correlated with the mediator 

variables respectively (expected earnings, insider-shareholding, assets-growth, sales-growth, and leverage); and that 

the mediator variables are correlated with share price, respectively. The correlation matrix of expected dividend and 

the mediation variables (expected earnings, insider- shareholding, assets-growth, sales-growth, and leverage) and 

share price is presented in table 2. 

Expected dividend is correlated with share price with a coefficient of 0.82 which is statistically significant at p value 

of 0.00. Expected dividend and expected earnings have a correlation coefficient of 0.89 which is statistically 

significant at p-value of 0.000.  

The correlation of expected earnings with share price is 0.78, which is statistically significant at p-value of 

0.000.These results indicate that expected earnings has the potential of mediating the impact of dividend on share 

price. These results confirm that mediation analysis is an appropriate technique to evaluate the influence of earnings 

on the impact of dividend on share price. The correlation coefficient of dividend and the other mediating variables 

(insider-shareholding, assets- growth, sales- growth, and leverage) are relatively low and suggestive that these 

variables may not be significant dividend signalling variables.  

 

Table 2. Correlation Matrix of Variables  

 Expected 

earnings 

Expe

cted 

divid

end 

Share 

Price 

Insider 

share 

Holding 

Asset Sales  Earnings 

Change 

Div. 

Change 

Share 

Price 

Change 

Sales 

Growth     

% 

Leve

rage  

Asset 

Growth 

% 

Expected 

earnings 

1             

Expected 

dividend 

p-value 

0.89 

.000 

1            

Share Price 

p-value 

0.78 

.000 

0.82 

.000 

1          

Insider 

share –

Holding 

p-value 

0.08 

 

 

0.39 

0.10 

 

 

0.16 

0.09 

 

 

0.23 

1           

Asset 

p-value 

0.04 

.338 

 

0.01 

.778 

0.01 

.844 

-0.26 

.000 

1          

Sales  

p-value 

0.31 

.000 

0.31 

.000 

0.27 

.000 

-0.16 

.000 

 0.45 

.000 

1        

Expected 

earnings 

Change 

p-value 

0.37 

.000 

0.17 

.000 

0.07 

.000 

0.02 

.048 

 0.02 

.575 

-0.02 

.000 

 1       

Expected 

dividend 

Change 

p-value 

0.15 

.000 

0.31 

.000 

0.01 

.000 

0.03 

.028 

 0.00 

.830 

0.00

3 

.936 

0.28 

.000 

1      

 Share 

Price 

Change 

p-value 

0.37 

 

 

.000 

0.41 

 

 

.000 

0.58 

 

 

.000 

0.04 

 

 

.023 

-0.02 

 

 

.789 

0.02 

 

 

.600 

0.07 

 

 

.506 

0.08 

 

 

.496 

1     

Sales 

Growth 

(%) 

p-value 

-.02 

 

 

.818 

-.02 

 

 

.956 

-0.02 

 

 

.496 

0.03 

 

 

.503 

 0.00 

 

 

.998 

0.00 

 

 

.932 

0.02 

 

 

.504 

0.03 

 

 

.396 

0.00 

 

 

.786 

1   

Leverage 0.02 0.05 0.03 0.05  0.00 0.03 0.00 0.02 0.02  0.01 1  



 
 

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p-value .666 .334 .520 .319 .973 .597 .949 .751 .660 .458 

Asset 

Growth 

(%) 

p-value 

0.02 

 

 

.539 

0.02 

 

 

.883 

0.00 

 

 

.932 

-0.06 

 

 

.000 

 0.15 

 

 

.000 

0.09 

 

 

.000 

0.08 

 

 

.862 

0.04 

 

 

.520 

-0.03 

 

 

.319 

 0.12 

 

 

.597 

0.01 

 

 

.395 

1 

Source: Author’s computation, 2016 

 

4.2. Relationship between Expected Dividend and Expected Earnings 

Table 3 presents the regression of expected dividend on expected earnings. The regression coefficient is 0.4649 and 

it is statistically significant at p-value of 0.0000. This confirms that expected dividend is a significant predictor of 

expected earnings and that expected earnings is a possible mediator in the relationship between dividend and share 

price. The positive sign of the regression coefficient confirms that increase in dividend pay-out is a signal of 

increase in future earnings as posited by the dividend information signalling theories (Bhattacharya, 1980).  

The estimated regression model is: 

Mi = Ɵ1+ Ɵ2Xi + ei                                                                                                                                                                             (4) 

     = 0.0686 + 0.4649Xi + ei 

Where:  

 Ɵ1 = intercept 

Ɵ2 = the influence of expected dividend on expected earnings 

 Xi  = Expected dividend 

 Mi = Expected earnings 

 ei  = Error term 

The null hypothesis is: 

   Ho: Ɵ2 = 0. 

 

Table 3. Relationship between Expected Dividend and Expected Earnings 

Model Summary 

R      R
2 

MSE        F df1 df2    p 

0.2957 0.0875 4.2941 38.33 1 400 0.0000 

Model 

 coefficient      S.E    t    p 

Constant 0.0686 0.1036 0.6627 0.5079 

Expected Dividend 0.4649 0.0751 6.1913 0.0000 

Source: Author’s computation, 2016. 

 

4.3. Total Effect of Expected Dividend on Change in Share Price 

The total effect (without control of the effect of the moderators) of dividend on share price is shown in table 4. The 

regression coefficient of expected dividend is positive and statistically significant at p-value of 0.0018. This 

confirms that expected dividend is a significant predictor of changes in share price. The coefficient of determination 

(R
2
), 3.13 per cent, is small and suggests that there are other variables that determine changes in share price other 

than expected dividend. The positive sign of the regression coefficient of dividend indicates that share price will 

increase with increase in expected dividend. The total effect of dividend on share price measures its influence 

without the mediating variables in the regression model.  

The total effect of expected dividend on change in share price is obtained by the regression of expected dividend on 

change in share price as in the model below. 

Yi =  + Xi + ei 

     = 5.2943 + 3.8465 Xi + ei                         (5) 

Where; 

 α = intercept 

  = Coefficient of expected dividend 

Y = Change in share price   

 



 
 

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Table 4. Total effect of expected dividend on change in share price 

Model Summary 

R R
2 

MSE       F df1 df2 p 

0.1770 0.0313 1153.37 2.129 6 395 0.0492 

Model: Outcome variable is Change in Share Price 

 Coefficient       S.E      t    p 

Constant 5.2943 1.6930 3.1273 0.0019 

Expected Dividend 3.8645 1.2273 3.1489 0.0018 

Source: Authors’ computation, 2016. 

 

As seen earlier, it is necessary to decompose the total effect of dividend into the direct and the indirect (mediated) 

effects of dividend on share price via the following mediating variables: expected earnings, insider- shareholding, 

assets-growth, sales-growth, and leverage. 

4.4.   Direct Effect of Expected Dividend and the mediators on Change in Share Price 

The direct effect of expected dividend on change in share price is the influence of dividend on share price in the 

presence of the mediating variables in the regression model: The regression model is as follows: 

Yi =   α1     + α2 Xi       + α3 M1i       + α4 M2i      + α5 M3i      + α6 M4i     + α7 M5i    + ei                     (6) 

 Yi = 0.59 + 3.5545Xi + 0.68M1i+ 0.09M2i – 0.005M3i –  0.005M4i + 0.006M5i + ei 

Where: 

α1    = Intercept 

 α2   =  direct effect of expected dividend on share price 

 α3     =  direct effect of expected earnings 

 α4    =  direct effect of insider-shareholding 

 α5    =  direct effect of assets-growth 

 α6    = direct effect of sales-growth 

 α7    = direct effect of leverage 

 Y   = Change in share price 

 X   = expected dividend 

M1   = expected earnings 

M2   = insider-shareholding 

M3   = assets-growth 

M4   = sales-growth;   

M5   = leverage;      and    

ei = the error term. 

The null hypothesis is that: 

 H0 : α1 = α2 =  α3 = α4 = α5 = α6 = 0 

 

Table 5.  Direct Effect of Expected Dividend on Change in Share Price 

Model Summary: outcome variable is change in share price 

R R
2 

MSE        F df1 df2   p 

0.1770 0.0313 1153.37 2.129 6 395 0.0492 

Model 

 Coefficient      S.E      t     p 

Constant 0.5859 5.1726 0.1133 0.9099 

Expected Earnings 0.6831 0.8255 0.8275 0.4084 

Insider-Shareholding 0.0921 0.0881 1.0457 0.2963 

Assets-Growth -0.0047 0.0053 -0.8838 0.3773 

Sales-Growth -0.0054 0.0216 -0.2494 0.8032 

Leverage 0.0064 0.0193 0.3286 0.7426 

Expected Dividend 3.5545 1.2904 2.7545 0.0062 

Source: Author’s Computation, 2016. 

 



 
 

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The results in table 5 show that only the regression coefficient of expected dividend is statistically significant with a 

p-value of 0.0062. The regression coefficients of all the mediators, particularly expected earnings, are not 

statistically significant. These results indicate that dividend has unique effect on share price because the direct effect 

of expected dividend was estimated with control on the influence of the moderators (particularly expected earnings) 

on share price.  

4.5. Indirect Effect of Expected Dividends on Change in Share Price 

The verification of relevance or irrelevance of the influence of dividend on share price dictates that the respective 

indirect (mediated) effect of dividend on share price via the mediators (expected earnings, insider-shareholding, 

assets-growth, sales-growth, and leverage) are estimated and tested for statistical significance. The indirect effects of 

dividend on share price through earnings, insider-shareholding, assets-growth, sales-growth and leverage are shown 

in Table 6. 

 

Table 6.  Indirect Effect of Expected Dividend on Change in Share Price 

Mediating Variable Effect Boot  S.E Boot LLCI Boot ULCI 

Total Indirect Effect 0.3100 0.5015 -0.4850 1.6731 

Expected Earnings 0.3175 0.4823 -0.4697 1.5961 

Insider Shareholding 0.0454 0.0388 -0.0061 0.1599 

Asset Growth -0.0382 0.0547 -0.1507 0.0312 

Sales Growth -0.0212 0.0878 -0.2666 0.0925 

Leverage 0.0064 0.0375 -0.0749 0.0566 

Source: Authors’ Computation, 2016. 

 

As shown in Table 6, none of the indirect effect of dividend on share price via the mediating variables is statistically 

significant, since their respective bootstrapped confidence interval contain zero value. Hence, the null hypothesis 

that the indirect effect is zero cannot be rejected for all the mediating variables. Of particular note is that the indirect 

effect of dividend on share price via expected earnings is not statistically significant. This indicates that while the 

direct effect of dividend on share price is significant, the indirect effect of dividend on share price via expected 

earnings is not significant. Further insight into the statistical significance of the indirect effects is done with the 

normal theory (Sobel) test of indirect effect, shown in Table 7. This ultimate test of indirect effect shows that none 

of the indirect effects of the mediating variables is statistically significant.  

 

Table 7. Sobel Test of Indirect Effects of Expected Dividend on Change in Share Price 

Variable  Effect      S.E       Z     p 

Expected Earnings 0.3175 0.3921 0.8099 0.4180 

Insider Shareholding 0.0454 0.0999 0.4543 0.6496 

Asset Growth -0.0382 0.0939 -0.4067 0.6843 

Sales Growth -0.0212 0.1060 -0.1997 0.8417 

Leverage 0.0064 0.0677 0.0948 0.9244 

Source: Authors’ Computation, 2016. 

 

Though none of the indirect effect of dividends on share price is statistically significant the relative importance of 

the mediating variable can be established by computing the completely standardized effect size of the mediating 

variables. 

The completely standardized effect coefficients are not dependent on the units of the mediating variables. They are 

measured in standard deviation units and so are directly comparable (Field, 2012). Standardized coefficients 

represent the number of standard deviations that the outcome variable will change as a result of one standard 

deviation change in a predictor variable. The completely standardized indirect effect of dividend on share price is 

exhibited in table 8. 

 

Table 8.    Effect Size (Completely Standardized) Indirect Effect 

Mediating Variable Effect Boot SE Boot LLCI Boot ULCI 

Total 0.0125 0.0240 -0.0187 0.0815 

Earnings 0.0128 0.0236 -0.0179 0.0787 



 
 

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Insider-shareholdings 0.0018 0.0016 -0.0004 0.0070 

Investment-growth -0.0015 0.0023 -0.0064 0.0013 

Sales-growth -0.0009 0.0037 -0.0099 0.0044 

Leverage 0.0003 0.0016 -0.0032 0.0027 

Source: Author’s Computation, 2016. 

 

As shown in Table 8, the most important mediating variable is expected earnings with a standardized effect size of 

0.0128. Insider-shareholding variable comes a distant second with standardized effect size of 0.0018. Next are asset-

growth, sales- growth and leverage in a descending order of importance. 

The above findings are inconsistent with the dividend irrelevance proposition that the influence of dividend on share 

price is due to its relationship with expected earnings. Rather, the significance of the direct effect of dividend on 

share price suggests that dividend has unique influence on share price. The results of this study are therefore 

consistent with dividend relevance proposition. 

5. Conclusion 

The argument of Miller and Modigliani (1961) dividend irrelevance proposition implies that the effect of dividend 

on share price is fully mediated by earnings. Full mediation of the effect of dividend on share price by earnings 

means that the direct effect of dividend on share price will not be significantly different from zero and indirect effect 

of dividend on share price via earnings will be significantly positive. On the other hand, if the mediation effect is 

partial, then both the indirect and direct effect of dividend on share price will be significantly positive. In this case, 

there will be a reduction from the total effects of dividend on share price, which is accounted for by the indirect 

effect of expected dividend on share price. If the effect of expected dividend on share price is not mediated by 

expected earnings, the indirect effect of expected dividend on share price via expected earnings will not be 

significantly different from zero, while the direct effect will be significantly positive. 

In this study,mediation analyses was applied to isolate and measure the direct, indirect and total impact of expected 

dividend on firm’s share prices with the mediation of expected earnings,insider shareholdings. asstes-growth, sales-

growth and leverage. The results shows that the direct effect of dividend on share price is positive and statistically 

significant while the indirect effect of expected dividend on share price, through expected earnings is insignificant. 

Furthermore, mediation of the effect of expected dividend on share price by insider-shareholding, assets-growth, 

sales-growth, and leverage (risk) were found to be statistically insignificant, respectively. While the total effect of 

dividend on share price is positive and statistically significant. 

These results contradict dividend irrelevance proposition but are consistent with dividend relevance hypothesis. The 

conclusion following from these results is that earnings do not mediate the effect of dividend on share price. 

Dividend has significant direct effect on share price that is not due to the relationship between dividend and earnings 

and thus, the Miller and Modigliani’s dividend irrelevance proposition do not hold in the Nigerian Stock Market. 

Dividend is relevant for the valuation of shares. The study has contributed to the resolution of the puzzle about the 

relevance or irrelevance of dividend for pricing of shares in the Nigerian Stock Market. 

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