




































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

ISSN 2576-1196   E-ISSN 2576-120X 

Impact Factor: 2.7 

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

 

 

7 

 

Micro Determinants of Dividend Policy in Quoted Manufacturing 

Companies in Nigeria 
 

 

Ngozi G. Iheduru
1 
& Charles U. Okoro

2 

 

1
Assocaite Professor, Department of Accountancy, Faculty of Business Administration, Imo State University, 

Owerri, Nigeria  
2
 M.Sc,Department of Accountancy, School of Management Sciences, Ken Saro-Wiwa Polytechnic, Bori, 

Rivers State, Nigeria 

 

Correspondence: Ngozi G. Iheduru,FCA,
 
Associate Professor, Department of Accountancy, Faculty of Business 

Administration, Imo State University, Owerri, Nigeria  

 

 

Received: October 10, 2018       Accepted: October 20, 2018          Online Published: November 7, 2018   

              

 

 

Abstract 

This study examined the factors that determine dividend policy of quoted manufacturing firms in Nigeria. The 

general purpose is to examine factors that affect dividend policy of the quoted firms. After exhaustive literature 

review, cross sectional data was sourced from financial statement of twenty quoted manufacturing firms.  

Dividend payout rate was proxy for dividend policy while growth opportunities, liquidity, management 

efficiency, profit level, cost of capital, company size and debt equity ratio were proxy for independent variables. 

The study applied the Pooled Ordinary Least Square (OLS), fixed effect, and random effect regression models 

using the e-view statistical package.  Findings reveal that growth opportunities, profit level, management 

efficiency and debt equity ratio have negative effect on dividend payout ratio while liquidity, cost of capital and 

company size have positive effect on dividend payout ratio of the manufacturing firms. We conclude that 

liquidity cost of capital and company size significantly determine dividend policy while growth opportunities, 

management efficiency, profit level and debt equity ratio have no significant effect on dividend policy. The 

study recommends among others, that managers/consultants should carefully examine the economic factors 

within a firm’s operating environment when carrying out the functions of developing or designing dividend 

policy for the firm. 

 

Keywords: Dividend Policy, Quoted Manufacturing Companies, Dividend payout ratio, Management 

efficiency. 

 

1. Introduction 

The primary goal of every corporate organization is to maximize shareholders wealth. This motivates 

management to formulate policies and make decisions that facilitates the achievement of the objectives. The 

policies and decisions will include (amongst others) investment, financing and dividend policy decisions. 

Dividend policy is a finance management function that determines the proportion of company’s earnings that is 

to be distributed to the shareholders and the proportion that is to be retained for further investment. As in 

Bartlomej and Jack (2015), it is determined by micro factors of the firm such as profitability, liquidity, company 

size, capital structure, growth of the firm, and corporate governance. 

Dividend – which is a reward for investment in equity can be made in the form of cash dividend, bond dividend, 

scrip dividend and or property dividend.  It can also be in a combination of any of the listed forms.  In the past 

some scholars such as Gordons (1959) as in Amidu and Abor (2006) opined that micro forces such as 

profitability level of a firm are the indicators that the firm is capable of declaring dividend.   This is not entirely 



 

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true today as there are many objectives which an organization may pursue such as the growth opportunities of 

the firm –which could determine the dividend payout regime of a firm. 

Understanding the behavioral aspect of dividend policy was first accredited to Lintner (1956), as in Brigham 

and Daves (2010), who split the reasons for dividend policy into two: Management sought to avoid making 

changes in their dividend rate that might reverse within a year which led to consistency of dividend policy and 

that dividend policy is based on earnings capacity of the firm.  The finance profession has long struggled to 

develop a simple satisfactory model of dividend determination without much success. According to Eugene and 

Kenneth (2011), Modigliani and Miller (1961) show that in perfect capital market with no information 

asymmetry and predetermined investment decision, the value of the firms is independent of the financing 

decisions. Hence, a firm’s financing decision including dividends, have no effect on the value of the firm, or the 

distribution of wealth between classes of security holders. However, in imperfect settings, dividend can 

influence shareholders wealth by providing information to investors or through wealth redistribution among 

claimants.  It can be argued that dividends provide information about the firm’s future cash flow and as such 

decision bothering on dividend can effect a change on a firm’s value.   

Knowledge of factors that determine dividend policy is crucial to the investors in the equity market as well as to 

the policy makers. For investors, discovering the economic variables could help them to appropriately forecast 

fluctuations in stock prices. Dividend policy was just concerned with selecting between payments of earnings to 

shareholder as cash dividend or retaining the profit in the firm. It only determined the incidence of dividend 

payments and the amount of dividends payable. However, in today’s corporate finance, dividend policy 

addresses other issues such as how firms can attract investors in different tax brackets; how the firm’s market 

value can be increased by this policy and share repurchases so as to reduce the incidence of paying out cash 

dividends. 

Despite the various reforms, the performance of the corporate organizations remains abysmal and affects the 

dividend policy of listed firms in Nigerian Stock Exchange. As in Urhoghide and Ojeme (2016), there have 

been fluctuations in the dividend paid in the last three years and they also observed the drops in dividend 

payments, and that some have not declared dividend over the past three decades. 

As mentioned earlier, dividend policy administration has metamorphose with the intent to attract investors, 

reduce further incidence of paying out cash, etc.   Urhoghide and Ojeme (2016) also opined that most quoted 

firms in the Nigerian Stock Exchange have no consistent dividend policy over the past three decades. This 

observed inconsistency could be attributed to ignorance and or improper understanding of the dynamics in 

dividend policy administration and this may lead to loss of opportunities to the corporate managers, investors, 

governments, and the general public. 

The factors that determinant corporate dividend policy in Nigeria has well been examined in literature as in 

(Abubakar, 2015; Urhoghide and Ojeme, 2016; Dada, 2015) to mention but a few; but the studies were on the 

banking industry.  The only attempt by Oyinlola, Oyinlola and Adeniran (2014) on the manufacturing industry 

was limited in scope as it centered on the breweries.   This creates a knowledge gap on factors that determine 

dividend policies in the manufacturing industry. From the above, this study intends to examine factors that 

determine dividend policy of quoted manufacturing firms in Nigeria. It has been observed that while some 

organizations pay dividend when they declare profit but some others do not consider profit as a necessary and 

sufficient indication for declaring dividend.  This has kept a lot of investors wondering what really determines 

when an organization is likely to declare dividend. 

1.1 Research Questions  

This study is provoked by the following questions. 

 To what extent does profit level determine dividend policy of quoted manufacturing firms in Nigeria? 

 To what extent does liquidity determine dividend policy of quoted manufacturing firms in Nigeria? 

 To what extent does company size determine dividend policy of quoted manufacturing firms in 

Nigeria? 

 To what extent do growth opportunities determine dividend policy of quoted manufacturing firms in 

Nigeria? 

 To what extent does management efficiency determine dividend policy of quoted manufacturing firms 

in Nigeria? 

 To what extent does cost of external financing determine dividend policy of quoted manufacturing 

firms in Nigeria? 

 To what extent does debt equity ratio determine dividend policy of quoted manufacturing firms in 

Nigeria? 

 



 

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1.2 Research Hypotheses 

 H01: There is no significant relationship between profit level and the dividend policy of quoted 

manufacturing firms in Nigeria 

 H02: Liquidity does not affect the dividend policy of quoted manufacturing firms in Nigeria. 

 H03: There is no significant relationship between company size and the dividend policy of quoted 

manufacturing firms in Nigeria. 

 H04: Growth opportunities have no significant impact on the dividend policy of quoted manufacturing 

firms in Nigeria. 

 H05: here is no significant relationship between management efficiency and the dividend policy of 

quoted manufacturing firms in Nigeria. 

 H06: Cost of external financing do not affect the dividend policy of quoted manufacturing firms in 

Nigeria. 

 H07: Debt equity ratio does not affect the dividend policy of quoted manufacturing firms in Nigeria. 

2. Literature Review 

Dividend Policy refers to a company’s policy which determines the amount of dividend payments and the 

amounts of retained earnings for reinvesting in new projects. This policy is related to dividing the firm’s earning 

between payment to shareholders and reinvestment in new opportunities. Dividend policy involves the 

determination of the payout, method of payment and the aggregate retention of earnings policy that 

management follows in determining the size and pattern of cash distributions to shareholders over time. 

Profit Level has long been regarded as the primary indicator for a company’s capacity to pay dividends. Lintner 

(1956) surveyed corporate chief executive officers and chief financial officers and found out that dividends are 

a function of current and past profit levels. A firm’s current and previous year’s profit are an important factor in 

influencing the dividend policy.  Dividends are a function of current and past profit levels and the future 

earnings and expected future earnings.  

Liquidity and cash flow position of the firm is also a vital consideration. This arises from the fact that dividend 

payout entails huge cash flows. Hence, a firm encountering liquidity challenges would find it difficult to pay 

higher dividend. Empirical evidence from Ahmed, Imran, and Ali (2014) reveal that dividend payout depends 

more on cash flow, which reflect the company’s ability to pay dividend rather than on earnings which are often 

influence by accounting practices.  Liu and Hu (2005) in their study found out that cash dividend payment was 

higher than accounting profit. However they found out that fifty (50%) percent of the sampled companies had 

dividend cash payments higher than free cash flow.   

Company Size is one of the major determinants of cash dividend payout. Larger sized firms have easier access 

to capital market.  This reduces their rate of dependency on internally generated revenue and hence, fosters 

prompt payment of higher rate of dividend. Fama and French (2000) found out that payers and no payers differ 

in terms of profitability, investment opportunities and size. Three fundamentals were evident profitability, 

investment opportunity and size as the key factors in decision to pay dividends. Dividend players tend to be 

large, profitable firms with earnings on order of investment outlays. Small firms have no easy access to 

additional capital hence they retain a higher proportion of their earnings, while big firms pay high dividend to 

their shareholder than small firms. Young firms prefer to retain all internal resources and do not pay dividends. 

Growth Opportunities of a firm determine the dividend payout ratio of a firm. Rapidly growing firms have a 

substantial need for funds to finance the abundance attractive investment opportunity instead of paying large 

amount as dividend and stand a chance of issuing new shares for investment capital. Firms with Higher 

dividend payout ratios tend to have low growth rates all things being equal. 

Management Efficiency is an important aspect of corporate strategy. It refers to the manager ability to reduce 

cost. Corporate efficiency signifies a level of performance that describes a process that uses the lowest amount 

of inputs to create the greatest amount of output. In finance, the concept relates how well the Naira invested in 

alternative produces revenue to the firm. It is a measure that determines the present value of an investment. 

Management efficiency is determined by the quality of manpower, risk management and corporate strategy.  

Management efficiency encourages cost effectiveness and by extension increase in profitability and this can 

affect positively dividend policy of a quoted firm. 

Transaction Costs of External Financing: A firm with a higher leverage has higher dependency on external 

finances. The smaller percentage of the company is held by outsiders, the higher the company’s dividend 

payout. Dividend payout ratio is dependent on transactions of external financing, financial constraints created 

by the financial leverage and the agency cost of outside ownership. A highly leveraged firm pays low dividend 

to their shareholder due to cash flow obligations to their financiers. 



 

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Debt- to- Equity Ratio is a financial ratio that indicates the relative proportion of equity and debt used to finance 

a company's assets. This ratio is also known as risk, gearing or leverage. Some scholars have opined that risk 

affects firms' dividend policy. Firms with high growth rates and high dividend payout ratios utilize debt 

financing and firms with high leverage compared to their respective industry.  However, conflicting evidence on 

the relationship between dividend payout ratios and leverage abound. In some industries payout and leverage 

ratios are positively related while in other industries the relationship is negative. There exist statistically 

significant and negative relationship between firm’s risk and the dividend payout ratios. It is evident that firms 

having a higher level of risk will pay out dividends at lower rate. In summary, the literature review points out to 

the fact that corporate profitability, cash flow, tax, sales growth, market-to-book ratio, and debt-to-equity ratio 

may impact upon the dividend payout ratio. Previous researchers concentrated on the determinants of 'standard 

ratio of dividend to earnings, or the standard dividend payout ratio.  

Theoretical Framework 

Relevance Theory 

Gordon (1962) stated that investors may prefer present dividend instead of future capital gains because the 

future situation is uncertain even if in perfect capital market. This theory further postulates that many investors 

may prefer dividend in hand in order to avoid risk related to future capital gain. Also in his work, he opined that 

there is a direct relationship between dividend policy and market value of share even if the internal rate of 

return and the required rate of return will be the same and that the share price of a firm is subordinate of 

discounted flow of future dividends. However, this theory may not be universally applicable as Diamond in 

1967 selected 255 US based firms as a sample and studied the association of firm’s value with dividends and 

retained earnings in 1961 and 1962; and reported that there is only weak evidence that investors prefer 

dividends to future capital gain. His findings also showed a negative association between growth of company 

and preference of dividend. 

Bird in Hand Theory 

The Gordon and Lintner (1959) bird-in-the-hand theory states that dividends are relevant.  Those Investors have 

a preference for a certain level of income now rather than the prospect of a higher, but less certain, income at 

some time in the future. The bird-in-the-hand may sound familiar as it is taken from an old saying; a bird in the 

hand is worth two in the bush. In this theory the bird in the hand' is referring to dividends and the bush is 

referring to capital gains. They argued that investors value dividends more than capital gains when making 

decisions related to stocks. As a company increases its payout ratio, investors become concerned that the 

company's future capital gains will dissipate since the retained earnings that the company reinvests into the 

business will be less. The essence of the bird-in-the-hand theory of dividend policy is that shareholders are risk-

averse and prefer to receive dividend payments rather than future capital gains. Shareholders consider dividend 

payments to be more certain that future capital gains thus a bird in the hand is worth more than two in the bush". 

Gordon contended that the payment of current dividends resolves investor uncertainty. Investors’ value a Naira 

expected dividend more highly than a Naira expected capital gain because the dividend yields component is less 

risky than the expected return hence; it is believed that investors require and prefer high dividends to capital 

gains resulting to a generous dividend policy by a firm. 

Tax Preference Theory 

Taxes are important considerations for investors.  This is because capital gains are taxed at a lower rate than 

dividends. This theory states that the reason why investors prefer low dividend payout to high payout as: 

 Long term capital gained are less taxed as compared to dividend and 

 Those taxes on capital gains are not paid unless the stock is sold.  

Signaling Hypothesis 

Dividends are information signals about the performance of a company which are necessary for the investors’ 

decision making. It has been observed that the price of a firms stock generally rises when its dividend is 

increased and the price will fall when the dividend drops. Thus, firms are expected to raise dividends when the 

future earnings are expected to rise.  This lead to the smoothening hypothesis of dividends by management 

which predicts that dividends are maintained at a constant rate and any increase are carried out rather cautiously 

by the firm to avoid significant dividend cuts even when the corporate earnings falls. This is because managers 

have better information of the firm’s performance than the investors.  However, some scholars argue that not all 

investors are the same as some regard dividend changes as a signal of management earnings forecasting. 

Therefore dividends act as a signal to investors on the current and future performance of the firm. Generally a 

rise in dividend payment is viewed as a positive signal, conveying positive information about a firm's future 

earnings prospects resulting in an increase in share price. Conversely a reduction in dividend payment is viewed 

as negative signal about future earnings prospects, resulting in a decrease in share price. 



 

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Information Asymmetry and Dividend Signaling  

This model was developed by Bhattacharya in 1979.  The dividend signaling theory states that, a firm that 

increases its dividend payouts is signaling that it has expected future cash flows sufficient to meet expenses 

without increasing the probability of bankruptcy. Given information asymmetry as a market imperfection, the 

signaling concept of financial capital structure can be readily applied to dividend policy. Managers signal 

investors because financial managers have privileged information about the firm’s expected cash flows that 

outside investors cannot know. This theory explains why firms pay dividends despite the apparent tax 

disadvantage. In Bhattacharya’s (1979) dividend signaling model, investors believe that an unexpected dividend 

increase is a favorable signal. This assumes that the dividend contains information regarding firm value not 

conveyed in other public information, and that the dividend is a valid signal since it is expensive for less 

valuable firms to mimic. Then the signaling value of dividends is positive and can be traded off against the tax 

costs. The implication of such a dividend signaling model is that it suggests an optimal dividend policy where 

the signaling benefits of paying dividends offsets the tax disadvantages of paying dividends.  

Dividend Policy and Agency Costs  

A wealth-maximizing firm will seek monitoring policies that minimize costs, and it is likely that dividend 

payments serve as a means of monitoring management performance. A greater dividend payment implies that 

the firm will need some costly external financing. Thus the fact that the firm must obtain external financing 

introduces outside suppliers of capital that help monitor management for the equity owners. Some rational firm 

would however propose an optimal dividend policy that is a trade-off between the flotation costs of raising 

external capital and the benefit of reduced agency costs.  Several studies have shown that firms with higher 

growth potential have lower dividend payouts, while firms with diffuse outsider holdings have higher dividend 

payouts. Clearly, dividend policy is one way to reduce excessive cash from the firm, although Kahle (2002) 

indicates that share repurchases do not eliminate all agency costs.  

Dividend Relevance Theory 

The Modigliani and Miller (1961) dividend-irrelevance theory says that investors can affect their return on a 

stock regardless of the stock's dividend. Investor could then buy more stock with the dividend that is over the 

investor's expectations. As such, the dividend is irrelevant to investors, and it can be further interpreted that 

investors care little about a company's dividend policy since they can simulate their own. 

Their theory was built on a range of key assumptions, similar to those on which they based their theory of 

capital structure irrelevancy. Modigliani and Miller (1961) argue that the value of the firm in a perfect capital 

market depends only on the income produced by its assets not on how this income is split between dividends 

and the retained earnings. It is worthy of note here that in a Perfect Capital Markets, there are no taxes both 

corporate and personal taxes; no transaction costs on securities; investors are rational; information is 

symmetrical hence all investors have access to the same information and share the same expectations about the 

firm's future as its managers.  

Empirical Review 

Kinfe (2011) investigated the factors determining dividend payout policy of banks in Ethiopia from 2006- 2010 

using panel data set of their audited financial statement as a source of data and ordinary least square as a 

technique for data analysis. The finding reveal that the main characteristic of firm dividend payout policy were 

that dividend payment related strongly and directly to firm size and lagged dividend per share but negatively to 

liquidity ratio. However, the result further revealed that there is no relationship between profitability, leverage 

and growth with dividend payout. The study validates the use of panel data technique and the ordinary least 

square regression model as a tool appropriate to engage this study.  The time scope is small and was conducted 

using the Ethiopia banking industry.   

Hussainey, Mgbame and Mgbame (2011) examined the relationship between dividend policy and share price 

changes in the UK stock market. Multiple regression analyses were used to explore the association between 

share price changes and both dividend yield and dividend payout ratio. A positive relationship is found between 

dividend yield and dividend policy changes and a negative relation between dividend payout ratio and dividend 

policy changes. In addition, it is shown that a firm’s growth rate, debt level, size and earnings explain dividend 

policy changes.  The result of this study may not apply completely to the Nigerian environment.  

Maniagi, Ondiek, Musiega, Maokomba, and Egessa (2013) examined the determinants among dividend payout 

of non-financial firms listed on Nairobi Securities Exchange. Dividend payout ratio was dependent variable 

while independent variables were profitability, Growth, current earnings, and liquidity. Size and business risk 

was taken as moderating variables. Return on equity current earnings and firms‘ growth activities were found to 

be positively correlated to dividend payout Business risk and size, both the two taken as moderating variables 



 

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increase the precision of significant variables from 95% to 99% hence among major determinants of dividend 

payout.  Here again the result of this study may not fit properly to the Nigerian environment. 

Dada (2015) evaluated the determinants of dividend policy of Nigerian banks. The study was based on panel 

data of selected Banks that are listed on the Nigerian Stock Exchange (NSE) having financial data for 2008 to 

2013 that was covered in the study. The study revealed that Dividend payment is positively related with 

leverage, performance, corporate governance and last year dividend while it is negatively related with firm's 

liquidity.  Most empirical studies on this subject in Nigeria bordered greatly on the Nigerian Banks.  Just like 

others, this study was limited to the banking industry and its findings may not completely define what happens 

in other sectors of the economy such as the manufacturing industry. 

King’wara (2015) investigated the determinants of dividend payout ratios in Kenya. He examined the effect of 

six factors including earnings of the firm, ratio of retained earnings to total assets, firm size, growth 

opportunities, leverage and market value on dividend policy. It was observed that dividend payout ratio is 

impacted negatively by the growth rate, debt ratios and firm size and positively by earnings, market-to-book 

ratio and retained earnings to total assets ratio. This study was done outside Nigeria and as such may not apply 

in the Nigerian situation.  

Urhoghide and Ojeme (2016) examined the determinants of dividend payout by Nigerian quoted banks. They 

stated that they observed that dividend payout in the banking industry witnessed widespread drop during the 

2008 financial melt-down and the 2011 bank reforms in Nigeria motivated this research. The study covered a 

period of seven years (2007 -2013) and the variables measured were liquidity, growth, leverage, profitability, 

firm size, and previous year’s dividend with data collated from the final account of all the quoted banks in 

Nigeria.  Panel data regression technique was used for the analysis of data and they reported that liquidity, firm 

size, profitability and the dividend paid in the previous year affected dividend payout positively, while growth 

and leverage in the capital structure affected it negatively.  They recommended that firms and investors should 

consider the determinants of dividend payout in their dividend policy decision.  This study like many others on 

this subject in Nigeria concentrated on the Banking industry. 

3. Literature Gap 

Existing literature on the subject (using the Nigerian business environment) has focused more on the banking 

industry, with limited studies of citable significance that incorporate other industries such as the manufacturing 

industry. Therefore this study examines the economic variables that affect dividend policy in the context of the 

Nigerian manufacturing industry. 

The literature examined in this study did not investigate direction of causality between the independent and 

dependent variables that determine dividend policy. Studies that attempt to do so failed to establish exact and 

causal relationship between the variables (Anil and Kapoor, 2008; King’wara, 2015; Kinfe, 2011; Maniagiet at., 

2013; Manigagi and El-Khoury, 2014, Ahmed et at, 2014).For this purpose, this study will enhance the analysis 

by establishing the causal dynamic relationship that exists between the independent and dependent variables and 

the extent to which it affect dividend policy of Nigeria quoted manufacturing firms.  The existing studies also 

did not address the case of the developing financial market like Nigeria but dealt with the financial market of 

the developed countries where it is considered more perfect than in developing countries. In this study, we will 

examine the economic variables that determine dividend policy of Nigeria manufacturing firms.It is however 

note-worthy that this study will apply the Gordon relevance theory. Gordon found that dividend policy affects 

stocks even in the perfect capital market as opposed to irrelevance theory of Miller and Modigliani. He noted 

that investors may prefer present dividend instead of future capital gains because the future situation is 

uncertain even if in perfect capital market. Empirical evidence on dividend policy and capital structure has 

validated the relevance theory than the irrelevance. This is based on the fact that the assumptions of irrelevance 

theory such as the perfect market are not attainable most especially in the developing markets and the emerging 

financial markets like Nigeria. 

4. Research Methodology 

This study used quasi experimental research design approach and descriptive survey. The quasi experimental 

research design approach combines theoretical consideration (a prior criterion) with the empirical observation to 

extract maximum information from the available data. This study used published data for the 10 years period 

beginning from 2007 - 2016. The secondary data was obtained from the stock exchange fact-book, the Central 

Bank of Nigeria statistical bulletin (and other publications) and financial statement of the quoted firms. The 

population is the manufacturing concerns quoted in the Nigerian Stock Exchange.  As at December 31, 2006; 

there were twenty five (25) publicly listed manufacturing concerns in Nigeria. There is however sixty three (63) 

publicly listed manufacturing concerns as at the end of October 2017 in Nigeria.   



 

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Apparently, 20 manufacturing firms that are listed on Nigeria Stock Exchange were used as our sample size. 

Panel data structure allows us to take into account the unobservable and constant heterogeneity, that is, the 

specific features of each quoted firm. The researcher also employed pooled Ordinary Least Square (OLS), Fixed 

Effects and Random Effects regression models to test the various hypotheses.  

In addition, OLS method has been employed in a wide range of economic relationships with fairly satisfactory 

results. Fixed effects and random effects models will aid to observe variations among cross-sectional units 

simultaneously with variations within individual units over time. It assumes that variables are strictly time 

disparity or time invariant. This undermines an exploration of the effect of slow change within individual firms’ 

factors. Hence, the rationale for adopting Fixed Effects and Random Effects models estimator as additional test 

was to enable the researcher control time contrast and time invariant variables, and thereby controls the effect of 

the unobserved heterogeneity in the dataset. It is worthy of note that, coefficient of estimations are reliable 

when regression parameters do not change over time and do not differ between various cross-sectional units, 

therefore, because the regression estimation differ widely between the two models (Fixed and Random Effects 

models), the Hausman test was adopted and the result formed the basis of the researcher’s findings and 

recommendations. Panel data over the period from 2007 - 2016 was used.  These analytical techniques enabled 

the researcher attain justifiable and robust results. 

  XitY 10            1 

Where Y = Dependent Variable  

Xit1   = Independent variable 

0   = Regression Intercept 

   = Error Term 

Disaggregating Equation 3.1 to form the multiple regression models, we have 

Model Specification 

Pooled regression specification 

 
ititititititititit DERCCCSPLMELIQGOPoDPR 177665544332211      2 

Fixed Effect Model Specification 

itiiitititititititit idumDERCCCSPLMELIQGOPoDPR 119

77665544332211        3 

Random effect model specification  

ititititititititit iDERCCCSPLMELIQGOPoDPR 177665544332211  
    4 

Where 

DPR = Dividend Payout Rate 

GOP = Growth opportunities measured by the percentage increase in stock turnover 

LOQ = Liquidity measured by current asset less current liabilities 

ME = Management Efficiency measured by Total Revenue to Total Expenditure 

PL = Profit level measured by return on investment 

CS = company size measured by total asset divided by total liabilities 

CC = cost of capital using weighted average cost of capital  

DER = debt equity ratio measured by total equity divided by total debt 

et =  Stochastic or disturbance/error term.  

t  =  Time dimension of the variables  

α 0  =  Constant or intercept.  

Table showing the proxy variables definition and expected result 

Proxy Variable Definition  Expected Sign 

Dividend Payout Ratio DPS/EPS Dependent Variable 

Debt Equity Ratio TD/TE + 

Company Size LTA/TA - 

Return on Investment (Profitability)   PAT/TI + 

Growth Opportunity %    ST - 

Liquidity CA/CL + 

Cost of Capital WACC - 

Management Efficiency TR/TE + 



 

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Estimation Techniques  

Panel unit root test result 

The data were checked for the presence of unit root using the ADF Fisher Chi-Square and Philiperon Fisher 

Chi-Square, which is based on the well-known Dickey–Fuller procedure. The null hypothesis for these tests is 

that there is a presence of non-stationary series against the alternative hypothesis of stationary series. The unit 

root test is important because non-stationary series regression estimation leads to spurious regression 

estimations with the wrong magnitude and sign of the parameter of the regressors, with wrongly inferred 

implications. The study assumes an absence of a time trend; hence it is tested for stationarity allowing for 

constant only. Stationarity denotes the non existence of unit root. We shall therefore subject all the variables to 

unit root test using the augmented Dickey Fuller (ADF) test specified in Gujarati (2004) as follows. 

Etyiyy t

m

i
tt  


 1

1
121          5 

Where:  

ty   = change time t 

1 ty  = the lagged value of the dependent variables  

t   = White noise error term  

If in the above  =0, then we conclude that there is a unit root. Otherwise, there is no unit root, which means 

that it is stationary. The choice of lag will be determined by Akaike information criteria. 

Decision Rule 

t-ADF (absolute value) > t-ADF (critical value) : Reject Ho (otherwise accept H1) 

Note that each variable will have its own ADF test value. If the variables are stationary at level, then they are 

integrates of order zero i.e 1(0). The unit root problem earlier mentioned can be explained using the model: 

Y= Yt-1 + I           6 

Where Yt is the variable in question; i is stochastic error term. Equation (a) is termed first order regression 

because we regress the value Y at time “t” on its value at time (t- 1). If the coefficient of Yt-i is equal to 1, then 

we have a unit root problem (non stationary situation). This means that if the regression. 

Y= Yt-1 + I            7   

Is run and L is found to be equal to 1 then the variable Yt has a unit root (random work in time series 

econometrics).If a time series has a unit root, the first difference of such time series are usually stationary. 

Therefore to salve the problem, take the first difference of the time series. The first difference operation is 

shown in the following model: 

Y= (L-1) Yt-1 + I                                                                                                                                                        8 

Yt-1 + I           9 

 (Note:  =1-1= 0; where L =1; Yt = Yt - Yt-i)       

Integrated Of Order 1 Or I(I) 

Given that the original (random walk) series is differenced once and the differenced series becomes stationary, 

then the original series is said to be integrated of order I or I (1). 

Integrated of Order 2 Or I (2) 

Given that the original series is differenced twice before it becomes stationary (the first difference of the first 

difference), then the original series is integrated of order 2 or 1(2).Therefore, given a time series has to be 

differenced Q times before becoming stationary it said to be integrated of order Q or I (q). Hence, non 

stationary time series are those that are integrated of order 1 or greater.The null hypothesis for the unit root is: 

Ho: a = 1; 

The alternative hypothesis is Hi: a <1. 

We shall test the stationarity of our data using the ADF test. 

Granger Causality Test 

Thus, Granger causality test helps in adequate specification of model. In Granger causality, test, the null 

hypothesis is that no causality between two variables. The null hypotheses is rejected if the probability of F* 

statistics given in the Granger causality result is less than 0.05. The pair-wise granger causality test is 

mathematically expressed as:  



 

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111

1

11

1

uxYxY t

x
n

i

t

y
n

i

ot  







          10 

and  

1
V

1y
xxdp1

n

1i

1Yt
y
1

dp
n

1i
o

dp
t

x 








 11 

Where xt and yt are the variables to be tested white ut and vt are the white noise disturbance terms. The null 

hypothesis 011  yy dp , for all I’s is tested against the alternative hypothesis 01 x  and .01 ydp if 

the co-efficient of 
x

1 are statistically significant but that of ydp1  are not, then x causes y. If the reverse is 

true then y causes x. however, where both co-efficient of 
x

1 and 
ydp1 are significant then causality is bi–

directional. 

5. Data Presentation, Analyses and Interpretations 

Presentation of Results 

Below are tables showing the results of the level series result, significance of the model (Hausman Test), 

Stability Test, Causality Test, and the Hypothesis Test. 

 

Table 1: Presentation of Level Series Result 

Variable  Pooled Effect Fixed  effect Random effect 

  

coefficient  

        T. 

stat 

p. value  

coefficient 

         T. 

stat 

 p. 

value 
 

coefficient 

       T. 

stat 

  p. 

value 

GOP -0.030499 -

0.182884 

0.8551 -0.009773 -

0.043160 

0.9656 -0.117053 -

0.569806 

0.8550 

LIQ 0.796832 3.299509 0.0004 1.544558 4.972520 0.0002 0.408731 1.117045 0.0050 

ME 0.278481 4.802463 0.0000 0.113972 0.284487 0.7764 0.590341 0.631148 0.4229 

PL -0.238385 -

0.683799 

0.4950 -0.080018 -

0.207835 

0.8356 -0.116753 -

0.008359 

0.4946 

CS 1.029037 4.526383 0.0000 2.301552 2.683141 0.0080 1.375980 2.551107 0.0003 

CC -0.366100 -

3.490270 

0.0079 -0.364344 -

3.399826 

0.0034 -0.654290 -

2.094724 

0.0075 

DER -0.046870 -

0.537981 

0.5912 -0.021320 -

0.224931 

0.8223 -0.453289 -

0.692466 

0.5909 

C 44.10257 4.198639 0.0000 23.80438 1.886767 0.0609 34.76437 3.432767 0.0000 

R
2
 0.443356   0.743071   0.343468   

AdjR
2
 0.307158   0.408853   0.117158   

F-

statistic 

3.197754   5.065960   1.568924   

 F- Prob 0.006071   0.000804   0.006071   

D W  1.844330   2.000017   1.844330   

Source:  extract from E-view 9.0 

From the table, the pooled effect model found that 44.33% and 30.7% variation on the dependent variable 

which is dividend payout ratio can be explained by variation on the independent variables. The F-statistics and 

the F-probability proved that the model is significant; the Durbin Watson statistics of 1.84 is less than 2.50 but 

greater than 2.00 which implies the absence of serial autocorrelation within the time series. The beta coefficient 

of the variables found that growth opportunities, profit level, cost of capital and debt equity ratio have negative 

effect on dividend policy while liquidity, management efficiency and cost of capital have positive effect on the 

dependent payout. The t-statistics and probability coefficient found that  liquidity, management efficiency 

company size and cost of capital have significant impact on the dependent variable while growth opportunities, 

profit level and debt equity ratio have no significant impact on dividend payout rate of the manufacturing firms. 



 

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The fixed effect model found that the independent variables can explain 74.3% and 40.8% variation on the 

dependent variable. The F-statistics and the probability found that the model is statistically significant. The 

Durbin Watson statistics of 2.007 is greater than 2.00 but less than 2.00 which imply the absence of serial 

autocorrelation within the time series. While the beta coefficient also showed that liquidity, management 

efficiency, company size and cost of capital have significant impact on the dependent variable while growth 

opportunities, profit level and debt equity ratio have no significant impact on dividend payout rate of the 

manufacturing firms. 

The results of the cross sectional random effect found that the independent variables can explain 34.3% and 

11.7% variation on the dependent variable which is the dividend payout ratio, while the F-statistics and the F-

probability found that the model is statistically not significant. The Durbin Watson statistics of 1.84 is less than 

2.00 but greater than 1.50; this means the absence of serial autocorrelation within the time series.  It shows that 

liquidity, management efficiency of the manufacturing firms. 

 

Table 2: Testing the Significance of the Models 

TEST: Redundant CHI–SQ STAT DF                                PROB 

Cross-section F 1.016650 (19,166) 0.4447 

Cross-section Chi-Square 21.244787                      

19 

0.3234 

TEST: Hausman                CHI–SQ STAT DF                                PROB 

Cross-section random 12.815882        7                   0.0467 

Source: Extract from E-view (9.0) 

In testing the validity of the models, the fixed effects on the cross section Redundant Fixed Effect- Likelihood 

Ratio, the P- value is 0.000 indicating that the effects are significant. Select the random effect and perform the 

Correlated Random Effects- Hausman test, testing the random effects model against the fixed effects model. 

The null hypothesis in that case is that both tests are consistent estimators and the random effects model is 

efficient. Under the alternative hypothesis, only the fixed effect is consistent. Since the p- value is 0.000, the 

null hypothesis is rejected and, therefore, the fixed effects model is to be preferred. 

 

Table 3:  Test for Stability 

Variables ADF - Fisher Chi-square/ PP - 

Fisher Chi-square 

Statistics  Probability REMARK DECISION 

DPR ADF - Fisher Chi-square  75.2451  0.0006 Stationary Reject H0 

 PP - Fisher Chi-square  90.5138  0.0000 Stationary Reject H0 

DER ADF - Fisher Chi-square  73.4426  0.0010 Stationary Reject H0 

 PP - Fisher Chi-square  178.549  0.0000 Stationary Reject H0 

CS ADF - Fisher Chi-square  62.9022  0.0119 Stationary Reject H0 

 PP - Fisher Chi-square  88.9974  0.0000 Stationary Reject H0 

CC ADF - Fisher Chi-square  76.1090  0.0005 Stationary Reject H0 

 PP - Fisher Chi-square  149.272  0.0000 Stationary Reject H0 

GOP ADF - Fisher Chi-square  52.0136  0.0066 Stationary Reject H0 

 PP - Fisher Chi-square  70.7596  0.0019 Stationary Reject H0 

LIQ ADF - Fisher Chi-square  72.9358  0.0011 Stationary Reject H0 

 PP - Fisher Chi-square  192.340  0.0000 Stationary Reject H0 

ME ADF - Fisher Chi-square  85.9849  0.0000 Stationary Reject H0 

 PP - Fisher Chi-square  237.332  0.0000 Stationary Reject H0 

PL ADF - Fisher Chi-square  78.0410  0.0003 Stationary Reject H0 

 PP - Fisher Chi-square  132.574  0.0000 Stationary Reject H0  

Source:  Extract from E-view 9.0 

 

The table above presents the summary results of the ADF and PP panel unit root tests. The results show that the 

null hypotheses of a unit root test for first difference series for all the variables can be rejected at all the critical 

values indicating that the level series which is largely time-dependent and non-stationary can be made 

stationary at the first difference and maximum lag of one. Thus, the reduced form model follows an integrating 



 

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order of 1(1) process and is therefore a stationary process. It also reveals that the test of stability in the residuals 

from the level series regression is significant at all lags. Furthermore, this indicates that the regression is no 

more spurious but real. That is to say, all the variables are individually stationary and stable.  

 

Table 4: Test for Causality 

Hypotheses    Obs        F. Stat Prob. DECISION 

 GOP does not Granger Cause DPR  154  3.99117 0.0002 Reject   H0 

 DPR does not Granger Cause GOP   1.88558 0.1553 Accept  H0 

 LIQ does not Granger Cause DPR  160  0.10405 0.9012 Accept  H0 

 DPR does not Granger Cause LIQ   2.74547 0.0373 Reject   H0 

 ME does not Granger Cause DPR  160  1.29596 0.2766 Accept  H0 

 DPR does not Granger Cause ME   2.28507 0.0052 Reject   H0 

 PL does not Granger Cause DPR  146  0.52234 0.5943 Accept  H0 

 DPR does not Granger Cause PL   1.33544 0.2663 Accept  H0 

 CS does not Granger Cause DPR  160  1.29760 0.2761 Accept   H0 

 CC does not Granger Cause DPR  160  4.67673 0.0004 Reject   H0 

 DPR does not Granger Cause CC   0.79315 0.4542 Accept  H0 

 DER does not Granger Cause DPR  160  0.41274 0.6626 Accept  H0 

 DPR does not Granger Cause DER   3.61125 0.0293 Reject   H0 

Source:  extract from E-view 9.0 

The objective of causality test is to examine if past variation on the variables can affect significantly the present 

condition. The study found that there is one way relationship between growth opportunity and dividend payout 

ratio but no causality between dividend payout ratio and growth opportunity. Liquidity granger cause dividend 

payout ratio but dividend payout ratio does not granger cause liquidity this implies acceptance of null 

hypotheses. Management efficiency does not granger cause dividend payout ratio but dividend payout ratio 

granger cause management efficiency. Profit level does not granger cause dividend payout ratio and dividend 

payout ratio does not granger cause profit level. Company size granger cause dividend payout ratio but dividend 

payout ratio does not granger cause company size. Cost of capital does not granger cause dividend payout ratio 

and dividend payout ratio does not granger cause cost of capital. Debt equity ratio grangers cause dividend 

payout ratio and dividend payout ratio granger cause debt equity ratio. 

Test of Hypotheses 

 

Table 5 :Showing the Test of Hypotheses and Results  

Variables T-TEST P-Value  CRITICAL VALUE DECISION 

GOP -0.043160 0.9656 0.965>0.05 Accept  H0 

LIQ 4.972520 0.0002 0.0002<0.05 Reject H0 

ME 0.284487 0.7764 0.7764>0.05 Accept  H0 

PL -0.207835 0.8356 0.8356>0.05 Accept H0 

CS 2.683141 0.0080 0.0080<0.05 Reject  H0 

CC -3.399826 0.0034 0.0034<0.05 Reject  H0 

DER -0.224931 0.8223 0.8223> 0.05 Accept  H0 

Source: Computed by researcher from E-view 9.0 

 

Table 6: Cross-Sectional Fixed Effect for Individual Firm 

S/N Company                   Coefficient 

1 Champion breweries  7.638369 

2 seven up bottling company  2.885348 

3 Ashaka cement  2.806344 

4 Cadbury -3.388142 

5 UAC  3.275649 

6 EVANS MEDICAL  4.668036 



 

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Source: extract from e-view 9.0 

Coefficient from the individual companies shows that, champion breweries, seven up bottling company, Ashaka 

cement, UAC, Evans Medical, Glaxo, Lafarage, Nestle, Nigerian ropes and Nigerian breweries and PZ cushion 

have positive coefficient while Cadbury, pabod breweries, flour mills, Guinness, May and Baker Nigerian bags, 

Unilever, University press and Vita foam have negative effect.  This implies that an increase in the independent 

variables on champion breweries, seven up bottling company, Ashaka cement, UAC, Evans Medical, Glaxo, 

Lafarage, Nestle, Nigerian ropes and Nigerian breweries and PZ cushion will have positive effect on their 

dividend payout ratio; while such increase will have a negative effect on the dividend payout ratio of Cadbury, 

pabod breweries, flour mills, Guinness, May and Baker Nigerian bags, Unilever, University press and Vita foam 

6. Discussion of Findings 

The objective of this study was to investigate economic variables that determine dividend policy of selected 

quoted manufacturing firms in Nigeria.  After a cross examination of the validity of the models, the fixed effect 

model was adopted therefore discussion of this result is based on the fixed effect result.   

Findings reveal that growth opportunities have negative and insignificant effect on the dividend policy of the 

manufacturing firms. This is not too surprising, as a company that has opportunity for growth is expected to 

retain more of its earnings for reinvestment on the growth areas rather than engaging in such growth venture 

with external funding. The negative effect of growth opportunity on dividend payout rate confirms the a priori 

expectation of the result. Growth companies have little incentive for dividend payout as the policy is geared 

toward reinvestment of the profits for better growth opportunity and greater future yield.  

The study found that liquidity has positive and significant impact on dividend policy of the selected 

manufacturing firms. This finding confirms the expectation of the results and implies that management of the 

manufacturing firm has optimum liquidity management policy that increases the investment of the firms and 

also made the company meet its short term liabilities. It confirms the findings of Jensen et al. (1992), Rozeff 

(1982) and Easterbrook (1984).  These scholars argued that companies liquidity have to pay higher dividends in 

order to reduce the agency conflict between managers and shareholders.  The result shows that liquidity is a 

major determinant of dividend payout rate.  

Management efficiency has positive but insignificant effect on dividend policy of the manufacturing firms. It 

implies that increase in management efficiency will increase dividend payment but not to a large extent. 

Management efficiency which measures the percentage of total costs to total revenue is expected to have a 

positive impact on dividend policy. The positive impact of management efficiency on dividend payout rate 

confirm and validates the empirical findings of Anyamaobi and Lucky (2017).The positive impact implies that 

management of the manufacturing firms are cost efficient, however the insignificant impact of the variables can 

be traced to high cost of operation and high operating leverage.  

Company size have positive and significant impact on the profitability of the quoted manufacturing firms, this 

implies that increase in corporate size will significantly lead to increase on dividend policy of the quoted 

manufacturing firms. Again it can be understood that the bigger companies would want to operate a consistent 

dividend policy so as to maintain their goodwill and reputation.  This decision also could assist them in wooing 

investors and stabilize the company share price at the capital market.  The positive impact of corporate size 

implies a major determinant of dividend policy which is consistent with the findings of Fama and French (2001) 

that the probability of paying dividends increases with the firm size. Larger firms pay higher cash dividends for 

several reasons. First, large firms face high agency cost as a result of ownership dispersion. Secondly, large 

7 PABOD BREWERIES -0.239920 

8 FLOOR MILLS -5.071780 

9 GUINNESS -1.018345 

10 GLAXO  0.716166 

11 LAFARAGE  1.240728 

12 MAY and BAKER -2.405355 

13 NESTLE  1.744464 

14 NIGERIA BAG -0.822705 

15 NIGERIA ROPES  1.113366 

16 NIGERIA BREWERIES  0.442032 

17 PZ CUSHION  1.543388 

18 UNILEVER -7.485542 

19 UNIVERSITY PRESS -4.962050 

20 VITA FOAM -3.027725 



 

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firms have easier access to capital markets, and they are able to raise funds with lower issuance costs for 

external financing. Consequently, large firms are better able to pay dividend than small firms.  

Cost of capital was found to have a negative impact on dividend payout ratio of the manufacturing firms. The 

negative impact of costs of capital confirms the expected result as cost of capital normally will bring the profit 

level down.  The negative impact of cost of capital   confirms the a-priori expectation of the result but 

invalidates the trade-off theory and market timing theory of capital structure. According to Pandey (2005), 

increase cost of capital exposes corporate organizations to financial risk such as leverage risk and credit risk. 

The negative impact on dividend payout rate implies that the companies are highly levered or have more debt 

than equity in the capital structure. It also implies that significant proportion of the company profits is used to 

settle external creditors than dividend payout rate. 

Profit level was found to have a negative impact on dividend payout ratio of the manufacturing firms. The 

negative impact of profitability on dividend payout rate is contrary to the expectation of the result as 

profitability is expected to have a positive impact on dividend payout rate. The negative impact validates the 

findings of Okpara (2010), which concluded that when firms experience surplus earnings, they allocate most of 

them into retention for the plugging back and growth of the firm. Furthermore, Ferris, et al., (2013) found that 

firms in the United Kingdom pay dividends while they had negative earnings. The studies of Baker and Powell 

(2000), Aivizian et al., (2003) and Amindu and Abor (2006) also confirm this finding. The study found that 

corporate size and management efficiency have positive but insignificant impact on dividend payout rate. Debt 

equity ratio has significant impact on dividend payout rate. The positive impact of debt equity ratio on dividend 

payout rate   implies that debt equity ratio have significant impact in determining dividend policy of the firm. 

The finding confirms and validates corporate strategies for optimal capital combination. The coefficient shows 

that company like champion breweries can add 7.6%, seven up can add 2.8% while ashaka cement will add 

2.8% to achieve a positive impact on their dividend payout regime; while Cadbury will reduce the pooled 

coefficient by 3.38% to achieve same.  This is contrary to expectation and can be blamed on dividend policy of 

the companies.   

7. Conclusion 

Dividend policy has been one of the areas of corporate finance that has attracted more works of empirical and 

theoretical research. This study was based on identifying the determinants of dividend policy of selected quoted 

manufacturing firms in Nigeria and applied Ordinary Least Square Regression Model, where the dependent 

variable was dividend payout ratio. In the researcher’s opinion, distribution of profit in the form of dividends 

may have a mediating function of conflicts between investors and managers; it is a way of signaling the market 

and attracts investors.  

8. Recommendation 

In view of the findings of this research, the following recommendations are advanced.  

 The manufacturing firms should formulate policies and device strategies of increasing profit level and 

the structure of corporate assets should be integrated with the objective of dividend policy and liquid 

asset of the firm should be optimal; this implies that the companies should not be too liquid because 

liquid assets such as cash do not add any profit to the firm and corporate tax should be integrated with 

the objective of dividend policy. 

 Management of the manufacturing firms should ensure that adequate policies are formulated for the 

growth of the firms and the company size should be properly managed to achieve the objective of 

shareholders wealth maximization through dividend policy and all strategies should be devised to 

increase management efficiency by reducing operating cost as this will enhance profitability and 

dividend policy.  This can be achieved by engaging the services of cost management accountants to 

study the operating system and develop strategies necessary to bring cost below the budget.  

 The finance manager should ensure optimal capital combination and ensure lower cost of capital to 

enhance dividend policy and there is need to reduce risk both internal and external within the 

company’s operating environment, all corporate governance codes should be properly articulated and 

adhered to and management should ensure that corporate governance is integrated as corporate 

philosophy of the manufacturing firms. 

 Government should ensure hitch free environment for the manufacturing firms to operate that will 

encourage them to be more favourably disposed to dividend growth of their firm and 

managers/consultants should carefully examine the economic factors within a firm’s operating 

environment in carrying out the function of developing or designing dividend policy for the firm or 

client. 

 



 

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