Test of the Implication of Life Cycle Theory of Dividend among Firms Listed on the Nigerian Stock Exchange
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Date
2014
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Department of Accounting, Adamawa State University, Mubi
Abstract
One of the recent explanations on dividend payout policies is the lifecycle theory of dividend The theory argues that the stage of a firm in its financial life cycle is a major determinant of the firm IS payout policy. However, the implications of the theory remain uncertain in the Nigerian context due to lack of empirical evidence in this regard The main aim of this study is to examine whether the life cycle theory explains dividend payout policies of firms listed on the Nigerian Stock Exchange. To achieve this objective, firm level data were extracted from Thomson Reuter's Worldscope Database (Datastream). Random effect analysis was carried out on a final sample of sixty four listed companies between 2005-2011. The findings of the study is consistent with the predictions of the life cycle theory as retained earnings to total equity(proxy for lifecycle theory) was found to be positively and significantly related to dividend payout ratio. Based on this result, the study concludes that low dividend payout by the listed firms is due to the fact that many firms are in the growth stage of their lifecycle and are still exploring growth opportunities. To prevent negative reaction of investors towards low payout ratio, the study recommends that investors should be educated that low dividend payment does not necessarily imply that the firm is not performing well.
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Keywords
Dividend, Lifecycle, Retained Earnings, Total Equity