Introduction

Dividend policy is considered as strategies and principles used by company to decide on

dividend schedules to their shareholders (Litzenberger and Ramaswamy, 1982). It is however

important to know if this policy have due effect on its value. This study hence gives a critical

review of competing theories on dividend policies, discuss the main determinants of dividend

payment and also present a critical analysis of the dividend policy’s impact on shareholders

wealth in listed companies in Ghana.

Competing theories of dividend policies and their practicalities.

According to Naser et al (2013), dividend policy is vital for companies. It is employed as a

sort of signal on the prospect of growth and stability of companies. There have been

numerous study and theories on the relevance of this dividend policy. The section of the

study gives a presentation on the key theories such as dividend irrelevance theory, tax

preference theory and bird in hand.

Dividends Irrelevance Theory

This indicates that dividend policy is immaterial and inapt in defining the value of a firm.

This theory was advocated by Miller and Modigliani (1961); and is based on that assumption

that

(1) there is perfect capital market with no taxes and no transaction costs exist

(2) No one buyer influence the market price,

(3) there is free information;

(4) investors are rationally in the market,

(5) there is certainty about a firm's investment policy

(6) Managers act as perfect agents of shareholders.

These scholars made known that investors can influence return on shares irrespective of the

share's dividend. Hence, dividend is immaterial to investors. This is because investors can

formulate their own. However, this main this theory is that investors are sure of investment

policy of firms since there is free access to information. These scholars theorized that

investors have their own incentive to influence dividend policy and that there is no tax and no

transaction cost. These assumption therefore defied the norm in reality hence making this

theory not practical. Dividend policy is relevant to share value of firms.

Tax-Preference Theory

This theory postulates that due to the high the tax burden on dividends against capital gains

dividend pay-outs should be lessened (Allen, et al., 2003). This in effect suggests that in the

long run, capital gains are taxed at a lower rate than dividends. This means that taxes are

important for investors. In this respect investors most often prefer capital gains to dividends.

This is because to Allen, et al., (2003), investors have absolute control when tax on capital

gains is recognized, however, they do not have control on tax on dividends. In this respect,

this make investors prefer low dividend pay-out. Thus making the investor prefer capital

gains to dividend when there is an element of tax. This according to Allen et al. (2003) is

practical in the real world.

Bird-In-Hand Theory

Developed by Lintner and Gordon (1959) , this theory advocates that investors are risk-

averse. It also maintains that investors prefer to receive dividend than future capital gains.

Therefore, dividend pay-out is important and also influence the market value of share. To

these scholars Investors price capital gains lesser to dividends when considering investment

decisions. In that to investors dividend now is relatively certain than future capital gains.
Hence, a bird in hand (dividends) is obviously better than that which is in the bush (capital

gains). To these scholars dividend in hands resolves part of investors' uncertainty. This theory

however is real since in general investors or people would choose to receive an amount of

income now than waiting for an uncertain anticipate high amount of income in the future.

Conclusion

Reviewing theories such as the Dividends Irrelevance Theory, Tax-Preference Theory and the

Bird-In-Hand Theory, it is realised that the Tax-Preference Theory and the Bird-In-Hand

Theory are real and practical . However, the Dividends Irrelevance Theory is not real due to

its wild assumptions.

According to the existing empirical literature, what are the main determinants of

dividend payment in Ghana? Support your analysis with references from current

literature.

Dividend payment is of great interest to shareholders. This is because it gives earnings to the

investor and also reduces the retained earnings of firms. As such corporation paying dividend

to consider so many factors. Hence factors that determine the payment of dividend in Ghana

include the following

Liquidity position: It is that firms in Ghana who have high ability to convert their assets to

cash have high tendency of paying dividend as often as possible. Reason being that they have

ready and high cash flows e.g. GOIL. According to Pal and Goyal (2007) a highly liquid firm

has the ability to pay stable and more reliable dividend than companies who are not liquid.

Hence the liquidity position of firms have due impact on the ability of a firm to pay out

dividend.
Desire of Shareholders: many business organizations in Ghana in some extent are

influenced by the desire of shareholders and this have due impact influencing management of

the organizations to pay out dividend. According to Pal and Goyal (2007), investors consider

two return from their investment: one is capital gains ( this constitute increase in share price)

and the other is dividends ( this is the anticipate income from investing ). Many shareholders

investors desire and look for consistent dividends so as to reduce any uncertainty relating

to the company. Hence their desire stipulates dividend pay out.

Investment Opportunities: Generally, business organizations operating in Ghana and found

in industries which are in high growth phase in their product life cycle pay low dividend since

they rely heavily on their retained earnings. Conversely, those operating in industrial sectors

which are in decline stage or maturity normally pay high dividends since there is nothing to

invest in. hence investment opportunities determine dividend policy of firms in Ghana. Pal

and Goyal (2007) expressed that when companies have profitable investment projects and is

virtually challenged in raising external funds , they often use their retained earnings. if, firms

tend use retrained earnings they often have low dividend pay-out. Conversely, companies

lacking profitable investment opportunities of have high dividend pay-outs.

Stability of Earnings: Generally, in Ghana companies who have stable earning find

themselves paying stable dividend. Conversely those who do not have stable earnings do not

pay or pay irregular dividend to their shareholders. From the view of Pal and Goyal (2007),

firms having stable earnings can afford to pay high dividend than those who do not have

stable earnings.

Conclusion

Deliberations above indicates that main determinants of dividend payment in Ghana include

liquidity position, desire of shareholders, investment opportunities, and stability of earnings.

Using the company’s financial statements or other sources as appropriate, collect five

years’ worth of share performance and dividend data (dividend payout and dividend

yield) for 10 listed companies in Ghana which declared dividends regularly for 2014 to

2018. By analyzing your data, discuss whether dividend policy does have an impact on

shareholder wealth for firms listed in Ghana.

Shareholder wealth is considered as the present value of all anticipated returns to a

shareholders of a firm (Travlos, et al. 2001). These returns may be periodic dividend

payments from sales of shares. Dividend policy of a firm determine the dividends paid out

by companies to their shareholders and also indicates the frequency with which dividends are

paid (Travlos, et al. 2001). This segment presents an empirical basis showing the impact of

dividend policy on shareholder wealth on 10 listed entities on the Ghana Stock Exchange.

Data is collected for the period 2014-2018. Companies considered in this study include

Camelot, Societe Generale Ghana (SoGB), Standard Chartered Bank Ghana (SCB), Ecobank

Ghana (EBG), CAL Bank , Anglogold Ashanti (AGA), Ghana Oil company (GOIL), Ghana

Commercial Bank (GCB),Total, and Benso oil Palm Plantation (BOPP). The table below

gives details of the market price per share for the above listed companies.

Market price per share

Listed

companies 2014 2015 2016 2017 2018

1 Camelot 0.09 0.12 0.12 0.11 0.1

2 SoGB 0.72 0.8 0.6 0.82 0.86

3 SCB 0.3 0.34 0.2 0.2 0.41

 4 EBG 7.6 7 6.4 7.57 7.5

5 CAL 0.8 1 0.75 1.08 0.95

37 37 37 37 37
6 AGA

7 GOIL 1.69 1.4 1.1 2.69 4.8

8 GCB 5.84 3.79 3.51 5.02 4.64

9 Total 2.95 5.1 1.97 3.53 4.05

10 BOPP 2.96 2.5 2.08 6.11 5.1

5.995 5.905 5.373 6.413 6.541

Average

Average market price per share computed was ¢5.995, ¢5.905, ¢5.373, ¢6.413 and ¢6.541for

the periods 2014,2015,2016,2017 and 2018 respectively.

The table below also gives details of the Dividend per share for the above listed companies.

Dividend per share

2014 2015 2016 2017 2018

1 Camelot 0.006 0.0075 0.0075 0.0098 0.0098

2 SoGB 0 0.076 0.076 0.033 0.040

3 SCB 0.0758 1.12 0.37 0.0442 0.0568

4 EBG 0.79 0.84 0.82 0.82 0.84

5 CAL 0.081 0.097 0 0 0.048

AGA 0 0 0.3634 0.20916 0.2931

6

7 GOIL 0.02 0.025 0.025 0.028 0.042

8 GCB 0.32 0.33 0.38 0.1 0.3

9 Total 0.0771 0.1151 0.1148 0.0701 0.0768

10 BOPP 0.0706 0.0469 0.0628 0.0628 0.034

 0.14405 0.26575 0.22195 0.137706 0.188944444
Average

Dividend per share computed was ¢0.14405, ¢0.26575, ¢0.22, ¢0.1377 and ¢0.1889 for

the periods 2014,2015,2016,2017 and 2018 respectively.

Dividend yield on the other hand is computed by dividing the dividend per share by stock

price per share. The table below also gives details of the Dividend yield for the above listed

companies

Dividend yield

2014 2015 2016 2017 2018

1 Camelot 0.0666667 0.0625 0.0625 0.089091 0.098

2 SoGB 0 0.095 0.126667 0.040244 0

3 SCB 0.2526667 3.294118 1.85 0.221 0.138536585

4 EBG 0.1039474 0.12 0.128125 0.108322 0.112

5 CAL 0.10125 0.097 0 0 0.050526316

AGA 0 0 0.009822 0.005653 0.007921622

6

7 GOIL 0.0118343 0.017857 0.022727 0.010409 0.00875

8 GCB 0.0547945 0.087071 0.108262 0.01992 0.064655172

9 Total 0.0261356 0.022569 0.058274 0.019858 0.018962963

10 BOPP 0.0238514 0.01876 0.030192 0.010278 0.006666667

Average 0.06411464 0.3814874 0.2396569 0.0524775 0.050601932

Dividend yield computed was ¢0.0641, ¢0.3814, ¢0.2396, ¢0.0524 and ¢0.0506 for the

periods 2014,2015,2016,2017 and 2018 respectively.

 A linear regression was designed for show the impact of dividend policy on the market price

of share (which represents the shareholders wealth) of the 10 listed companied used for the

study. A model designed is shown below

Fv = a0 +b1Dp +b2Dy+ e

Where

Firm value =f (dividend per share, and dividend yield)

Dy= dividend yield

Dp = dividend per share

a = Intercept

Coefficient Table

Coefficient Standard Lower Upper Lower Upper

s Error t Stat P-value 95% 95% 95.0% 95.0%

- -

1.65830 3.41737 0.07599 1.4680 12.8021 1.4680 12.8021

Intercept 5.667056 8 2 5 7 8 7 8

- -

4.24013 0.48210 21.874 14.6135 21.874 14.6135

dividend yield -3.63028 6 -0.85617 9 1 5 1 5

- -

dividend per 11.6891 0.42431 0.71261 45.334 55.2544 45.334 55.2544

share 4.959946 9 9 8 6 5 6 5

An anticipated linear regression established is shown below

Fv= 5.66 – 3.63028 Dy +4.959Dp

The model shows a positive intercept of ¢5.6. This means that all thing being equal if there

exist no dividend yield and dividend per share the average market shareholder value is ¢5.6.

Hence an increase in the intercept value holding other variable constant on the average

increase the shareholders’ value. In the same line, it was noticed that there exist a positive

relation between dividend per share and the average firm value. This implies that an increase

in dividend per share eventually increase the firm value. However, this was not significant

given a p-value of 0.712. This associates to the findings of Graham and Dodd (1951).

According to this model, as market per share increases when dividend are declared, it

increases dividend per share Hence, market price of shares positively relate to high dividend

per share. Contrarily, it was noted that there exist a negative relation between dividend yield

and firm value. As such when there is an increase in the value of dividend yield, there is a

corresponding negative effect on the firm value. This was however, not significant given the

p-value of 0.48. This associates to the findings of Zakaria et al. (2012). They found that

Dividend yield related negatively to changes in market price of shares.

Conclusion

The above presentation shows that dividend policy has a mist effect on shareholder wealth of

shareholders. This is to say that there exist a positive impact of dividend per share on

shareholders’ value and there also exist a negative impact of dividend yield on shareholder

value. The magnitude of impact of a dividend policy however depends on the magnitude of

change in the dividend yield or per share of the firm in question.

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