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.O PhD Candidate Department of Banking and Finance University of Portharcourt ihejirikap@yahoo.com ABSTRACT The study investigated the dividend policy of manufacturing companies in Nigeria using a sample of 17 companies over 17 years (1989-2005). Using Pooled Least Squares with tests under common effects, fixed effects and random effects, the study found on aggregate that there is a strong relationship between profit after tax, Size and past dividend payout and dividend policy decision of manufacturing companies in Nigeria. However, the study establishes that dividend policy decisions are unique to the firm. It is recommended that manufacturing companies in Nigeria examine their individual circumstances when making dividend decisions with respect to profit after tax and Size.

INTRODUCTION

About 50 years ago, Melton Miller and Franco Modigliani (1961) started a controversy that up to the present, the issues seem as if they were muted yesterday. A search in many finance journals local and international will immediately reveal that the concept of dividends and dividend policy are on the hot pen of finance and economic researchers/academicians. The debate initially was whether the proclamation of Miller and Modigliani (MM) in 1961 that dividend policy is irrelevant under certain contestable assumptions holds. At first, the issue was and still is on the relationship between dividend payout policy and the value of the firm. In the process of determining the nature of this relationship, issues as to whether dividend policy impacts on the capital structure and investment decisions of firms arose. At a point, in recognition of the fact that in reality investors can not wish away: taxes, transaction costs, information asymmetry, agency costs, and many more factors that MM based their assumptions on, researchers started in search of factors/determinants of dividend payout policy of firms. Several factors such as: firm size, profitability, investment policy, past dividend payout, corporate governance/ agency costs, taxation, ownership structure, leverage, growth, risk, cash flow and others were examined.

With time, several theories came on stream to explain why and how companies pay dividend. Mention is made here of theories like: Dividend irrelevance theory, The life-cycle theory, The catering theory, The pecking order theory, Agency theory, Separation theory etc. These discussions on dividends and dividend policy have also produced insights as to what firms do with respect to dividend payout policy. Every finance student passes through such pedagogical issues like: Full payout policy A bird in the theory Constant payout ratio Small plus extra dividend policy Clientele effect Stock dividends Stock repurchases And many more concepts geared towards the explanation of firms dividend behavior. However, Fisher (1976) overwhelmed by the growing number of issues and magnitude of the debate wrote in his dividend policy puzzle article that the debate has turned into a puzzle and asked: what should corporations do about dividend policy? To resolve the puzzle according to Frankfurter and Wood (1997), dividend policy of firms should be seen as a cultural phenomenon that changes continuously according to environment and time. Thus, dividend behavioral models must necessarily be continuously modified to capture those factors that are peculiar to a particular period and environment. After all, as 3

Adelgan (2003) indicate, the assumption of constant response coefficient is unrealistic. This is because the response coefficient is affected by firm-specific, industry-specific and economic factors which are dynamic in nature. Possibly because of this understanding, several researchers are concentrating on individual country analysis and/or regional analysis while a few are concerned with industry and firm specific analysis. For instance, Manoj (2004) dwelt on the factors influencing dividend policy decisions of corporate India, Kaczynski (2005) studied the determinants of capital structure of Japanese companies. Also, Eriotis and Vasiliou (2005) investigated the effect of distributed earnings and size of firm to its dividend policy in Greece. Von Eije and Magginson (2006) studied the dividend policy of firms in the European Union while Kenwal (2008) wrote on the determinants of dividend payout ratios of the Indian information technology sector. More researchers like Sexena (2009) wrote on the determinants of dividend payout policy of regulated and unregulated firms. Bancel et al (2009) concentrated on the cross-country determinants of payout policy of European firms while Musa (2009) analyzed the dividend policy of firms in Nigeria. Furthermore, Hafeez and Attiya (2009) studied the determinants of dividend policy in Pakistan with Kapoor (2009) dwelling on the impact of dividend policy on shareholders value in India while Okpara (2010) diagnosed the determinants of dividend policy in Nigeria using factor analytical approach. Other studies include: Gil and Joseph (2005), Walter et al (2006), DeAngelo and DeAngelo (2007), Baker(2009), Magni and Velozpareja (2009), Franc-Dabroska (2009), Jungsub lee (2009), Kumari et al (2009), Tamule and Rambo (2009), not forgetting Brave et al (2005) who wrote on payout policy in the 21st century. All these efforts however, have not yielded the desired resolution. According to Sexena (2009), the issue as to why firms pay dividend is as yet unresolved. There is lack of unanimity among researchers though everyone agrees that the issue is important as dividend payment is one of the most commonly observed phenomenon in corporations worldwide.

These studies also purposed to study the capital market as a whole even as they made general conclusions on the factors affecting dividend policy decisions not minding that countries differ, industries differ, even companies differ whether in same sectors or not.

Therefore, the present study, though a study on dividend policy is an exclusive analysis of the dividend policy of quoted manufacturing companies on the Nigerian Stock exchange. The study investigates the impact of firm size, past dividend and earnings after tax on dividend policy decisions of manufacturing companies in Nigeria.

Following from the above introduction, the next section explores related Literature review conceptual and empirical. Next we present the methodology adopted in this study. This will be followed by the analysis of data and interpretation of findings and finally concluding remarks are presented.

REVIEW OF RELATED LITERATURE Many researchers have provided insights, theoretical as well as empirical into the dividend policy puzzle. However, the issue as to why firms pay dividends is yet unresolved. Pontifications for a corporate dividend policy have been proposed in the literature, but there is no agreement among researchers. Everyone however, agrees that the issue is important as dividend payment is one of the most commonly observed phenomenons in corporations worldwide. Thus, the importance of dividend policy cannot be over emphasized. Researchers have found that firms use dividends as a mechanism for financial signaling to investors regarding the stability and growth prospects of the firm. Again, dividends play an important role in a firms capital structure. Yet some studies have established relationships between firm dividend and investment decisions. According to the residual dividend theory, a firm will pay dividends only if it does not have profitable investment opportunities, i.e. positive 5

net present value projects. Further, a firms stock price is affected, among other things, by the dividend pattern. Firms usually do not like to reduce or eliminate dividend payments (Woodridge and Gosh, 1988, 1991); hence, they make announcements of dividend initiation or increase only when they are confident of keeping up with their good performance. Indeed, the market value of a firm is dependent upon its stock price. One of the most popular models for stock valuation (the dividends discounting models) relies upon the assumption that the firm will pay dividends until eternity. Black (1976) in his study posed this question: What should the corporation do about dividend policy? Researchers have proposed many different theories about the factors that influence a firms dividend policy. A number of factors have been identified in previous empirical studies to influence the dividends policy decisions of firms. These include: Profitability Risk Cash flows Agency costs Growth Ownership Taxes Price earning ratio Leverage Size of firm etc

EMPIRICAL FRAMEWORK Profits have long been regarded as the primary indicator of the firms capacity to pay dividends. Lintner (1956) concluded a classic study on how U.S managers make dividend decisions. He developed a compact mathematical model based on survey of 28 well established industrial U.S 6

firms which is considered to be a finance classic. According to him, the dividend payout pattern of a firm is influenced by the current year earnings and previous year dividend. Baker, Farelly and Edelman (1986) surveyed 318 New York stock Exchange (NYSE) firms and concluded that the major determinants of dividend payments are anticipated level of future earning and pattern of past dividends. Pruitt and Gitman (1991) asked financial managers of the 1000 largest U.S firms and reported that current and past year profits are important factors influencing dividend payments. Baker and Powell (2000) conclude from their survey of New York Stock Exchange (NYSE) listed firms that dividend determinants are industry specific and anticipated level of future earnings is the major determinant. Pruitt and Gitman (1991) find that risk (year to year variability of earnings) also determine the firms dividend policy. A firm that has relatively stable earnings is often able to predict approximately what its future earnings will be. Such a firm is more likely to pay a higher percentage of its earnings than firms with fluctuating earnings. In other studies, Roseff (1982), Lloyd et al (1985) and Collins et al (1996) used beta value of a firm as an indicator of its market risk. They found statistically significant and negative relationship between beta and dividend payout. Their findings suggest that firms having higher level of market risk will payout dividends at lower rate. D Souza (1999) also finds statistically significant and negative relationship between beta and dividend payout. The liquidity or cash flow position is also an important determinant of dividend payouts. A poor liquidity position means less generous dividends due to shortage of cash. Alli et al (1993) reveal that dividend payments depends more on cash flows, which reflect the companys ability to pay dividends than on current earnings, which are less heavily influenced by accounting practices. They claim that current earnings do not really reflect the firms ability to pay dividends. Green et al (1993) questioned the irrelevance argument and investigated the relationship between the dividends and investments and financing decisions. Their study showed that dividend payout levels are not totally decided after a firms investment and financing decisions have been made. Dividend decision is taken along with investment and financing decisions. Partington (1983) revealed that 7

firms use target payout ratios, firms motives for paying dividends and the extent to which dividends are determined are independent of investment policy. Higgins (1981) indicates a direct link between growth and financing needs: rapidly growing firms have external financing needs because working capital needs normally exceed the incremental cash flows from new sales. Higgins (1972) shows that payout ratios are negatively related to firms needs to finance growth opportunities. Rozeff (1982), Lloyd et al (1985) and Colions et al (1996) all show significantly negative relationship between historical sales growth and dividend payout. D Souza (1999) however shows a positive but insignificant relationship in the case of growth and negative but significant relationship in the case of market to book value. Crutchley and Hansen (1989) examine the relationship between Ownership, dividend policy and leverage and conclude that managers make financial policy trade offs to control for agency costs in an efficient manner. Smith and Watts (1992) investigated the relations among executive compensation corporate financing and dividend policies. They conclude that a firms dividend policy is affected by its other corporate policy decisions. In addition, Jensen, Solberg and Zorn (1992) linked the interaction between financial policies and insider ownership to information asymmetries between insiders and external investors. They employed a simultaneous system of equation and found that corporate financial decisions and insider Ownership are interdependent. Atul and Saxena (2009) conclude that a firms dividend policy will depend upon its past growth rate, future growth rate, systematic risk, the percentage of common stocks held by insiders, and the number of common stockholders. However, the established relationships were all negative except for number of common stockholders. Uzoaga and Alozieuwa (1974) investigated the pattern of dividend policy pursued by a sample of 13 companies in Nigeria within four years (1969-1972). The study concludes that the change in the level of dividend paid by companies could best be explained by fear and resentment rather than the conventional factors used in the Lintners model. This conclusion was challenged by later studies such as Inanga (1975, 1978), Soyode (1975), and Oyejide (1976). They criticize the 8

study for its failure to empirically test the contribution of conventional factors to change in dividend of the affected companies. I think Inanga, Soyede and Oyejide missed their argument. Note that the period (1969 -1972) was a war time period in Nigeria. The question is what statistical tests will a study that covered only four years produce? Four years is not enough for a company to go one cycle and using results from such test will not compare favourably or do I say reasonably with Lintners model that used data spanning several years and the number of companies included in the study far outnumber that of Uzoaga and Alozieuwa. Similarly, Inanga (1975) and Soyode (1975) also failed to empirically investigate the extent to which Lintners model could be used to explain the dividend policy of the companies in Nigeria. The two studies rather advanced both conventional and non-conventional factors such as excess liquidity resulting from the infusion of new capital and the unrealistic pricing policy of the Capital Issues Commission (CIC) as explanation for the change on dividend behaviour of their sampled companies.

Oyejide (1976) empirically tested Lintners Model as modified by Britain (1966). His study covered 8 years (1968-1976) and included 19 companies. The study found strong support for Lintners model in Nigeria. Oyejide (1976) found support in later studies of Izedonmi and Eriki (1996) and Adelagan (2003). Adelagans study is more interesting as it covered a period of 13 years (1984-1997) against 5 years for Izedonmi and Eriki. Adelegan (2003) re-evaluated the incremental information content of cash flow in the modified Lintners model. Musa (2005) Criticized both Lintners and Rozeffs Model with their modifications on the basis of the fact that the model was predicated on the assumption of constant response coefficient implying that investors react identically to all explanatory indices of firms. As Adelagan (2003) and others indicate, the assumption of constant response coefficient is unrealistic. This is because the response coefficient is affected by firm specific, industry- specific and economic factors which are dynamic in nature. 9

Well, since according to Frankfurter and Wood (1997) dividend policy of firms is a cultural Phenomenon that changes continuously according to environment and time, dividend behavioral models must necessarily be continuously modified to capture those factors that are peculiar to a particular period and environment. Musa (2005) claimed to have developed a different model. He called it the parsimonious approach. However, according to Lee (2002) and others, his parsimonious approach does not guarantee a conclusion and if based on incorrect working hypotheses or interpretations of incomplete data, may even strongly support a false conclusion. Considering the fact that he admitted to have manipulated his sample selection of firms, the result of his study cannot be relied upon. To expanciate, he selected firms with positive earnings, firms that paid dividend during the period under study, those with record of cash flows and those firms with record of capital spending.

This study however, adopts the Lintners Model as modified. The study among other objectives will establish the firms specific and industry- specific nature of dividend policy decisions among manufacturing companies in Nigeria

METHODOLOGY The objective of this study is to investigate the dividend policy of manufacturing companies in Nigeria. The population of this study comprises all the quoted manufacturing companies at the Nigerian stock exchange (1989- 2005). These are spread across the different sectors based on the Nigerian Stock Exchange (NSE) classifications. They also cut across different types of production / products. A total number of 17 companies entered into the analysis in this study. All the data used were sourced from the Nigerian stock exchange (NSE) fact book several issues. 10

MODEL SPECIFICATION AND MEASUREMENT OF VARIABLES MODELS OF DIVIDEND POLICY John Lintner (1956) in a study of 600 firms out of which he chose to interview and survey 28 focused on how corporate managers decide on dividend policies of their companies. Out of the many observations Lintner made, one important conclusion is that companies have a long-run target dividend payment ratio ( Nikolaos (2005) ).

In his analysis, Lintner developed a partial adjustment model that captures his findings. According to Lintner in Eriotis (2005), each firm has a target dividend payout ratio (ri). Using this payout ratio, Lintner computed the expected target dividend at time t (Dit) as a proportion of the real earnings of the firm i at time t (Eit ). That is: Dit = riEit-------------- (1)

However, as observed by Eriotis (2005), in the real world the dividend which the firm finally pays at time t, Dit differs from the expected one D*it. Therefore, he suggested that it is more reasonable to model the change between the actual dividend at time t and time t-i, instead of the actual dividend at time t only. Furthermore, taking the change in actual dividend into account, it is realistic and consistent with the long- run target payout ratio, to assume that the actual change in dividend at time t, (Dit- Di t-I) equals to a constant portion (Di) Plus the speed with which the dividend at time t-I, has adjusted to the target dividend at time t

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(Dit- Dit-i). Since the expected dividend at time t is a proportion of the real earnings at time t, the final model is given as: Dit - Dit-I = i + CiriEit - CiDit-i . (2) Where: Dit Eit Ci = = = Actual dividend at time t Earnings of the firm during time t the adjustment factor (measures the speed of adjustment of dividend to optimal target dividend at time t) ri = the target payment ratio

Dit =

Where

Dit = 1 2

Eit

Lintner reported an 85% explanatory power when the above model was applied. Thus dividend changes in his sampled companies is explained 85% of the time by the independent variables of earnings and past dividend. Fama and Babiak (1968) reviewed the performance of Lintners model. Using 392 companies over a period of 18 years (1946-1964), they tested Lintners model with

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their data and methodology and found that it performed well but noted that it can perform better by introducing the lag of earnings and removing the constant term. Another way to derive equation 3 above as used in the Literature is the adaptive expectations model. This model assumes that the dividend at time t is given by a proportion (Ki) of the long-run expected earnings at time t (Eit) Plus a disturbance term (vit). Dit = Ki Eit + Vit (4)

In addition, the model assumes that the changes at time t in long-run expected earnings (Eit*-Eit-i) can be expressed as a proportion i of the change between the actual earnings at time t and the expected long- run earnings at time t-I (Eit Eit*) That is E*it E*it-I = iEit E*it-i (5) However, if the successive earnings changes are independent, the optimal value of

i is one (full adjustment). The assumption here is that the change in dividend (Dit

Dit-i) is equal to a constant portion i plus the proportion Ki of the actual earnings Eit minus the dividend at time t-I . Dit Dit-I = i + KiEit - Dit-I + Vit (6) Nevertheless, Fama and Babiak (1968) suggest that the adaptive expectations model appears to be an inappropriate specification to their sample. Joannos and Filippas (1997) examined the dividend policy of 34 companies listed in the Athens stock exchange during the period 1972-1988. Their results conclude that Lintners model best describes the dividend policy of the firms. They

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identified current profits as the most important variable that tends to influence changes in dividends while the previous dividends also significantly influence the changes in the dividend policy of firms. Eriotis and Vasiliou (2003) and Vasilious and Eriotis (2005) test the model of Lintner and suggest two different versions that they say improves on the Lintners model. Their firs model considered as dependent variable the change in dividend between time t and time t-1 and as independent variables, the change in earning of the firm between time t and t-1 and the change in dividend between time t-1 and t-2.

Dit = i +1Eit + 2Di,t-1 +uit.(7)

Where: Dit Eit = = the dividend of the firm i at time t Net income of firm i available for stockholders at time t Change between dividend at time t and time t-1 ie (Dit-Dit-1) Change in net income at time t (Eit- Eit-1) error term.

Dit = Eit

= =

uit

The second variant of their model considers the variables but without the change or rather their lags. Dit = i + 1Eit + 2Dit-i + Eit.. (8) Their findings in (2003) suggest that dividend payout of firms depend upon the firms long-run target dividend that is adjusted according to the net earnings of the firm.

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Vasilious and Eriotis (2005) extended their 2003 study by introducing Size as measured by sales of the firm along Earnings and the lags of dividend and earnings. According to them, sales include both the risk of company and the related bankruptcy cost. They observe that large companies are more independent and less risky than small firms which make them more attractive to investors. They use data between 1996 and 2001 and a sample of 49 companies resulting to a Panel data with 718 observations excluding some missing data. They employ econometric methods designed for Panel data in the analysis of their data. The use of Panel data models is a powerful research instrument, since it combines the cross- sectional data with time series data, and provides results that could not be estimated and studied if only time series or cross- sectional data were used. A general model for panel data that allows the researcher to estimate panel data with great flexibility and formulate the difference in the behaviour of the cross- section elements is theoretically given as: Yit = xit + Zit + Eit.. (9)

Where: Yit Xi Zi = = = is the dependent variable is the matrix with the independent variables is a matrix of constants terms and a set of individual or group specific variables which may be observed or unobserved. If the matrix Zi can be observed, for individuals, then the least square method gives efficient and consistent estimators

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Three considerations are pertinent in this analysis of panel data. 1. The pooled regression considers that Zi contains only a constant term. In this case, the ordinary least square method provides an efficient and consistent estimate for the and the coefficients. 2. If Zi is unobserved and correlated with the independent variables, then the least squares estimator of is biased and inconsistent, as a result of an omitted variable. The Fixed effects method takes those problems into account and gives an unbiased and consistent estimate of and . 3. If the unobserved individual effects can be formulated and under the assumption that these observations are uncorrelated with the independent variables, the econometric model can be estimated by the random effects method. Vasilious and Eriotis (2005). The findings of Vasilious and Eriotis (2005) conclude that firm earnings and size are capable of explaining 95.4% of the dividend policy decision of firms when cross- sectional weights are considered.

Following previous studies starting with Lintner (1956) through Eriotis and Vasilious (2005), Dividend in this study is measured by the Naira Payment as recorded in the companies annual accounts. In this study, dividend is the dependent variable and is hereby referred to as DIV. Other variables in this study include Profit after Tax PAT

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SIZ DIVt-I

Size is used here to represent A) the cost of issuing new equity and B) Increases in Investment opportunity Deriving from the above discussion, the model for estimation in this study is given as follows: DIV= F (PAT, SIZ, DIVt -1) .. (10) Where: DIV, PAT, SIZ and DIVt-I, are as defined above. This study tests the explanatory power of a model based on the profit after tax (PAT) of the firm and its size (SIZ) and introduces the lags of PAT and Dividend. Thus: Dit =

i + 1 PATit + 2 SIZit + 3DIVit-1 + 4PAT it-1 +Eit . (11)

EMPIRICAL RESULTS The econometric model specified above is estimated by using the common, the fixed effects and the random effect model and are presented below: TABLE 1: RANDOM EFFECTS MODEL Model Mothod Constant PATit

Dit = i + 1 PATit + 2 SIZit + 3DIVit-1 + 4PAT it-1 +Eit

Random effect (GLS, Variance Components Coefficient T-Stat Prob. (t.Stat) 0313.15 0.997470 0.3195 0.569208 10.50597 0.0000

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- 2.577998 87.49800 -6.674614 0.903133 0.901583 402162.0 Generalized least square Is the square error of the regression

The results using the random effects total model indicate that 90% of the amount of dividend paid by manufacturing companies can be explained by the variables tested. Except the constant term, all the variables are statistically significant at the 5% level of significance. Table 2 COMMON COEFFICIENT CROSS SECTION WEIGHTS Dit = i + 1 PATit + 2 SIZit + 3DIVit-1 + 4PAT it-1 +Eit model Method Constant SIZ PAT DIV(-I) PAT(-I) R2 R2 adj F-stat S.E COMMON COEFFICIENTS (GLS CROSS SECTION WEIGTHS Coefficients Stand. error t-stat Prob. -1416.115 1152.973 -1.228229 0.2205 -0.000800 0.003637 -0.219862 0.8262 0.359873 0.051600 6.974257 0.0000 1.005270 0.070300 14.29969 0.0000 -0.279461 0.033617 -8.313198 0.0000 0.936367 0.935349 919.6996 276597.5

As can be noticed from the R2 and R2 adjusted in Table 2 (0.936, 0.935 respectively) the estimation of equation 11 using common coefficients and the Generalized least squares with cross section weights improved our result against the earlier estimation with R2 and R2 adjusted of 0.903 and 0.901 respectively. However, size though maintained its negative relationship is no longer significant

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as a factor determining dividend policy of manufacturing firms. All other variable were significant at the 95% confidence level. Overall, we can conclude that the random effects model has great explanatory power but there seems to be the presence of individual effects that made the constant term insignificant in our estimations. Therefore we test for fixed effects model. TABLE 3: FIXED EFFECTS MODEL Model Method SIZ PAT DIV(-1) PAT(-1 R2 adj. f-stat S.E

Dit = i + 1 PATit + 2 SIZit + 3DIVit-1 + 4PAT it-1 +Eit

FIXED EFFECTS (GLS CROSS SECTION WEIGHTS Coefficients Stand. Error T-Stat Prob 0.002487 0.002584 0.962267 0.3369 0.359490 0.038049 9.448067 0.0000 0.783641 0.095409 8.213502 0.0000 - 0.162841 0.033311 -4.888571 0.0000 0.938489 1298.459 286359.3

The results of the fixed effects model slightly improved our earlier estimation results. The explanatory power of the fixed effects model increased to 0.943 and 0.938 for R2 and R2 adjusted respectively. Nevertheless, the coefficient of size remained insignificant but with a positive sign. Apart from size, all other coefficients are significant at the 95% confidence level and maintained their signs. Going by the result of the three different estimations in this study, profit after tax is statistically significant and maintained a positive sign throughout. Thus, the greater the profit after tax, the more the dividend payout and vice versa. The variable size showed mixed results. It was statistically significant when Random effects (GLS variance components) model was used. This model however

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established or rather confirmed our expectation that size has a negative relationship with dividend payout. The higher the size of a firm, the greater the need to finance its assets with earnings and thus the lower the dividend payout. Using common coefficients (Gls Cross- Section Weights) model, size was insignificant but maintained its negative sign. On the other hand, the estimation using fixed effects (Gls Cross- Section weights) model produced a positive relationship between Size and dividend payout but the relationship was statistically insignificant. This positive relationship can be explained when size is seen as a measure of the cost of issuing new equity. Obviously, the larger the size of a firm the more appeal it has for investors. In terms of risk, the bigger the firm, the less risky investors perceive it to be and thus the cost of issuing new equity by bigger firms are lesser than that of small firms. Borrowing from Eriotis and Vasilious (2005), the test for long- run target dividend payout ratio shows that for past dividends, there is a positive and significant relationship with dividend payout. Thus manufacturing companies considers past dividend in determining what dividend to pay at time t. Past profit after tax however showed a negative and significant relationship with dividend payout. Eriotis and Vasilious (2005) explained this phenomenon by implying that a positive change in profit after fix has a negative impact on dividend payout because even though firms are increasing their earning, they try not to change their dividend policy, at least for the short- run.

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HAUSMAN TEST Apart from the common effects model, two important approaches were used in this analysis; the random effects model and the fixed effects model. However, the question of which approach best suites our purpose arises. To take a decision on which one best fits our model, we conducted the Hausman Test. A widely used class of tests in econometrics is the Hausman test. The underlying idea of the Hausman test is to compare two sets of estimates, one of which is consistent under both the null and the alternative and another which is consistent only under the null hypothesis. A large difference between the two sets of estimates is taken as evidence in favor of the alternative hypothesis. The null is that the two estimation methods are both OK and that therefore they should yield coefficients that are "similar". The alternative hypothesis is that the fixed effects estimation is OK and the random effects estimation is not; if this is the case, then we would expect to see differences between the two sets of coefficients. Again, the random effects estimator makes an assumption that the fixed effects estimator is not ok. If this assumption is wrong, the random effects estimator will be inconsistent, but the fixed effects estimator is unaffected. Hence, if the

assumption is wrong, this will be reflected in a difference between the two set of coefficients. The bigger the difference (the less similar are the two sets of

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A large and significant Hausman statistic means a large and significant difference, and leads to the rejection of the null that the two methods are OK in favour of the alternative hypothesis that one is OK (fixed effects) and one isn't (random effects). The full test result using Eviews 7.0 is presented below. Table 4: CORRELATED RANDOM EFFECTS HAUSMAN TEST

Test cross-section random effects Test Summary Cross-section random Chi-Sq. Statistic 0.000000 Chi-Sq. d.f. Prob. 4 1.0000

Cross-section random effects test comparisons: Variable DIV?(-1) PAT? PAT?(-1) SIZ? Fixed 0.587161 0.558543 -0.088121 -0.014911 Random 0.942951 0.566684 -0.346252 -0.025963 Var(Diff.) Prob. 0.020194 -0.025305 -0.032065 -0.000031 0.0123 NA NA NA

The result of the Hausman test from table 4 above is inconclusive. We fail to reject both models, and conclude that the data do not provide enough information to discriminate between the two models.

CONCLUSIONS This study analyzed the aggregate impact of profit after tax (PAT), Size (measured by total assets), Past dividend and past PAT on the dividend policy of quoted manufacturing companies in Nigeria.

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The empirical findings of the model estimated in this study suggest that profit after tax and size of the firm play a significant role in the determination of Manufacturing Companies dividend policy. This is because the model provides a significant estimation with explanatory power of 94.3% when cross- section weights and characteristics groups are taken into account. Thus the study concludes that manufacturing Companies in Nigeria have a dividend policy to distribute each year, dividend according to their target payout ratio, which is adjusted given the level of profit after tax and size of the firm. Finally, no one model can successfully exhaust all the issues in a research of this nature. Therefore, this study suffers from the disadvantage of confirmatory specification as it has the tendency of omitting other important variables.

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REFERENCES Adelegan OJ (2000): An Empirical Analysis of the Relationship between Cash flows and Dividend Changes, A paper presented at the 23rd Annual Congress of the European Accounting Association, Munich, Germany p.5. Adelegan O. (2003), The Impact of Growth Prospect, Leverage and Firm Size on Dividend behaviour of corporate firms in Nigeria, The centre for Econometric and Allied Research UI,Nigeria Aneel Kanwer(2003) The Determinants Of Corporate Dividend Policies In Pakistan: An Empirical Analysis Foundation for Business and Economic Research Baker, H.K and Powell, G.E. (2000) Determinants of corporate dividend policy: a survey of NYSC firms. Finance and economic journal Black Fisher (1976) The dividend puzzle The Journal of Portfolio Management, winter. pp 634-639 Brittain JA (1964): The tax Structure and Corporate Dividend Policy, American Econ. Rev. 54(3): 272. Charitou A, and Vafeas N (1998). The Association between Operating Cash flows and Dividend Changes: An Empirical Investigation, Collins et all (1996) The role of huriders and dividend policy: A comparism of regulated and unregulated firms Journal of Financial and strategic Decisions Vol 9 No 2, Summer PP 1-9.

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