THE EFFECT OF TAXES ON DIVIDEND POLICY OF BANKS IN NIGERIA (A STUDY OF FIRST BANK OF NIGERIA PLC ENUGU)

Thesis Overview

INTRODUCTION1.1     OVERVIEW OF STUDYTax is a compulsory levy imposed by government on the incomes of individuals and corporate organization for the performance of its duties of social welfare and security. In other words, it is a levy imposed by the government against the income, profit or wealth of the individuals, partnership and corporate organization. (Ochiogu 2001:1). For government it is dispensable for it to provide all the important amenities which are needed to make life worth living. Some of the services performed by government include: maintenance of law and order, defense, basic education, health services, pipe-borne water, road construction etc. If any of these services is not provided, our lives and economy (i.e. business environment) would become worse off. Therefore the government tries to generate the funds to carry out these activities through taxation.Every corporate organisation is expected as a requirement to pay taxes as one of its corporate social responsibilities. Dividend policy on the other hand forms a major financial decision often faced by management of corporate organisations in their pursuit of maximizing the value of their organisation. Dividend policy allocates the earnings between payment to shareholders and reinvestment in the firm. A lot of controversies regarding taxes ad dividend policy have attracted many academic interests. Some scholars are of the opinion that taxes affect organisational corporate dividend policy. If this speculation is true, changes in corporate dividend policy would be expected whenever the government changes its income tax policy (Wu 1996). However, this is not the case in the banking business. Linter (1996:12) asserted that the major determinants of dividend policy are the anticipated future earning and the pattern of past dividend.The banking sector is of interest to this research because of the structure of its dividends. Dividends are usually paid to owners or shareholders of a business at specific periods. This depends largely on the declared earning of the firm and the recommendation of the directors. Therefore, if no profit is made, dividends will not be declared. But when profits are made, the company is obligated to pay corporate tax and other statutory taxes to the government. The taxes no doubt reduces the profit available for disposal by the organisations either to be retained or distributed as dividends to shareholders of the company.For many years, several postulations and assumptions have been made regarding whether such taxes paid by organisations actually affects firms pattern of dividend policy. Dividend policy is the trade-off between retaining, earning and paying out cash or issuing new shares to shareholders tax liability, it does not, in general alter the taxes that must be paid regardless of whether the company distributes o retain its earnings (Brealey, Myers and Marcus 1999).Based on this assumptions, regarding dividend policy, this study is directed at evaluating the effects of taxes on the dividend policy of banking in Nigeria, focusing in three banks in the financial industry.1.2     STATEMENT OF THE PROBLEMProblems are inevitable in achieving an end. The problem of whether or not there is any fundamental impact of taxes on dividend payout (policy) spurred this research study. This is of considerable importance not only to management of those financial institutions but also to investors planning portfolio trying to develop a flow of investments.Again, there is the problem associated with the fact that empirical studies on the effect of taxes on dividend policy of banks have not reached a definite conclusion. For example Masculis and Trueman (1988:10) posited that taxes affect organisational corporate dividend pay-out. Linter (1958:7) on the other hand, is of the opinion that the major determinants of dividend policy are the anticipated level of future earnings and the pattern of past dividends. Thus the problem of a clear cut empirical analysis and findings on the effects of taxes on the dividend policy of bank stimulated this research.1.3     PURPOSE OF THE STUDYMost literature and empirical works on dividend policy are largely based on foreign models, which may not be applicable in Nigerian context. Obviously, Nigerian banks operate in an environment that is rarely the same with that of their foreign counterparts. Thus the purpose of this study is to reveal how propounded dividend policy models could apply to banks in Nigeria and the impact of taxes on dividend pay-out (policy) in the banks.Other objectives of this study are:

1. To identify the optional pay-out ratio adopted by banks to enhance efficiency.
2. To identify the reasons for adopting the identify optimal pay-out ratio.
3. To ascertain the major factors that are considered in determining the optimal dividend pay-out ratio for a firm’s dividend policy.
4. To determine how the optimal pay-out ratio so chosen is affected by taxation.
5. To identify the problems associated with taxation and their impact on dividend policy.

1.4     RESEARCH QUESTIONS            The following research questions will be answered in the course of this study to ascertain the impact of taxes on the dividend policy of banks:

1. Does taxes have any effect on dividend pay-out of banks?
2. Will a change in tax policy lead to a change in dividend policy of firms?
3. Do shareholders ever bother about how earning are distributed?
4. Do investors and management benefits form taxation?
5. How can optimal pay-out ratio be determined?
6. Do shareholders influence the pay-out ratio?
7. How does taxation affect dividend policy of banks?

1.5     RESEARCH HYPOTHESISTe following research hypothesis shall be tested in the course of this study:H0:     There is no significant relationship between taxes and dividend policies of banks in Nigeria.H1:     There is a significant relationship between taxes and dividend policies of banks in Nigeria.1.6     SIGNIFICANCE OF STUDYEvery research work is expected to be significant in a variety of ways. This one is not an exception. The value attached to decisions involving dividend policy of banks can not be over emphasised. Therefore, management of banks need this information to harmonise the general direction of the firm with a view to achieving the short and long term objective of the firm with regards to dividend payment. In essence, this study adds to the knowledge of managers on the tax measures and their effect on dividend pay-out (policy), of firms. This study is also significant in the following ways:

1. It helps to determine whether taxes are necessary in the development of dividend policy of a firm.
2. It helps to enhance decision making with regards to how much of the firm’s earning should be distributed and retained in the firm.
3. It indicates the method to be adopted in computing the pay out ratio.
4. Finally, his study contributes to the existing stock of knowledge on the concept of the effect of taxes on dividend policy and will, therefore, serve as a data base for those seeking empirical information on the impact of taxes on dividend pay-out banks in Nigeria.

1.7     SCOPE OF THE STUDYThis study has a very wide scope: it is supposes to over all bank in Nigeria but, to carry out a realistic study on all these banks is a difficult task, unrealistic time consuming and would involve enormous resources financially. Thus, this study is restricted to three selected banks in Nigeria. All inference and deductions are based on the study of these selected banks and conclusions drawn there from.1.8     LIMITATION OF THE STUDYAs is always the case in every human endeavours, this research work is not without limitations. Some of these limitations are:Time: A long time interval is require to carry out and extensive study on all selected banks. The time available to achieve this is too short, making it a major limitation.Money: The money available for this research is not sufficient. As a student, to finance this expansive venture was difficult since so much is to be expected. So finance was another major constrain of this study.1.9     DEFINITION OF TERMS:TAX: Compulsory levy imposed by government on the income of individuals and firms to raise funds.DIVIDEND: The portion of corporate earnings (profit after tax) paid to shareholders of affirm as part of benefits accruable to them (shareholders) for investing their money in the firm.DIVIDEND POLICY (PAY-OUT): This is the determination of the earnings to be distributed to shareholders and the amount to be retained in the business (firm) for reinvestment.PAY-OUT RTIO: This is the ratio of dividend per share to the earning per share of a firm.It is calculated using the formulaPay-out ratio (POR) =Dividend per share X 100
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Earning per share