Capacity Utilization, Industrial Production Index and Dividend Payout Policy in Nigeria: An Autoregressive Distributed Lag (ARDL) Model Approach to Cointegration

Abstract

The study apply the Autoregressive Distributed Lag (ARDL) Model approach to cointegration analysis and  Error Correction Model (ECM) to examine the relationships between dividend payout policy, capacity utilization and the industrial production index for Nigeria. The cumulative sum of recursive residuals (CUSUM) and the Cumulative Sum of Squares of Recursive Residuals (CUSUMSQ) were used to test for structural stability of the model. The results from the ADF unit root tests indicate that the average dividend yield and the industrial production index are first difference stationary while capacity utilization is an I(0) variable. The ARDL bounds tests suggest that the average dividend yield, capacity utilization and the industrial production index series are cointegrated. The ECM also reveals that capacity utilization and the industrial production index have significant causative implications for dividend payout policy. The CUSUM and CUSUMSQ plots lie within the 5 per cent critical bound thus providing evidence that the parameters of the model do not suffer from any structural instability over the period of study. The analysis suggests that policies designed to increase the capacity utilization rate should be favourable for the dividend payout policy of firms in Nigeria.  These might include government policies aimed at developing infrastructure, creating enabling environment for effective and profitable productive activities to grow as well as the ability to operate at optimal capacity as a sin-qua-non to achieving policy objectives by firms.

Keywords: Capacity Utilization, Industrial Production Index, Dividend Payout Policy