Evaluating the Role of Dividends Paid Out Ratio as a Signal of Quality of Selected Banks Listed on Nigerian Stock Exchange

Abstract

This study examined the relationship between bank dividend policy and bank quality rating. Empirical evidence shows that bank management uses its dividend policy as a vehicle for signaling its financial health to the investing public. Using the regression models, this study showed that an inverse relationship exists between quality and dividends as a percent of earnings, because those banks like Zenith and UBA despite lower dividends as a percent of earnings exhibited better quality. The result clearly points to the facts that retained earnings are a key source of capital for banking institutions and that capital position provides information about institutional soundness or, alternatively, risk. This study also recommends that depositors, shareholders, and creditors can acquire information about the overall quality of a bank by examining both aspects of a bank’s dividend policy.

Keywords: Evaluation, dividends payout ratio, signaling, quality, banks, Nigerian stock exchange

DOI: 10.7176/RJFA/11-17-15

Publication date:October 31^st 2020