ABSTRACT

This research work is concerned with the Effect of Taxes on Dividend Policy of
Banks in Nigeria. Nigeria banks operate in an environment that is rarely the same
with their foreign counter parts. 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 payout in the banks. The research methodology used in this
research was the quasi-experimental design, while the sampling procedure adopted
was basically the simple random sampling method. The analysis of data in this
research was based on certain statistical tools including the chi-square ( X).The
findings showed that taxes have a great influence on the dividend pay-out of
companies. It also showed that shareholders are normally concerned about the
payout ratio of their companies. It was therefore recommended that companies
should not neglect the payment of taxes as this would lead to enhanced business
environment and profitability in the long run. Government on its own part should
also make policies that would not lead to multiple taxation so that these indigenous
banks can grow. This growth will lead to economic stability.
 CHAPTER ONE

INTRODUCTION

1.1 OVERVIEW OF STUDY

Tax 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
1)
 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 PROBLEM

Problems 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 STUDY

Most 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 firms

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 HYPOTHESIS

Te 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 STUDY

Every 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 firms 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 STUDY

This 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 STUDY

As 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 formula

Pay-out ratio (POR) = Dividend per share X 100
Earning per share