CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND OF THE STUDY

Efficient management of the flow of funds within a firm shows that the firm has a goal or an objective because judgment as to whether or not financial decision is efficient must be made in the light of some standard. The objectives of firms are multi­-dimensional; this may range from social, to economics and to finance.

The social objective holds the view that the firm should socially responsible. This is because the firm is not operating in a vacuum but within environment, internal and external environments of the firm. These social responsibilities include the supply of quality products at low prices to the customers, tarring of roads maintenance of sound industrial relations, giving a fair deal to employees and seeking their participation in management and contribution towards the social overheads through taxes and donations. However, the social welfare maximization objective is greeted with very may criticism. The economics objective has profit maximization objective as its own objective and holds the view that sole objective of any firm should be to maximize profit.

The objective though considering better than that of social school of thought, also witness several and serious criticisms. The finance is maximizing the, wealth of the shareholders or value of the firm. The objective of wealth maximization would cause financial managers to take decisions, which balance returns and risk in such a manners as to maximize the benefits, through dividends and enhancement of share price, to the shareholders.

Dividend policy is seen to be sine-qua-non to the value of a firm subject to the position maintained in the above paragraph. The shareholders see dividends as signals of the firm’s ability to generate future income, hence, it is used in the valuation of the firm. The management of the firm is expected to choose the capital structure that will be able to give optimum return to the firm.

Hence, dividend policy “… consist of rules by which the earning are distributed between retention and dividends to shareholder,” Oloyede (2000).

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