The growth of businesses in corporate Ghana will depend much more on the ability of these businesses to expand and have greater market share not only in Ghana but also beyond the boundaries of Ghana. This means businesses will have to raise additional capital either from retained earnings, share capital or borrowing in order to expand. Basically, the size of retained earnings of a business depends largely on what is paid out to share holders or the dividend policy of the business. Many views have been expressed on whether businesses should pay dividends to shareholders or should rather invest retained earnings into projects with positive NPVs.

Considering the fact that gearing usually has negative implications on the image of a business and retained earnings is difficult to come by, the probable option will be the raising of share capital. In recent times many investors within the West African sub region and even beyond have found Ghana as an attractive business environment to invest their capital. Most of these investors are risk averse. They will therefore prefer to invest in shares of high performing businesses instead of setting up their on businesses. Businesses in Ghana must therefore find a way of attracting these investors. One way of attracting them is by adopting very good dividend policies and having very good payment records.

Apart from the above, the flourishing of the stock exchange in Ghana could depend to some extent on the dividend policies and payment records of businesses in Ghana. Dividend policy is known to be very important in signalling share prices. Researchers have hypothesized that a firm uses dividend policy as a signal to outsiders regarding the stability and growth prospects of the firm. Woodridge and Ghosh (1988, 1991) argued that stock price is affected by dividend pattern, hence the reluctance of managers to eliminate or reduce dividend payments. Petit (1972) found a strong positive relationship between dividend changes and stock price changes, and that the size of the stock price reaction depended heavily on the size of the dividend change.

Dividend Policy and Share Prices

Dividend policy theory is described as the effect of change in dividends on a firm’s value. Brealey et al (1986: p 417) defined dividend policy as “the trade off between retaining earnings on the one hand and paying out cash and issuing new shares on the other.” Woolridge (1960) observed that in order to measure the effects of dividend changes on stock prices, it is important to distinguish between anticipated and unanticipated changes in dividends. Dividends itself are described as payments made by businesses to their shareholders. It is the distribution of the business’ recent profit to its owners and also a reward for investing in a business.

According to a study conducted by Smith and Watts (1995) based on a sample of US businesses, dividends tend to be lower when there are more investment opportunities. However, many businesses tend to base their dividends on the profit or earnings of the most recent year. They concluded that there are many factors that determine dividend policy of firms.



Dividend Controversy

Dividend payment has generated a lot of controversy among researchers. It is a puzzle, which researchers are finding it very hard to solve. Over the past years, researchers have come out with three schools of thought in an attempt to solve the dividend puzzle. One school of thought argues that dividends are attractive and have a positive influence on stock prices. A second bloc believes that stock prices are negatively correlated with dividend payout levels. The third group of theorists maintain that a firm’s dividend policy is irrelevant in stock price valuation.

Miller and Modigliani (MM theory- 1961) belong to the third group of theorists who believe dividend payments are irrelevant to stock prices. According to them, the investor is indifferent between dividend payment and capital gains. Their theory focuses on what makes dividend policy matter, just like their capital structure propositions. Other studies done by researchers such as Black and Scholes (1974), Miller and Scholes (1978, 1982), and Bernstein (1996) maintain that dividend policy makes no difference because it has no effect on either stock prices or the cost of equity.

The MM theory was criticised for being unable to address the importance of dividend payments in businesses. According to the critics, if dividends are irrelevant as claimed by the theory, why do firms struggle to maintain dividend payments? Some firms even have to borrow to pay dividends. R.R Petit (1972) in his ‘dividend information hypotheses’ argued that market changes in dividend policy affect stock prices. The hypothesis further went on to explain that dividend increases send a good signal to the market while dividend cuts send bad signals. The argument in short is that dividend changes signal information to the market.

Conclusion

The truth is for any firm to be able to pay dividend to its shareholders that firm must first declare profit. It is true some managers borrow money to pay dividend but I do not think businesses in Ghana have got to that level yet. Luckily, when the unaudited financial reports of some of the GSE listed companies for the 2007 financial year were released, the results were quite encouraging. Most of the companies declared profits with the exception of Sam-Woode Ltd (SWL). Some of the companies, which declared profits showed remarkable increase in profit over the previous years. Though there were drops in profit of some of the listed companies compared to the profits they declared the previous year, it is still encouraging considering the current financial turbulence across the globe.




Francis Kwaku Kuma
Lecturer – Business School, Koforidua Polytechnic
Kwakuhull@yahoo.com