IMPACT OF FINANCIAL LEVERAGE AND DIVIDEND POLICY ON SHARE VALUE OF QUOTED OIL AND GAS COMPANIES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

The primary objective of every rational investor be it an institutional investor or individual investor,is to maximize expected returns on their investments within an acceptable level of risk. Thus, they prefer to invest their funds in shares of companies with increasing prices that will eventually boost their wealth in the stock market. Generally, most investors prefer persistent increase in the value of their shares in the stock market in order to earn more return on their investments and maximize their wealth.

However, in practice, the prices of stocks do not increase at all times in the stock market. They could fluctuate and perhaps result in losses that could be detrimental to the shareholders’ wealth. Therefore, the players in the financial market usually find it difficult to obtain reliable information on market values of shares as these values fluctuate quite frequently (Pandey, 2003). This fluctuation in the share values of companies at the stock market has been a matter of great concern to investors, fund managers and investment analysts globally and has attracted debates from financial economists, corporate finance experts and scholars over the years (Almumani, 2014).

Limento and Djuaeriah (2013), Gharaibeh (2015) and Aliyu (2015) contend that macroeconomic factors such as interest rate, gross domestic product, inflation rate, money supply, and risk free rate also cause movement in the share prices of companies in the stock market. On the other hand, it has also been argued that share value could be influenced by microeconomic variables like dividend per share, dividend payout, return on equity, earnings per share, book value per share, price earnings ratio, profitability, firm size, and leverage (Stephen &Okoro, 2014, Taimur, Harsh, &Rekta, 2015, Zeeshan, Ali, Sohail&Sulaiman, 2015 and Adenugba, Ige&Kesinro, 2016).

It has been seen in many studies that the share price of a company is influenced by financial leverage. For example, Buigut, Soi, Koskei and Kibet (2013) contend that the ratio of total debt to total capital is one of the major factors causing movement in the share value of a company. In the same vein, it has been argued by Hussain and Gul (2011) that the company’s share price is affected by its interest coverage ratio as investors perceive the company’s ability to cover its interest charges from profit as an indication that the company is profitable.

Similarly, scholars like AlTroudi and Milhen (2013) and Stephen and Okoro (2014) are of the view that the firm’s share price is strongly influenced by the retained earnings ratio. They further posit that investors prefer companies that retain their earnings for business growth rather than paying dividends. Conversely, Majanga (2015) asserts that dividend coverage ratio is one of the factors that cause fluctuation in the share value of a company. He added that investors prefer to invest their funds in shares of companies that pay dividends.

Therefore, a critical analysis of these factors gives the investors insight knowledge on whether the share price of a company is undervalued or overvalued in stock market at a particular point in time. An understanding of the impact of various fundamental variables on share price by investors helps them in making informed investment decisions(Srinivasan, 2013). However, the dynamic nature of the stock market and conflicting views held by scholars in the literature as regard the factors influencing Share price and persistent fluctuation in the prices of shares is still a crucial issue facing investors, fund managers and investment analysts in the financial market (Malhorta and Tandon, 2013) and (Almumani, 2014). These also pose a challenge making the task of identifying those fundamental factors that could cause changes in the share value and predicting future prices of shares complex.

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