Inflation, Dividend Policy and Investment Decisions of Quoted Firms: A Panel Data Estimates from Nigeria
Vol.5 Issue 1
In this study, we investigated the effect of inflation on dividend decision and investment decision of quoted firms in Nigeria using both time series and panel data frameworks. The study aimed to examine how the three inflation variants; core, food and headline affect the performance in these decision areas of 21 quoted firms selected from different sectors of the Nigerian economy. For time series analysis, the auto-regressive distributive lag (ARDL) model was employed and the data were collected yearly from 1981 to 2016. The panel data analysis was based on the three conventional panel data methods; pooled least square, fixed effects and random effects methods. The panel data comprises 210 observations on 21 firms over 10 time series from 2007 to 2016. Both Likelihood Ratio and Hausman specification tests were employed for model selection and validation. The results showed that inflation has a negative relationship with dividend decision, measured by average dividend yield. There is evidence that the three variants of inflation all have positive relationships with firm investment decision measured by net investment cash flows. The study conclude that inflation have significant effect on dividend decision and investment decision of the quoted firms. We recommend that that payment of dividend is necessary, especially in the presence of asymmetric information between managers and shareholders. Firms should invest in only assets that promise higher future cash flows and should use appropriate inflation-adjusted discounted capital budgeting methods to appraise new projects.
