59 Continental J. Social Sciences 3: 59 - 64, 2010 ISSN: 2141 - 4265 © Wilolud Journals, 2010 http://www.wiloludjournal.com DIVIDEND POLICY, LIQUIDITY CONSTRAINTS AND FIRM INVESTMENT IN NIGERIA: AN EMPIRICAL ANALYSIS S.E. Samuel and D.O. Gbegi Department of Accounting, Kogi State University, Anyigba ABSTRACT This study appraised the importance of dividend policy of firm investment and liquidity constraints in Nigeria. To enable an empirical comparison of the findings, a critical review of related literatures was carried out. A survey research method used for the study and the data employed was derived from the annual publications of financial institution in Nigeria. The analytical tool used in analysis data obtained for the study is regression analytical tool. The empirical results reveal that investment has a significant effect on the dividend policy of firms in Nigeria. More so, liquidity has effect on dividend policy firms in Nigeria but not significant. KEYWORDS: Dividend, Investment, Liquidity, Earnings per share, Cash ratio, Dividend per share INTRODUCTION The topic of dividend policy is one of the most enduring issues in modern corporate finance. This has led to the emergence of a number of competing theoretical explanations for dividend policy (Al-Malkawi, 2007). This has attracted a lot of controversies and many academic interests (Samuel and Inyada, 2010; Li et al., 2006; Gordon, 1959). Dividends are not just an outcome of a firm payout policy; they reflect a complicated combination of investment strategy, financial decision and private information (Miller and Rock, 1985). From managerial perspective, dividend can serve as a tool to mitigate agency problem by digesting extra free cash flows (Jensen, 1986), or to signal to the market that only good quality firms afford to pay dividends (Bhattacharya, 1979). On the other hand, from the investors’ prospective, dividends are beneficial since they represent a regular income stream which will enhance self-control by avoiding any irrational trades (Shefrin and Statman, 1984). Focusing on the implications for dividends, Higgins (1972) later found that dividends varied positively with earnings but negatively with investment. Dhrymes and Kurtz (1967) found that a firm’s desire to maintain stable dividends may hamper investment by reducing internal funds available for capital expenditure. Furthermore, their results suggest that investment needs have an influence on dividends, with greater investment reducing dividends payment as predicted by a residual policy (Elston, 1995; Alli et al., 1993; Keown et al., 2002). Devereux and Schiantarelli (1989) and Bhattacharya (1988) point out that without explicitly modeling the dividends policy of the firm, it is not possible to tell which firms constrained by their earnings. In line with the above findings, what then is the major determinant of dividends policy? Does working capital has any effect on dividend policy in Nigeria? The objective of this study is to appraise the importance of dividend policy on firm investment and liquidity constrains in Nigeria. Specifically, this study attempted to: i. Examine the effect of investment on dividend policy of firms in Nigeria. ii. Examine the effect of liquidity constraints on dividends policy of firms in Nigeria. The null hypothesis formulated and tested for the study are: i. Liquidity constrains has no significant effect on dividend policy of firms in Nigeria. ii. Investment has no significant effect on the dividend policy of firms in Nigeria. LITERATURE REVIEW Researchers on corporate dividend policy have over the years followed two divergent paths. Some researchers have followed a behavioral approach by survey the opinion of corporate managers in order to gain insight in to the factors they consider most important in determining their firms’ dividend policy (Musa, 2009). Studies in the category include the works of Baker et al. (1988), Farrelly et al. (1986), Baker and Farrelly (1988), Pruit and Gitman (1991), Baker and Powell (1999 and 2001) and Mainoma (2001). These studies found that different managers at different times attach varying importance to the factors that influence a firm’s dividend decision.