American Finance & Banking Review; Vol. 2, No. 2; 2018 ISSN 2576-1226 E-ISSN 2576-1234 Published by Centre for Research on Islamic Banking & Finance and Business, USA 1 A Test of Miller and Modigliani Dividend Policy Irrelevance Theory in Nigerian Stock Market Udobi, Philomina I. 1 & Iyiegbuniwe, Wilfred I. 1 1 Department of Finance, Faculty of Management Sciences, University of Lagos, Akoka, Lagos, Nigeria Correspondence: Udobi, Philomina I. ,Department of Finance, Faculty of Management Sciences, University of Lagos, Akoka, Lagos, Nigeria,Email:udobiphil@yahoo.com Received: May 19, 2018 Accepted: May 25, 2018 Online Published: June 13, 2018 Abstract This study empirically tests for the validity of Miller and Modigliani’s dividend irrelevance proposition in the Nigerian Stock Exchange (NSE). Secondary data were obtained from the Nigerian Stock Exchange fact book and firms’ annual audited financial statements for fifteen years (2001-2015). Mediation Analyses, was used to measure the direct and indirect effects of dividend on stock price. Correction of the anomalous use of current dividend and current earnings by the use of naive expectation of dividend and earnings revealed that the direct effect of expected dividend on share price is significant but the indirect effect of expected dividend on share price through earnings is not significant. The implication of these results is that expected dividend has its unique (direct) effect on share price beyond the effect on share price which it shares with expected earnings (indirect effect). This conclusion suggests that dividend policy is relevant in valuation of shares in NSE. It was therefore recommended that company management should treat dividend as an active corporate finance decision-making variable and should employ dividend in information signalling to capital market investors. Keywords: Expected dividend, Expected earnings, Share price, Mediation, Relevance, Irrelevance. 1. Introduction Dividend policy is a major tool in decision making by corporate managers. It has received keen interest from scholars and researchers worldwide and this has led to the formulation of many theoretical models and testing of various variables. Huda and Farah (2011) affirmed that the development of theoretical models and variables has helped in determining the factors that assists managers in dividend policy decision making. Adesina, Uwuigbe, Uwuigbe, Asiriuwa and Oriabe (2017) suggested that corporate managers should use dividend as a vital tool in their firm’s decision making. This suggestion is contrary to the finding of their study that dividend does not have influence on firm’s value. The dividend relevance theory posited by Lintner (1956) and dividend irrelevance theory posited by Miller and Modigliani (1961) are the major contending theories on dividend policy and its impact on share price. The arguments and assertions of these theories did not rule out the influence of earnings on firms’ share prices. The dividend relevance theory agrees that despite the direct relationship between dividend and share price, there is still a possibility of an indirect effect of dividend on share price through earnings while the dividend irrelevance theory argues that the relationship that dividend tends to have on share price is as a result of its relationship with firms’ future earnings. Thus, the impact of dividend on share price is not direct but only indirect. In the light of the above arguments, various studies’ all over the world’s stock market has tried to test for the validity of dividend policy irrelevance with no consensus. Some of the challenges in the previous empirical tests of the effects of dividend on share price include the inaccurate measurement and definition of the earnings variable which is the unobservable but key variable in MM (1961) dividend irrelevance proposition. Amadasun, (2011); Toby, (2014) stated that the use of current dividend and current earnings in some previous tests of dividend irrelevance gave erroneous results that led to the conclusion that dividend is irrelevant in the valuation of share price. Udobi (2016) asserted that the use of current dividend and current earnings is flawed because share price is determined by