Determinants of stock prices during dividend announcements: an evaluation of firms' variable effects in Nigeria's oil and gas sector

• Author: Aik Nai Chiek,Mfon NU Akpan
• DOI: http://doi.org/10.1111/opec.12063
• Published date: 01 March 2016
• Date: 01 March 2016

Determinants of stock prices during

dividend announcements: an evaluation of

firms’ variable effects in Nigeria’s oil and

gas sector

Aik Nai Chiek* and Mfon NU Akpan**

*Researcher, Faculty of Accountancy and Management, Universiti Tunku Abdul Rahmah (UTAR), Kajang,

Selangor, Malaysia.

**PhD in Finance Research student, Faculty of Accountancy & Management, Universiti Tunku Abdul

Rahmah (UTAR), Kajang, Selangor, Malaysia. e-mail: mnuakpan@gmail.com

Abstract

The aim of this research was to analyse, statistically significant, quantitative variables that

determine the share price of oil and gas sector companies listed on the Nigerian Stock exchange,

during the economic slowdown period of 2009–2013, after the world financial crisis of 2008, and

investigate whether the signalling hypothesis holds or not. In terms of analytical tools, multiple

regression analysis is used. During dividend increase announcements, the regression coefficient

determinant (R

2

) indicates that over 90 per cent of variations in stock prices is explained by

variations in dividend announcements. This study supports the dividend signalling hypothesis

(DSH) but discredits the efficient market hypothesis. During a dividend decrease, the R

2

for both

equations indicates that over 64 per cent of variations in stock prices is explained by variations in

dividend announcements. This result also supports the DSH. The implication of this is that

racketeers can capitalise on this and make unjustified returns. By so doing, both sector investors

and the stock market will be short changed. As this research considers only the oil and gas sector,

further studies need to be conducted that consider possibly all listed firms in the Nigerian stock

market, within the same interval to further investigate if the signalling hypothesis will hold or not.

But most appropriately, applicable, as a comparative study of the same sector before and after the

world financial crisis of 2008 the paper seeks to find out if this phenomenon is also applicable to

OPEC member states. This research is in progress.

1. Introduction

The world economy relies heavily on oil and the consumption of oil—driven by

countries such as United States, India and China. This is so because the horse and

carriage has given way to cars as the main method of transportation. As such, oil has

become vitally important to the world economy. Its importance has risen to such an

©2016 Organization of the Petroleum Exporting Countries. Published by John Wiley & Sons Ltd, 9600 Garsington

Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

69

extent that, if the world were to suddenly find itself without oil, all minor and major

distribution systems that allow economic transactions on a more than local basis would

fail and the world economy would collapse (Terry, 2009).

The Energy Information Administration (EIA) (2009) reported that world oil

consumption is 85.64 mb/d—roughly equivalent to every single person on the planet

using 2 L of oil a day. Of course, the global distribution of oil consumption is not evenly

spread out as developed and oil-rich states consume far more oil than less developed

states. In addition, this oil is not simply consumed without any end-products. Oil is

involved in the manufacture of a large number of everyday items—such as plastics,

asphalt and farm fertilisers. Furthermore, the majority of this oil is refined into gasoline,

jet fuel and diesel, to be used for transportation. Other examples are in the manufacturing

of plastic toys, cosmetics, detergents and nylon clothing. Waxes for chewing gum are

also produced from oil. Lubricating oil is also used to keep automobile engines from

getting too hot and to ensure that all moving parts of the machinery are kept in good

working order.

Ryan (2004), in his New Political Economy article ‘A Bargain Born of Paradox’, stated

that the role of oil in fuelling transport oil is currently non-substitutable—that is, there is

nothing in the world that, within the bounds of its infrastructure, could replace oil. Since the

early 1900s, the world has experienced growth in its consumption of oil in most years. A

trend of this nature is likely to continue into the future, with the majority of the growth in oil

consumption coming from two sources—India and China. These two countries account for

over a third of the world’s population—2.5 billion people—and both have been following

plans for rapid economic development. Consumption of oil by China has already increased

from 2 mb/d in 1990 to 6.93 mb/d in 2009 (EIA). Because of this, the EIA estimates that

Chinese oil consumption will rise to 15 mb/d by 2030—adding a further 8 million barrels,

or around 10 per cent, to current world consumption. However, if we consider that Chinese

oil consumption currently stands at least 1 L a day, compared with the United States’11 L,

then we can begin to understand the potentially huge rise in oil consumption that China

represents. In fact, if Chinese per capita consumption of oil rose to the same level as the

United States, then the world’s total oil consumption would double to over 160 mb/d.

Consumption of India’s oil, reflecting its slower rate of economic growth, by 2009 stands at

2.7 mb/d and is expected to grow to 4.5 mb/d by 2030 (EIA). However, with India’s huge

and growing population, estimates of its future oil consumption could easily be revised

upwards based on small increases in predicted levels of economic growth. Also, with the

recent release of the 100,000-rupee ($2000) Tata Nano car, with its aim of expanding the

Indian car market by 65 per cent, India’s potential to drive up future world consumption of

oil should not be underestimated.

Oil is important. This is so because the world economy has been developing with oil

as its lifeblood for over a hundred years. Oil is directly responsible for about 2.5 per cent

OPEC Energy Review March 2016 ©2016 Organization of the Petroleum Exporting Countries

70 Aik Nai Chiek and Mfon NU Akpan