Corporate governance and dividend policy in Indonesia

Abstract

Purpose – This study aims at examining the impact of corporate governance on dividend policy among Indonesian companies. There are two theories of the effect of corporate governance on dividend policy: substitution and outcome theory. Substitution theory argue that corporate governance have negative effect on dividend policy, while outcome theory argue that corporate governance have positive effect on dividend policy. Therefore, this study investigates the effect of corporate governance on dividend policy in Indonesia. This study aims at examining the impact of corporate governance on dividend policy among Indonesian companies. There are two theories of the effect of corporate governance on dividend policy: substitution and outcome theory. Substitution theory argue that corporate governance have negative effect on dividend policy, while outcome theory argue that corporate governance have positive effect on dividend policy. Therefore, this study investigates the effect of corporate governance on dividend policy in Indonesia. Design/methodology/approach – The sample of this research comprises 248 firms from Indonesian Stock Exchange during 2004-2006. This research using Transparency and Disclosure Index (TDI) to measure corporate governance in Indonesia Findings – We find that TDI are low among Indonesian firms, with a score of 32 per cent out of the maximum point. This score indicates that Indonesian corporate governance is still low. The results show that there is a negative relation between corporate governance and dividend policy in Indonesia. Thus, the Indonesian companies pay more dividends when corporate governance practice is low. This result confirms applicable of substitution theory in Indonesia. Research limitations/implications – This research focuses on manufacturing industry in Indonesia. Therefore, the conclusions of this research apply on the manufacturing companies in Indonesia Practical implications – This research shows that companies with poor corporate governance pay dividend higher than companies with better corporate governance. Thus, investor can use this information to make investment decision. Originality/value – This research provides evidence on the negative effect of corporate governance on dividend policy in Indonesia (substitution theory).

Corporate Governance Quality, Board Gender Diversity and Corporate Dividend Policy: Evidence from Jordan

“…This outcome supports (Mitton, 2004;Kowalewski et al, 2008;Sawicki, 2009) and contradicts (Setiawan et al, 2013) who provided evidence showed that dividend policy is affected negatively by corporate governance. …”

“…However, the results showed that the percentage of inside directors, the percentage of women, insiders' ownership and Directors' tenure are statistically insignificant related to dividend policy. Setiawan et al, (2013) tested the impact of corporate governance on dividend policy for a sample of 248 manufacturing firms listed on Indonesian Stock Exchange during the period [2004][2005][2006]. The study used Transparency and Disclosure Index (TDI) to measure corporate governance in Indonesia.…”

What do we know about the dividend puzzle? – A literature survey

“…In fact, a growing number of studies have started to examine the relationship between ownership structure (e.g., families, institutional investors and the state), corporate governance (e.g., board size, board independence and CEO duality) and dividend policy in the context of emerging markets. For example, various cross-country studies, such as Mitton (2004) -19 developing countries from Latin America and Asia to Europe, Abor and Fiador (2013)four emerging markets in Sub-Saharan Africa, and Mehdi et al (2017) -362 firms from East Asia and Gulf Cooperation Council countries, and single-country studies, such as Abdelsalam et al (2008) in Egypt, Bokpin (2011) in Ghana, Setiawan and Phua (2013) in Indonesia, Benjamin and Zain (2015) in Malaysia and Al-Najjar and Kilincarslan (2016) in Turkey, have all documented the effect of ownership structure and/or corporate governance on dividend payment decisions.…”

Testing Theory of Dividend Policy: Evidence in the Real Estate Sector in Indonesia

“…This study intends to test whether firm size can strengthen the effect of profitability on dividend policy. While firm size has no effect on dividend policy [3] [21].…”