The Role of Ownership on Behavior of Dividend Payers

Abstract

The objectives of this study are to give empirical evidences about cash cow firms and free cash flow theory. Conducting compare means paired samples t test and logistic regression with samples of 141 firms which listed in Indonesia Stock Exchange for period 2009 to 2014, this study proves dividend payers in Indonesia are not cash cows and ownership has role in determining behavior behind dividend policy. Firms with individuals and/or public ownership both for larger and smaller size shall pay dividends for some other intentions, but firms with institutional and/or state ownership concerns with its size shall pay dividends because : first, they are not at cash cows status or not under circumstance of internal conflict; second, they shall behave like cash cows in order of conflict avoidance

The Motives behind Dividend Policy

“…The relationship with dividend policy, DeAngelo, DeAngelo, and Stulz (2006) confirming that, the mature firms are have high tendencies to distribute their earnings in form of dividends to their shareholders because they have better profitability with small investment opportunities. Moreover, DeAngelo, DeAngelo, and Stulz (2006) emphasize that, mature firms often increase their dividends for their shareholders because these firms are supported by abundant portion of retained earnings, which is consistent with the findings by Fairchild, Guney, and Thanatawee (2014), Budiarso and Pontoh (2016) and Saerang and Pontoh (2016) who confirm that, mature firms are normally increase their dividends because they are much larger, more profitable, have higher cash flows and have higher retained earnings ratios, although Fairchild, Guney, and Thanatawee (2014) also pointing, higher debt generally decreases dividend payments.…”

“…Notice the works by Jensen (1986), Thakor and Wilson (1995), Neale, Milsom, Hills, and Sharples (1998), Myers (2001), Aivazian, Ge, and Qiu (2005), Brav, Graham, Harvey, and Michaely (2005), Fairchild, Guney, and Thanatawee 2014, Thalassinos et al (2012;2015a, 2015b and Saerang and Pontoh (2016) this study suspects, if shareholders are using debt as tool in term to control the investment activities by managers includes disciplining them then free cash flow theory is exist, where debt has positive significant effect to dividend policy.…”

“…Following Jensen (1986), Myers (2001) explains that, the free cash flow theory is a theory that applicable especially for profitable firms or mature firms in condition of overinvest, where debt can be used by shareholders as a tool for controlling and disciplining the managers. In similar, Thakor and Wilson (1995), Neale, Milsom, Hills, and Sharples (1998), Aivazian, Ge, and Qiu (2005), Brav, Graham, Harvey, and Michaely (2005), Fairchild, Guney, and Thanatawee (2014), and Saerang and Pontoh (2016) are also suggest to obtain the debt in term to control the expenditures for investments activities by managers and distribute the profit as dividends to shareholders.…”

“…The puzzle seems occur for dividend policy in Indonesia, since the firms have paid fluctuate amount for yearly dividends and the others have not paid yearly dividends as informed by Budiarso and Pontoh (2016). The puzzle seems more complex while the firms in Indonesia have varies shareholders as informed by Saerang and Pontoh (2016) who classifying the ownership for firms in Indonesia into two groups, which are : state and/or institutional ownership and individual and/or public ownership. This study observed, debts are the factor which makes these firms are varies in distributing their dividends since most of firms have large debt.…”

“…Notice the works by Budiarso and Pontoh (2016) and Saerang and Pontoh (2016), then the study resolves the issues behind dividend policy in perspectives of three theories, which are free cash flow theory, life cycle theory, and catering theory. Free cash flow theory emphasizes that dividend policy arise because of conflict between shareholders and managers (Jensen, 1988;Kuan, Li, and Liu, 2012;Thalassinos and Liapis, 2014;Liapis et al, 2013).…”