Valuation and Forecasting Roles of Dividends of Indonesian Listed Firms

Abstract

We study the role of dividends in valuation and in forecasting future earnings in a low‐protection environment with highly concentrated ownership that is expected to yield low earnings quality. Using a sample of 372 distinct Indonesian firms listed on the IDX during the period 1995 to 2012 we show that dividends are reliably positively priced by the capital market, violating thus the dividend displacement theorem. This result persists even after controlling for some typical factors that affect firm value (capital structure, risk) and the effect of factors not separately identified, but priced by the Indonesian capital market (other information). Dividends replace accounting earnings entirely in valuation. Dividends are positively correlated to future earnings over and above current accounting earnings and other accounting and market variables. Both findings show that dividends play a central role on the Indonesian capital market. Finally, we show evidence consistent with the view that earnings management of Indonesian firms after 2002 is contractually efficient rather than opportunistic.

Earnings Quality and Market Values of Indonesian Listed Firms

“…We find that firms that pay out more dividends are valued significantly higher, a finding consistent with the central role dividends play on the Indonesian capital market (see Hutagaol‐Martowidjojo and Valentincic ). The size of the coefficient shows, in the first instance, that dividend displacement does not hold on the Indonesian capital market.…”

“…The results related to control variables are interesting on their own. We find that firms that pay out dividends are valued significantly higher, a finding consistent with the central role dividends play in the Indonesian capital market (see Hutagaol‐Martowidjojo and Valentincic ). Conversely, firms issuing new equity (net of repurchases) are valued lower.…”

“…The first column contains only the aggregate EQ measure constructed from individual aspects presented above. The second column introduces accounting variables that the existing literature reports as important in determining the relation between market values and accounting numbers and attributes (e.g., Hutagaol‐Martowidjojo and Valentincic ; Rees and Valentincic ; Akbar and Stark ). Column 3 reports the relation between Tobin's Q and EQ controlled for typical market‐related attributes: idiosyncratic risk, systematic risk, information environment and two governance attributes: the percentage of closely held shares and firm status as a former SOE.…”

“…Rees and Valentincic () show that for a ‘traditional’ capital market (the UK) net dividends do play an important role in both firm valuation and future profitability when core earnings – presumably the earnings figure that is relevant to capital market participants – are not taken into account appropriately. Hutagaol‐Martowidjojo and Valentincic () build on this literature and show that in the Indonesian capital markets: i) dividends displace the role of accounting numbers in the valuation of equity of Indonesian firms entirely; ii) EM is positively, rather than negatively, related to the market value of equity, particularly after the second Indonesian crisis in 2002, after the introduction of independent directors in 2001, and using – essentially – high‐quality international accounting standards (IAS) . Incidentally, this is also the period in which the BAPEPAM recommendations were issued (Siagian et al.…”

“…Manual inspection of Indonesian data reveals that using only three months does not guarantee that the market is aware of accounting data. Hence, the window is moved to +6 months (as in Hutagaol‐Martowidjojo and Valentincic ).…”