The research has revealed and affirmed that the Risk Based Bank Rating RBBR variables (profitability, liquidity, capital adequacy, and risk profiles) simultaneously as independent variables affect the stock returns, this effect is accentuated by the dividend policy which is made by the banks management. The research results imply that stock market is not induced transitively by the profitability measures of the banks which are in the market as represented by the ROA variable, this particular condition happens in Indonesian stock market as observed; and the market does concern on the profile of the banks’ corporate governance, investors are perceiving corporate governance not the quantitative financial report parameters as critical variable for investment decision making. This situation should also be realized that investors perceive low reliability on the financial reports, which is inherently may contain results of profitability re-engineering.
The correlation among the aggregate RBBR variables, dividend policy (DIV) or the dividend payout ratio (DPR), and the stock returns (RSY), theoritically and research-wise the dividend policy (DIV) is the intervening variable, since the influence of the RBBR variables to stock returns is considered as indirect effect, the dividend policy as intervening variable has two correlation roles such as independent variable that affect stock returns and as dependent variable that takes affect from RBBR variables. Theoritically, as stipulated by the signaling theory that the corporate action such as dividend payment shall induce positively and significantly the stock returns, this was affirmed by the results of the research. Moreover, dividends are not only a signal about a firm’s prospects under asymmetric information, but they can also act as a corporate governance instrument to align the management’s interests with those of the shareholders. The research results indicated that corporate governance and signaling theories are related to the research results.
The empirical resuts of the research shows strong evidence that risk profiles such as: loan to deposit ratio and non performing loan (NPL) affect dividend policy while also stand as determinants of stock returns. There is anomaly on the relationship between NPL and dividend (DPR), the root cause of the anomaly is: when the banks have positive expectation on the future economic condition, they tend to increase proportionally the risky asset such as by lending more loans to borrowers that is to maximize expected profit rather than putting highest priority on risk management of the bank (managing risk of Non-Performing Loan), in parallel the banks tend to pay more dividend based on higher expected profit. Considering the banks’ governance rules this practice is not in compliance with the standards, and this might be considered as infringement on banks’ governance best practices. As well, Lintner (1956) argued that the main reason why companies smooth their dividends is the need to reduce the information asymmetry.
As indicated by the results of the research that implies that due to decrease of banks’ liquidity that was absorbed by loan disposal to the borrowers, and the implication is the draining liquidity or cash drain which hampers the banks to pay dividend. In this situation banks with the positive economic expectation shall decide for corporate action such as dividend stocks, and during the period of observation (2006-2017) four banks i.e.: Bank Himpunan Saudara 1906, BNI, Bank Danamond, BRI decided to pay dividend stocks rather than cash pay out.
Moreover, the risk based bank rating which is indicated by bank corporate governance index has also been affirmed by the results of this research which is shown in the results of the two models that banks corporate governance strongly affect in the decision making of dividend payment and also in the stock returns volatility. This is obviously indicated by the coefficient of the variable (CGPI) in the equation of the models. The dual perception standings of the this governance variable implies that the observed banks management do take care of the governance profile in their corporate action, and the market perceives the governance index as one of the inducing factors that determining the stock returns. The Indonesian listed banks take into account the banks operational variables such as: LDR, NPL, and banks’ corporate governance index in their decision making on dividend policy listed banks. The corporate decision taken by Indonesian listed banks (based on the banks’ sample) on dividend policy strongly based on the risk profiles and banks governance level (subject of regulator audit).
The findings of this study immense would be helpful to the market especially the individual investors as well as institutional investors of the Indonesian capital market to take the sound investment decision regarding selecting the banks for their investment, helps to security analyst to consisting portfolio and policy-making bodies to make an efficient, effective and reasonable dividend payout decision which is in the long run will help them to achieve their objective of maximizing profit and satisfying employees and shareholders’ needs.
The results of the empirical study indicate that the stock price move upward as it is affected by the dividend payment announcement, the model shows that dividend significantly and positively affect the price volatility or the stock returns, and it is statistically revealed that dividend policy is a key driver of stock prices changes in the Indonesian stock market. The cash dividend announcements are indicative of the future financial performance especially for the listed Indonesian banks at IDX. The model used in this research help to understand the intricacies of dividend policy and stock returns behaviour in the Indonesian banking sector for the observed period. Although the results are not absolutely robust enough as in the case of developed markets but shades some more interesting facets to the existing corporate finance literature on dividend policy in Indonesia.
The results has also confirmed the signaling theory since the dividend policy has significant impact on the share price, also the finding of this study supported the dividend relevance theory. An important implication of this study is that, managers may employ dividend policy to influence their stocks’ risk.
The overall findings suggest that the higher the payout ratio the less volatile a stock. Since both management and investors are concerned about the volatility of stock price, this research has provided a light on the path way to discovering what moves stock price and important factors to be considered by investors before making investment decisions, and management in formulating dividend policies for their firms price would be.
Indeed, it may be possible for the managers to use dividend policy or the dividend payout ratio for controlling their share price volatility in desired way. These results can also help an investor to decide wether to invest for short-term in miximizing prices fluctuation or long-term according to the company’s prospects. As for short-term investment, this research guides investors in the Indonesian stock market in providing an insight as to which period generates best returns for trading, and as for long-term investment, an investor should consider about company’s prospects, and thus investments differ in the way they produce returns to investors affecting portfolios’ of risk returns composition. Results of the random-effect models indicate that dividend policy plays a significant role in explaining variations in stock returns. The random-effect model shows the presence of firm level effect in explaining the possible links between dividend policy and stock price behaviour of the banks. In another words it exhibits the possibility of clientele effect implications in case of some banks. Therefore the model helps to understand the intricacies of dividend policy and stock-return behaviour in the Indonesian banking sector for the same period, while the results are not robust enough as in the case of developed markets but shades some more interesting facets to the existing corporate finance literature on dividend policy in Indonesia.
The research results affirm that Indonesian stock market follow the signaling theory and and the bird-in-hand theory, since dividend payout ratio has a significant positive relationship with stock returns or the volatility of share price as supported by the bird-in-hand theory that suggested that owners give preference to a dollar of estimated dividends over a likely dollar of capital gains, while pragmatically the prospect and mental accounting theory to explain why investors like dividends, and this is affirmed that the Indonesian investors is very inclined to have dividends, and the results of the research had obviously substantiated this mental accounting profile. The empirical research results has determinantly indicated that Indonesian listed banks which are included in the sample of the observation during the period of 2007-2016 have the inclination or propensity to retain earnings (profitability) rather than take the coroprate action decision such as dividend payment and this is in line with the free cash flow theory asserts, and while complimentarily this is accentuated by the pecking order theory which asserts that if financial managers need funds because of lucrative investment opportunities, the company will choose to use internal funds first. The banks’ risk profile as indicated by the variables such as: non performing loan, loan to deposit ratio, and capital adequacy ratio, and the banks corporate governance level simultaneously have strong and significant correlation with the dividend policy and this implies the affirmation of the agency theory that holds for the dividend policy model. In practice, it shows that trend of banks with higher safety and lower non-performing loans to pay more dividends is more stronger as the banks have higher return on assets, the research had shown particularity on the issue of return on asset.: END OF FIRST PART
The primary research of this study had focused on observing the stock prices of the seven listed banks in IDX under the investigation, and this will enable recording the changes in stock prices over time (2007-2016) as well as the dividend payouts over the period of observation. As a result, the data collected will assist the researcher to ascertain if there is a relationship between changes in stock prices with changes in dividend payouts made by a respective firm. When a firm does dividend payments, its value reduces by the particular amount of the total made payouts. Thereby, many investors reason that stock prices of a company should decline by an equal amount as the one used to pay the dividends to reflect the reduced value of the firm. The economic theory of supply and demand plays a core role in stock pricing. In every market, it is normal that when demand increases, a firm’s stock as one of them, their prices will increase and on the other hand, when demand decreases, the stock prices will decrease. A company’s stocks may be demanded highly by potential or existing stakeholders as a result of future projected benefits from holding the stock. All investors often examine the returns they will get from an investment. Modigliani and Miller theorem of dividend invariance is proved to be incorrect because the existing benefits from dividends are lower than the mean dividend payout yield over the time that historical growth on earnings rates was taken. As the main conclusion from this process, it is possible to consider that positive influence of the size of the dividend for a change of a stock value has been revealed that allows assuming the correctness of theories of the relevance of dividend payouts. These results were confirmations of alarm and agency motives of dividend policy. In addition, certain specifics of the turned-out results have allowed claiming that the theory of satisfaction of preferences of investors also has the right for life in modern conditions. Thus, as a result of the hypothetical tests analysis, a number of the findings have a great practical value from the point of view of the theory of corporate finance and practice of modern business has been received.
Good corporate governance is the key to the intergrity of corporations, financial institutions, markets, and central to the health of Indonesian economies and its stability, the concept and implementation of corporate governnance as manfistated by Risk Based Bank Rating (RBBR) implementation become the indexing pilar of the Indonesian banks corporate governance achievement. Good corporate governance is widely associated with better performance and well-governed banks, which is generally have higher stock return. The research has affirmed that the corporate governance index positively and significantly affect the stock returns of the banks’ securities in the Indonesian market. However as previous researches and practical market operation indicated stock return can not fully reflect cross-sectional differences in governance. Excess returns can only result from exposure to identified risk factors, and this relies within the realm of governance process. In the condition when investors recognize the better bank performance and lower risk level of well-governed banks, the market values of the well-governed banks increase and opportunity for additional returns appear, this dissertation shows the results of the analysis that banks good corporate governance leads to higher common stock return in IDX.
The research had revealed more information regarding the determinants of dividend policy in Indonesia, that is pragmatically and partially responding for the conundrum’s solution on the dividend policy, that is empirically influenced banks’ risks and banks’ corporate governance profiles. The research should have given contribution to the debatebale issue in the area of dividend policy or dividend payment. The results of the research also has risen the confidence upon understanding the conundrum and the solution, while the researcher is very conscious that the confidence needs enhancement and accentuation of further analysis on the empirical research which include more variant of variables in the hypothetical models. The researcher is also confident that the results of the research shall become the pivot in undertanding the intricacies as related to the issues that impregnate the dividend payment.
The results of the research also provides new evidence of determinants influencing the amount of dividends paid by firms from a developing country point of view such as Indonesia that is related to health condition of a bank as indicated by the Risk-Based Banking Rating (RBBR), while the results also the influence to the banks’ stock returns. Indeed, this is very essential, since one would expect that the dividend payout policy in developing country would be different from that of the developed ones, the following Table 6.1 depicts the most common determinants of dividend policy and stock returns for both developed and developing countries.
| Countries Status | Determinants of Dividend Policy | |||
| Developed Countries | Profitability | Liquidity | Size | Leverage |
| Developing Countries | Profitability | Leverage | Market to Book Value | Corporate Governance |
Table 6.1 Determinants of Dividend Policy
(developed and developing countries)
The evidence presented here by the research provides insight into the dividend policies of emerging market firms such as in Indonesia where the corporate governance plays major role in the corporate action decision making, but it also illustrates the complexity of that issue and leaves many unanswered questions. The dissertation research shows that corporate governance takes affect on dividend policy, this means as related to Table 6.1 Indonesian banks take into account the corporate governance index in their corporate action for dividend payment, and this is in congruent with the actual profile of dividend policy determinants in most developing countries, while particular anomaly that becomes exceptional such as profitability this is due mainly Indonesian banks do incline to retain profits for further investment to increase the banks corporate value, such an inclination of policy is in line with Pure Residual Dividend Policy. A better understanding of dividend behavior in this country will require much additional research, both at the aggregate and at firm levels.
The empirical research results denote that Indonesian stock market follows the signaling theory and and the bird-in-hand theory, since dividend payout ratio has a significant positive relationship with stock returns or the volatility of share price as supported by the bird-in-hand theory that suggested the sharholders give preference to a dollar of expected dividends over a possibility of a dollar of capital gains. Referring to the research results that depict the market reacts positively to dividend pay out and create new value to the banks’ stocks, while also something that can be implied from the research results that Indonesian market are speculative and capital gain which are most sought by investors, and they due give consideration to dividend and dividend policies.
In view of the implications that derive from this empirical research, the researcher is confident that the profile of Indonesian stock market describe that banks or corporations with high CSR (Corporate Social Responsibility) commitment pay more dividends than those of low committed CSR (M. Benmelih 2014). The banks and corporations with high CSR commitment may use the dividend policy to manage their agency problems. The related research result also shows that CSR firms are not only socially responsible in their wealth creation process but they are more likely to be in the distribution of the wealth created. In regard of stability of dividend payout, socially irresponsible firms such as banks and corporations adjust dividends quicker than do not socially responsible firms, and this provides support for the conclusion that dividend payout is more stable in high CSR firms than in low CSR firms.
In the world economy on the trend of increasing globalization, value maximization is no longer the only corporate goal for a firm or a bank. A successful, responsible firm should eye on corporate growth while in the meantime rigorously endeavoring to enhance social growth. In this new definition of dual corporate goals, a firm should take their social responsibility to all the corporate stakeholders, including stockholders, creditors, employees, suppliers, government and environment. In particular, a socially responsible firm should not only focus on traditional issues of business ethics, but also on how they could contribute to corporate stakeholders in order to advance social growth. Therefore, the fulfillment of corporate social responsibility should be re-defined in a more comprehensive manner to include proactive contributions to economy, society, and environment, and when a firm makes efforts to fulfill its social responsibility, it would not only increase its socially responsible investment, but also improve its corporate image so as to attract interested investors in the stocks, thus causing a favorable stock performance. The corporate or a firm endeavors to fulfill its corporate social responsibility has a positive impact on stock performance, relative to the market and the growth portfolios. The implication is that the implementation of corporate social responsibility does not necessarily result in additional operating costs and/or expenses. On the contrary, a socially responsible firm may be welcomed by investors due to better corporate image, thus having a positive impact on stock returns (George Wang, 2011). Generally speaking, fulfilling corporate social responsibility does not necessarily contradict with the goal of maximizing firm value. Since the implementation of corporate social responsibility is positively associated with firm performance, management should treat socially responsible investment as a core business strategy, which would pave a way for a firm’s perpetual growth. More specifically, a firm could serve as a good corporate citizen, while in the meantime pursuing the growth of stockholder’s wealth.
The research results depict that Indonesia banks industry and the market do concern on risk profile such as loan to deposit ratio and non performing loan, while liquidity and solvency do influence the stock returns volatility. The results is in conguence with the regional banks’ industrial profile.
Researches had been conducted and analysed the relationship between dividend policy and stock returns among the Indonesia listed banks at IDX by Marvin Wijaya et al (2015) and founded that Dividend policy (dividend payout ratio) has significant correlation stock price. This result is consistent with variables of the research construct as defined in this research hypothesis, which had delivered some information on the factual determinants of the dividend policy in various international Novianti et al. (2013) and DeAngelo & DeAngelo (2005). It was also confirmed by the study of Margaretha and Damayanti (2008), and Puspitasari and Purnamasari (2013) which suggest that the dividend payment has significant effect on stock returns, while research by Kurniasih and Andriana (2011) is in contrast to the statement. Table 2.8 on page 106 describes consecutive of previous researches in the area of dividend policy with various determinants (independent markets, also Table 2.9 page 114 are some previous related researches that had been accomplished to reveal the relationship of dividend policy and the implication to stock price changes or the stock returns.
Based on researcher observation found that governmental banks pay smaller dividends than their privately owned counterparts. These findings are consistent with both the signaling theory (i.e., banks use dividends as a costly signal of bank asset quality) and the notion that banks with greater investment opportunities retain more earnings.
Banks’ leverage and liquidity is one of the most important variables in predicating future dividend payment behavior since both are essential indators of banks’ healthiness. Highly leveraged banks would be willing to pay low dividends and retain more and high liquidity tends to pay higher dividends after maintaining a substantial amount of liquid cash. In case of political instability of the country obliges banks to use the surplus earnings to allocate most of them into retention for the plugging back for harsh economical periods. The other explanation is that the surplus earnings of the firm are being allocated mostly to the growth opportunities of the company so that the banks can open new branches in different regions and countries where they found projects with positive net present value, and a dividend policy is generally perceived as an expansion of the capital structure decision.
Empirical evidence shows that bank management uses its dividend policy as a vehicle for signaling its financial health to the investing public. Returns on banking stocks is likely to mirror the improvement in the bank health, especially if balance sheet repair, correction in the policy framework for addressing bad loans in the corporate sector plays out and also supported by government policy and the macros are constructive as well. The research denotes for such kind of banks’ governance parameters and had proven banks operational variables that strongly relate to banks healthy condition.
The results of the research indicate that the Indonesian stock market volatility is affected by dividend policy and also the banks’ corporate governance, in this regards, some market participants view volatility as an opportunity to make profits by conducting particular trading strategies. Others consider volatility as risk when equity returns become uncertain or do not meet expectations. From a different perspective as perceived within the context of IDX as part of the global capital market, Indonesian market regulators view excessive volatility as threats to the fairness, efficiency and integrity of the market due to substantial and rapid price movements. Failure to achieve fairness, efficiency and integrity leads to withdrawals of investors and firms from the market, and eventually affects the general economy.
Therefore, a deeper understanding of high volatility can better equip regulators to develop mechanisms to reduce its impact. This study helps enhance the understanding of the relationsip volatility patterns, dividend policy and banks’ corporate governance. Given the important economic impact of the banks’ role, the regulators such as Bank of Indonesia and the OJK should increase the enforcement of information disclosure regulations to ensure the quality and speed of information released to the market. The results of this study will provide at least three benefits for market participants. First, the patterns of volatility as induced by dividend payment and corporate governance level. Second, market participants with moderate or conservative risk levels would be able to reduce risks by using the available these two parameters. Third, the market participants might have broader horizon in understanding the dynamism of the market and more confident in their investment decisions.
The researcher implies from the research results that Indonesian market are speculative and capital gain which are most sought by investors, and they due give consideration to dividend and dividend policies; and also referring to the research results that depict the market reacts positively to dividend pay out and create value to the banks’ stocks.
The indicative researches that relate to the speed of adjustment of stock prices to dividend announcements which is an implication of the stock market efficiency depicted that there is positive average abnormal returns surrounding the dividend announcement, and denotes for semi-strong form of the market efficiency, since the market adjusts in an effective way to this new public information, Aharony and Swary (1980). The inductive correlation between the results of this research and the previous studies regarding dividend policy impact on stock prices may be grouped on the basis of coherence with the efficient market hypothesis, claiming that market efficiency can be weak, semi-strong or strong with respect to how much information stock prices reflect and how quickly they adjust to the new information. Previous research reported disparate results with respect to market efficiency, i.e. the speed of incorporation of new information regarding dividend announcement decisions into the stock price