Dividend policy is one of the most controversial issues in modern corporate finance. This mystery led to the emergence of a handful of competing theoretical and empirical research to explain why companies pay or do not pay dividends. After two decades of non-stop research, the dividend policy is still listed as one of the top ten crucial unresolved issues in the world of finance in which no consensus has been reached.
Dividend policy is one of the questions profitable companies face. Firms, especially banks are faced with dilemma of distributing income to shareholders or investing back their earnings in operating assets, securities, or used to retire bond so as to foster further growth of the business. The decision of the firm concerning how much earnings should be distributed, how stable should the distribution be, and how much should be retained is the concern of dividend policy decision.
The issue of dividend has attracted the attention of academicians and researchers. listed Dividend issue as one of the top ten important unresolved issues in the field of advanced corporate finance. Scholars developed a number of theoretical models describing the factors that corporate managers should consider when setting dividend payout decisions which caused to be the center of debate in the financial literature. They argues that the harder we look at the dividends picture, the more it seems like a conundrum, with pieces that do not fit together; and to help to explain this conundrum, some theories were developed.
Some concepts were introduced such as prospect theory and mental accounting to explain why investors like dividends. Statman (1997) contends that solving the dividend conundrum is impossible while ignoring the patterns of normal investor behavior. While today, corporate managers are left with a vast and often conflicting body of research about dividends.
One way to enhance our understanding of why corporations pay dividends is to examine the factors determine dividend payout decisions. Past researches have provided important insights into the different factors affecting dividend payout. For example, Lintner (1956) indicate that the dividend payment pattern of a firm is influenced by the current year’s profit and previous year’s dividend payment; managers prefer stable dividend payout policy. Other researchers including Rozeff (1982), Lloyd, et al. (1985), Amidu and Abor (2006) show a significant negative relationship historical sales growth and dividend payout ratio. Such studies complement other types of empirical research on dividend payout policy.
This quantitative research will contribute to existing knowledge in several ways, and one of the first studies in the area of dividends of financial firms in Indonesia such as banks, where bank is important and growing sector in the Indonesian economy. This research will also provide new evidence of determinants influencing the amount of dividends paid by firms from a developing country point of view. Since this is important, as one would expect that the dividend payout policy in developing country would be different from that of developed ones. Since emerging countries generally share a number of similar characteristics, examining the dividend payout policy of banks operating in Indonesia could present a rich- base for future comparative research in other banks operating in Indonesia.
The research highlights the different variables that shall affect dividend payout between the established facts and practice, and practically this has implications for investor’s investment decisions. Shefrin and Statman (1984), introduced concepts such as prospect theory and mental accounting to explain why investors like dividends. Statman (1997) contends that solving the dividend puzzle is impossible while ignoring the patterns of normal investor behavior. Currently, corporate managers are left with a vast and often conflicting body of research about dividends.
One way to enhance our understanding of why corporations pay dividends is to examine the factors determine dividend payout decisions. Previous researches have provided important insights into the different factors affecting dividend payout. For example, Lintner (1956) indicate that the dividend payment pattern of a firm is influenced by the current year’s profit and previous year’s dividend payment; managers prefer stable dividend payout policy. The following researchers including Rozeff (1982), Lloyd, et al. (1985), Amidu and Abor (2006) show a significant negative relationship historical sales growth and dividend payout ratio, and such studies complement other types of empirical research on dividend payout policy.
The research will also provide 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) and also the influence to the banks’ shares price. 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 research of the dividend policy in the emerging stock markets such as in Indonesia has until recently been more limited than in the developed markets.
Dividend policy is one of the questions profitable companies face, and banks are faced with dilemma of distributing income to shareholders or investing back their earnings in operating assets, securities, or used to retire bond so as to foster further growth of the business. The decision of the firm concerning how much earnings should be distributed, how stable should the distribution be, and how much should be retained is the concern of dividend policy decision.
The issue of dividend has attracted the attention of academicians and researchers. Brealey and Myers (2003) listed dividend issue as one of the top ten important unresolved issues in the field of advanced corporate finance. Scholars developed a number of theoretical models describing the factors that corporate managers should consider when setting dividend payout decisions which caused to be the center of debate in the financial literature. Black (1976) argues that the harder we look at the dividends picture, the more it seems like a conundrum with pieces that do not fit together, especially that relate to the relative of condition of the banks.
To help explain this conundrum, academicians developed various theories; signaling, tax preference, agency costs, and bird-in-the-hand explanations. These theories led Ang (1987) to observe the phenomena upon payment of dividends, and Shefrin and Statman (1984), introduced concepts such as prospect theory and mental accounting to explain why investors like dividends. Statman (1997) contends that solving the dividend conundrum is impossible while ignoring the patterns of normal investor behavior; and currently corporate managers are left with a vast and often conflicting body of research about dividends.
One way to enhance our understanding of why corporations pay dividends is to examine the factors determine dividend payout decisions. Past researches have provided important insights into the different factors affecting dividend payout. For example, Lintner (1956) indicate that the dividend payment pattern of a firm is influenced by the current year’s profit and previous year’s dividend payment; managers prefer stable dividend payout policy. Other researchers including Rozeff (1982), Lloyd, et al. (1985), Amidu and Abor (2006) show a significant negative relationship historical sales growth and dividend payout ratio. Such studies complement other types of empirical research on dividend payout policy.
Corporate investments as an option of investment for individual as well as institutions and numbers of participants are depicting meaning full growth from time to time. Eventually, this augments the need to identify the driving elements of dividend payment policy in Indonesia through empirical analysis. Therefore, a study on the determinants of dividend payout policy shall be a relevant decision in view of these phenomena, with the focus of the banks ratings and the implication on banks’ shares price.
Bank’s health is the interest of any related party, the owner, management, customer, and bank authority. Nevertheless, bank’s health level can be used by those parties to evaluate bank’s performance in the implementation of precaution principles, compliance on regulation, and risk management (Taswan, 2010). In relation to the bank’s health the RBBR indicators defines the health indicators such as: Risk Profile, Good Corporate Governance, Rentability (Return on Asset-ROA), and Capital Adequacy (Capital Adequacy Ratio-CAR).
Many theories and models have been put forth to examine numerous facets of dividend study. The first empirical study of dividend policy was performed by Lintner (1956). He discovered that firms have long-run target dividend payout ratios and place their attention more on dividend changes than on absolute dividend levels. He also found that dividend changes follow shifts in long-run sustainable and managers are hesitant to make dividend changes that may later need to be reversed. Managers also try to stabilize dividends and avoid dividend cuts. The article by Miller and Modigliani is also groundbreaker in the theoretical modeling of dividends, which proposed dividend irrelevance. On the other hand, theories which support dividend relevance include tax preference, sidgnaling, and agency explanations.
Researchers have developed and empirically tested various models to explain dividend behavior. Some conducted surveys of corporate managers to learn the most important determinants of corporate dividend payouts. Among a number of researchers, Baker, et al. (1986), Pruit and Gitman (1991), Gill, et al. (2009) found dividend payout are the function of firm’s profitability. Eddy and Seifert (1988), Higgins (1981), Al¬kuwari (2007) indicated that large firms distributed a higher amount of their net profit as cash dividend. Liquidity was also additional variable found to be the significant determinant variable of dividend payout Liu and Hu (2005), Mohamed, et al. (2006). Rozeff (1982), Jensen, et al. (1992), Al-Malkawi and Nazar (2008) affirmed that investment opportunities influence dividend decisions and found a significant negative relationship between dividends and firms investment opportunities. Pruitt and Gitman (1991), Llyod, et al. (1985), Collins, et al. (1996) indicated that financial leverage (risk) affects firms’ dividend payout decision. But, the fact that many researchers have tested these alternative theories of dividend policy but have not obtained conclusive results. Thus, the issue of which explanation of dividend policy are most correct remains unresolved.
The research focuses on identifying and assuring that various factors available as per literature that influence dividend payout ratio in banking sector in Indonesia, and with the focus on the influence of banks’s health indicated by the RBBR standards of the Indonesian Banking as regulated by Bank of Indonesia, further analysis was focused on the impact of the dividend policy to the banks’ shares price.
Statistical techniques of correlation and regression have been used to explore the relationship between the key variables. Thus the main theme of the study is to identify the various factors that influence the dividend payout policy, and the implication to the shares price (stock returns) of banking firms in Indonesia.
This research aims to determine factors that contribute to the definition of dividend payout policy in Indonesia as a developing country in South East Asia, and more specifically, this research focuses on the banking sector since it is considered as a backbone of the Indonesian economy, which account for 7.2 % of the GDP growth; and the strength of the Indonesian banking sector lie on the individual investors as well as the institutions that have been extensively interested in becoming shareholders.
Eventually, this expands the need to recognize the driving elements of the dividend payment policy in this sector with the basis measurement on the banks’ risk-based rating. Despite the importance of the banking sector in the Indonesian economy, the research and examination of the dividend policy in the Indonesian listed banks has been so limited. Therefore, this study seeks to fill this gap by conducting an empirical analysis on the determinants of the dividend payout of Indonesian banks listed at Indonesia Stock Exchange (IDX).
Dividend payout policy is the financial policies regarding paying cash dividend and are of the most enduring issues in financial research. Many controversies regarding large number of conflicting hypothesis, theories and explanations have attracted many academic interests on dividend policy (Frankfurter and Word, 1997). Despite several decades of research on developed markets, developing countries is still lacking in the literature, especially that relate to the implication on shares price. The purpose of this research is to identify the relationships between dividend payout policy, Risk Based Bank Rating (RBBR) of Indonesian banks, and also the implication to the shares price or the stock returns.
The researcher had collected data of more than thirty listed banks at the Indonesia Stock Exchange (IDX) with the period of evaluation from 2007 until 2016 to support the background or reasoning this research, and applied specific criteria to create the sample. The researcher suspected upon banks’ operational and governance parameters, dividend payout ratio (DPR) and the stock return (RSY). The researcher is suspecious upon the existence of relationship among the banks’ corporate governance indicator, devidend policy, and the stock returns.
The banks’corporate governance variable is a surrogate variable which comprises of all variables such as: the duties and responsibilities exercised by the Board of Commissioners and board of directors, completeness and the accomplishment of the Committee’s tasks, handling conflicts of interests, the compliance function which is implemented by the Bank, the internal audit function which is implemented by the bank, the external audit function which is implemented by the bank, the intern of the risk management function which is implemented by the bank, and the provision of funds to related parties and debtors (large exposures), financial and non financial condition, generate reports on the implementation of good corporate governance.
Also the transparent internal reporting, and banks’ strategic plan in line with the vision and mision of the banks. As we evaluated and observed, it is obvious there is a linear relationship of the three variables ( corporate governance, dividend payout ratio and stock return), while we can find also the anomaly of the three variables. The research will affirm upon these two phenomena based on the statistical inference.
The research is aimed toward finding and affirming the consistency relationship of variables as further will be defined in the cusntruct or the model of hypothesis of the research. This study seeks to add to literature by providing a detailed analysis of dividend payout policy in Indonesian banks as an emerging market. The research and study had developed thirtheen research hypotheses, which are used to represent the main theories of banks corporate dividends.
The research will also provide new evidence of determinants influencing the amount of dividends paid by firms from a developing country point of view as related to bank rating. This is important, as one would expect that the dividend payout policy in developing country would be different compared to the developed ones. Since emerging countries generally share a number of similar characteristics, examining the dividend payout policy of banks operating in Indonesia could present a rich-base for future comparative research in other firms operating in Indonesia, while the research highlights the different variables that shall affect dividend payout between the established facts and practice. This has implications for investor’s investment decisions which will be based by banks’ health indicators (RBBR), and the study examines the analysis of the amount of dividends payment using multiple regression analysis.
Indonesia is in the track of continuous economic growth registering promising annual GDP growth which resulted from the development of different sectors; service, agriculture, and industry. Corporate investments as an option of investment for individual as well as institutions and numbers of participants are depicting meaning full growth from time to time. Eventually, this augments the need to identify the driving elements of dividend payment policy in Indonesia through empirical analysis. Therefore, a study on the determinants of dividend payout policy shall be a relevant decision in view of these phenomena.
Based on data obtained from the Indonesian banks’ Annual Report 2007-2016, some of the banks listed in the Indonesia Stock Exchange (IDX) generated negative ROA which indicate that the bank is in unhealthy, condition when viewed from the profitability factor or rentability aspect.
The banks which are listed in the stock market do need to improve the performance and their operational health so that business continuity is maintained. The use of method such as: Risk-Based Bank Rating is considered able to measure the health of banks and identify the risks that may arise, so that banks can then take the appropriate remedial actions.
Many theories and models have been put forth to examine numerous facets of dividend study. The first empirical study of dividend policy was performed by Lintner (1956). He discovered that firms have long-run target dividend payout ratios and place their attention more on dividend changes than on absolute dividend levels. He also found that dividend changes follow shifts in long-run sustainable and managers are hesitant to make dividend changes that may later need to be reversed. Managers also try to stabilize dividends and avoid dividend cuts. The article by Miller and Modigliani is also groundbreaker in the theoretical modeling of dividends, which proposed dividend irrelevance. On the other hand, theories which support dividend relevance include tax preference, signaling, and agency explanations.
Researchers have developed and empirically tested various models to explain dividend behavior. Some conducted surveys of corporate managers to learn the most important determinants of corporate dividend payouts. Among a number of researchers, Baker, et al. (1986), Pruit and Gitman (1991), Gill, et al. (2009) found dividend payout are the function of firm’s profitability. Eddy and Seifert (1988), Higgins (1981), Al¬kuwari (2007) indicated that large firms distributed a higher amount of their net profit as cash dividend. Liquidity was also additional variable found to be the significant determinant variable of dividend payout Liu and Hu (2005), Mohamed, et al. (2006). Rozeff (1982), Jensen, et al. (1992), Al-Malkawi and Nazar (2008) affirmed that investment opportunities influence dividend decisions and found a significant negative relationship between dividends and firms investment opportunities. Pruitt and Gitman (1991), Llyod, et al. (1985), Collins, et al. (1996) indicated that financial leverage (risk) affects firms’ dividend payout decision. But, the fact that many researchers have tested these alternative theories of dividend policy but have not obtained conclusive results. Thus, the issue of which explanation of dividend policy are most correct remains unresolved.
The research also focuses on identifying whether various factors available as per literature influence the policy for dividend payout ratio in banking sector in Indonesia, while also considering the banks’ health indicators (RBBR) as administered by regulators in Indonesia such as the Bank of Indonesia and described in Bank of Indonesia regulation: No.13/1/PBI/2011, and the Indonesian Fianancial Services Authority (OJK).Statistical techniques of correlation and regression have been used to explore the relationship between key variables such as: RBBR, dividend pay-out-ratio, and the shares price. Thus the main theme of the reasearch is to identify the various factors that influence the dividend payout policy and the implication on share prices (stock return) of banking firms in Indonesia.
Referring to the issues as described in the background of the research, the followings are identified problems by researcher, such statements as shown below will be answered throughout the various forthcoming chapters via the examinations and investigations that will be conducted using the quantitatve empirical data as collected:
• There have been absurdities in defining the features that characterize the smoothness of dividends behaviour for listed banks in Indonesia, as that related to the rating of banks’ health in Indonesia.
• There have been incomplete understanding upon the dividend policy determinants as related to risk-based-performace rating of Indonesian banks, and in compliance with the RBBR standards or the Corporate Governance Index (CGI).
• There have been less information on the characteristics on the determinants of the dividend policy and its implication on banks’ share price or the stock return.
• There have been no platform or basis on the dividend policy of the Indonesian banks to be compared or contrasted with the internationally published evidence, in lieu of banks’ rating and stock price performance (stock returns).
The topic of dividend policy is essential in determining the value of corporations and has a clear effect on their performance. The value of a firm is affected by the amount of dividend paid, hence; investors are in turns expected to inquire about them. Dividends are used as an indication to assist the investors in their decision to invest in any firm or bank, just as a dividend policy influences and is influenced by the financing and investing decisions. However, and based on the literature recorded to date in this respect, research on dividend policy and dividend decisions were found to be scarce in developing markets.
The Indonesian market is regarded as one of those emerging markets, which actually highlights an important aspect of this research. The present study derives its significance from the fact that it tackled an issue of great importance to Indonesian investors, which is mainly ‘dividends’, and furthermore, it focuses attention onto the most prominent variables such as: bank ratings and share price performace or stock return that underpinning these investors’ decision.
Moreover, the results of the tests generated should be beneficial and of use in guiding the investors into developing an expectations framework on the dividends to be disbursed in the future by concentrating on the variables that are related to a company’s dividend decision. Moreover, understanding the relationship of banks’ health ratings with its implication on the banks’ stock return.
This research should act as a benchmark for the banking industry of Indonesia as well as their investors, in a way which gives more credence and value to dividends, and their role in the stock market as indicated by their stock prices and especially their stock performance or stock return
.
In addition, the impact of the health of banks’ rating on share prices and the impact of firm characteristics on the smoothness of dividends have been another objectives that help in examining the behaviour of the banking sectors in Indonesia. Actually, many arguments can be advanced to indicate how important this present research is, with its research questions as will be described below.
The fact that dividend policies are expected to affect companies’ investments through their impact on these companies’ capital structures and consequently costs of capital, it is useful to examine the listed Indonesian banks’ dividend policy. This type of analysis enables us to compare the behaviour of the Indonesian banks as based on the RBBR ratings, and this research should then be advantageous for the listed Indonesian banks with their international counterparts and give some recommendations that should help the financial Indonesian companies in answering at their dividend decisions.
Finally, as it will be explained later on, the significance of this quantitative research is based on the fact that a bank’s dividend policy will be examined using measures which become standard method in risk-based-banking rating, which have not been used before in the Indonesian context.
The research document will also be used to propose a set of recommendations for all those listed banks regarding their dividend policies, building on the resultant outcomes of the certain tests. It will also guide investors in their investment portfolio selections. In brief then, the main objectives are to:
• Determine whether the different banks’ health measures such as: risk profile, good corporate governance, earning or rentability, and capital which have an impact on the dividend policy
• Understand the determinants of dividends in Indonesia, and in particular, the implication of the policy to the banks’ stock prices and stock return
• Understand the relationship the Indonesian RBBR rating to the performanace of banks shares price and the stock return