ICMEM

The 4th International Conference on Management in Emerging Markets

Determinants of Dividend Payout Policy: A Case Study of LQ 45

Companies

EXTENDED ABSTRACT

Abstract

Dividend payout policy is an important decision both for investor and corporation. There are several different theories and
opinions related with dividend payout policy. Therefore, this research aims to find the determinant factors of dividend payout
policy for firms listed in LQ 45 Index February – July 2019 period. This research belongs to quantitative research. Panel data
regression is employed as the method to analyze the data. The sample consists of 28 companies from year 2014-2018 and taken
using purposive sampling method. This research expected to reach the result that there is significant relationship between
dividend payout ratio to leverage as proxied by debt to asset ratio, liquidity as proxied by current ratio, profitability as proxied
by return on equity, and firm size as proxied by total asset.

Keywords: Dividend Payout Ratio; Debt to Asset Ratio; Current Ratio; Return on Equity; Total Asset; Panel Data Regression Analysis

INTRODUCTION
One of the most important stakeholder in a company is shareholder, and they expect two kinds of return which are dividend and
capital gain (Singhania & Gupta, 2012) Dividend is important because it could be a signal whether the company’s financial
performance is good or not. It also affects company’s share price and the wealth of shareholders as well (Rehman, 2012).
Sighania & Gupta (2012) argue that dividend payout policy determines how much of the earnings of the company is distributed
as dividend and how much is retained for reinvestment. This decision related to investment decision that makes dividend payout
policy important for both investors and corporation. In Indonesia, public companies are listed in Indonesia Stock Exchange and
it has several stock price index in it. One of the index is LQ 45 Index which consists of 45 companies that has the highest
liquidity in the market. Looking at its proven excellent financial performance, LQ 45 companies always generate positive
income which later on will be alocated into two account, retained earnings and dividend, but the decision of the alocation
proportion is influenced by different factors. Paying out dividend is important both to the companies and the investors which
may give advantage to avoid information asymetry, it also maximizes shareholders wealth since LQ 45 is a notable companies
and the shareholders put high expectation. However, there is debate about how the company's dividend policy can affect
company value. Some researchers believe that dividends can increase shareholder welfare (Gordon, 1963). Some believe that
dividends are irrelevant (Miller & Scholes, 1978) and some believe that dividends actually reduce shareholder welfare
(Litzenberg & Ramaswany, 1979). This study aim to investigate the factors that significantly influence the dividend payout
policy of LQ 45 companies period February – July 2019, where the result would be helpful for investors to choose a company
to invest in. The limitation of this study are regards to the subject which is publicly listed company in Indonessia Stock
Exchange that are included in LQ 45 index February – July 2019 period and the historical data that are derived from annual
report will have the time horizon from 2014 to 2018. Quantitative method, namely panel data regression analysis will be used to
examine the data and generate the analysis. The analysis would expected to be resulted the significance of dividend payout

© 2019 The 4th International Conference on Management in Emerging Markets (ICMEM 2019)
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policy proxied by dividend payout ratio with some variables: leverage proxied by debt to asset ratio, liquidity proxied by
current ratio, profitability proxied by return on equity, and firm size proxied by total asset.

LITERATURE REVIEW
Dividend
Dividend is the company's revenue distributed to shareholders. The amount of dividend can be represented by dividend payout
ratio. There are several types of dividend namely cash dividend, stock dividend, property dividend, and liquidation dividend.
Dividend Policy
Dividend Policy is corporation’s choice of whether to pay its shareholders a cash dividend and, if so, how much to pay and with
what frequency (Megginson 1997, p.353). Some of the company’s dividend policy are using the ratio of constant dividend
payments, dividend per share are constant, also small and regular dividends plus extras
Dividend Payout Policy Theory
There are various theory about dividend payout policy, which are dividend irrelevance theory that employed several
assumptions such as perfect capital markets, rational behavior and perfect certainty; bird-in-the-hand theory states that investor
think that current dividend is less risky than future fividends; signaling theory suggests that dividend payout policy is a way of
communication between firm’s management and investors to reduce information asymetry; agency theory explains about the
different interest between shareholders as the principal and management as the agent where this condition will lead to conflict
and hurts shareholder value; and pecking order theory which states that a company obtain financing through retained earning
first, then followed by debt financing, and finally external equity financing.
Variables
This research consists of one dependent variable that is dividend payout policy, proxied by dividend payout ratio, and four
independent variable that are leverage, proxied by debt to asset ratio; liquidity, proxied by current ratio; profitability, proxied by
return on equity; firm size, proxied by total asset.

Figure 1 Conceptual Framework

Table 1 Literature of Variable

Variable Equation Explanation

Dividend Payout The dividend payout ratio indicates the
Ratio percentage of each dollar earned that the
firm distributes to the owners of the firm in
the form of cash. (Gitman, 2012)
Debt to Asset Ratio Debt to asset ratio is applied as the proxy
for leverage following the research by Mui
& Mustapha (2016).
Current Ratio Liquidity refers to the solvency of firm’s
overall financial position—the ease with
which it can pay its bills. (Gitman, 2012)
Return on Equity Return on equity is a ratio which measures
the return obtained from the investment
made by shareholders of the firm.
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Firm Size Firm sized is proxied by natural logarithm
of total asset following the research by Mui
& Mustapha (2016).

METHODOLOGY
Research Design
Research design briefly depicts the methodology used for the research. This chapter would present the step of the
research, starting from problem identification, literature review, data collection, data processing, data analysis, and
end with conclusion and recommendation
Data Collection
The data derived from financial statements published on the annual reports of LQ-45 Index’s company for
February – July 2019 period. The time horizon used for this research is five years starting from 2014 to 2018.
Sample Selection
The sample selection criteria used in this study is:
 Included in the list of LQ-45 companies for the period 1 February 2019 until 31 July 2019.
 Pay dividends consistently for five consecutive years from 2014 - 2018.
 Publish audited financial statements for five consecutive years from 2014 - 2018.
 The companies does not run business in financial sectors.
Below are the list of companies that become the sample of this research:

Table 2 List of Companies

No Companies Name Ticker
1 PT Adhikarya (Persero) Tbk. ADHI
2 Adaro Energy Tbk. ADRO
3 AKR Corporindo Tbk. AKRA
4 Astra International Tbk. ASII
5 Charoen Pokphand Indonesia Tbk. CPIN
6 Erajaya Swasembada Tbk. ERAA
7 Gudang Garam Tbk. GGRM
8 H. M. Sampoerna Tbk. HMSP
9 Indofood CBP Sukses Makmur Tbk. ICBP
10 Indofood Sukses Makmur Tbk. INDF
11 Indah Kiat Pulp & Paper Tbk. INKP
12 Indocement Tunggal Prakarsa Tbk. INTP
13 Indo Tambangraya Megah Tbk. ITMG
14 Matahari Department Store Tbk. LPPF
15 Media Nusantara Citra Tbk. MNCN
16 Bukit Asam Tbk. PTBA
17 PP (Persero) Tbk. PTPP
18 Pakuwon Jati Tbk. PWON
19 Surya Citra Media Tbk. SCMA
20 Semen Indonesia (Persero) Tbk. SMGR
21 Sri Rejeki Isman Tbk. SRIL
22 Pabrik Kertas Tjiwi Kimia Tbk. TKIM
23 Telekomunikasi Indonesia (Persero) Tbk. TLKM
24 Chandra Asri Petrochemical Tbk. TPIA
25 United Tractors Tbk. UNVR
26 Unilever Indonesia Tbk. UNVR
27 Wijaya Karya (Persero) Tbk. WIKA
28 Waskita Karya (Persero) Tbk. WSKT

Data Analysis
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Statistical method is used for this research where the objective is to find the relationship between one dependent
variable with independent variable amounted more than two variables. Since the data for this research is in the
form of panel data, panel data regression analysis method will be used. First, stationary test will be conducted and
followed by five classical assumption test. Afterwards, estimation model test is runned to determine the best model
for the regression. Then the regression analysis is examined with the equation stated below:

Where:
DPR = Dividend Payout Ratio, proxy for dividend payout policy
DAR = Debt to Asset Ratio, proxy for leverage
CR = Current Ratio, proxy for liquidity
ROE = Return on Equity, proxy for profitability
SIZE = Natural logarithm of total assets, proxy for firm size
Hypothesis
H1: Leverage proxied by Debt to Asset Ratio significantly affect Dividend Payout Ratio
H2: Liquidity proxied by Current Ratio significantly affect Dividend Payout Ratio
H3: Profitability proxied by Return on Equity significantly affect Dividend Payout Ratio
H4: Firm Size proxied by Total Asset significantly affect Dividend Payout Ratio

FINDINGS AND ARGUMENT

Relationship between Debt to Asset Ratio and Dividend Payout Ratio
Debt to Asset Ratio (DAR) as the proxy of leverage estimated to have significant negative relatioship with
dividend payout policy as proxied by Dividend Payout Ratio (DPR). As DAR increase the DPR will decrease since
the company are oblige to prioritize in repaying the debt compared to paying dividend. Since the DAR
significantly affect the DPR, both investors and companies should pay attention to the ratio
Relationship between Current Ratio and Dividend Payout Ratio
Current Ratio (CR) as the proxy of liquidity estimated to have significant positive relatioship with dividend payout
policy as proxied by Dividend Payout Ratio (DPR). As CR increase the DPR will also increase because the
company has sufficient cash to repay the current liability. Thus, higher CR indicates that the companies will pay
higher dividend to the investors
Relationship between Return on Equity and Dividend Payout Ratio
Return on Equity (ROE) as the proxy of profitability estimated to have significant positive relatioship with
dividend payout policy as proxied by Dividend Payout Ratio (DPR). As the value of ROE increase, the DPR value
will also increase as the implication of the increase in shareholder’s return. Therefore, the increase in ROE give
signal to the investors that companies will pay more dividend
Relationship between Total Asset and Dividend Payout Ratio
Total Asset (SIZE) as the proxy of firm size estimated to have significant positive relatioship with dividend payout policy as
proxied by Dividend Payout Ratio (DPR). When the value of SIZE increase, the DPR will also positively increase. The positive
relationship indicates that the larger the size of the firm, the dividend payout ratio will be greater.

CONCLUSIONS
This study has objective to identify factors affecting dividend payout policy. Several independent variables are chosen based on
previous studies by other researchers. The independent variables are leverage, liquidity, profitability, and firm size, while the
dependent variable is dividend payout policy. Leverage measured by debt to asset ratio, liquidity measured by current ratio
profitability measured by return on equity, firm size measured by total assets, and dividend payout policy measured by dividend
payout ratio. From the panel data regression analysis it is expected to draw the result that all independent variables significantly
affect dividend payout policy based on the statistical test namely T-test and F-test. The value of adjusted R 2 resulted from the
regression model expected to be above 70%. The findings thus potential to be used for potential investors, that investors should
pay attention to the four independent variable of the LQ 45 companies they are about to invest in, while for the companies itself
they should maintain the the level of four ratios in independent variable to be suitable with the information signal that the
company wants to give to the investors. Recommendation for future research is to broaden the variable used for the research
aside from leverage, liquidity, profitability, and firm size to increase the adjusted R 2 value.
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