Dividend policy and residual dividend theory: evidence from Indonesia

Dewa Gede Wirama · Komang Ayu Krisnadewi · Luh Gede Sri Artini · Putu Agus Ardiana

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

Purpose Using the residual dividend theory, this study examines the impact of capital expenditures and working capital on the dividend policies of publicly listed companies in Indonesia. Design/methodology/approach Using data on public companies (other than those in the financial sector) listed on the Indonesia Stock Exchange from 2011 to 2020, this study collected 870 observations (firm-years). This study employs a regression analysis technique using the STATA application program. The main variables in this study are capital expenditure and working capital, and the control variables are sales growth, firm size, leverage, profitability, liquidity and dummy variables for state-owned enterprises. The dependent variable of dividend policy is proxied by the dividend payout ratio. Findings This study’s results support the residual dividend theory’s hypothesis, in which capital expenditure negatively affects a company’s dividend policy. This study also analyzes this effect on companies that pay cash dividends at quantile positions of 25, 30, 50 and 60. The results show that the effect of capital expenditure on cash dividend payments is more pronounced in the case of companies whose cash dividends are in the 50th quantile. This result holds across different specification and endogeneity tests. Originality/value This study analyzes the residual dividend theory in Indonesian companies, focusing on localized factors and investment priorities. It challenges traditional Western dividend policies and provides empirical data that enhances the theory’s robustness. The findings have practical implications for investors, policymakers and corporate decision-makers in the Indonesian market.

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References

1961Dividend Policy, Growth, and the Valuation of Shares 1997Emerging equity market volatility 2003Do Emerging Market Firms Follow Different Dividend Policies From U.S. Firms?2019Determinants of dividend policy: evidence from an emerging and developing market 2015Corporate dividend policy revisited 2012Dividend policy in Indonesia: survey evidence from executives 2022Impact of dividend payouts and corporate social responsibility on firm value – Evidence from India 2017Dividend policy: A selective review of results from around the world

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