ICOI-2018

The 2018 International Conference of Organizational Innovation

Volume 2018

Conference Paper

Analysis of the Factors Influencing Dividend

Policy: Evidence of Indonesian Listed Firms
Theresia Trisanti
Sekolah Tinggi Ilmu Ekonomi YKPN, Yogyakarta

Abstract
The purpose of this study is to determine the influences of the company variables to
dividend policy of firms. There are four hypotheses draw for this study to increase
our understanding of the effect and relationship of dividend payout of firms, such
as sales, profitability, companies’ debt, and assets growth. The data used were the
financial reports of manufacturing company that were obtained through IDX from
2013–2016. Four hypotheses, which relate to dividend payout such as sales, assets
growth, profitability and debt financing, were tested in this research. Regression
analysis indicated that profitability, sales and assets growth have positive significant
Corresponding Author: influence to dividend payout but debt has negative significant.
Theresia Trisanti
thetrisanti@yahoo.com Keywords: dividend payout, sales, assets growth, profitability and debt financing
Received: 29 August 2018
Accepted: 18 September 2018
Published: 11 November 2018

Publishing services provided by 1. Introduction

Knowledge E

Theresia Trisanti. This article Company condition is reflected from the Financial Statement that has been presented,
is distributed under the terms of
because in the Financial Statement there is an information needed by external parties
the Creative Commons
Attribution License, which and internal parties. The Financial Statement is a means to conduct a communication
permits unrestricted use and activity between the management and the shareholders. The purpose of Financial
redistribution provided that the
Statements prepared by the management is to provide information ranging from finan-
original author and source are
credited. cial position, financial performance and cash flow statement of a company useful for

Selection and Peer-review

decision-making. In this case between the management and the shareholders are
under the responsibility of the expected to communicate with each other with clear information so that corporate
ICOI-2018 Conference
goals can be achieved. Companies that are able to distribute dividends to sharehold-
Committee.
ers are considered to have good performance because it is assumed able to record
profits and pay attention to the investors. However, management often has difficulty
in making decisions related to dividends. This is because investors prefer dividends
to be distributed, but on the other hand management is more interested in using
those profits to increase capital for future investment financing [8]. Dividend policy
is considered at the very core of corporate finance. In this study, the investors will like

How to cite this article: Theresia Trisanti, (2018), “Analysis of the Factors Influencing Dividend Policy: Evidence of Indonesian Listed Firms” in The
2018 International Conference of Organizational Innovation, KnE Social Sciences, pages 240–249. DOI 10.18502/kss.v3i10.3377
Page 240
 ICOI-2018

to determine the factors that affecting dividend payout decision and how dividend
decision affect the value of the firms. The expected dividend payout is influenced by
many factors such as after tax earnings, availability of cash, shareholders expectation,
expected future earnings, liquidity, leverage, return on investment, industry norms as
well as future earnings. In this study, factors that influence dividend payout such as
stability in debts ratio, assets growth companies, profitability and sales of the firm will
be identified [7].

2. Literature Review

A firm’s dividend policy refers to its choice of whether to pay shareholders a cash
dividend, how large the cash dividend should be, and how frequently it should be
distributed. In a broader sense, dividend policy also encompasses decisions such as
whether to distribute cash to investors via share repurchases or specially designated
dividends rather than regular dividends, and whether to rely on stock rather than cash
distributions [9]. The firm’s dividend policy includes two basic components. First, the
dividend payout ratio indicate the amount of dividends pay relative to the company’s
earnings. The second component is the stability of the dividends over time. In formulat-
ing a dividend policy, a manager of a firm faces trade-offs. Assuming that management
has already decided how much to invest and has chosen its debt-equity mix for financ-
ing these investments, the decision to pay a large dividend means simultaneously
deciding to retain little, if any, profits; this is turn result greater reliance on external
equity financing which may costly for a firm [6].
One of the most critical arguments of financial literature has been dividend policy.
Dividend has two important aspects. First, it is an effective element of corporations’
investment. On the one hand, the higher the dividend paid out, the lower will be
corporations’ internal resources for performing investment projects, while outsourcing
requirement will increase which is an effective element of the stock price. On the
other hand, many corporate shareholders demand cash dividends [13]. Thus, man-
agers should always equilibrate between different interests of shareholders so that
they could utilize investment profitable opportunities and would pay required cash
dividends for some shareholders. Therefore, a dividend decision by corporations’ man-
agers is very sensitive and important as well. There is no doubt that when deciding
about income, managers should consider their outcomes. Conversely, given the firm’s
investment and financing decisions, a small dividend payment corresponds to high
profit retention with less need for externally generated equity funds will give a lower

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cost for a firm. Normally if the cost of paying dividend is higher than retention earning,
it is more beneficial for firm to retain its earnings [11].
A dividend policy is a company’s approach to distributing profits back to its owners
or stockholders. If a company is in a growth mode, it may decide that it will not
pay dividends, but rather re-invest its profits (retained earnings) in the business. If a
company does decide to pay dividends, it must then decide how often to do so, and at
what rate. Large, well-established companies often pay dividends on a fixed schedule,
but sometimes they also declare ‘special dividends’. The payment of dividends impacts
the perception of a company in financial markets, and it may also have a direct impact
on its stock price. As discussed earlier, there are some factors which affected the
dividend payout ratio, there the hypothesis and explanation as follows:

H1 : There is positive association between the companies’ debt and the dividend pay-
out. Of course high leverage companies need a lot of funds to service their debt,
and as we know servicing debt is very expensive. Therefore, they have to allocate
the high portion of their earning for that purpose and directly will reduce the
amount of earnings to be paid as dividend. In addition, high leverage firms have
the possibilities of constraints by possible rules and regulation imposed by the
debtors called debt covenants [8].

H2 : There is positive association between firms’ asset growth with the dividend pay-
out. The higher the growth rates of the companies, the greater the need for
funds to finance the expansion. Therefore, there a possibilities that companies
will reserve the higher portion of earnings to finance the growth, hence it will
result in low dividend’s payment [1].

H3 : There is a positive relationship between the profitability by the companies with

the dividend payout to shareholders. Profitability is considered as the most impor-
tant factors associated with the dividend policy choices. It is understood that the
firms, which experience stable earnings, can predict its future earning with higher
accuracy and hence can predict stable dividend policy. Thus, firm can commit
to pay higher dividend payment if they can predict higher earnings ( John and
Muthusamy, 2012).

H4 : there is positive association between the companies’ sales growth and the divi-
dend payout. The higher the sales growth of the companies, the grate will be the
dividend payout. Firms experiencing or anticipating higher sales growth will have
lower dividend payout ratios because of investment opportunities and expected
NPV projects [1].

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The relationship among variables describes as follow:

Sales

Profitability
Financial Report Dividend Payout

Debt Financing

Assets Growth

3. Methods

This study aims to examine the factors determining dividend payout ratio among the
listed firms in the Indonesian Stock Exchange. This chapter discusses four important
parts to achieve the aims of this study. The first part consists of the determinants of
dividend payout ratios, second is sampling, third: selection data, and the last sections
is empirical model and explanations of variable.
A sample of 80 firms continuously traded firms from the Indonesia Stock exchange
(IDX) from 540 firms was selected. A sample firm must have a typical dividend payout
ratio ranging from 0 to 1. Data for calculating all the variables must be available for
that firm. The selection of the sample was based on the criteria, that the 80 firms
were randomly selected and for 4 years total data are 320. Each sample companies
must be listed on the IDX during the year of sampling from year 2013–2016. The study is
based on the secondary data. Sources of those data had been collected from individual
Firm Annual Reports (company database), which is available in the IDX Online. This
research has used historical information and statistical methods ANOVA to examine the
relationship between variables and to test the hypotheses. Required information was
collected through different annual and financial reports. Regression analysis methods
were used to analyze the statistical tests and SPSS software was used to process
information.
This study adopted standard multivariate regression model to determine the possi-
ble factors that will influence the companies’ dividend policy decision. A few variables
have been identified including the companies earning, growth, size, and debt were
used to determine the factors that influence the dividend policy decision.
The model used in the study:

𝑌=𝛼+ 𝛽𝑋 + έ
∑

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α, β’ = parameter of regression
έ = Residual error
Where Y = Dividend Pay Out (DPO) of companies. This variable had been from:

Dividend per share

Earnings per share

Or

Dividend Payout = Dividend/earnings = Dividend per share/EPS

Dividend policy means the rationale under which a firm determines what it will pay
in dividends. The dividend payout ratio is the ratio of the dividends paid to earnings. For
example, if a company paid out $1 per share in annual dividends and had $3 in EPS, the
DPR would be 33% ($1/$3 = 33%). The real question is whether 33% is good or bad and
that is subject to interpretation. Growing companies will typically retain more profits
to fund growth and pay lower or no dividends. Companies that pay higher dividends
may be in mature industries where there is little room for growth and paying higher
dividends is the best use of profits [4].
There are two different tests that will be used to analyze the data, (1) descriptive test
to analyze the central tendency and dispersion of the data and (2) regression analysis
to ascertain the relationship between dependent variable and independent variables.
The equation is:

Y predicted = b0 + b1*Sales + b2*Tot Debt + b3*Profit +

DEBT = DEBT is debt to equity ratio which is companies leveraged measured by (long
term debt/total equity). It explained the ratio of debt to the availability of equity used
in the company’s operations. It is expected that the higher leverage of companies will
give negative relationship to companies’ dividend payout. This is due expensive cost
of debt. Companies with higher leverage need a lot of funds to service their debt [1].

Debt = Long term debt/Equity

AGR = Assets Growth Rate as proxy for growth. It is an average of expansion or

contraction, which is measured by change in total assets divide total assets (𝑡−1) . This
is another operational variable proxy for growth. Murtaza and Ahmed (2015) had used
this variable proxy for growth in their studies on dividend policy. The positive sign
shows the investment expansion and the negative sign indicate investment activities.
It is expected that growth proxy will have a negative relationship with the dividend

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policy. This is to understanding that firms will allocate more funds to finance invest-
ment and less for dividend payments.

Assets Growth = Change in Total Assets(𝑡−1) /Total Assets

PRFT = Net Income available for year t to the sales of year t. This variable represents
proxy for profitability for the companies. Murtaza and Ahmed (2015) had used this
variable as a proxy for profitability in their studies on dividend policy. It is expected
that this variable will show positive relationship to dividend payout. This assumption
is due to the studies done by scholars where most of the studies showed that profits
are very important determinant of dividend policy [2].

Net profit margin = Net profit/Sales

LOGSALES = Natural log of sales as proxy for growth. Abor and Fiador (2013) used sales
gate growth as an investment opportunity proxy. Frankfurter et al. (1997) conclude that
firms experiencing or anticipating higher sales growth will have lower dividend payout
ratios.

4. Results

The research methodology and data collection was explained in the previous section.
All the findings researcher figures gathered during the data collection processed. The
analysis was done using simple random sampling of 85 manufacturing firms (out of the
2013 listed manufacturing firms on 2016) to examine the overall results of the financial
determinant of dividend policy in Indonesian listed firms.
T 1: Model summary.

Model R R Square Adjusted R Square Std. Error of the

Estimate
1 0,6056 (a) 0,4417 0,4122 0,70589768621
Note: (a): Predictors: (Constant), Assets Growth, Profit, Total Debt, Sales.

Statistical output allows researcher to specify multiple models in a single regres-

sion command. This tells researcher the number of the model being reported. R is the
square root of R-Squared and is the correlation between the observed and predicted
values of dependent variable. R-Square is the proportion of variance in the dependent
variable (dividend per share) which can be explained by the independent variables
(assets growth, profit, total debt, sales). The first measure in the table is called R. This is
a measure of how researcher our predictors predict the outcome, but researcher need

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to take the square of R to get a more accurate measure. R-squared varies between 0
and 1. In this case it is 0,4122, so 41% of the variance in dividend per share test scores
can be explained by the independent variables (assets growth, profit, total debt, sales)
test scores. (Note: This does not imply causality.) Std. Error of the Estimate, this is also
referred to as the root mean squared error. It is the standard deviation of the error
term and the square root of the Mean Square for the Residuals in the ANOVA (Table
3).

T 2: ANOVA.

Model Sum of df Mean F Sig.

Squares Square
1 Regression 48,338 5 9.668 22.263 0.000𝑎
Residual 40,820 314 0.434
Total 89,157 319
a. Predictors: (constant), Assets Growth, Profit, Tot Debt, Sales
b. Dependent Variable: Div/Share

5. Discussion

Table 4 looking at the breakdown of variance in the outcome variable, these are the
categories researcher will examine: Regression, Residual, and Total. The Total vari-
ance is partitioned into the variance which can be explained by the independent vari-
ables (Model) and the variance which is not explained by the independent variables
(Error). Sum of Squares – These are the Sum of Squares associated with the three
sources of variance, Total, Model and Residual. The Total variance is partitioned into
the variance which can be explained by the independent variables (Regression) and
the variance which is not explained by the independent variables (Residual). For df.
these is the degrees of freedom associated with the sources of variance. The total
variance has N-1 degrees of freedom. The Regression degrees of freedom correspond
to the number of coefficients estimated minus 1. Including the intercept, there are 5
coefficients, so the model has 6 – 1 = 5 degrees of freedom. The Error degrees of
freedom were the DF total minus the DF model, 99 – 5 = 94. Mean Square – These
are the Mean Squares, the Sum of Squares divided by their respective DF. F and Sig. –
This is the F-statistic the p-value associated with it. The F-statistic is the Mean Square
(Regression) divided by the Mean Square (Residual): 9.668/0.434 = 22.263. The p-
value is compared to some alpha level in testing the null hypothesis that all of the
model coefficients are 0.

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T 3: Coefficients.

Model Unstandardized Coefficients Standardized t Sig.

Coefficients
B Std. Error Beta B Std. Error
1 (Constant) –5.590 1.655 –3.377 0.001
Sales 0.192 0.018 0.0250 2.839 0.006
Tot Debt –0.044 0.053 0.057 0.752 0.054
Profit 0.157 0.055 0.218 2.984 0.003
Assets Grow –0.307 0.027 0.396 2.352 0.009

The column of estimates provides the values for b0, b1, b2, b3 and b4 for this equa-
tion. For sales for every unit increase in sales, researcher expect 0.192 unit increases
in the sales score, holding all other variables constant. For total debt the coefficient
for total debt is –0.044. So for every unit increase in total debt, researcher expects an
approximately –0.044 point increase in the dividend payout, holding all other variables
constant. For the profit, the coefficient for profit is 0.157. So for every unit increase
in profit, researcher expects a 0.157 point increase in the dividend payout score. The
same for asset growth the coefficient for profit is –0.307. Therefore for asset growth
for every unit decrease in dividend payout, researcher expects a –0.307 point decrease
in the dividend payout. Std. Error, these are the standard errors associated with the
coefficients. For Beta, these are the standardized coefficients. These are the coeffi-
cients that researcher would obtain if researcher standardized all of the variables in the
regression, including the dependent and all of the independent variables, and ran the
regression. By standardizing the variables before running the regression, researcher
have put all of the variables on the same scale, and researcher can compare the
magnitude of the coefficients to see which one has more of an effect. Researcher
will also notice that the larger betas are associated with the larger t-values and lower
p-values. For t and Sig. these are the t-statistics and their associated 2-tailed p-values
used in testing whether a given coefficient is significantly different from zero.

6. Conclusion

This study examined the relationship between dividend payout and several variables
such as: leverage, profitability, asset growth, sales for 3 periods from 2013 up to 2016.
Past studies have rarely investigated the effect of dividend policy on manufacturing
listed firms especially with four independent variables together on manufacturing firm.
The result in general shows that there are significant descriptions between sales, debt
financing, profitability to dividend payout. Assets growth rate negatively influenced

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DPO. Profitability proxy, represented by PRFT, which is positively related with dividend
payout, is a significant determinant of dividend payout.
This study is limited to a few constraints. Due to time constraint and availability of
the data, the study only covers a period of 4 years (2013 to 2016) with 80 firms. The
number of firms chosen is only 80 out of the IDX 250 manufacturing firms listed in
Indonesia Stock Exchange. This might not give accurate representation of the overall
Indonesian company dividend policy. The study only focused on those companies who
paid dividends. There is no comparison between firms, which pay dividend, and firms,
which do not pay dividends. So, omitting firms has choose not to pay dividend may
have bias result. Suggestion for the future research should overcome the limitations
and cover other important areas that are not examined. It is recommended that more-
in-depth study can be done using few models in order to increase the accuracy of the
result. It is also important to use a bigger number of samples from various firms. This
will help to generalize the study.

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