Corporate governance and dividend policy in Indonesia

Abstract

Purpose – This study aims at examining the impact of corporate governance on dividend policy among Indonesian companies. There are two theories of the effect of corporate governance on dividend policy: substitution and outcome theory. Substitution theory argue that corporate governance have negative effect on dividend policy, while outcome theory argue that corporate governance have positive effect on dividend policy. Therefore, this study investigates the effect of corporate governance on dividend policy in Indonesia. This study aims at examining the impact of corporate governance on dividend policy among Indonesian companies. There are two theories of the effect of corporate governance on dividend policy: substitution and outcome theory. Substitution theory argue that corporate governance have negative effect on dividend policy, while outcome theory argue that corporate governance have positive effect on dividend policy. Therefore, this study investigates the effect of corporate governance on dividend policy in Indonesia. Design/methodology/approach – The sample of this research comprises 248 firms from Indonesian Stock Exchange during 2004-2006. This research using Transparency and Disclosure Index (TDI) to measure corporate governance in Indonesia Findings – We find that TDI are low among Indonesian firms, with a score of 32 per cent out of the maximum point. This score indicates that Indonesian corporate governance is still low. The results show that there is a negative relation between corporate governance and dividend policy in Indonesia. Thus, the Indonesian companies pay more dividends when corporate governance practice is low. This result confirms applicable of substitution theory in Indonesia. Research limitations/implications – This research focuses on manufacturing industry in Indonesia. Therefore, the conclusions of this research apply on the manufacturing companies in Indonesia Practical implications – This research shows that companies with poor corporate governance pay dividend higher than companies with better corporate governance. Thus, investor can use this information to make investment decision. Originality/value – This research provides evidence on the negative effect of corporate governance on dividend policy in Indonesia (substitution theory).