The Relation between Dividend and Financial Constraints to Firm Value

Adrian Teja,John Iwan Kusno,Kevin Chanry,Wilson A

doi:10.32350/jfar/2020/0202/851

Abstract

This study examines the relation between dividends and financial constraints to firm value using publicly traded firms in Indonesia from 2013 to 2017. The very exploration used a repeated cross section regression method to understand monotonic and non-monotonic alliance between dividends and financial constraints to firm value. The non-monotonic correlation measured by dummy variables for 6 dividends categories, i.e. 0 category is defined as firms that did not pay dividends and category 5 is defined as firms that pay dividends with the highest quintile. It is found that monotonic bond lowers the financial constraints that has more important and consistent positive effects on firm value relative to dividends. These findings imply investors to have higher preferences for a firm’s ability to realize good investment projects and provide higher future profits, relative to current profit in the form of dividends. It also found that non-monotonic connection between dividends and firm value and dividends and financial constraints have relatively equal positive effect to firm value.

Highlights

For a growing concern organization, firm profit should be distributed to investors or reinvested within the firm to maintain and create more future profit
The purpose of this paper is to examine the relationship between dividend and financial constraints to firm value in monotonic and non-monotonic relation context
The results of this study indicates that lower financial constraints have more positive effect to firm value relative to dividend

Summary

Introduction

For a growing concern organization, firm profit should be distributed to investors or reinvested within the firm to maintain and create more future profit. Investors’ value future profit higher than historical profit and current profit because future profit is what investor will experience in the future. Future condition is vague and full with uncertainty. A routine investor practice is to invest and infer future. Yields based on historical profit trend and current profit, especially dividend paid out to investors, and assess the profitability of project taken by the firm. Accumulated future profit or dividend is one of the major contributions to estimate firm value

Objectives

Methods

Results

Discussion

Conclusion