Abstract
This study provides evidence about how stockholders control insiders using dividend policy to prevent overinvestment. This study observes the dividend yield, market risk, profitability, and growth opportunities of 155 public firms listed on the Indonesia Stock Exchange from 2010 to 2017. The dividend yield data were split into quartiles and categorized into the following areas: 1) firms with the lowest dividend yields, 2) firms with lower dividend yields, 3) firms with higher dividend yields, and 4) firms with the highest dividend yields. This study conducts multinomial regression for testing the hypotheses. The results confirm that systematic risk has an insignificant relationship with dividend policy, and profitability has a significant relationship with dividend policy. Consistent with agency theory in supporting free cash flow theory, this study finds that the agency problem exists for firms with high dividend yields relative to firms with low dividend yields in the context of Indonesian public firms. The systematic risk has an insignificant relationship with dividend policy, of which the study sample is limited. The findings also imply that stockholders tend to control insiders in case of overinvestment. Besides, this study also finds that market risk as a systematic risk is insignificant both for firms with high and low dividend yields.
Highlights
The motivation for this study begins with the concept of agency relationships by Jensen and Meckling (1976)
Consistent with agency theory in supporting free cash flow theory, this study finds that the agency problem exists for firms with high dividend yields relative to firms with low dividend yields in the context of Indonesian public firms
This study finds that the case of firms with high dividend yields is consistent with free cash flow theory under agency theory relative to firms with low dividend yields
Summary
The motivation for this study begins with the concept of agency relationships by Jensen and Meckling (1976). Jensen and Meckling (1976) refer to those assumptions as to the source of agency problems based on the following logic: (1) principals are uninformed about the process of how input becomes output, especially in terms of increasing profits and (2) agents act for their benefit instead of maximizing the wealth of principals. As dividends increase the wealth of principals (called stockholders),these individuals expect a higher return on investment (Jensen & Meckling, 1976; Easterbrook, 1984). In the context of free cash flow, Fairchild et al (2014) confirm that increased profits create high demand by stockholders, while growth opportunities have no relationship with the agency problem, and those results were verified by Budiarso et al (2019). The sections of this study are as follows: section 1 reviews the literature to develop the hypotheses, section 2 explains the research method of this study, section 3 discusses the results of the study, section 4 discusses the results of the study, and last section presents the conclusions
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