The Role of Institutional Ownership and Industry Characteristics on the Propensity to Pay Dividend: An Insight from Company Open Innovation

S Martono,Arief Yulianto,Angga Pandu Wijaya,Rini Setyo Witiastuti

doi:10.3390/joitmc6030074

Abstract

The purpose of this study is to test the free cash flow agency theory hypothesis; namely, (a) whether differences in industrial sector affect a company’s propensity to pay dividends, and (b) whether institutional ownership is able to substitute for the propensity to pay dividends as a bonding mechanism. The analysis uses logistic regression to explore the existence of institutional ownership as a substitute for paying cash dividends in companies belonging to different industrial sectors. The results show that companies in the manufacturing sector have a greater propensity to pay dividends compared to those in non-manufacturing sectors. The results also indicate that low institutional ownership, as an external monitoring mechanism, can substitute for increasing the propensity to pay dividends. Overall, the results are consistent with implications in dividend policy. The results support the notion that the propensity to pay dividends accommodates different behavioral factors, considering sectoral differences. In addition, the results illustrate the relevance of alternative theories in explaining dividend policy from the perspective of agency theory. The results show that sectoral comparisons, in addition to institutional ownership factors, play important roles in the propensity of Indonesian companies to pay dividends. This study shows that each industry sector has different income characteristics, which affect the differences in propensity to pay dividends.

Highlights

Benefits are an essential factor that push the relationship between agency problems and free cash flow
In terms ofResults the institutional ownership percentage based on propensity to pay cash dividends, 4
In terms of the institutional ownership percentage based on propensity to pay cash dividends, them (53.78%) did not pay dividends while the remaining 1148 companies (44.22%) paid dividends

Summary

Introduction

Benefits are an essential factor that push the relationship between agency problems and free cash flow. Agents have a high propensity to maximize their benefit; if a conflict arises, the agent will prioritize their interests. Conflicts of interest appear due to significant differences in interest [1]. Agency problems occur due to differences in the interests of managers and shareholders in using free cash flow (FCF). Easterbrook argued that there are two causes of agency problems [2]: (a) shareholders preference for using FCF for investments with high returns despite a high level of risk, and opting to monitor the managers’ investment decisions; (b) managers dislike of risk, which prompts them to allocate FCF for investments with low risk. It is suspected that FCF is the cause of agency problems between managers and shareholders

Objectives

Results

Conclusion