The effects of ownership structure, sub-optimal cash holdings and investment inefficiency on dividend policy: evidence f
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The effects of ownership structure, sub‑optimal cash holdings and investment inefficiency on dividend policy: evidence from Indonesia Abdul Moin1 · Yilmaz Guney2 · Izidin El Kalak3
© The Author(s) 2019
Abstract We investigate how a firm’s decision to hold excessive cash or to overinvest could influence its dividend payout policy in Indonesia. Additionally, we examine the association between corporate ownership structure and cash dividends. Using a data set of Indonesian listed firms for the period from 1995 to 2014, we find that excessive cash holding (overinvestment) positively (negatively) affects a firm’s likelihood of paying dividends. Also, we find that family, foreign, state and institutional ownership have significantly negative links with dividends, which suggests the signals of expropriation of firms’ wealth by major shareholders. These findings strongly support the expropriation hypothesis that commonly applies to firms with higher level of concentration or to firms in a weak legal environment by which the rights of minority interests are put at risk by large shareholders. Keywords Dividend policy · Overcash · Overinvestment · Corporate governance · Ownership structure · Indonesia JEL Classification G32 · G34 · G35
* Izidin El Kalak [email protected] Abdul Moin [email protected] Yilmaz Guney [email protected] 1
Accounting and Finance Department, Faculty of Economics, Islamic University of Indonesia, Yogyakarta, Indonesia
2
Accounting and Finance Department, Business School, University of Hull, Hull, UK
3
Accounting and Finance Department, Business School, Cardiff University, Aberconway Building, Column Drive, Cardiff, UK
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A. Moin et al.
1 Introduction Agency theory indicates that there are some potential problems when firms hold overcash (i.e., excessive cash holding) which can be related to managerial overcompensation and overinvestment (Jensen 1986; Fairchild 2010). Overcompensation and overinvestment can be intertwined as corporate managers could use cash flows to be invested in negative net present value (NPV) projects, which leads to managerial private benefits and to enhance managerial overcompensation due to the increasing scale of duty, firm size, and responsibility (Jensen and Meckling 1979). On the other hand, such actions could be harmful to shareholders since some cash should be returned to them. Fuller and Blau (2010) name this situation as the “free cash flow problem” and to reduce this problem firms should pay dividends to their shareholders. In this study, we sought to address the following two questions: Is there any link between the decision to hold overcash and to overinvest and a firm’s dividend policy? Is there any association between a firm’s corporate governance, represented by ownership structure and types, and its dividend policy? Therefore, our analysis focuses on two closely related issues. First, we examine the relation between a firm’s decision to hold overcash and to overinvest and dividend payout policy. The deviation from a
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