Ownership structure and dividend policy in Indonesia
| DOI | https://doi.org/10.1108/JABS-05-2015-0053 |
| Published date | 01 August 2016 |
| Pages | 230-252 |
| Date | 01 August 2016 |
| Author | Doddy Setiawan,Bandi Bandi,Lian Kee Phua,Irwan Trinugroho |
| Subject Matter | Strategy,International business |
Ownership structure and dividend policy
in Indonesia
Doddy Setiawan, Bandi Bandi, Lian Kee Phua and Irwan Trinugroho
Doddy Setiawan and
Bandi Bandi are both
based at Faculty of
Economics and Business,
Universitas Sebelas
Maret, Surakarta,
Indonesia. Lian Kee Phua
is based at School of
Management, Universiti
Sains Malaysia, Penang,
Malaysia.
Irwan Trinugroho is
based at Faculty of
Economics and Business,
Universitas Sebelas
Maret, Surakarta,
Indonesia.
Abstract
Purpose –This research aims to examine the effect of ownership structure on dividend policy using the
Indonesian context. The most common ownership structure is concentrated in the hand of family owners
except in the UK and USA (La Porta et al., 1998, 2000). Family owners hold more than half of the
companies in Indonesia (Carney & Child, 2013; Claessens et al., 2000). Family firms play an important
role in Indonesia. Another important characteristic that emerges is the rise of government- and
foreign-controlled firms in Indonesia. Thus, this research also divides ownership concentration into
family firms, government-controlled and foreign-controlled firms.
Design/methodology/approach –Samples of this research consist of dividend announcements
during 2006-2012 in Indonesian Stock Exchange. This research excluded financial data because these
have characteristics that are different non-financial sectors’ characteristics. The final sample of this
research consists of a 710 firm-year observation.
Findings –The result of this research shows that ownerships have a positive effect on dividend payout.
This research divides the sample into family-controlled firms, government-controlled firms (GOEs) and
foreign-controlled firms. This research shows that government- and foreign-controlled firms have a
positive impact on dividend payout. However, family firms have a negative effect on the dividend
payout. Family firms pay lower dividends because they prefer to control it themselves. Family firms earn
benefit from those resources, but at the expense of minority shareholders. Thus, family firms engage in
expropriation to minority shareholders.
Research limitations/implications –This study focuses on ownership structure of Indonesian listed
firm. This study does not analyze the impact of other corporate governance mechanism such as board
structure on dividend decisions. The owner of the companies (family, government and foreign firm) has
an opportunity to put their member as part of board members. However, this study does not analyze the
impact of board structure on dividend decisions.
Originality/value –This study provides evidence that ownership concentration positively affects
dividend payout. However, there is a different effect of ownership structure (family-controlled firms,
GOEs and foreign-controlled firm). Government- and foreign-controlled have a positive effect; however,
family-controlled firm have a negative effect on dividend payout. Therefore, this study provides
evidence of the importance of ownership structure on dividend decision.
Keywords Ownership structure, Dividend, Family firms, Foreign-controlled firms, Government-controlled firms
Paper type Research paper
Introduction
We investigated the effect of ownership concentration on dividend policy by studying
Indonesian firms. The most common ownership structure is concentrated in the hands of
families except in the UK and the USA (La Porta et al., 1998,2000). Family owners control
more than half of the firms in East Asia (Claessens et al., 2000). Although this number
decreased to 46.1 per cent in 2008 because of significant political changes in the East
Asian countries (Carney and Child, 2013), family owners still control the greater part of firms
in Asia.
The proportion of family firms in Indonesia, an emerging market and the world’s fourth most
populous country, has also decreased from 68.6 to 57.3 per cent (Carney and Child, 2013);
Received 1 May 2015
Revised 7 August 2015
4 October 2015
Accepted 10 October 2015
The authors would like to
thank Kurniawan Agung and
Fany Himawan S for their
research assistance and Leo
Indra Wardhana (University of
Limoges) for his constructive
comments.
PAGE 230 JOURNAL OF ASIA BUSINESS STUDIES VOL. 10 NO. 3, 2016, pp. 230-252, © Emerald Group Publishing Limited, ISSN 1558-7894 DOI 10.1108/JABS-05-2015-0053
however, they still account for more than half of Indonesian firms, meaning that family firms
still play an important role in Indonesia. The other ownership structures are government-
and foreign-controlled firms. In this study, therefore, we have divided ownership
concentration into the categories of family firms, government-controlled firms (GOEs) and
foreign-controlled firms.
Shleifer and Vishny (1997) have argued that, if controlling shareholders hold almost full
control of firms, they can make decisions based on their best interests. However, such
interests are not always congruent with those of other shareholders. Controlling owners can
make decisions that keep firms’ resources to themselves through related party transactions
or by investing in affiliated firms. Of course, these behaviors should reduce firms’ values for
controlling owners, meaning that benefits can be extracted from companies at the expense
of minority shareholders. Therefore, agency conflicts between controlling shareholders and
minority shareholders are mostly found in those firms with concentrated ownership
(Claessens and Yurtoglu, 2013;Shleifer and Vishny, 1997). They are also called principal–
principal conflicts (Jiang and Peng, 2011;Peng and Jiang, 2010).
Faccio et al. (2001) focused on controlling shareholders’ decisions regarding dividends.
Dividends are important because they mean that controlling shareholders have to share
their resources instead of holding onto them. Minority shareholders expect that they will get
dividends as returns from their investments. However, they may also bear higher costs
because of a higher probability of expropriation. Faccio et al. (2001) found that firms in East
Asia with controlling owners pay lower dividends compared to their counterparts in Western
Europe. Controlling owners in East Asia prefer to hold their resources rather than distribute
them amongst minority shareholders. Therefore, negative effects have been found in the
link between ownership concentration and dividend payouts. This result is confirmed by
other studies (De Cesari, 2012;Gugler and Yurtoglu, 2003;Harada and Nguyen, 2011; and
Manos et al., 2012).
On the other hand, Shleifer and Vishny (1986) argued that large shareholders are more
motivated to monitor managers and are also able to bear costs better. Therefore, it is
expected that large shareholders have a positive effect on firms’ values. Maury and Pajuste
(2005), studying Finnish firms, showed that multiple large shareholders at firms positively
affected dividend payouts. Berzin et al. (2012) also showed that higher ownership
concentration among Norway’s private firms was associated with higher dividend payouts
for minority shareholders. Controlling shareholders improved their reputations by paying
higher dividends to minority shareholders.
La Porta et al. (2000) showed that institutional settings could affect decisions about
dividends. In weakly governed countries, shareholders are more likely to receive lower
dividends. Controlling owners use their funds to pursue their own interests rather than
spending them on paying dividends to minority shareholders. This result shows that
dividend payments are an “outcome” of corporate governance and institutional
development.
As an emerging market, Indonesia has poor governance (Nys et al., 2015). As a result,
minority shareholders may obtain lower dividends because of the expropriation of
resources by controlling owners. On the other hand, Faccio et al. (2001) found that
shareholders receive lower dividends when the ratio of ownership rights to cash flow rights
is lower. Thus, firms with a higher probability of engaging in expropriations pay lower
dividends to keep their resources inside businesses. The findings of La Porta et al. (2000)
and Faccio et al. (2001) revealed that minority interests are weakly protected from
expropriation and subsequently receive lower dividends.
As pointed out by Carney and Child (2013), GOEs and foreign-controlled firms are also the
dominant forms of ownership structure in Indonesia. Therefore, for this present paper, we
have considered three types of ownership concentration which are family-run businesses,
GOEs and foreign-controlled firms.
VOL. 10 NO. 3 2016 JOURNAL OF ASIA BUSINESS STUDIES PAGE 231
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