04 May 2016

Dividends Family Ownership: Evidence from Indonesia

Evy Mulyani, 2014
Deakin University

Abstract
This thesis provides evidence on dividends and family ownership in Indonesia. The thesis is presented as a sequence of three studies that are based on a sample dataset of 539 firms listed on the Indonesia Stock Exchange (IDX) over the period 1990–2011. The data analysis is based on a market model and multivariate regression analysis. The theoretical foundations for these three sets of studies are agency theory, signalling theory, and income and dividend smoothing hypothesis.

The first examines whether family-controlled firms in Indonesia utilize dividends and leverage to either intensify or alleviate agency problems. The second study analyses the information content of and market reactions to the dividend announcements of firms with different family ownership and dividend timing in Indonesia. The third study investigates whether firms in Indonesia manage their earnings in relation to dividend payments.

Using simultaneous equations, the first empirical study finds a significant negative association between family ownership and dividend payout in the Indonesian market. Furthermore, it uncovers a two-way negative relation between dividend payout and leverage. The analysis reveals that, compared to non-family firms, family firms tend to maintain lower dividend payouts and higher leverage. Family firms do not appear to utilize dividends to mitigate agency conflict. During the Asian and global financial crisis, family-controlled firms changed their dividend payout more than non-family firms did. It is also documented that industry-specific characteristics influence dividend payout.

The second empirical investigates whether dividends announced by family firms in Indonesia have different magnitudes of market reaction and information content. It is revealed that the market does not disregard the existence of family ownership in reacting to dividend announcements. Similarly, dividends announced by family firms possess greater information content than dividends announced by non-family firms. The study extends the analysis by controlling for different dividend timing. Family ownership dominance and two dividend announcements, interim and annual dividends, are among the unique market settings exclusive to this study. Analysis shows that the market reacts more to interim dividend announcements than to annual dividend announcements, which is consistent with the greater information content of interim dividends compared to annual dividends.

The third empirical study examines the relation between family ownership and the chances of earnings management with regard to upcoming dividends. It reveals that dividend-paying family firms are associated with lower abnormal accruals as as a proxy of earnings management. The findings show that earnings are managed robustly within dividend-paying firms that experience relatively fewer earnings. The analysis concludes that abnormal accruals are negatively related to the existence of family ownership and positively associated with expected dividend level. Further, family firms appear to be less hesitant about decreasing dividends as compared to non‒family firms. Sales growth shows a negative relation with dividend cut, apparently this growth involves higher investment expenditures. The analysis also indicates that earnings management is more pronounced among small firms and in firms with low levels of institutional ownership.

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