http://www.jurnal.unsyiah.ac.

id/JAROE

Bank-Specific Factors as Determinants of Dividend Yield:

Case of the Indonesia Stock Exchange

Muhamad Umar Mai

Accounting Department, Politeknik Negeri Bandung, Bandung Barat, Jawa Barat
Email: [email protected]

Abstract
Objective – The purpose of this study is to observe the impact on dividend yields caused by
bank-specific factors of profitability, liquidity, bank size, leverage, and bank growth.

Design/methodology – This study was conducted on the bank sub-sector of the Indone-
sia Stock Exchange for the period of 2009-2018, which resulted in 367 bank-year observations.
The sample is determined using a purposive sampling method with a criteria of bank that paid
dividends hence resulting in 134 bank-year observations. However, to achieve the fit model's
goodness, the final sample used was 120 bank-year observations. This paper used OLS Multiple
Linear Regression for analyzing data.

Results – The results show that return on assets and leverage negatively affects dividend
yield, and bank size has a positive effect. Meanwhile, growth and liquidity do not affect divi-
dend yield. These results are useful for investors in determining their investment decisions in
the banks’ shares on the Indonesia Stock Exchange and for managers in considering bank-
specific factors to meet investors' preferences for dividends.

Keywords: Profitability, Liquidity, Bank Size, Leverage, Growth, Dividend Yield .

1. Introduction
Handorf (2016) depicts dividend policy as per share dividend and payout ratio
paid from time to time by a company to its shareholders. There have been many discus-
sions about dividend decisions in financial studies. Academics and professionals have
been long confused about whether companies pay dividends and why investors are very
much concerned about it (Baker, Mukherjee, & Paskelian, 2006). Regardless of the
number of studies conducted, it is still difficult to understand how dividend policy can
be influenced by various factors and how they can interact (Rajput & Jhunjhunwala,
2019). Black (1976) describes that not achieving an agreed understanding of a company
dividend policy is a "dividend puzzle". The longer we try to explore the image of divi-
dend policy, the more contradictory components tend to be like a puzzle, Black (1976)
claims. Although his point has been achieved for more than four decades, Black’s ob-
servation still sounds reasonable since to date there is no strong hypothesis or agree-
ment on dividend policy.
Until now, the determinants of dividend policy are still being studied since there
is still no agreement on what drives a company to pay dividends and the proportions of
the payments (Budagaga, 2020; Dewasiri et al., 2019). The yield of dividend, the ratio
of dividend payout, and the tendency to pay dividends are usually used to investigate
the policy (Dewasiri et al., 2019). However, despite the three variable proxies' repeated
use, studies report that the results remain inconsistent.
Based on the research results in 16 countries, Boţoc & Pirtea (2014) report that
liquidity and profitability positively influence the ratio of dividend payout. However,
Kuzucu (2015) has the opposite view; with the focus of research in Turkey, his conclu-
Journal of Accounting
sion says that the dividend payout ratio is negatively impacted by profitability, and is Research, Organization
not affected by liquidity. On the other hand, Al-Kayed (2017) reports findings from con- and Economics
ventional banks that dividend yield is negatively affected by the growth of past divi- Vol. 3 (3), 2020: 229-237

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dends (lagged dividends), leverage, liquidity, and profitability. Since the 1950s, the in-
JAROE dicators of lagged dividends policy have been claimed as the key determinants of divi-
VOL. 3(3) dend policy (Chakraborty, 2010); however, the results have remained inconsistent.
Yusof & Ismail (2016) mention lagged dividend as an unimportant indicator of dividend
payout ratio in Malaysia, but Al-Kayed (2017) reports that it is a key factor which im-
pacts the dividend policy in Saudi Arabia.
Budagaga (2020) claims that the decision of dividend payment is influenced by
several bank key specific factors which include size, profitability, capital adequacy,
credit risk, and age, but growth is not a critical factor that affects banks' dividend policy
in emerging markets in MENA region. However, the important role of size towards a
company’s dividend policy is denied by (Al-Najjar, 2011; Bokpin, 2011). Similarly, Kimie
& Pascal (2011) also point out that size is a negative indicator of dividend policy in Jap-
anese companies.
Considering the gaps found in previous studies, this present study, therefore, tries
to observe the dividend yield determinants of companies listed on the Indonesia Stock
Exchange (IDX), especially those belonging to the bank sub-sector. The number of go-
public banks on the IDX for ten years, namely 2009 to 2018, shows a rapid develop-
ment. In 2009, 30 banks went public on the IDX, and in 2018 that number increased to
45 banks (IDX, 2001). Thus, during those ten years, the number of go-public banks on
the IDX increased by 50%.
The rapid development of the number of banks on the IDX will certainly attract
many investors to invest their funds into the shares issued by banks. Meanwhile, the
goal of investors to invest their funds in stock securities is to get returns in the form of
price increases and dividends received. Thus, observing the dividend yield determi-
nants in the bank sub-sector on the IDX is imperative and appealing. This study is
hoped to lead to the advancement of the current dividend theory and its application to
the banking sector in Indonesia. Practically, it can be used to guide investors and po-
tential investors in identifying the determinants of dividend yield. The determinants of
dividend yield in this study are bank-specific factors proxied by profitability, liquidity,
leverage, bank growth, and bank size. The five variables have been used by several pre-
vious studies in different countries and not only in the banking sector. They are
Jabbouri (2016) in non-bank companies in the MENA market, Al-Kayed (2017) in the
Saudi Arabian banking sector, and Dewasiri et al., (2019) on a manufacturing company
in Sri Lanka.
This paper is structured in several parts. Part2 (two) presents the literature review
and hypotheses development. Part 3 (three) describes the research method; population,
sample, data, and analysis tools. Part 4 presents the research results and discussion.
Finally, Part 5 gives the conclusion, theoretical and practical contributions of this paper,
limitations of the research, and suggestions for future researches.

2. Literature Review and Hypotheses

The relationship between dividend policy and share method preferences have been
discussed through a number of theories. Lintner (1956) and Gordon (1959) say the Bird-
in-the-Hand theory claim that investors prefer dividends to retained earnings. The Tax
Preference theory states that higher dividend payments cause lower tax brackets and
vice versa, Elton & Gruber (1970) mentions. The Signaling theory claims that since in-
vestors have unbalanced information, a company uses dividends to communicate its
profitability to outside shareholders (Bhattacharya, 1979). The Free Cash Flow theory,
which identifies free cash flow as manager excess cash flow, claims that dividend dis-
bursement will stop managers from investing in various projects with negative net
value. Thus, it can be said that dividends are a way to minimize agency conflicts and
reduce agency costs (Jensen, 1986).
 http://www.jurnal.unsyiah.ac.id/JAROE

Myers (1984) through the Pecking Order theory of dividends agrees that compa- Bank-Special
nies’ investment is initially funded by retained earnings, next guaranteed debt or, can
as some say, risky debt, and at last by equity. Although this hypothesis does not directly
Factors,
impact the dividend payments, it is still needed to reconcile dividends and investments Dividend
(Fama & French, 2001). The Life Cycle theory of dividends by Mueller (1972) argues Yield
that soon after a company grows larger and more mature, the financing for its invest-
ments will also get bigger. The shareholders will face reduced dividend income, and this
will greatly influence the company's life cycle.
Fama & French (2001), then, claim that companies with high profits and low
growth prospects will likely pay dividends while those with low profits and high growth
will not. In other words, companies in the adult stage have a stronger tendency of divi-
dend payment, while the younger ones do not (DeAngelo, DeAngelo, & Stulz, 2006). La
Porta, Lopez-De-Silanes, Shleifer, & Vishny (2000), who propose a substitution model
of dividends, agree that dividend is considered as the result of the effective legal protec-
tion of corporate governance and as a replacement for corporate governance mecha-
nisms.

The Influence of Profitability towards Dividend Yield

The signaling and the pecking order theory describe the correlation between prof-
itability and company dividend policy (Fama & French, 2001; Yarram & Dollery, 2015).
Profitability gives a negative influence on company dividend policy (Kimie & Pascal,
2011; Kuzucu, 2015). However, Amidu (2006), Al-Malkawi (2007), Bokpin (2011), Al-
Najjar (2011), Patra, Poshakwale, & Ow-Yong (2012), and Boţoc & Pirtea (2014) state
that it is indeed a determinant that positively impacts the dividend policy. Similarly,
Baker, Dewasiri, Yatiwelle Koralalage, & Azeez (2019), through their research on com-
panies in Sri Lanka, argue that profitability is the most important determinant of divi-
dends. The results of research on Islamic banks in Saudi Arabia by Al-Kayed 92017)
report that Return on Assets (ROA), as profitability measure, significantly and nega-
tively impact dividend yield. Therefore, the first hypothesis put forward is:
H1: Profitability negatively influences dividend yield.

The Influence of Bank Size towards Dividend Yield

The Agency Cost theory explains that broad ownership structures in larger compa-
nies will reduce investors' ability to manage the financing activities they invest in. This,
in turn, causes more unbalanced information and higher agency costs. To overcome this
problem, the study of Al-Malkawi (2007) concludes that the size of company signifi-
cantly and positively determine dividend policy. However, Bokpin (2011) and Al-Najjar
(2011) deny this great impact. Kimie & Pascal (2011) through their study in Japanese
companies context also propose that company size is a negative determinant of dividend
policy. Some results of more recent studies, however, are in line with the finding of (Al-
Malkawi, 2007). Patra et al., (2012), Kuzucu (2015), and Yusof & Ismail (2016) all con-
clude that company size positively influences dividend policy. Baker et al., (2019) report
that company size significantly and positively determine the dividend payments of Sri
Lanka companies. Therefore, the second hypothesis to be proposed is:
H2: Bank size positively influences dividend yield.

The Influence of Leverage towards Dividend Yield

Lintner (1956) states that debt does not really influence the dividend policy of a
company. Besides debt, leverage and other external financing also do not give much
impact on dividend policy (Abor & Bokpin, 2010). However, Rozeff (1982) states that
company will pay low dividends if it has high leverage. It is done to reduce transaction
costs caused by external financing. On the other hand, company will pay fewer divi-
dends when the debt ratio is high, Al-Malkawi (2007) says.
Bokpin (2011), Patra et al. (2012), and Arko, Abor, Adjasi, & Amidu (2014) prove
dividend policy is mainly determined by leverage. However, Yusof & Ismail (2016), with

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their research in Malaysian companies, argue that it negatively determines the dividend
JAROE policy. Similarly, Al-Kayed (2017) through his study on conventional banks in Saudi
VOL. 3(3) Arabia reports that leverage has a negative and significant effect on dividend yields.
Therefore, the third hypothesis to be proposed is:
H3: Leverage negatively influences dividend yield.

The Influence of Bank Liquidity towards Dividend Yield

Liquidity is discovered to be a lesser-known factor in Lintner's (1956) qualitative
study of 28 company managers. However, Baker, Farrelly, & Edelman (1985) state that
it is the main determinant of dividend policy. Since then, studies regarding the influence
of liquidity towards company dividend payout policy have been conducted by many
(Dewasiri et al. 2019). Banerjee, Gatchev, & Spindt (2007) highlight the negative rela-
tion between these two, calling it the “dividend liquidity hypothesis” which is, then, also
agreed by (Zhiqiang, Zhang, & Tang, 2015).
Baker & Kapoor (2015) in their research on Indian companies also reveal strong
agreement for the relation between liquidity and share dividends. The level of liquidity
does not significantly impact the dividend yield of Sri Lankan companies, Dewasiri et
al. (2019) report. However, Al-Kayed (2017) shows that it actually gives a significant
positive effect on conventional banks in Saudi Arabia. Thus, the fourth hypothesis to be
proposed is:
H4: Liquidity positively influences dividend yield.

The Influence of Bank Growth toward Dividend Yield

Companies with higher growth opportunities have the opportunity to distribute
more infrequent dividends. This is done to maintain a larger portion of the company's
revenue in order to finance its growth (Rozeff, 1982). Therefore, many experts predict
that dividend payments have a negative correlation with company growth. Neverthe-
less, Budagaga (2020) concludes that bank growth is not an essential factor which in-
fluences the dividend policy of the banking industry in MENA emerging markets. Sim-
ilar with the arguments put forward by (Rozeff, 1982), Al-Kayed's research (2017) con-
cludes that bank growth significantly and negatively impacts the dividend yield of con-
ventional banks in Saudi Arabia. Therefore, the fifth hypothesis is:
H5: Bank growth negatively influences dividend yield.

3. Research Method
All bank subsectors listed on the IDX for the period of 2009 to 2018 became the
population of this study, which resulted in 367 banks. The sample selection uses pur-
posive sampling with the criteria that the bank publishes its financial reports and pays
dividends. The results show 134 bank-year observations of paying dividends. However,
to achieve a goodness of fit from the model, 14 bank-year observations with outliers
data are omitted. Data analysis used the Ordinary Least Squares (OLS) method, which
was processed using the E-Views 10 application. The following is a statistical equation
model built..
DYDi,t = β0 + β1ROAi,t+ β2SIZE i,t + β3LEV i,t +
β4LIQ i,t + β5GRW i,t + έ i,t............................................ (1)

In which:
DYD = Dividend Yield; dividend per annual share divided by market price per share.
ROA = Return on Assets; profit after tax divided by total assets.
SIZE = Bank Size; the logarithm (log) of total assets.
LEV = Leverage; total debt divided by total assets.
LIQ = Liquidity; cash on hand divided by total assets.
GRW = Growth; the growth of total interest income.
 http://www.jurnal.unsyiah.ac.id/JAROE

4. Result and Discussion Bank-Special

Based on the 120 bank-year samples analyzed, descriptive statistics are presented, Factors,
which present the mean, maximum, minimum, and standard deviation values as fol-
lows: Dividend
DYD ROA SIZE LEV LIQ GRW
Yield
Mean 2.0783 0.0224 8.0871 0.8548 0.0162 0.1361 Table 1. Descrip-
Maximum 4.5300 0.0399 9.0799 0.9316 0.0354 0.4033 tive Statistic
Minimum 0.0200 0.0070 6.3808 0.7300 0.0007 -0.0526
Std. Dev. 0.9512 0.0091 0.6968 0.0473 0.0088 0.0959

Table 1 shows that the DYD variable has an average value of 2.0783; this shows that
investors get a dividend yield that is twice the market price per share. The maximum
value for DYD is 4.5300, the minimum is 0.0200, and the standard deviation is 0.9512.
The ROA variable has an average value of 0.0224, which indicates that the banks
achieve a relatively small return on assets by only 2.24%. The maximum value of ROA
is 0.0399, the minimum is 0.0070, and the standard deviation is 0.0091. The SIZE var-
iable has an average value of 8.0871, a maximum value of 9.0799, a minimum of 6.3808,
and a standard deviation of 0.6968. The LEV variable has an average value of 0.8548,
which indicates that 85.48% of the total assets owned by the bank are funded by debt.
The maximum LEV is 0.9316, the minimum is 0.730, and the standard deviation is
0.0473. The LIQ variable has an average value of 0.0162, which indicates that bank cash
on hand is 1.62% of total assets. The maximum LIQ value is 0.0354, the minimum is
0.0007, and the standard deviation is 0.0088. The GRW variable has an average value
of 0.1361, which indicates that the total growth of interest income banks paying divi-
dends is 13.61% for each year. The maximum value of GRW is 0.4033, the minimum is
-0.0526, and the standard deviation is 0.0959.
Table 2 presents a summary of the goodness of fit of the statistical equation models
built for this study along with the results of testing the effect of the independent varia-
bles (return on assets, liquidity, size, growth, and leverage) on the dependent variable
(dividend yield).
Independent Table 2. OLS Mul-
Coefficient Std. Error t-Statistic Prob. VIF tiple Regression
Variable
ROA -45.098 18.023 -2.5022 0.0144** 2.9951 Results
LIQ 14.953 16.175 0.9245 0.3580 2.2674
SIZE 0.5603 0.1911 2.9313 0.0044*** 1.9864
GRW -1.1126 1.1171 -0.9960 0.3222 1.2848
LEV -5.7598 2.35411 -2.4467 0.0166** 1.3889
C 3.3913 2.1437 1.5819 0.0176
Dependent Variable: DYD
Heteroskedasticity Test:
R-squared 0.2006 White Method
Adjusted R-squared 0.1512 Obs*R-squared 15.1927
F-statistic 4.0640 Prob. Chi-Square(20) 0.7653
Breusch-Godfrey Serial Correlation LM
Prob(F-statistic) 0.0024 Test:
Jarque-Bera 4.4613 Obs*R-squared 0.2915
Probability 0.1075 Prob. Chi-Square(2) 0.8644
Notes: **statistically significant at 5%; ***statistically significant at 1%

The OLS gives Adjusted R-squared value of 0.1512 and Prob (F-statistic) 0.0024,
which indicate that the significant variation in DYD is determined at 15.12% by changes
in ROA, LIQ, SIZE, GRW, and LEV. The OLS results have a Jarque-Bera value of 4.4613
with a Jarque-Bera Probability of 0.1358; this shows that the analyzed data is normally
distributed. The Variance Inflation Factor (VIF) for all independent variables scores less
than 10; this indicates that there is no multicollinearity symptom in the model built.
The results of the Heteroskedasticity Test with the white method have Obs * R-squared

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values of 15.1927 and Prob. Chi-Square is 0.7653; this result explains that there is no
JAROE heteroscedasticity symptom in the model built. The Breusch-Godfrey Serial Correlation
VOL. 3(3) LM has an Obs* R-squared value of 0.2913 with Prob. Chi-Square 0.8644, indicating
that the model built does not have autocorrelation symptoms. Overall, the classical as-
sumption test results show that the OLS multiple regression model is free from econo-
metric problems.
Table 2 also shows that the effect of ROA on DYD has a coefficient value of -45.098,
with a probability value of 0.0144. These results identify that banks with significantly
higher profitability (ROA) have lower dividend yields (DYD). Myers (1984) pecking or-
der theory of dividends explains that retained earing is the first main financing source
a company used when it needs investment. This condition leads to a negative relation
between profitability and dividend yield. This is similar with Al-Kayed (2017) who carry
out a research in the Saudi Arabian banking industry for four years(2011 – 2014). He
proves that the profitability proxied by the Return on Assets (ROA) variable gives a sig-
nificant negative impact on the dividend yield (DYD). Shares issued by banks that have
greater profitability get higher appreciation in the capital market, according to the bird-
in-the-hand theory, so that stocks with a market price per share may be higher. This is
predictable, which is why the dividend yield of bank stocks with a higher ROA has a
smaller DYD.
The effect of LIQ on DYD has a coefficient value of 14,953, with a probability value
of 0.358. The results of this analysis indicate a tendency that banks with a higher level
of liquidity (LIQ) have a higher dividend yield (DYD); however, this effect is not statis-
tically significant. Thus, this study cannot prove that liquidity (LIQ) has an effect on
dividend yield (DYD). Therefore, the findings of this study do not fully agree with the
free cash flow theory, which claims that the excess cash flow owned by a company
should be distributed to shareholders as cash dividends so that there is a significant
positive relation between liquidity and dividend yield. These findings are similar with
the results of Al-Kayed's (2017) which prove that liquidity does not have a significant
effect on dividend yield (DYD). In addition, Dewasiri et al., (2019) through their re-
search conducted in Sri Lanka also conclude that the company liquidity is not an essen-
tial determinant of dividend yield.
The effect of bank size (SIZE) on DYD has a coefficient value of 0.5603, with a prob-
ability value of 0.0044. This empirical evidence indicates that a bank with a larger size
(SIZE) has a significantly higher dividend yield (DYD). This empirical finding supports
Mueller (1972) life cycle theory of dividends, which states that larger and older compa-
nies tend to pay dividends while those smaller and younger do not (DeAngelo et al.,
2006). Furthermore, the studies of Patra et al., (2012), Yusof & Ismail (2016), and
Jabbouri (2016) identify that company size is a positive determinant of dividend policy.
This result is in line with Dewasiri et al., (2019), which prove that size has a positive and
significant effect on dividend yields in Sri Lankan companies.
The effect of GRW on DYD has a coefficient value of -1.1126 with a probability value
of 0.3222, this empirical evidence shows a tendency that banks that have higher growth
(GRW) provide a smaller dividend yield (DYD), but it is not statistically significant.
Thus, this study cannot prove that bank growth (GRW) has a significant effect on divi-
dend yield (DYD). This empirical evidence does not fully support the life cycle theory of
dividends, which explains that companies with higher growth tend not to pay or pay
fewer dividends (Fama & French, 2001). The findings of this study are in line with the
study results Al-Kayed (2017) which proves that growth has no effect on dividend yield
(DYD). The effect of LEV on DYD shows a coefficient value of -5.7598 and a probability
value of 0.0166. The results of this analysis indicate that banks with a significantly
higher debt ratio (LEV) have a lower dividend yield (DYD). With regard to this finding,
Rozeff (1982) shows that companies with high leverage tend to have low dividend pay-
out ratios in order to reduce the transaction costs caused by external financing. Al-
Malkawi (2007) shows that companies with high debt ratios more likely pay infrequent
 http://www.jurnal.unsyiah.ac.id/JAROE

dividends. The results of research by Bokpin (2011), Patra et al., (2012) and Abor, Bank-Special
Adjasi, & Amidun (2014) identify leverage as the key determinant of dividend policy.
Furthermore, Yusof & Ismail (2016) through their study in Malaysia claim that debt is
Factors,
a negative determinant of dividend policy. The results of this study are in line with what Dividend
have found by Al-Kayed (2017) on the Saudi Arabian banking industry. Yield

5. Conclusions, Limitations, and Suggestions

This study was aimed to observe the influence of bank-specific factors, proxied by
return on assets, liquidity, size, growth, and leverage variables, towards dividend yield.
The research was conducted on the banking sub-sector of the Indonesia Stock Exchange
(IDX) listed during 2009 – 2018. The data analysis method used Ordinary Least
Squares (OLS) with multiple linear regression techniques that are processed using the
E-Views 10 application. The results prove that Dividend Yield the bank sub-sector on
the Indonesia Stock Exchange during the period of 2009 to 2018 is negatively and sig-
nificantly affected by Return on Assets and Financial Leverage. Meanwhile, it is posi-
tively and significantly influenced by Bank Size. However, this study cannot prove that
Bank Growth and Bank Liquidity have a significant effect on Dividend Yield. The results
provide support for the life cycle theory and the pecking order theory of dividends. This
can be demonstrated by proving that banks with a larger size provide higher dividend
yields, and banks with higher profitability provide fewer dividend yields. These results
recommend investors and potential investors on the IDX to invest in stocks issued by
banks that have a large total asset size so that the investor will obtain a greater dividend
yield.
This study has several limitations, including examining only bank-specific factors
proxied by the variables return on assets, liquidity, size, growth, and leverage on divi-
dend yield as the functional variables of the dividend policy. The observations covered
the period 2009 to 2018 and the Ordinary Least Squares (OLS) method was used to
analyze the data. The next research agenda is suggested to consider other variable def-
initions for bank-specific factors, for example, lagged dividends, capital adequacy,
credit risk, bank age, and non-performing loans. Apart from that, bank governance and
macroeconomic conditions also need to be considered in analyzing the determinants of
bank dividend policy. Dividend policy variable proxies, in addition to dividend yield,
are recommended to use the dividend payout ratio and the tendency to pay dividends,
as have been used by previous researchers.

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