Dividend policy, investment opportunity set, free cash flow, and company performance: Indonesian’s agricultural sector

Choiri Chosiah, Budi Purwanto, Wita Juwita Ermawati


Dividends are a tool that can be an essential source of information for investors or other stakeholders as it contains information that can provide a signal about the company's prospects (dividend signaling theory). This study aims to examine the effect of dividend policy on company performance through moderation of investment opportunity set (IOS) and free cash flow (FCF) and examine the effect of the application of corporate governance on dividend policy and company performance. Based on purposive sampling technique obtained a sample of 71 companies that meet the criteria. The study was conducted using panel data regression method. The results showed that dividend policy had a significant negative effect on company performance in the following year. IOS has a positive and insignificant effect on company performance, while FCF has a positive and significant effect on company performance. IOS variable is able to moderate the relationship of dividend policy on company performance in the following year, while FCF is not able to moderate the influence of dividend policy on company performance in the following year. In addition, the corporate governance mechanism has an insignificant effect on dividend policy which shows that the corporate governance mechanism is still not effective in increasing the number of dividends paid to shareholders.

JEL Classification: D13, I31, J22

DOI: https://doi.org/10.26905/jkdp.v23i3.2517


Corporate governance; Dividend policy; Free cash flow; Firm performance; Investment opportunity set

Full Text:



Abor, J., & Bokpin, G. (2010). Investment opportunities, corporate finance, and dividend payout policy. Studies in Economics and Finance, 27(3), 180-194. https://doi.org/10.1108/10867371011060018

Agyei, S. K., & Yiadom, E. M. (2011). Dividend policy and bank performance in Ghana. International Journal of Economics and Finance, 3(4), 202-207. https://doi.org/10.5539/ijef.v3n4p202

Akumu, O. C. (2014). Effect of Free Cash Flow on Profitability of Firms listed on The Nairobi Securities Exchange. Master of Business Administration. Nairobi: University of Nairobi.

Ararat, M., Black, B. S., & Yurtoglu, B. B. (2016). The effect of corporate governance on firm value and profitability: Time series evidence from Turkey. Emerging Markets Review, 30(C), 113-132. https://doi.org/10.1016/j.ememar.2016.10.001

Ardestani, H. S., Rasid, S. Z. A., Basiruddin, R., & Mehri, M. (2013). Dividend payout policy, investment opportunity set and corporate financing in the industrial products sector of Malaysia. Journal of Applied Finance and Banking, 3(1), 123-136.

Arilaha, M. A. (2009). Corporate governance dan karakteristik perusahaan terhadap kebijakan dividen. Jurnal Keuangan dan Perbankan, 13(3), 386-394.

Artini, L. G. S., & Puspaningsih, N. L. A. (2011). Struktur kepemilikan dan struktur modal terhadap kebijakan dividen dan nilai perusahaan. Jurnal Keuangan dan Perbankan, 15(1), 66-75.

Baker, H. K. (1993). Growth, corporate policies, and the investment opportunity set. Journal of Accounting and Economics, 16(1993), 161-165. https://doi.org/10.1016/0165-4101(93)90008-4

Baker, H. K., & Jabbouri, I. (2015). How Moroccan managers view dividend policy. Managerial Finance, 42(3), 270-288. https://doi.org/10.1108/MF-07-2015-0211

Bhatt, P. R., & Bhatt, R. (2017). Corporate governance and firm performance in Malaysia. The International Journal of Business in Society, 17(5), 296-912. https://doi.org/10.1108/CG-03-2016-0054

Bhattacharya, S. (1979). Imperfect information, dividend policy, and “the bird in the hand fallacy”. The Bell Journal of Economics, 10(1), 259-270. https://doi.org/10.2307/3003330

Bokpin, G. A. (2011). Ownership structure, corporate governance and dividend performance on the Ghana Stock Exchange. Journal of Applied Accounting Research, 12(1), 61-73. https://doi.org/10.1108/09675421111130612

Brigham, E. F., & Houston, J. F. (2014). Dasar-dasar Manajemen Keuangan (Essentials of Financial Management). Jakarta: Salemba Empat.

Cadbury, A. (1992). The Financial Aspects of Corporate Governance. The Committee on the Financial Aspect of Corporate governance and Gee and Co. Ltd.

Chae, J., Kim, S., & Lee, E. J. (2009). How corporate governance affects payout policy under agency problems and external financing constraints. Journal of Banking and Finance, 33(2009), 2003-2101. https://doi.org/10.1016/j.jbankfin.2009.05.003

Cheng, Z., Cullinan, C. P., & Zhang. J. (2014). Free cash flow, growth opportunities, and dividends: Does cross-listing of shares matter?. The Journal of Applied Business Research, 3(2). https://doi.org/10.19030/jabr.v30i2.8428

Ehikioya, B. I. (2015). An Empirical Investigation of the impact of dividend policy on the performance of firms in developing economics: Evidence from listed firms in Nigeria. International Journal of Finance and Accounting, 4(5), 245-252. https://doi.org/10.5923/j.ijfa.20150405.03

Elmagrhi, M., Ntim, C., Crossley, R., Malagila, J., Fosu, S., & Vu, T. (2017). Corporate governance and dividend pay-out policy in the UK listed SMEs. International Journal of Accounting & Information Management, 25(4), 459-483. https://doi.org/10.1108/IJAIM-02-2017-0020

Fairchild, R. (2010). Dividend policy, signaling and free cash flow: An integrated approach. Managerial Finance, 3(5), 394-413. https://doi.org/10.1108/03074351011039427

Fauzi, M. N., & Suhadak. (2015). Pengaruh kebijakan dividen dan pertumbuhan perusahaan terhadap struktur modal dan profitabilitas (Studi pada sektor mining yang terdaftar di Bursa Efek Indonesia periode 2011-2013). Jurnal Administrasi Bisnis, 24(1).

Giriati. (2016). free cash flow, dividend policy, investment opportunity set, opportunistic behavior and firm’s value (A study about agency theory). Procedia–Social and Behavioral Sciences, 219(2016), 248-254. https://doi.org/10.1016/j.sbspro.2016.05.013

Herdinata, C. (2009). Kebijakan pendanaan dan dividen dengan pendekatan investment opportunity set. Jurnal Keuangan dan Perbankan, 13(2), 237-248.

Hidayati, N., & Sunaryo, H. (2016). Dampak corporate governance terhadap keputusan dividen (Literature review pada negara-negara di Asia, Australia, dan Afrika). Jurnal Keuangan dan Perbankan, 20(1), 32-41. https://doi.org/10.26905/jkdp.v20i1.146

Hong, Z, Shuting, Y., & Meng, Z. (2012). Relationship between free cash flow and financial performance evidence from the listed real estate companies in China. International Conference on Innovation and Information Management, 36(2012). https://doi.org/10.4028/www.scientific.net/AMM.556-562.6445

Hsiao, H-F., & Hsu, C-Y. (2013). Managerial sentiment, investment opportunity set, and firm performance. Proceedings for the Northeast Region Decision Sciences Institute, 122.

Jensen, M. C. (1986). Agency cost of free cash flow, corporate finance, and takeovers. The American Economic Review Paper and Proceedings of the Ninety-Eight Annual Meeting of the American Association, 76(2), 323-329.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(1976), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X

Jiraporn, P., & Ning Y. (2006). Dividend policy, shareholder rights, and corporate governance. https://doi.org/10.2139/ssrn.931290

Jiraporn, P., Kim, J., & Kim, Y. S. (2011). Dividend payouts and corporate governance quality: an empirical investigation. The Financial Review, 46(2011), 251-279. https://doi.org/10.1111/j.1540-6288.2011.00299.x

Khan, M. N., Nadeem, B., Islam, F., Salman, M., & Gill, H. M. I. S. (2016). Impact of dividend policy on firm performance: An empirical evidence from Pakistan Stock Exchange. American Journal of Economics, Finance, and Management, 2(4), 28-34.

Kadioglu, E., & Yilmaz, E. A. (2017). Is the free cash flow hypothesis valid in Turkey? Borsa Istanbul Review, 17(2), 111-116. https://doi.org/10.1016/j.bir.2016.12.001

Lachheb, A., & Slim, C. (2017). The impact of free cash flow and agency costs on firm performance. Proceedings of ISER 56th International Conference Rome Italy.

La Porta, R., Lopez‐de‐Silanes, F., Shleifer, A., & Vishny, R. W. (2000). Agency problems and dividend policies around the world. The Journal of Finance, 55(1), 1-33. https://doi.org/10.1111/0022-1082.00199

Mai, M. U. (2010). Dampak kebijakan dividen terhadap nilai perusahaan dalam kajian perilaku oportunistik manajerial dan struktur corporate governance – Studi empiris pada perusahaan manufaktur go public di Pasar Modal Indonesia. Dissertation. Semarang: Universitas Diponegoro.

Michael, K. (2014). The relationship between free cash flow and investment of firms quoted at the Nairobi Securities Exchange. Master of Science Program. Nairobi: University of Nairobi.

Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147-175. https://doi.org/10.1016/0304-405X(77)90015-0

Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information the investors do not have. National Bureau of Economic Research. https://doi.org/10.1016/0304-405X(84)90023-0

Nidar, S. R. (2010). Analisis struktur modal, kebijakan dividen, dan volatiitas pendapatan terhadap kinerja emiten terbaik. Trikonomika, 9(2), 105-112.

Pamungkas, H. S., & Puspaningsih, A. (2013). Pengaruh keputusan investasi, keputusan pendanaan, kebijakan dividen, dan ukuran perusahaan terhadap nilai perusahaan. Jurnal Akuntansi dan Auditing Indonesia, 17(2), 156-165. https://doi.org/10.20885/jaai.vol17.iss2.art6

Park, K., & Jang, S. (2013). Capital structure, free cash flow, diversification and firm performance: a holistic analysis. International Journal of Hospitality Management, 33(2013), 51-63. https://doi.org/10.1016/j.ijhm.2013.01.007

Pratiwi, R. (2016). Pengaruh struktur modal dan investment opportunity set terhadap kinerja fundamental dan pasar saham sektor pertambangan Bursa Efek Indonesia. Thesis. Bogor: Institut Pertanian Bogor.

Ross, S. A. (1977). The determination of financial structure: The Incentive-Signalling Approach. The Bell Journal of Economics, 8(1), 23-40. https://doi.org/10.2307/3003485

Sawicki, J. (2009). Corporate governance and dividend policy in Southeast Asia pre- and post-crisis. European Journal of Finance, 15(2), 265-282. https://doi.org/10.1080/13518470802604440

Shamsabadi, H. A., & Chung, B. S. M. R. (2016). Corporate governance and dividend strategy: lessons from Australia. International Journal of Managerial Finance, 12(5), 583-610. https://doi.org/10.1108/IJMF-08-2015-0156

Smith, C., & Watts, R. (1992). The investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Financial Economics, 32(3), 263-292. https://doi.org/10.1016/0304-405X(92)90029-W

Soejono, F. (2010). Pengaruh kepemilikan, keputusan investasi, pengalaman dan kinerja finansial. Jurnal Bisnis dan Akuntansi, 12(1), 29-38

Suartawan, A., & Yasa, G. W. (2017). Pengaruh investment opportunity set dan free cash flow pada kebijakan dividen dan nilai perusahaan. Ejurnal Akuntansi Universitas Udayana, 11(2), 63-73.

Subramaniam, R., Devi, S. S., & Marimuthu, M. (2011). Investment opportunity set and dividend policy in Malaysia. African Journal of Business Management, 5(24): 10128-10143. https://doi.org/ 10.5897/AJBM11.687

Sudiyatno, Bambang dan Elen Puspitasari. (2010). Tobin’s Q dan Altman Z-Score sebagai indikator pengukuran kinerja perusahaan. Kajian Akuntansi, 2(1), 9-21.

Suganda, T. R., & Sabbat, E. H. (2014). Sinyal profitabilitas dan reaksi pasar modal terkait peningkatan dividen saat laba meningkat. Jurnal Keuangan dan Perbankan, 18(3), 335-344.

Sukendro, J., & Pujiharjanto, C. A. (2012). Pengaruh kebijakan dividen terhadap kinerja perusahaan di Indonesia (Studi empirik pada perusahaan-perusahaan non keuangan yang terdaftar di Bursa Efek Indonesia dengan Probabilistic Regression Model). Proceeding of Conference in Business, Accounting, and Management (CABM), 1(1), 475-484.

Wang, G. Y. (2010). The impacts of free cash flow and agency costs on firm performance. Journal Services Science and Mangement, 3(4), 408-418. https://doi.org/10.4236/jssm.2010.34047

Yegon, C., Cheruiyot, J., & Sang, J. (2014). Effects of dividend policy on firm’s financial performance: econometric analysis of listed manufacturing firms in Kenya. Research Journal of Finance and Accounting, 5(12).

Yero, J. I., & Usman, S. H. (2013). Free cash flow, growth opportunity, and performance of Nigerian Quoted Food, Tobacco & Beverages Firms. Kaduna State University International Conference.

DOI: https://doi.org/10.26905/jkdp.v23i3.2517


  • There are currently no refbacks.

Jurnal Keuangan dan Perbankan (Journal of Finance and Banking)

Diploma Program of Banking and Finance, Faculty of Economics and Business, University of Merdeka Malang

Published by University of Merdeka Malang

Mailing Address:
2nd floor Finance and Banking Building, Jl. Terusan Raya Dieng No. 57 Malang, East Java, Indonesia
Phone: +62 813-3180-1534
Email: jkp@unmer.ac.id

This work is licensed under a Creative
Commons Attribution-ShareAlike 4.0