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A MECHANISM AND DETERMINANTS OF AN AGENCY-COST EXPLANATION FOR DIVIDEND PAYMENTS

Gadjah Mada International Journal of Business (GamaIJB) · Vol. 5 No. 2 (2003) · pp. 145–166

DOI
10.22146/gamaijb.5404
ISSN
2338-7238, 1411-1128
Published
2003-06-12
Publisher
Master in Management, Faculty of Economics and Business, Universitas Gadjah Mada
Language
eng

Abstract

This study explains the dividend puzzle using the agency-cost frame work suggested by Easterbrook (1984). Easterbrook hypothesized that shareholders in firms, who increase cash dividend payout and ‘simultaneously' raise debts to finance their investments are likely to be wealthier than those in firms who only increase their cash dividend payout. He provided the mechanism that shareholders use the dividend payments to force managers to go to the capital markets to raise funds. Therefore, he argued that dividend policy influences the financing policy. A system of simultaneous equation using three-stage generalized least square method is used to test the hypotheses. Among the variables to proxy the investment opportunity set, market-to-book ratio, market-to-book assets ratio and accounting earnings-per-share-to-price ratio are the best proxies. Attempt is made to obtain better proxies for the investment opportunity set using an instrument variable method. The system is robust to alternate investment opportunity variables as well as to the instrumental variables. The findings are as follows. For the firms that increase cash dividend payout and raise debt simultaneously, (a) dividend policy is not a shareholders' mechanism, but a manager's accounting-based decision with accounting earnings and retained earnings as the major determinants, (b) dividend policy influences financing policy, but not the other way around, (c) increasing dividend payment decreases shareholders' wealth, but increasing debt subsequently increases shareholders' wealth with a net effect positive to shareholders' wealth, and (d) dividend policy is independent from investment policy.

Keywords

Collaboration network of the authors

20 authors · 37 co-authorship links · 11 across different organisations

Hover or tap a name to highlight its co-authors. Double-click to open the author's page.

  • Universitas Gadjah Mada
  • Universitas Teknologi Yogyakarta
  • Atma Jaya University Yogyakarta
  • University of Bradford
  • University of Surabaya
  • Perbanas Institute
  • Affiliation unknown
  • Different organisations
  • Same organisation
  • Affiliation unknown
  • Thicker line = more joint articles · bigger circle = more articles
Show as table
Co-authorOrganisationJoint articles
Eduardus TandelilinUniversitas Gadjah Mada1
Mamduh Mahmadah HanafiUniversitas Gadjah Mada1
Setiyono SetiyonoUniversitas Gadjah Mada1
Achmad DjunaediUniversitas Gadjah Mada1
Hargo UtomoUniversitas Gadjah Mada1
Wahyuni ReksoatmodjoUniversitas Gadjah Mada1
Slamet SugiriUniversitas Gadjah Mada1
Sumiyana SumiyanaUniversitas Gadjah Mada1
Zaki BaridwanUniversitas Gadjah Mada1
Nofie ImanUniversity of Bradford1
Dedhy SulistiawanUniversity of Surabaya1
Luciana Spica AlmiliaPerbanas Institute1
Ertambang NahartyoUniversitas Gadjah Mada1
. SupriyadiAffiliation unknown1
Junaidi JunaidiUniversitas Teknologi Yogyakarta1
Setiyono MiharjoUniversitas Gadjah Mada1
Bambang HartadiUniversitas Teknologi Yogyakarta1
Eko SuwardiUniversitas Gadjah Mada1

Affiliations come from OpenAlex; journal OAI-PMH metadata carries none. Authors without an OpenAlex ID are matched by name, which can merge or split people.

Metadata source: OAI-PMH (metadata jurnal) https://journal.ugm.ac.id/gamaijb/oai, first harvested 28 Okt 2026, last seen 28 Okt 2026.
Original metadata (oai_dc) 
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	<dc:title xml:lang="en-US">A MECHANISM AND DETERMINANTS OF AN AGENCY-COST EXPLANATION FOR DIVIDEND PAYMENTS</dc:title>
	<dc:creator>Hartono, Jogiyanto</dc:creator>
	<dc:creator>Ratnaningsih, Dewi</dc:creator>
	<dc:subject xml:lang="en-US">agency-cost; agency theory; dividend puzzle; dividend mechanism; instrumental variable; investment opportunity set; shareholders; wealth</dc:subject>
	<dc:description xml:lang="en-US">This study explains the dividend puzzle using the agency-cost frame work suggested by Easterbrook (1984). Easterbrook hypothesized that shareholders in firms, who increase cash dividend payout and ‘simultaneously' raise debts to finance their investments are likely to be wealthier than those in firms who only increase their cash dividend payout. He provided the mechanism that shareholders use the dividend payments to force managers to go to the capital markets to raise funds. Therefore, he argued that dividend policy influences the financing policy. A system of simultaneous equation using three-stage generalized least square method is used to test the hypotheses. Among the variables to proxy the investment opportunity set, market-to-book ratio, market-to-book assets ratio and accounting earnings-per-share-to-price ratio are the best proxies. Attempt is made to obtain better proxies for the investment opportunity set using an instrument variable method. The system is robust to alternate investment opportunity variables as well as to the instrumental variables. The findings are as follows. For the firms that increase cash dividend payout and raise debt simultaneously, (a) dividend policy is not a shareholders' mechanism, but a manager's accounting-based decision with accounting earnings and retained earnings as the major determinants, (b) dividend policy influences financing policy, but not the other way around, (c) increasing dividend payment decreases shareholders' wealth, but increasing debt subsequently increases shareholders' wealth with a net effect positive to shareholders' wealth, and (d) dividend policy is independent from investment policy.</dc:description>
	<dc:publisher xml:lang="en-US">Master in Management, Faculty of Economics and Business, Universitas Gadjah Mada</dc:publisher>
	<dc:date>2003-06-12</dc:date>
	<dc:type>info:eu-repo/semantics/article</dc:type>
	<dc:type>info:eu-repo/semantics/publishedVersion</dc:type>
	<dc:type xml:lang="en-US">Peer-reviewed Article</dc:type>
	<dc:format>application/pdf</dc:format>
	<dc:identifier>https://journal.ugm.ac.id/gamaijb/article/view/5404</dc:identifier>
	<dc:identifier>10.22146/gamaijb.5404</dc:identifier>
	<dc:source xml:lang="en-US">Gadjah Mada International Journal of Business; Vol 5, No 2 (2003): May-August; 145-166</dc:source>
	<dc:source>2338-7238</dc:source>
	<dc:source>1411-1128</dc:source>
	<dc:language>eng</dc:language>
	<dc:relation>https://journal.ugm.ac.id/gamaijb/article/view/5404/4400</dc:relation>
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