Title: The Role of Dividend Catering Theory and Dividend Signaling Theory in the Indonesian Capital Market

Author: Liliana Inggrit Wijaya

Item Type : Thesis (Thesis)

Affiliations: Master of Management Science Study Program, Faculty of Economics and Business, Universitas Airlangga , Surabaya, Indonesia

Publisher: Universitas Airlangga

Abstract

Information asymmetry is the underlying assumption behind the dividend catering theory (DCT) and dividend signaling theory (DST). While both theories face the same information asymmetry situation, DCT and DST employ different strategies to address this information asymmetry. DCT addresses the desires of investors in the market, while DST bases dividend decisions on the company's intrinsic aspects. However, both dividend theories share the same goal: to generate incentives to increase company value. DCT operates in situations of high information asymmetry, so DST firms attempt to reduce this information asymmetry by sending dividend signals to inform investors about the company's prospects. The purpose of this study is to confirm a theory capable of explaining dividend policy in the Indonesian capital market. Given that Li and Zhao's (2008) research found that DST does not apply, this study utilizes the information asymmetry differential (IAD) as a measure of market-level asymmetry to counter the market-level dividend premium. It is hoped that IAD can provide the answer, as a higher IAD indicates a greater gap between the information asymmetry of dividend-paying firms and non-dividend-paying firms. When market-level information asymmetry increases, companies signal a dividend increase, indicating good prospects. Research shows that both DCT and DST are valid in the Indonesian capital market from 2010 to 2018, where both theories are complementary for dividend change decisions, namely the decision to increase dividends and the decision to decrease dividends. However, in terms of magnitude, the complementary nature only occurs for the magnitude of dividend increases. Meanwhile, for the magnitude of dividend decreases, the DCT results do not apply, meaning only DST can explain the dividend decrease.

Keywords: dividend premium, information asymmetry differential

Sources: http://repository.unair.ac.id/94302/