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 assumption underlying the application of dividend catering theory (DCT) and dividend signaling theory (DST). Both theories face the same information asymmetry situation, but DCT and DST use different strategies in responding to this information asymmetry. DCT caters to investors' desires in the market, while DST sets dividend decisions based on intrinsic aspects of the company. However, both dividend theories have the same goal, namely to obtain incentives in order to increase company value. DCT takes place in a situation of high information asymmetry so that in DST the company tries to reduce this information asymmetry by sending dividend signals, so that investors understand the company's prospects. The aim of this research is to confirm a theory that is able to explain dividend policy in the Indonesian capital market. Considering that the research results of Li and Zhao (2008) found that DST does not apply, this research uses information asymmetry differential (IAD) as a measure of market level asymmetry to match the market level dividend premium. It is hoped that IAD can be the answer, because the higher the IAD shows the greater the gap between information asymmetry from companies that pay dividends to companies that do not pay dividends. When market level information asymmetry increases, it encourages companies to send dividend signals to increase to show the company has good prospects. The research results prove that DCT and DST both apply in the Indonesian capital market 2010-2018, where the two 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 complementarity only occurs for the magnitude of dividend increase. Meanwhile, for the magnitude of dividend decrease, the DCT results do not apply, meaning that only DST is able to explain the decrease in dividend distribution.

Keywords: dividend premium, information asymmetry differential

 

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