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Journal of Asia Business Studies

Ownership structure and dividend policy in Indonesia


Doddy Setiawan Bandi Bandi Lian Kee Phua Irwan Trinugroho
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Doddy Setiawan Bandi Bandi Lian Kee Phua Irwan Trinugroho , (2016),"Ownership structure and dividend policy in
Indonesia", Journal of Asia Business Studies, Vol. 10 Iss 3 pp. 230 - 252
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Ownership structure and dividend policy
in Indonesia
Doddy Setiawan, Bandi Bandi, Lian Kee Phua and Irwan Trinugroho

Doddy Setiawan and Abstract


Bandi Bandi are both Purpose This research aims to examine the effect of ownership structure on dividend policy using the
based at Faculty of Indonesian context. The most common ownership structure is concentrated in the hand of family owners
Economics and Business, except in the UK and USA (La Porta et al., 1998, 2000). Family owners hold more than half of the
Downloaded by University of Newcastle At 16:54 30 October 2016 (PT)

Universitas Sebelas companies in Indonesia (Carney & Child, 2013; Claessens et al., 2000). Family firms play an important
role in Indonesia. Another important characteristic that emerges is the rise of government- and
Maret, Surakarta,
foreign-controlled firms in Indonesia. Thus, this research also divides ownership concentration into
Indonesia. Lian Kee Phua
family firms, government-controlled and foreign-controlled firms.
is based at School of
Design/methodology/approach Samples of this research consist of dividend announcements
Management, Universiti during 2006-2012 in Indonesian Stock Exchange. This research excluded financial data because these
Sains Malaysia, Penang, have characteristics that are different non-financial sectors characteristics. The final sample of this
Malaysia. research consists of a 710 firm-year observation.
Irwan Trinugroho is Findings The result of this research shows that ownerships have a positive effect on dividend payout.
based at Faculty of This research divides the sample into family-controlled firms, government-controlled firms (GOEs) and
Economics and Business, foreign-controlled firms. This research shows that government- and foreign-controlled firms have a
Universitas Sebelas positive impact on dividend payout. However, family firms have a negative effect on the dividend
Maret, Surakarta, payout. Family firms pay lower dividends because they prefer to control it themselves. Family firms earn
Indonesia. benefit from those resources, but at the expense of minority shareholders. Thus, family firms engage in
expropriation to minority shareholders.
Research limitations/implications This study focuses on ownership structure of Indonesian listed
firm. This study does not analyze the impact of other corporate governance mechanism such as board
structure on dividend decisions. The owner of the companies (family, government and foreign firm) has
an opportunity to put their member as part of board members. However, this study does not analyze the
impact of board structure on dividend decisions.
Originality/value This study provides evidence that ownership concentration positively affects
dividend payout. However, there is a different effect of ownership structure (family-controlled firms,
GOEs and foreign-controlled firm). Government- and foreign-controlled have a positive effect; however,
family-controlled firm have a negative effect on dividend payout. Therefore, this study provides
evidence of the importance of ownership structure on dividend decision.
Keywords Ownership structure, Dividend, Family firms, Foreign-controlled firms, Government-controlled firms
Paper type Research paper

Introduction
We investigated the effect of ownership concentration on dividend policy by studying
Indonesian firms. The most common ownership structure is concentrated in the hands of
Received 1 May 2015
Revised 7 August 2015 families except in the UK and the USA (La Porta et al., 1998, 2000). Family owners control
4 October 2015 more than half of the firms in East Asia (Claessens et al., 2000). Although this number
Accepted 10 October 2015
decreased to 46.1 per cent in 2008 because of significant political changes in the East
The authors would like to
thank Kurniawan Agung and Asian countries (Carney and Child, 2013), family owners still control the greater part of firms
Fany Himawan S for their in Asia.
research assistance and Leo
Indra Wardhana (University of
Limoges) for his constructive
The proportion of family firms in Indonesia, an emerging market and the worlds fourth most
comments. populous country, has also decreased from 68.6 to 57.3 per cent (Carney and Child, 2013);

PAGE 230 JOURNAL OF ASIA BUSINESS STUDIES VOL. 10 NO. 3, 2016, pp. 230-252, Emerald Group Publishing Limited, ISSN 1558-7894 DOI 10.1108/JABS-05-2015-0053
however, they still account for more than half of Indonesian firms, meaning that family firms
still play an important role in Indonesia. The other ownership structures are government-
and foreign-controlled firms. In this study, therefore, we have divided ownership
concentration into the categories of family firms, government-controlled firms (GOEs) and
foreign-controlled firms.
Shleifer and Vishny (1997) have argued that, if controlling shareholders hold almost full
control of firms, they can make decisions based on their best interests. However, such
interests are not always congruent with those of other shareholders. Controlling owners can
make decisions that keep firms resources to themselves through related party transactions
or by investing in affiliated firms. Of course, these behaviors should reduce firms values for
controlling owners, meaning that benefits can be extracted from companies at the expense
of minority shareholders. Therefore, agency conflicts between controlling shareholders and
minority shareholders are mostly found in those firms with concentrated ownership
(Claessens and Yurtoglu, 2013; Shleifer and Vishny, 1997). They are also called principal
principal conflicts (Jiang and Peng, 2011; Peng and Jiang, 2010).
Faccio et al. (2001) focused on controlling shareholders decisions regarding dividends.
Dividends are important because they mean that controlling shareholders have to share
their resources instead of holding onto them. Minority shareholders expect that they will get
dividends as returns from their investments. However, they may also bear higher costs
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because of a higher probability of expropriation. Faccio et al. (2001) found that firms in East
Asia with controlling owners pay lower dividends compared to their counterparts in Western
Europe. Controlling owners in East Asia prefer to hold their resources rather than distribute
them amongst minority shareholders. Therefore, negative effects have been found in the
link between ownership concentration and dividend payouts. This result is confirmed by
other studies (De Cesari, 2012; Gugler and Yurtoglu, 2003; Harada and Nguyen, 2011; and
Manos et al., 2012).
On the other hand, Shleifer and Vishny (1986) argued that large shareholders are more
motivated to monitor managers and are also able to bear costs better. Therefore, it is
expected that large shareholders have a positive effect on firms values. Maury and Pajuste
(2005), studying Finnish firms, showed that multiple large shareholders at firms positively
affected dividend payouts. Berzin et al. (2012) also showed that higher ownership
concentration among Norways private firms was associated with higher dividend payouts
for minority shareholders. Controlling shareholders improved their reputations by paying
higher dividends to minority shareholders.
La Porta et al. (2000) showed that institutional settings could affect decisions about
dividends. In weakly governed countries, shareholders are more likely to receive lower
dividends. Controlling owners use their funds to pursue their own interests rather than
spending them on paying dividends to minority shareholders. This result shows that
dividend payments are an outcome of corporate governance and institutional
development.
As an emerging market, Indonesia has poor governance (Nys et al., 2015). As a result,
minority shareholders may obtain lower dividends because of the expropriation of
resources by controlling owners. On the other hand, Faccio et al. (2001) found that
shareholders receive lower dividends when the ratio of ownership rights to cash flow rights
is lower. Thus, firms with a higher probability of engaging in expropriations pay lower
dividends to keep their resources inside businesses. The findings of La Porta et al. (2000)
and Faccio et al. (2001) revealed that minority interests are weakly protected from
expropriation and subsequently receive lower dividends.
As pointed out by Carney and Child (2013), GOEs and foreign-controlled firms are also the
dominant forms of ownership structure in Indonesia. Therefore, for this present paper, we
have considered three types of ownership concentration which are family-run businesses,
GOEs and foreign-controlled firms.

VOL. 10 NO. 3 2016 JOURNAL OF ASIA BUSINESS STUDIES PAGE 231


We have studied the Indonesian context as Ang et al. (1997) and Baker and Powell (2012)
provided evidence that dividends have a significant effect on firms values. Thus, dividend
decisions are important, especially for Indonesian firms. In addition, Indonesia has unique
characteristics, e.g. family firms are the most dominant business structure there (Carney
and Child, 2013). Families in Indonesia control more than half of the countrys publicly
traded firms. Although Indonesia faced a financial crisis at the end of 1990s in the midst of
political change when Suharto stepped down as President in 1997, family firms have
continued to dominate business. As mentioned by Shleifer and Vishny (1997), Claessens
and Yurtoglu (2013), Jiang and Peng (2011) and Peng and Jiang (2010), principal
principal conflicts are agency problems for firms with concentrated ownership. It is
therefore expected that family ownership has a negative effect on firms dividend payouts.
Carney and Child (2013) showed that the number of GOEs and foreign firms in Indonesia
has increased in recent years. The World Bank (2010) has argued that overseeing dividend
payouts can be a mechanism for monitoring GOEs, as it would lead to a greater scrutiny of
how GOEs manage resources by the public. It is expected that GOEs should achieve
greater efficiency. Therefore, we have argued that GOEs should have a positive effect on
dividend payouts. Bradford et al. (2013) showed that Chinese GOEs pay higher dividends
than privately owned firms.
Foreign firms have to maintain their reputation in host countries, meaning that they may pay
higher dividends. Another argument is that foreign firms have to meet regulation on
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corporate governance practices in their host countries. Thus, foreign firms have tighter
regulations regarding corporate governance. Therefore, it is expected that foreign-owned
firms will pay more in dividends.

Literature review and hypothesis development


Agency costs can be divided into two types:

1. conflict between shareholders and managers (Type I); and


2. conflict between majority shareholders and minority shareholders (Type II).
Agency conflict Type I occurs in widely dispersed firms (Jensen and Meckling, 1976), it is
argued, because there is an information asymmetry between managers and shareholders.
Both parties work in their own best interests. Managers make decisions in their own best
interests at the expense of shareholders. Dispersed shareholders do not hold enough
shares to take action to monitor their managers, as the costs of doing so are too expensive.
Large shareholders hold substantial numbers of shares to bear the cost of monitoring and
to earn their returns on investment (Shleifer and Vishny, 1986). Large shareholders will take
strategic action to enhance firms values. Thus, large shareholders should have a positive
effect on firms values.
Agency conflict Type II is widely found in insider-dominated firms (Claessens and Yurtoglu,
2013). When shareholders have a majority control of firms, they have an opportunity to
make decisions in their own favor (Shleifer and Vishny, 1997). Controlling shareholders
make decisions to keep resources within firms. In Asia, controlling shareholders take
advantage of pyramidal structures or business groupings to keep resources under their
control, leading to tunneling (Johnson et al., 2000). Such kinds of expropriation
disadvantage minority shareholders (Xunan, 2011). There is some empirical evidence from
China that controlling shareholders use dividend payouts for tunneling (Chen et al., 2009;
Lv et al., 2012). Moreover, expropriation becomes worse in environments with weak
corporate governance (La Porta et al., 1998, 2000).
The circumstances of dividend payouts could be interesting as a backdrop for analyzing
Type II agency conflicts because in those situations, controlling shareholders have to share
their resources with minority shareholders. On the other hand, minority shareholders expect
dividends as returns for their investments. Controlling ownerships in Asia, being mostly
family-based, tend to take strategic decisions, such as putting their relatives on boards of

PAGE 232 JOURNAL OF ASIA BUSINESS STUDIES VOL. 10 NO. 3 2016


directors or even making them chairs and CEOs of businesses. These kinds of decision
lead to management members monitoring their firms themselves, giving them more
opportunities to engage in expropriation.
Faccio et al. (2001) investigated the effect on dividend payouts on the dispersal of
ownership rights and control rights to different agencies in Asia and Western Europe. Both
regions are characterized by concentrated ownership. Lower dispersal of ownership rights
and control rights increases the potential for expropriation. They documented that in
Indonesia, Thailand and Italy, the effect of the ratio between ownership and control rights
on dividend payouts is positive. Firms with lower ratios of ownership to control rights pay
lower dividends. In other words, firms with a higher probability to expropriate funds
distribute fewer dividends. Those firms keep resources within their firms instead of
distributing them to minority shareholders. This result shows that concentrated ownership
has negative effects on dividend payouts. Further, Lv et al. (2012), by studying Chinese
firms, found that concentrated ownership has a negative effect on dividend payouts. This
result shows that firms with concentrated ownership give lower dividends. Concentrated
ownership may exploit dividend mechanisms to engage in tunneling. This result confirms
the findings of Faccio et al. (2001).
Harada and Nguyen (2011) studied the link between concentrated ownership and dividend
policy in Japan. Their results showed that the presence of controlling shareholders has a
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negative effect on dividend payouts. Controlling shareholders compensate minority


shareholders with low dividend payouts. This was in line with the research undertaken by
Manos et al. (2012) who found that Indian business groupings prefer not to share
dividends. There is evidence that firms that have higher related party transactions pay
lower dividends in China (Su et al., 2013).
Maury and Pajuste (2005) investigated the effect of multiple large shareholders on dividend
payout policy in Finland. They documented how multiple large shareholders have a positive
effect on dividend payouts. Having multiple large shareholders could be considered as a
corporate governance mechanism that protects minority shareholders. Contestability
between large shareholders affects firms values positively (Jara-Bertin et al., 2008). This
result was in line with that of Faccio et al. (2001) who found that ownership concentration
has a positive effect on dividend payouts. Berzins et al. (2012) investigated the effect of
controlling ownerships by studying private firms in Norway. It was argued that agency
problems should generally be worsened for private firms, as they have no external (public)
monitoring mechanisms. They also found that minority shareholders receive higher
dividends when agency conflict is higher. In this particular case, those with controlling
ownership have a common interest with minority shareholders.
Based on the literature review, we expected that the existence of controlling ownerships
should have a significant effect on dividend payouts:

H1. Controlling ownership has a positive effect on dividend payouts.


Family control of firms is the dominant ownership structure in the world, except in the UK
and the USA (La Porta et al., 1998, 2000). In Asia, more than half the firms are dominated
by family ownership structures. As has been pointed out by Shleifer and Vishny (1986),
large shareholders have more motivation to monitor managers and take significant action
to improve their firms values. In cases where families are the controlling shareholders, they
are strongly motivated to increase firms values because their families wealth is highly
associated with their firms values. Family owners should also improve their firms values to
maintain their reputations. Some have provided empirical evidence for this. For example,
those firms tend to provide better accounting information (Cascino et al., 2010), have more
voluntary disclosure (Chen et al., 2008) and are more conservative (Chen et al., 2013).
Some studies also reveal that family firms eventually have better performance than
non-family-controlled firms (Anderson and Reeb, 2003; Barontini and Caprio, 2006;
Martin-Reyna and Duran-Encalada, 2012).

VOL. 10 NO. 3 2016 JOURNAL OF ASIA BUSINESS STUDIES PAGE 233


Pindado et al. (2012) studied family firms and dividend policies in Europe using
cross-country samples. They revealed that family firms affect firm performance
positively. Moreover, family firms pay higher dividends compared to others. This
research also shows that controlling interests of families is in line with controlling those
of minority shareholders. Some other studies (Ampenberger et al., 2010; Setia-Atmaja,
2010) confirmed this finding. They found that family firms distribute higher dividends to
shareholders. Controlling families interests were seen to converge with those of other
shareholders and, thus, controlling family firms should have positive effects on dividend
policies.
By contrast, Shleifer and Vishny (1997) argued that controlling shareholders have
opportunities to exploit firms resources for their own interests at the expense of minority
shareholders. Family owners, as controlling shareholders, have the power to select their
relatives as top management and/or chairs of boards. They could also occupy other
strategic positions at firms that lead to them dominating the management of their
enterprises. This leads to there being higher incentives for the expropriation of those
businesses resources. Family owners are mostly prevalent in countries with limited
liability financing (Masulis et al., 2011). Therefore, family-controlled firms use their
internal sources to finance their businesses. However, this may harm minority
shareholders interests because of suboptimal investment decisions and lower rates of
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return. Studies by Almeida et al. (2011) and Hwang et al. (2013) on Korean chaebol
(business groups) found that affiliations with chaebol had negative effects on Tobins q
ratio. Family owners have incentives to keep resources within their firms instead of
distributing them to other shareholders. Therefore, minority shareholders of
family-owned businesses may receive lower dividends, as families control funds and
use them for their own interests at the expense of minority shareholders. De Cesari
(2012), studying Italian firms, revealed that family ownership has a negative effect on
dividend payouts. Wei et al. (2011) found similar results in China in spite of its different
institutional setting in which the government holds significant shares of most publicly
traded firms. Some studies have also concluded that family firms in China exploit
dividend payouts to tunnel their resources (Chen et al., 2009). In Austria (Gugler, 2003)
and Germany too (Gugler and Yurtoglu, 2003), family firms have lower dividend payout
ratios than non-family firms do.
The inconsistency of the results on the effects of family ownership on dividend payouts may
be caused by the contention that the relationship between the two is non-monotonic. Huang
et al. (2012) investigated this issue using Taiwan as an example. They concluded that
families with less than 50 per cent ownership of their businesses shares had a negative
effect on dividend payouts. On the other hand, families that controlled more than 50 per
cent of their firms shares had higher dividend payouts than other firms. Family owners
interests are convergent with those of minority shareholders, if they hold more than 50 per
cent of shares.
Prabowo and Simpson (2011) investigated the effect of family ownership on firms
performances in Indonesia. According to their paper, family ownership was found to
have a negative effect on performance. Controlling families may place their members
on the boards to control firms fully (Claessens et al., 2000). Family involvement at the
executive level could be detrimental for firms values (Prabowo and Simpson, 2011).
This result confirmed the findings of Tabalujan (2002a, 2002b) in which family
ownership in Indonesia was reported to weaken corporate governance by allowing
owners to create ineffective monitoring mechanisms that made it easier for controlling
families to expropriate their companies resources. Therefore, it is supposed that
controlling families have more incentives to expropriate funds from minority
shareholders through dividend policies. Thus, we expect that family firms have a
negative effect on dividend decisions:

PAGE 234 JOURNAL OF ASIA BUSINESS STUDIES VOL. 10 NO. 3 2016


H2. Family ownership has a negative effect on dividend payouts.
The number of GOEs and foreign-controlled firms traded on the Indonesia Stock
Exchange (IDX) has doubled in recent years (Carney and Child, 2013). GOEs[1] have
different characteristics from family-controlled firms. First, GOEs are mainly tasked to
help the government improve societal wealth. However, such firms are sometimes
politically pressured to pay greater dividends to the government. For example, in 2012
they contributed dividends of Rupiah 30.77 trillion to the governments budget, which
was an increase of 11.53 per cent on the dividends paid in 2011.
He et al. (2012) analyzed the behavior of state-owned banks in Hong Kong with regards
to their dividend policies. They concluded that GOEs disbursed more in dividends than
privately-owned firms. Likewise, Bradford et al. (2013) found that Chinese GOEs pay
higher dividends than private firms. They have more access to external sources of
funding which means they depend less on internal sources. Gugler and Yurtoglu (2003)
also found that Austrias state-owned firms pay higher dividends than private
enterprises:

H3. Government ownership has a positive effect on dividend payouts.


There has been a substantial increase in the number of foreign-owned firms in
Indonesia in recent years. Carney and Child (2013) found that the number of
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foreign-controlled firms in Indonesia is the second highest compared with other


countries in East Asia. The percentage of foreign-controlled firms in Indonesia is 7.8 per
cent, which is much higher than Taiwans (0.0 per cent) and Hong Kongs (0.6 per cent),
for instance. Therefore, it is important to investigate the effect of foreign ownership on
dividend policy. Foreign firms in developed countries are characterized as having
better corporate governance, as being more efficient and better equipped with
advanced technology (Trinugroho et al., 2014). Therefore, they require higher
standards of transparency and disclosure. According to the outcome model of La Porta
et al. (2000), foreign-controlled firms should have better corporate governance
mechanisms, which should subsequently lead them to pay higher dividends. They
usually have higher incentives to monitor corporate activities to protect their
investments. However, Lam et al. (2012) have argued that foreign owners prefer to keep
dividends inside their firms to fund investments. We contend that there are two
possibilities for how foreign ownership affects dividends policy:

1. foreign owners may prefer to receive higher dividends, pushing managers to lessen
their retained earnings (Jeon et al., 2011); and
2. foreign owners may tend to reinvest their earnings rather than distribute them (Lam
et al., 2012).
We therefore expect that foreign ownership has a positive and significant effect on dividend
policies. Our fourth hypothesis is formulated as follows:

H4. Foreign ownership has a positive effect on dividend payouts.

Research methods
Data
Samples for this study consisted of dividend announcements on the IDX in the period
from 2006 to 2012. We excluded financial firms as they have different characteristics
than others types of businesses. The final sample consisted of 710 firm-year
observations.
The dependent variable was dividend payout which was measured as dividend per
share divided by earnings per share. The main determinant variable was ownership
structure. The first proxy for ownership structure was the percentage of control rights.
We followed the methodologies of Claessens et al. (2000) and Faccio et al. (2001) to

VOL. 10 NO. 3 2016 JOURNAL OF ASIA BUSINESS STUDIES PAGE 235


measure control rights. As mentioned by Huang et al. (2012), the relationship between
ownership structure and dividend payout is non-monotonic. Therefore, we used a
square of control rights to account for such non-monotonic relationships.
Going deeper, we divided ownership concentration into three categories:
family-controlled firms, GOEs and foreign-controlled firms. Family-controlled firms
was a dummy variable, which was given a value of 1 where firms had family ownership
with 20 per cent or more control rights, and 0 otherwise. Firms were classified as
government-controlled when the government owned 20 per cent or more of a
businesss shares and were given a value of 1 in those circumstances, and 0 otherwise.
Foreign ownership was also a dummy variable, which was given a value of 1 where
there were overseas shareholders with control rights of 20 per cent or more, and 0
otherwise. This study followed previous studies, such as those by Claessens et al.
(2000), Huang et al. (2012), La Porta et al. (1998) and Prabowo and Simpson (2011) by
using a cutoff point set at 20 per cent. However, some previous researchers have used
cutoff points of more than 20 per cent, such as Huang et al. (2012) and Prencipe et al.
(2011), who used 30 and 50 per cent, respectively. Therefore, we set three cutoff points
for each category: 20, 30 and 50 per cent.
We took into account a number of control variables, including growth, leverage, firm
size and financial performance. Growth was measured by market-to-book value of
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equity. Leverage was measured as the ratio of total debt to total assets. Financial
performance was measured by the return on assets (ROA) and firm size was measured
as the natural logarithm of total assets.

Hypothesis testing
To test the hypothesis, we estimated empirical models as follows:
Divit 1UOit 2FSit 3ROAit 4Growthit 5Levit ei (1)
Divit 1UOit2 2FSit 3ROAit 4Growthit 5Levit ei (2)
Divit 1FOit 2FSit 3ROAit 4Growthit 5Levit ei (3)
Divit 1GOEit 2FSit 3ROAit 4Growthit 5Levit ei (4)
Divit 1FORit 2FSit 3ROAit 4Growthit 5Levit ei (5)
where:
Divit dividend payout, dividend per share divided by earnings per share;
UO controlling ownership, percentage of control right;
UO2 the square of controlling ownership;
FO family ownership, dummy variable, 1 if family owners have 20 per cent or
more control rights;
GOEs government-controlled firms, dummy variable, 1 if government holds 20 per
cent or more control rights;
FOR foreign-controlled firms, dummy variable, 1 if foreign owners hold 20 per cent
or more control rights;
FS firm size, natural logarithm of total assets;
ROA return on assets;
Growth market-to-book value of equity; and
Lev leverage, debt to total assets.

We ran our empirical model using the static panel data technique which was estimated
using least-square and Tobit regressions. However, we could not use any individual
fixed-effect, as our main variables (ownership structure) were not necessarily
time-variant. Therefore, we only included time effect (year dummies).

Descriptive statistics
Tables I and II provide information regarding the descriptive statistics of this study.

PAGE 236 JOURNAL OF ASIA BUSINESS STUDIES VOL. 10 NO. 3 2016


Table I Descriptive statistics for continuous variables
Statistics Div UO Lev Growth FS ROA

Mean 23.8559 59.4341 0.4594 2.3211 6.3722 9.4764


Median 22.2904 60.000 0.4693 1.5462 6.3501 7.5311
Maximum 58.5106 98.5500 0.9054 22.769 8.1861 50.7924
Minimum 0.1463 9.1500 0.0040 0.0000 3.9587 0.0053
SD 13.7620 18.9167 0.1884 2.5021 0.6869 7.7139
Notes: Div dividend payout, dividend per share divided by earnings per share; UO controlling ownership; percentage of control
rights; FS firm size, log total assets; ROA return on assets; Growth market-to-book value of equity; Lev leverage, debt to total
assets

Table II Descriptive statistics for dummy variables


Category FO20 FO30 FO50 GOE20 GOE30 GOE50 FOR20 FOR30 FOR50

Category1 0.6278 0.5937 0.5369 0.1065 0.1065 0.0965 0.2159 0.2045 0.1747
Category0 0.3722 0.4063 0.4631 0.8935 0.8935 0.9035 0.7841 0.7955 0.8253
Notes: FO20 family ownership, 1 if family owners have 20% or more control rights; FO30 family ownership, 1 if family owners have
30% or more control rights; FO50 family ownership; 1 if family owners have 50% or more control rights; GOE20
government-controlled firms, 1 if government holds 20% or more control rights; GOE30 government-controlled firm, 1 if government
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holds 30% or more control rights; GOE50 government-controlled firm, 1 if government holds 50% or more control rights; FOR20
foreign-controlled firm, 1 if foreign owners hold 20% or more control right; FOR30 foreign-controlled firm, 1 if foreign owners hold 30%
or more control rights; FOR50 foreign-controlled firm, 1 if foreign owners hold 50% or more control rights

Tables I and II provide descriptive statistics for our variables. The average dividend
payout was 23.86 per cent, while the value of dividend payouts was close to the median
(22.29 per cent). The dividend payout was lower than in a previous study by Faccio et
al. (2001) for the period from 1992 to 1996. However, this dividend ratio was close to
the dividend payout of 22.49 per cent in China (Wei et al., 2011). The mean (median)
of controlling ownerships in Indonesia was 59.43 per cent (60.00 per cent). This showed
that Indonesian firms are mostly concentrated. This finding was close to that in the work
of Truong and Heaney (2007) who found that ultimate ownership in Indonesia was
around 52.85 per cent. As exhibited in Table II, most Indonesian firms are controlled by
families. Families dominate 62.78 per cent of Indonesian firms when using 20 per cent
as the cutoff point. According to our further analysis using the higher cutoff points of 30
and 50 per cent, family shareholders control 59.37 and 53.69 per cent of Indonesian
firms, respectively. The dominant role of family firms in Indonesia is similar to that in
Italy, as pointed out by Mancinelli and Ozkan (2009), who documented that 61.2 per
cent of their sample was controlled by families. The second largest ownership grouping
in Indonesia is that of foreign-controlled firms; 21.59, 20.45 and 17.47 per cent of firms
are foreign-controlled, using 20, 30 and 50 per cent as cut-off points, respectively.
Government-controlled firms made up 10.65, 10.65 and 9.65 per cent of our sample
using 20, 30 and 50 per cent as cut-off points, respectively.
Table III provides information regarding the correlations between variables.
In Table III, the correlation between controlling ownership and dividend payouts is positive
and significant. The significant result is also found in the correlation between the three
types of ownership (family, government and foreign) and dividend payouts. Further,
Table III also shows that controlling ownership is significantly correlated with family
ownership, but there no significant correlation was found between controlling ownership
and GOEs. Similarly, the correlation between controlling ownership and foreign-controlled
firms was not significant.

Analysis
Table III shows the effect of the types of controlling ownership on dividend payouts.

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Table III Correlation matrix

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Variable Div UO UO2 FO20 GOE20

Div 1.0000
UO 0.1403*** (0.0002) 1.0000
UO2 0.1173*** (0.0018) 0.9730*** (0.0000) 1.0000
FO20 0.1744*** (0.0000) 0.1028*** (0.0063) 0.0402 (0.2866) 1.0000
GOE20 0.1826*** (0.0000) 0.0371 (0.3252) 0.0111 (0.7676) 0.4485*** (0.0000) 1.0000
FOR20 0.1268*** (0.0007) 0.1172*** (0.0018) 0.1371*** (0.0003) 0.6815*** (0.0000) 0.1812*** (0.0000)
FS 0.1045*** (0.0055) 0.0849** (0.0241) 0.1108*** (0.0032) 0.0703 (0.0619) 0.2196*** (0.0000)
ROA 0.1008*** (0.0074) 0.2247*** (0.0000) 0.2282*** (0.0000) 0.2089*** (0.0000) 0.0394 (0.2960)
Growth 0.1505*** (0.0001) 0.1214*** (0.0012) 0.1234*** (0.0010) 0.1295*** (0.0006) 0.0749** (0.0468)
Lev 0.1741*** (0.0000) 0.1195*** (0.0015) 0.1178*** (0.0017) 0.1063*** (0.0047) 0.0777** (0.0393)
(continued)
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Table III
Variable FOR20 FS ROA Growth Lev

Div
UO
UO2
FO20
GOE20
FOR20 1.0000
FS 0.0620 (0.1001) 1.0000
ROA 0.2928*** (0.0000) 0.0752** (0.0459) 1.0000
Growth 0.1467*** (0.0001) 0.2536*** (0.0000) 0.5761*** (0.0000) 1.0000
Lev 0.2013*** (0.0000) 0.1741*** (0.0000) 0.3950*** (0.0000) 0.0450 (0.2325) 1.0000
Notes: *; **and; ***are significant at 10, 5 and 1%, respectively; Div dividend payout, dividend per share divided by earnings per share; UO controlling ownership, percentage
of control rights; FO20 family ownership, 1 if family owners have 20% or more control rights; GOE20 government-controlled firms, 1 if government holds 20% or more control rights;
FOR20 foreign-controlled firm, 1 if foreign owners hold 20% or more control rights; FS firm size, log total assets; ROA return on assets; Growth market-to-book value of equity;
Lev leverage, debt to total assets

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PAGE 239
Table IV shows that controlling ownership has a positive and significant effect on
dividend payouts. This result demonstrates that the higher the percentages of
ownership concentration, the higher are the dividends paid. It means that those with
controlling ownership have interests that are aligned with those of minority
shareholders. The presence of controlling shareholders may push firms to pay more
dividends in line with Shleifers and Vishnys (1986) argument that large shareholders
have greater incentives to monitor their managements and can take necessary actions
to ensure their investments are protected. Huang et al. (2012) and Mancinelli and
Ozkan (2009) found that ownership structure has a non-monotonic effect on dividend
payouts. Our study also examined the non-monotonic effects of ownership structure on
dividend payouts. As we can see in Tables I and II, there is a positive effect of the
square of ownership on dividend payouts which means that a monotonic relationship
between ownership concentration and dividend payouts is confirmed. To double-check
our results, we ran our empirical model using Tobit regression. The results were
consistent with those presented in Table IV, especially with regard to our main variable.
Thus, there were seen to be positive effects of ownership concentration on dividend
payouts when using both linear and non-linear estimation techniques.

Our control variables, which were firm size, growth and leverage, had a significant
effect on dividend payouts, except where ROA was used as a proxy for financial
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performance. The positive effect of firm size on dividend payouts was also seen. Large
firms were shown to pay more dividends than small firms, which was in line with the
findings of previous studies by Setia-Atmaja (2010), Su et al. (2013) and Wei et al.
(2011). Growth was positively associated with dividend payouts. This result was not
consistent with our expectation that the effect should be negative (Gugler, 2003; Gugler
and Yurtoglu, 2003; Jiraporn and Ning, 2006). We found that firms with higher growth
pay higher dividends because of managers beliefs that by paying higher dividends,
they can maintain growth by sending positive signals to markets. In addition, such firms
might need more resources to fund their businesses. Thus, they should pay more
dividends to attract investors. There was a negative effect of leverage on dividend
payouts. More leveraged firms prefer to settle their debts, rather than pay dividends.
This result is consistent with previous research undertaken by De Cesari (2012),
Farinha (2003) and Su et al. (2013).

As presented in Table V, Family ownership has a negative effect on dividend payouts


which could be because family firms pay lower dividends than non-family firms. They
prefer to hold onto their resources inside their firms because they can control them that

Table IV Fixed effect: The effect of controlling ownership on dividend payouts


Least-square Tobit
1 2 3 4

8.8567 (0.0968) 11.6069** (0.0248) 9.9093 (0.0581) 12.7036** (0.0119)


UO 0.0940*** (0.0006) 0.0954*** (0.0004)
UO2 0.0006*** (0.0042) 0.0006*** (0.0031)
FS 2.6223*** (0.0009) 2.6515*** (0.0008) 2.4377** (0.0015) 2.4615*** (0.0014)
ROA 0.1945** (0.0327) 0.1879** (0.0397) 0.2091** (0.0194) 0.2026** (0.0240)
Growth 0.8606** (0.0191) 0.8601*** (0.0011) 0.8877*** (0.0005) 0.8863*** (0.0006)
Lev 16.2306*** (0.0000) 16.3395*** (0.0000) 15.9779*** (0.0000) 16.0076*** (0.0000)
Year dummies Yes Yes Yes Yes
F-value 6.8330*** 6.4655***
F-prob (0.0000) (0.0000)
Adjusted R2 0.0836 0.0787
Notes: This research uses least-square with a clustered standard error t-test for Columns 1 and 2 and a Tobit test for Columns 3 and
4. *; **and; ***are significant at 10, 5 and 1%, respectively; Div dividend payout, dividend per share divided by earnings per share;
UO controlling ownership, percentage of control rights; UO2 the square of controlling ownership, percentage of control rights;
FS firm size, log total assets; ROA return on assets; Growth market-to-book value of equity; Lev leverage, debt to total assets

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Table V Fixed effect: The effect of family ownership on dividend payouts


Least Square Tobit
1 2 3 4 5 6

19.7594*** (0.0001) 17.7201*** (0.0005) 16.6542*** (0.0010) 20.9702*** (0.0000) 19.0228*** (0.0001 18.0363*** (0.0003)
FO20 4.0400*** (0.0001) 4.2062*** (0.0001)
FO30 2.5598** (0.0069) 2.7222*** (0.0042)
FO50 1.3377* (0.0955) 1.5091* (0.0688)
FS 2.1598*** (0.0060) 2.3078*** (0.0034) 2.3356*** (0.0032) 1.9770*** (0.0094) 2.1081*** (0.0059) 2.1218*** (0.0057)
ROA 0.1952** (0.0314) 0.1759 (0.0535) 0.1582 (0.0821) 0.2079** (0.0194) 0.1886** (0.0348) 0.1707 (0.0560)
Growth 0.8839*** (0.0008) 0.8871*** (0.0008) 0.8769*** (0.0009) 0.9009*** (0.0004) 0.9055*** (0.0004) 0.8950*** (0.0005)
Lev 15.9568*** (0.0000) 16.1975*** (0.0000) 16.3226*** (0.0000) 15.6547*** (0.0000) 15.8840*** (0.0000) 15.9996*** (0.0000)
Year dummies Yes Yes Yes Yes Yes Yes
F-value 7.1030*** 6.2518*** 5.8174***
F-prob (0.0000) (0.0000) (0.0000)
Adjusted R2 0.0871 0.0759 0.0700
Notes: This research uses least-square for Columns 1, 2 and 3 and a Tobit test for Columns 4, 5 and 6.; *; **and; ***are significant at 10, 5 and 1%, respectively; Div dividend
payout, dividend per share divided by earnings per share; FO20 family ownership, 1 if family owners have 20% or more control rights; FO30 family ownership, 1 if family owners
have 30% or more control rights; FO50 family ownership, 1 if family owners have 50% or more control rights; FS firm size, log total assets; ROA return on assets; Growth

VOL. 10 NO. 3 2016


market-to-book value of equity; Lev leverage, debt to total assets

JOURNAL OF ASIA BUSINESS STUDIES


PAGE 241
way and exploit them for their own best interests. As pointed out by Shleifer and Vishny
(1997), large owners could extract resources from companies for their own interests,
but at the expense of minority shareholders. This result was consistent with previous
studies by Chen et al. (2009), De Cesari (2012), Gugler (2003), Gugler and Yurtoglu
(2003) and Wei et al. (2011), among others.

In the context of Indonesia, Prabowo and Simpson (2011) found that the presence of
independent directors does not work effectively as a corporate governance practice
because family owners tend to take most control at their firms. As controlling owners,
families have an opportunity to make decisions in their own best interests. In cases like
these, family owners may force their senior managers to hold onto resources inside the
firms or to tunnel them away to affiliated firms. Thus, family ownership has a negative
effect on performance (Prabowo and Simpson, 2011), as decisions may be taken that
are not in line with the optimal benefits of stakeholders. Moreover, family firms in
Indonesia also provide disclosure less voluntarily than non-family firms do (Darmadi
and Sodikin, 2013), which may be driven by their instincts to protect their own interests.
As explained earlier, our result shows that family firms pay fewer dividends. It is
therefore suspected that family firms in Indonesia are inclined to expropriate resources
from minority shareholders.
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Further analysis using different cutoff points (30 and 50 per cent) also provided
consistent results. Family ownership was negatively associated with dividend payouts.
The results of Tobit regressions were also consistent with those derived from ordinary
least squares regressions.

As shown in Table VI, GOEs pay more dividends to shareholders. The government, as
a controlling shareholder, pushes managers to pay higher dividends to finance national
development. This result is confirmed in previous studies by Bradford et al. (2013),
Gugler and Yurtoglu (2003) and He et al. (2012), who found that there is a positive effect
on dividend payouts resulting from government ownership. As seen in the descriptive
statistics, there were similar numbers of GOEs when 20 and 30 per cent cutoff points
were used. Therefore, the effect of government ownership on dividend payouts, using
20 and 30 per cent cutoff points, was identical. Further analysis using a 50 per cent
cutoff point also provided a similar result. There is a positive significant effect of
government ownership on dividend payout policies. More analysis using Tobit
regression also provided similar results as those obtained from least-square
regression. GOEs have a positive effect on dividend payouts using any of the 20, 30
and 50 per cent cutoff points. GOEs in Indonesia pay higher dividends to their
shareholders.

Our results illustrated the different characteristics of family-owned firms and GOEs. As
controlling shareholders, families prefer to tunnel dividends to affiliated firms. Thus, the
economic benefits of business resources remain in the charge of families that are
controlling shareholders. By contrast, GOEs distribute a higher proportion of their
resources to their shareholders.

Table VII shows that foreign-controlled firms have a positive effect on dividend payouts.
This could be because foreign owners urge firms to pay more in dividends, as foreign
owners prefer to earn higher returns in dividend form than to reinvest. This is in line with the
finding of Jeon et al. (2011) who concluded that foreign owners positively affected dividend
decisions at local firms.

The number of foreign firms in Indonesia has risen in the past decade (Carney and
Child, 2013). Our results have confirmed that foreign-controlled firms have different
decision policies regarding dividends compared with family-controlled firms. Family
ownership has a negative effect on dividend payouts, while foreign ownership has a

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Table VI Fixed effect: The effect of government-controlled firms on dividend payouts


Least Square Tobit
1 2 3 4 5 6

20.0848*** (0.0001) 20.0848*** (0.0001) 19.4841*** (0.0001) 21.2051*** (0.0000) 21.2051*** (0.0000) 20.6497*** (0.0000)
GOE20 7.9010*** (0.0000) 7.8616*** (0.0000)
GOE30 7.9010*** (0.0000) 7.8616*** (0.0000)
GOE50 7.8292*** (0.0000) 7.8933*** (0.0000)
FS 1.6180** (0.0415) 1.6180** (0.0415) 1.7168** (0.0302) 1.4349 (0.0630) 1.4349 (0.0630) 1.5246** (0.0477)
ROA 0.1610 (0.0714) 0.1610 (0.0714) 0.1594 (0.0746) 0.1754** (0.0456) 0.1754** (0.0456) 0.1729** (0.0491)
Growth 0.8814*** (0.0007) 0.8814*** (0.0007) 0.8871*** (0.0007) 0.9094*** (0.0004) 0.9094*** (0.0004) 0.9118*** (0.0003)
Lev 17.1958*** (0.0000) 17.1958*** (0.0000) 17.1341*** (0.0000) 16.9302*** (0.0000) 16.9302*** (0.0000) 16.8671*** (0.0000)
F-value 7.9384*** 7.9384*** 7.7240***
F-prob (0.0000) (0.0000) (0.0000)
Adjusted R2 0.0979 0.0979 0.0951
Notes: This research uses fixed effect for Columns 1, 2 and 3 and a Tobit test for Columns 4, 5 and 6. *; **and; ***are significant at 10, 5 and 1%, respectively; Div dividend
payout, dividend per share divided by earnings per share; GOE20 government-controlled firms, 1 if government holds 20% or more control rights; GOE30 government-controlled
firms, 1 if government holds 30% or more control rights; GOE50 government-controlled firms, 1 if government holds 50% or more control rights; FS firm size, log total assets;

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Table VII Fixed effect: The effect of foreign-controlled firms on dividend payouts
Least Square Tobit
1 2 3 4 5 6

VOL. 10 NO. 3 2016


14.4207*** (0.0041) 14.6162*** (0.0036) 14.6048*** (0.0036) 15.4290*** (0.0016) 15.5847*** (0.0014) 15.5329*** (0.0015)
FOR20 3.1123*** (0.0077) 3.3805*** (0.0081)
FOR30 2.9340** (0.0129) 3.2192*** (0.0068)
FOR50 3.5431*** (0.0063) 3.7877*** (0.0036)
FS 2.4805*** (0.0017) 2.4526*** (0.0019) 2.4619*** (0.0018) 2.3035*** (0.0027) 2.2815*** (0.0029) 2.2994*** (0.0027)
ROA 0.1916** (0.0377) 0.1880** (0.0415) 0.2011** (0.0304) 0.2058** (0.0228) 0.2023** (0.0253) 0.2143** (0.0185)
Growth 0.8825*** (0.0008) 0.8819*** (0.0008) 0.8853*** (0.0008) 0.8989*** (0.0005) 0.8974*** (0.0005) 0.8981*** (0.0005)
Lev 15.8351*** (0.0000) 15.7879*** (0.0000) 15.6816*** (0.0000) 15.4912*** (0.0000) 15.4340*** (0.0000) 15.3334*** (0.0000)
Year dummies Yes Yes Yes Yes Yes Yes
F-value 6.2312*** 6.1411*** 6.2669***
F-prob (0.0000) (0.0000) (0.0000)
Adjusted R2 0.0756 0.0744 0.0761
Notes: This research uses least square for Columns 1, 2 and 3 and a Tobit test for Columns 4, 5 and 6. *; **and; ***are significant at 10, 5 and 1%, respectively; Div dividend
payout, dividend per share divided by earnings per share; FOR20 foreign-controlled firm, 1 if foreign owners hold 20% or more control rights; FOR30 foreign-controlled
firm, 1 if foreign owners hold 30% or more control rights; FOR50 foreign-controlled firm, 1 if foreign owners hold 50% or more control rights; FS firm size, log total assets;
ROA return on assets; Growth market-to-book value of equity; Lev leverage, debt to total assets
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Table VIII Random effect: The effect of controlling ownership on dividend payouts
Least Square Tobit
1 2 3 4

12.6439 (0.0658) 15.3769** (0.0205) 9.9093 (0.0581) 12.7036** (0.0119)


UO 0.0972*** (0.0029) 0.0954*** (0.0002)
UO2 0.0007*** (0.0067) 0.0006*** (0.0016)
FS 2.3555** (0.0203) 2.3711** (0.0202) 2.4377** (0.0015) 2.4615*** (0.0014)
ROA 0.3813*** (0.0000) 0.3810*** (0.0000) 0.2091** (0.0194) 0.2026** (0.0240)
Growth 0.7704*** (0.0031) 0.7767*** (0.0029) 0.8877*** (0.0005) 0.8863*** (0.0006)
Lev 17.5647*** (0.0000) 17.6017*** (0.0000) 15.9779*** (0.0000) 16.0076*** (0.0000)
F-value 7.8854*** 7.5750***
F-prob (0.0000) (0.0000)
Adjusted R2 0.0466 0.0446
Notes: This research uses least square for Columns 1 and 2 and a Tobit test for Columns 3 and 4. *; **and; ***are significant at 10, 5 and 1, respectively; Div dividend payout,
dividend per share divided by earnings per share; UO controlling ownership, percentage of control rights; UO2 the square of controlling ownership, percentage of control rights;
FS firm size, log total assets; ROA return on assets; Growth market-to-book value of equity; Lev leverage, debt to total assets

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Table IX Random effect: The effect of family ownership on dividend payouts
Least square Tobit
Variable 1 2 3 4 5 6

VOL. 10 NO. 3 2016


23.7889*** (0.0002) 21.9813*** (0.0007) 20.9414*** (0.0013) 20.9702*** (0.0000) 19.0228*** (0.0001 18.0363*** (0.0003)
FO20 3.9517*** (0.0046) 4.2062*** (0.0001)
FO30 2.2884** (0.0452) 2.7222*** (0.0042)
FO50 1.2944 (0.1670) 1.5091* (0.0688)
FS 1.8760 (0.0616) 1.9771 (0.0505) 2.0232** (0.0467) 1.9770*** (0.0094) 2.1081*** (0.0059) 2.1218*** (0.0057)
ROA 0.3718*** (0.0000) 0.3655*** (0.0021) 0.3566*** (0.0001) 0.2079** (0.0194) 0.1886** (0.0348) 0.1707 (0.0560)
Growth 0.7880*** (0.0024) 0.7992*** (0.0008) 0.7855*** (0.0026) 0.9009*** (0.0004) 0.9055*** (0.0004) 0.8950*** (0.0005)
Lev 17.2811*** (0.0000) 17.4724*** (0.0000) 17.4991*** (0.0000) 15.6547*** (0.0000) 15.8840*** (0.0000) 15.9996*** (0.0000)
F-value 7.9581*** 6.8996*** 6.5128***
F-prob (0.0000) (0.0000) (0.0000)
Adjusted R2 0.0471 0.0402 0.0377
Notes: This research uses least-square for Columns 1, 2 and 3 and a Tobit test for Columns 4, 5 and 6.; *; **and; ***are significant at 10, 5 and 1%. Div dividend payout,
dividend per share divided by earnings per share; FO20 family ownership, 1 if family owners have 20% or more control rights; FO30 family ownership, 1 if family owners have
30% or more control rights; FO50 family ownership, 1 if family owners have 50% or more control rights; FS firm size, log total assets; ROA return on assets; Growth
market-to-book value of equity; Lev leverage, debt to total assets
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Table X Random effect: The effect of government-controlled firms on dividend payouts


Least Square Tobit
1 2 3 4 5 6

23.2861*** (0.0003) 23.2861*** (0.0003) 22.4522*** (0.0004) 21.2051*** (0.0000) 21.2051*** (0.0000) 20.6497*** (0.0000)
GOE20 7.1552*** (0.0007) 7.8616*** (0.0000)
GOE30 7.1552*** (0.0007) 7.8616*** (0.0000)
GOE50 6.5421*** (0.0020) 7.8933*** (0.0000)
FS 1.4470 (0.1518) 1.4470 (0.1518) 1.5893 (0.1138) 1.4349 (0.0630) 1.4349 (0.0630) 1.5246** (0.0477)
ROA 0.3464*** (0.0001) 0.3464*** (0.0001) 0.3428*** (0.0001) 0.1754** (0.0456) 0.1754** (0.0456) 0.1729** (0.0491)
Growth 0.8007*** (0.0020) 0.8007*** (0.0020) 0.7952*** (0.0021) 0.9094*** (0.0004) 0.9094*** (0.0004) 0.9118*** (0.0003)
Lev 17.8371*** (0.0000) 17.8371*** (0.0000) 17.7742*** (0.0000) 16.9302*** (0.0000) 16.9302*** (0.0000) 16.8671*** (0.0000)
F-value 8.1546*** 8.1546*** 7.7444***
F-prob (0.0000) (0.0000) (0.0000)
Adjusted R2 0.0484 0.0484 0.0457
Notes: This research uses least square for Columns 1, 2 and 3 and a Tobit test for columns 4, 5 and 6. *; **, and; ***are significant at 10, 5 and 1%, respectively; Div dividend
payout, dividend per share divided by earnings per share; GOE20 government-controlled firms, 1 if government holds 20% or more control rights; GOE30 government-controlled
firms, 1 if government holds 30% or more control rights; GOE50 government-controlled firms, 1 if government holds 50% or more control rights; FS firm size, log total assets;

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Table XI Random effect: The effect of foreign-controlled firms on dividend payouts
Least Square Tobit
Variable 1 2 3 4 5 6

VOL. 10 NO. 3 2016


18.3327*** (0.0044) 18.5654*** (0.0039) 18.6043*** (0.0037) 15.4290*** (0.0016) 15.5847*** (0.0014) 15.5329*** (0.0015)
FOR20 4.0219*** (0.0080) 3.3805*** (0.0042)
FOR30 3.5227** (0.0192) 3.2192*** (0.0069)
FOR50 3.9006** (0.0153) 3.7877*** (0.0036)
FS 2.2151** (0.0293) 2.1897** (0.0312) 2.1963** (0.0304) 2.3035*** (0.0027) 2.2815*** (0.0029) 2.2994*** (0.0027)
ROA 0.3831*** (0.0000) 0.3788*** (0.0000) 0.3870*** (0.0000) 0.2058** (0.0228) 0.2023** (0.0253) 0.2143** (0.0185)
Growth 0.7758*** (0.0030) 0.7755*** (0.0030) 0.7817*** (0.0027) 0.8989*** (0.0005) 0.8974*** (0.0005) 0.8981*** (0.0005)
Lev 17.2799*** (0.0000) 17.2074*** (0.0000) 17.1354*** (0.0000) 15.4912*** (0.0000) 15.4340*** (0.0000) 15.3334*** (0.0000)
F-value 7.5132*** 7.1975*** 7.2735***
F-prob (0.0000) (0.0000) (0.0000)
Adjusted R2 0.0442 0.0422 0.0427
Notes: This research uses least square for Columns 1, 2 and 3 and a Tobit test for Columns 4, 5 and 6. *; **and; ***are significant at 10, 5 and 1%, respectively; Div dividend
payout, dividend per share divided by earnings per share; FOR20 foreign-controlled firm, 1 if foreign owners hold 20% or more control rights; FOR30 foreign-controlled firm, 1
if foreign owners hold 30% or more control rights; FOR50 foreign-controlled firm, 1 if foreign owners hold 50% or more control rights; FS firm size, log total assets; ROA return
on assets; Growth market-to-book value of equity; Lev leverage, debt to total assets
positive effect. Foreign controlling shareholders align their interests with minority
shareholders. This result confirms Shleifers and Vishnys (1986) hypothesis that large
shareholders minimize conflicts between managers and shareholders. Therefore, there
is a congruent interest between foreign owners, as controlling shareholders and other
shareholders. Foreign and government ownership have similar effects on dividend
policy.

Robustness checks
We undertook some robustness checks to ensure the consistency of our results. First,
instead of using time-fixed effects, we ran our models using random effects. With
regard to our variables for interest, the results remained unchanged (Tables VIII-XI).
Second, as one might argue that ownership structure may be endogenously
determined, we ran our empirical models using a dynamic panel, more specifically
using a two-step generalized method of moments (GMM). We found consistent results,
especially for our main variables.

Conclusions
We investigated the effect of ownership structures on dividend payouts. As an
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emerging market, Indonesia is mostly dominated by family firms (Carney and Child,
2013; Claessens et al., 2000; La Porta et al., 2000). However, there is evidence that the
percentage of foreign-controlled firms and GOEs has increased as well. Our empirical
results show that ownership concentration has positive effects on dividend payouts.
The higher the percentage of ownership of controlling shareholders, the greater are the
incentives to monitor managers and to ensure that returns on investments are realized.
This result could be explained by Shleifers and Vishnys (1986) contention that large
shareholders are more willing to bear monitoring costs to assure returns on their
investments. The higher the percentages of ownership, the higher are the dividends
received by shareholders.

However, as revealed by Gugler and Yurtoglu (2003), there is a different effect on


dividend payouts caused by ownership structure. Further analysis has shown that
family ownership has a negative effect on dividend payouts. Family owners may have
more incentives to tunnel resources to their affiliated firms. Minority shareholders may
prefer to receive higher dividends instead of having funds reinvested in firms. However,
family owners tend to make decisions based on their best interests, at the expense of
minority shareholders.

Going deeper, looking at the effect on dividends of government and foreign ownership
provided consistent results. There was shown to be a positive effect of both government
and foreign ownership on dividend payouts. GOEs and foreign-controlled firms
distribute more dividends than others.

Our findings have several policy implications. First, investors should consider ownership
structures before making investment decisions. This study has found that controlling
ownership has a positive effect on dividend payouts. Therefore, higher percentages of
ownership are positively correlated with dividend policies. Second, the effect of there being
controlling ownership of a business depends on the type of owner. GOEs and
foreign-controlled firms tend to pay more dividends, while family owners have a negative
effect on dividend payouts.

Note
1. They have been partially privatized via initial public offerings; however, the government remains
the majority shareholder. Nevertheless, a large number of other Indonesian state-owned
enterprises are still fully controlled by the government.

VOL. 10 NO. 3 2016 JOURNAL OF ASIA BUSINESS STUDIES PAGE 249


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Corresponding author
Doddy Setiawan can be contacted at: doddy.setiawan@staff.uns.ac.id

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