Dividend and Debt policy as Corporate Govemance Mechanism: Indonesian Evidence

Syafaruddin Alwi, Ruzita Abdul Rahim

Abstract


This study examines the effectiveness of dividend and debt policies as corporate governance mechanisms to reduce agency conflict. Indonesia is significant for such a study because it provides a setting where the tendency for agency problems is high. using purposive sampling method, this study selects 187 firms which stocks are listed on Indonesia stock Exchange between 2002 until 2006. This study employs event study method and regression analysis to test its hypotheses. The results suggest that dividend policy can be used as a corporate governance mechanism to mitigate agency conflict as far as its impact on market performance is concerned, in all firms and particularly so in firms with high concentrated ownership structure.Debt policy fails to serve as a corporate governance mechanism except infirms with high concentrated ownership structure and when concerns profitability. with the viability of financial policies'function as effective corporate governance mechanisms have yet to be verified, the Indonesian capital Market-Regulatory Board needs to rely on and/or formulate other corporate governance mechanisms to regulate the conducts of the firms.

ABSTRAK
Kajian ini menguji keberkesanan dasar dividen dan hutang sebagai mekanisme tadbir urus untuk mengurangkan konflik agensi. Indonesia penting bagi kajian sedemikian kerana ia menyediakan situasi yang mana kecenderungan masalah
agensi wujud adalah tinggi. Menggunakan kaedah pensampelan bertujuan, kajian ini memilih 187 firma yang sahamnya tersenarai di Bursa saham Indonesia antara
tahun 2002 hingga 2006. Kajian ini menggunakan kaedah kajian peristiwa dan analisis regresi untuk menguji hipotesisnya. Hasil kajian menyarankan dasar
dividen boleh digunakan sebagai mekanisme tadbir urus untuk mengurangkan konflik agensi berdasarkan kepada kesannya terhadap prestasi pasaran, dalam semua firma tetapi khuswnya dalam firma yang mempunyai struktur pemilikan terpusat yang tinggi. Dasar hutang gagal menjadi mekanisme tadbir urus kecuali dalam firma yang mempunyai struktur pemilikan terpusat yang tinggi dan apabila
melibatkan keuntungan. Dengan kesesuaian dasar-dasar kewangan berfungsi sebagai mekanisme tadbir urus masih perlu diuji kesahihannya, Badan Pengawas Pasaran Modal (BAPEPAM) Indonesia perlu bergantung kepada dan/atau
memformulasi mekanisme tadbir urus yang lain untuk mengawasi tindak-tanduk firma-firmanya.


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