Determinants of bank’s dividend policy: a life cycle theory test in Indonesia

Abstract

Purpose

This research attempts to examine bank dividend policy in Indonesia by applying the life cycle theory of dividends.

Design/methodology/approach

This research used secondary data gotten from two sources: banks’ annual financial statements from 2005 to 2019 and the number of observation samples was 510 from 42 banks. Random Effects Logit Model (RELM) is used to detect the influence of independent variables on Propensity to Pay Dividends (PPD) and Random Effects Tobit Model (RETM) is used to test the influence of independent variables on Dividend Payout Ratio (DPR).

Findings

The RELM results show that Retained Earnings to Total Equity (RE/TE), Retained Earnings to Total Asset (RE/TA) and bank age have a positive impact on the propensity to pay dividends (PPD) while bank growth (GRW) has a negative impact. The RETM results reveal that RE/TE, ROA and bank size have a positive impact on the dividend payout ratio (DPR) while GRW has a negative impact. This analysis also discovers that the capital adequacy ratio (CAR) and Non-performing Loans (NPL) is one important factor considered by banks in Indonesia in determining their dividend policy.

Research limitations/implications

This study contributes to enriching literature in finance, especially in the life cycle theory of dividends. Also, it can be a guide to consider by investors before deciding to put their shares in banks in Indonesia.

Originality/value

Research on bank-specific life cycle theory is very difficult to find, especially in the Indonesian context, so this research can enrich the body of knowledge on dividend decisions.

Citation

Setiawan, S., Wahyudi, S. and Muharam, H. (2024), "Determinants of bank’s dividend policy: a life cycle theory test in Indonesia", Managerial Finance, Vol. 50 No. 8, pp. 1409-1423. https://doi.org/10.1108/MF-12-2022-0553