Tax Position, Investment Opportunity Set (IOS), and Signaling Effect as A Determinant of Leverage and Dividend Policy Simultanity
(An Empirical Study on Jakarta Stock Exchange)
Studies on corporate leverage and dividend policy usually take under the assumption that both, leverage and dividend policy are independent. Recently, many researchers find that, in order to lessen the agency conflict, leverage and dividend policy are simultaneous. On that case, agency theory is capable to explain their simultaneity. Eventhough there is an agreement on this argument, Barclay, Smith and Watts (1995) argue that, not only agency theory can explain the leverage and dividend policy simultaneity. Through their empirical study Barclay et.al (1995) find three factors that can affect the simultaneity, there are: tax position, investment opportunity set (IOS), and signaling effect.
According to Barclay et.al (1995), this study is aimed to, test the three factors of leverage and dividend policy simultaneity in Indonesian manufacturing industry. This study uses 100 firm samples, which consists of firms listed in Jakarta Stock Exchange (JSX) from 1994 until 1998. The samples and data are collected, using pooling data and purposive sampling method.
In order to test the simultaneity, this study uses two-stage least square (2SLS) method of analysis. As dependent variables this study use market leverage ratio and dividend payout ratio, and the independent variables are; non-debt tax shield, market-to-book value of equity, future abnormal earnings, assets tangibility, and liquidity position. The result of the analysis shows that variables used, as a proxies for tax position, investment opportunity set (IOS) and signaling effect have significant influence on leverage and dividend policy simultaneity. The other variables, assets tangibility and liquidity position also have significant effect on leverage and dividend policy. This study also find the simultaneous positive relationship between leverage and dividend policy.
Keywords: Leverage, Dividend, Tax Position, Investment Opportunity Set (IOS), and Signaling Effect
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