CEO OVERCONFIDENCE AND DIVIDEND POLICY: EVIDENCE … · 2019. 11. 24. · Dividend policy is a...

CEO OVERCONFIDENCE AND DIVIDEND POLICY: EVIDENCE FROM

INDONESIA STOCK EXCHANGE

Dina Fitri Septarini

Department of Accounting of Musamus University, Merauke Indonesia

email: [email protected]

ABSTRACT

This study was aimed to examine the interaction between CEO overconfidence and growth opportunities in

relation to free cash flow and dividend policy, and interaction between CEO overconfidence and growth

opportunities concerning dividend policy. This study used the manufactures in the basic industry and chemical

sector listed in Indonesia Stock Exchange (IDX) for period of 2016-2018 as research population that were 71

companies in total. Those companies were selected as sample based on certain criteria (purposive sampling) and

total sample obtained were 12 companies. The hypothesis testing used Moderated Regression Analysis (MRA).

Partial testing of independent variables without involving the effect of CEO overconfidence at the basic industry

and chemicals companies in Indonesia found that free cash flow, the size of the company, and profitability have

significant influence on dividend policy, while growth opportunities and debt maturity have insignificant

influence on dividend policy. The interaction of CEO overconfidence can weaken the relation between free cash

flow and dividend policy, whereas for growth opportunities does not weaken the relation between free cash flow

and dividend policy, and CEO overconfidence does not strengthen the relation between growth opportunities and

dividend policy.

Keywords CEO overconfidence, growth opportunities, free cash flow, dividend policy, Indonesia Stock

Exchange

1. INTRODUCTION

One of attractive factors for investors to invest and maintain their investment is the company

value since this worth describes the selling value of a company when assets are sold at the

stock price. Therefore, each and every company always strives to optimize its worth or its

company value in the eyes of investors and stakeholders. The distribution of some of

corporate profits for the current year in form of dividend to all investors is one of ways to

maximize the company worth and also to increase the prosperity of the shareholders.

However, in the reality not all of companies gaining profits for the current year will distribute

dividend. In 2018, of total 617 companies listed in Indonesia Stock Exchange (IDX), 283

companies (46%) distributed their dividend and the remaining 334 companies (54%) did not

share their dividend. Moreover, the company’s motivation in distributing their dividend is

also still in contradiction. Modigliani and Miller (MM) (1958), in Irrelevancy Theory, stated

that the company value is not influenced by the dividend, rather it is influenced by the ways

of a company to generate profits as desired and to manage its business risks by using its assets.

The theory is on the contrary with the The Bird in The Hand Theory developed by Myron

Gordon (1956) and John Lintner (1962), stated that investors prefer to receive dividend to the

capital gain since dividend is considered to have more security (certainty) and less risk,

thence if company’s Deviden Payout Ratio (DPR) is low then it will increase its own capital

cost. Therefore, dividend policy is one of strategies for a company to optimize its value as the

investors will show dissatisfaction with their investment through selling their shares if they do

not obtain the desired return and this will have impact on the decreasing company value. This

theory is in line with the Dividend Signaling Hypothesis proposed by Bhattacharya (1979),

stated that dividend is a means for a management to give signal to the investors regarding the

company’s ability in generating profits as desired and having a strong financial condition thus

Dina Fitri Septarini, Int. Jou Eco. Res, 2019, V10 i5, 55– 67 ISSN:2229-6158

IJER – September – October 2019 available online @ www.ijeronline.com

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mailto:[email protected]

able to pay its dividend. This strong financial condition will depict company’s future bright

growth prospect.

Dividend policy is a decision to determine how much profits gained for the current year will

be paid as dividend to the shareholders and how much profits will be reinvested in the

company (Brigham and Houston, 2011). The authority to set this dividend policy is one of

rights delegated by the investors to the board of directors. The capital structure theory and the

agency theory consider that manager and investor are always rational in making their

decision. It means that a manager acts by taking account the return of financial decision he or

she made and optimizing its utility. In fact, not all managers act rationally (bound of

rationality) as during decision financial making a manager has an above-average conviction

of his or her decisions. Such conviction has a kind of cognitive bias, or else in the economic

psychology is called as overconfidence. Some studies in the field of psychology have found

that an individual tends to believe that his or her ability is higher above the average

(Fischhoff et al., 1977; Weinstein, 1980) and most managers who control the company tend

to be overconfident (Wei et al., 2011). It is shown from some empirical studies that

overconfidence bias found a lot among managers (Ben-David et al., 2007; 2010; Malmendier

and Tate, 2005a; b; 2008; Malmendier et al., 2011).

An overconfident manager believes he or she has more information and higher ability in

predicting the future, thereby he or she has a conviction that his or her decisions will give

positive results for the company in the future. For pursuing company’s objectives, a manager

is faced with three types of interrelated financial decisions, namely investment decision,

funding decision, and dividend decision. Related to dividend decision, an overconfident

manager believes that the opportunity for the success of company’s investment is very big,

thence for developing the company the manager tries to prevent the existing cash from being

distributed as dividend so that it can be used as investment or even expansion. Ben-David et

al. (2007) conducted a test of CEO overconfidence on the company’s policy by using survey

method. This study results show that a company led by an overconfident manager has a high

investment rate, frequent acquisitions, high debt, rare dividend sharing, and prefers to

repurchasing the shares. A study by Cordeiro (2009) proved that a company that does not

distribute dividend is having an overconfident CEO, and among companies that distribute

dividend that are led by overconfident CEO, they have smaller proportion of dividend.

Some studies that examined the relation between overconfident CEO and the investment

decision, merger decision, and funding decision are, among others, Malmendier and Tate

(2005a, 2005b, 2008), Malmendier et al. (2011), Wei et al. (2011), and Ben-David et al.

(2007). Meanwhile, studies concerning the relation between CEO overconfidence and

dividend decision have not been widely conducted (Ben-David et al., 2007; Cordeiro, 2009;

Likitratcharoen, 2011; Deshmukh, 2013; Wu and Liu, 2011). Besides, the result

inconsistencies of previous studies have encouraged some researchers to conduct those

studies. And the study held by Ben-David et al (2007) revealed that an overconfident CEO

will decrease the dividend distribution since they believe that the company has the

opportunity to make future investment. Whereas, study by Wu and Liu (2011) stated that

overconfident CEO will make a mistake by valuating too high his or her company, believing

that the company has a bright future prospect, thereby they distribute dividend as a signal to

the investors.



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Previous studied held in Indonesia by Santi (2016) and Ar-rachman (2018) examined the

relation between overconfident CEO and investment decision, found that overconfidence bias

had positive influence on investment decision. Meanwhile, study by Abiprayu and Wiratama

(2016), that examined the influence of overconfident CEO on dividend decision, have found

that companies led by overconfident CEOs tend to hold or decrease their dividend payment.

This study tried to look into the interaction between overconfident CEO and the free cash

flow and growth opportunities related to the dividend policy in the basic industry and

chemicals companies listed in Indonesia Stock Exchange for period of 2016-2018. Basic

industry and chemicals are sectors that have somewhat high growth. According to the report

by Indonesia Stock Exchange, the growth of basic industry and chemicals sector in 2018

increased to 21.17%.

2. THEORY ANALYSIS AND HYPOTHESIS DEVELOPMENT

Dividend payment highly depends on the available free cash flow. The greater the available

free cash flow is, the greater expected dividend paid to the shareholders. This condition is in

accordance with the free cash flow theory, stating that if a company has excess of cash, it

would be better for the manager to return it to the shareholders in form of dividend as a way

to optimize the wealth of shareholders and minimize the agency cost by reducing the sum of

free cash held by the manager (Jensen, 1986). Findings of the studies conducted by Fairchild

(2010), Lucyanda and Lilyana (2012), and Silaban and Pangestuti (2007) found that positive

influence of free cash flow on dividend policy.

A company led by an overconfident CEO, if having more than enough internal funding for all

positive NPV projects, relatively shows an excessive desire to invest compared to a rational

CEO (Aktas, 2019). It is in line with Malmendier and Tate (2005, 2008), stating that

overconfident CEO in a company with excessive cash tend to do more distortion of capital

expenditure and excessive merger and acquisition activities. Excessive cash will be used for

excessive investment to fund company’s projects rather than used for paying dividend, the

reason is if the company pays the dividend excessively it will decrease the availability of

internal funding for investment and as a consequence company’s investment will depend on

external fund source which is more costly.

H1 : Overconfident CEO weakens the relation between free cash flow and company’s

dividend policy.

Another factor that affects the decision to pay dividend is the company’s growth

opportunities. According to Silaban (2017), growth opportunities indicate that there is a

business opportunity in the market entered by the company, therefore growth opportunities

give signal of company’s growth in the future. A company with high growth opportunities

shows a bigger chance for investment, thence a greater fund required to carry out expansion.

According to Adam and Goyal (1999), the quantity of investment opportunity owned by a

company is reflected from the information of cash flow required for investment and

distribution of potential investment returns. To fulfill those fund requirements, a manager will

use the remaining cash since if they use external funding source thus capital cost expenditure

will be higher from the returns. This will have impact on the decreasing of profit sharing

distributed to the shareholders. Therefore, growth opportunities weaken the relation between

free cash flow and dividend policy. Studies by Al-Najjar and Hussainey (2009), Abor and



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Bokpin (2010), Pribadi and Sampurno (2012), as well as Jabbouri (2016) found that

company’s growth has positive influence on the dividend distribution or payment.

H2 : Growth opportunities weaken the relation between free cash flow and company’s

dividend policy.

A company with high growth opportunities has a bigger investment opportunity and requires

more funds, thereby is more likely to decrease its dividend as it will be used to perform

expansion. In order to be able to make use the opportunity to increase the company value a

company generally will select a manager with good reputation. However, according to Liu,

Zhang, and Jiraporn (2011) in Likitratcharoen (2011), a manager with good reputation can

create an excessive self-confidence, making them overconfident in using their ability and can

demonstrate a more aggressive risk-taking behavior. In making dividend decision, an

overconfident CEO is more likely to pay lower dividend and keep more fund to fulfill the

future investment need as he or she believes that the company will obtain higher return level

in the future and the investment will contribute to higher company growth compared to the

scenario of dividend payment (Likitratcharoen, 2011). Study results held by Deshmukh (2013)

revealed that a company with an overconfident does pay lower dividend in a company with

growth than a company with low growth.

H3 : Overconfident CEO strengthens the relation between growth opportunities and

company’s dividend policy

3. RESEARCH METHOD

3.1. Population and Sample

Population in this study was manufactures in basic industry and chemicals sector listed in

Indonesia Stock Exchange (IDX) for period of 2016 – 2018 in total of 71 companies. Sample

taking used certain criteria (purposive sampling), consisting of:

1) All manufactures in basic industry and chemicals sector listed in Indonesia Stock

Exchange (IDX) for period of 2016 – 2018.

2) Companies that published annual financial statement completely from 31 December

2016 to 31 December 2018.

3) Companies that presented financial statement in Indonesian rupiah currency (IDR)

and have complete data in accordance with the study requirements.

After sample taking process based on above criteria thus sample of 12 companies with 3

years of observation were obtained, thereby total data being analyzed were 36 data.

3.2. Operational Definition and Variable Measurement

Dependent variable in this study was dividend policy. Decision on dividend policy is a

decision about how much recent profit will be paid as divided rather than profits held to be

reinvested in the company (Brigham and Houston, 2011). Dividend policy is measured by

using Dividend Payout Ratio (DPR) since Dividend Payout Ratio describes total profit for

each share (stock sheet) allocated in form of dividend. DPR is calculated from the ratio

between dividends per share and earnings per share (Al-Najjar and Hussainey, 2009).

Independent variables used in this study were free cash flow (C) and growth opportunities

(GO). Free cash flow is available cash to be distributed to the shareholders after the company



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invested in some projects that have positive NPV (Jensen, 1986). This free cash flow is

calculated from the comparison between capital expenditure subtracted from its operating

cash flow and divided by its book value of total asset (Silaban and Pangestuti, 2017;

Deshmukh, 2013). Meanwhile, growth opportunities are the growth of a company in certain

period of time considered as the development of company’s efforts or businesses. Growth is

proxied by approximate Q (Deshmukh 2013), calculated from the ratio of market value of

assets and book value of assets, where market value of assets is market value of equity plus

book value of total assets subtracted by book value of equity.

CEO Overconfidence (CO) in this study is a moderator variable defined as a belief held by an

individual that considers himself or herself has higher ability/performance compared to

others. CEO Overconfidence is a dummy variable measured by using proxy of

overconfidence index as similarly used by Schrand and Zechman (2012). There are two

components of overconfidence in the firm-level related to investment decision and funding

decision made by a company. Schrand dan Zechman (2012) assumed that if those two

indicators are met then a company is assumed to have an overconfident CEO, thence will be

given with score 1 and score 0 if those two indicators are unfulfilled. This study used industry

average as a comparison. Components of overconfidence used in this study consisted of (1)

industry-adjusted excess investment (IA-EXI). This variable is calculated by means of capital

expenditure (Hamidi, 2003). A company is said to have an overconfident CEO if its IA-EXI

is above the median of industry, and will be categorized as 1, and 0 if the contrary occurs. (2)

The second component of overconfidence is firm’s industry-adjusted debt-to-equity ratio

(IA-DER). Overconfidence leads to optimistic assessment of investment payoff, however for

preference of reversed pecking order, namely that overconfidence causes optimistic

assessment of cost of capital used to finance investment (Hackbarth, 2008). Higher DER

compared to industry median can describe the CEO overconfidence (Malmendier et al., 2011;

Ben-David et al., 2007). IA_DER will get score 1 if the company’s DER ratio is above the

industry median, and score 0 if the contrary happens.

Control variable used here are in form of variables considered having their own influences on

the dividend policy. Control variable in this study was obtained from Fama and French model

(2001), i.e. the size of the company and profitability, as well as additional of Abor and

Bokpin (2010), namely debt maturity. Company size (S) is measured by using natural

algorithm of company’s total asset. Profitability (ROA) is proxied with Return On Assets

(ROA) calculated by comparing between net income after and total asset. These two variables

are expected to have positive relation with dividend policy. Debt maturity (DM) is measured

by the ratio of short-term debt and total debt. It is expected that this variable will have

negative relation with dividend policy.

3.3. Data Analysis and Hypothesis Testing

Data used in this study was a sort of secondary data in form of company’s annual financial

statement. For testing the hypothesis, interactions in regression analysis or Moderated

Regression Analysis (MRA) was used. Prior to conducting interactions in regression analysis,

classical assumption test was carried beforehand which consisting of normality test,

multicollinearity test, autocorrelation test, and heteroscedasticity test.



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Normality test aims to determine if confounding or residual variables have normal

distribution in the regression model. Normality test in this study used non-parametric

statistical test of Kolmogrov-Smirnov (K-S). Multicollinearity test aims to examine if there is

any correlation between independent variables in regression model. Detection of the presence

or absence of multicollinearity can be seen from the value of Tolerance and Variance

Inflation Factor (VIF) for each independent variable. Autocorrelation test aims to determine

if there is any correlation between confounding error for period t and period t-1 in regression

model. Autocorrelation test in this study used Durbin Watson test and Runt Test.

Heteroscedasticity test aims to determine whether there is any variant similarity of the

residual variables from one observation to another in regression model. Statistical test used to

detect if there is any heteroscedasticity in this study was scatterplot graph test.

Regression equation used in this study is as follows:

D = α+ 1C+ 2GO+ 3U+ 4ROA+ 5DM+

(1)

D = α+ß1C+ß2O+ß3OC+ ß4U+ß5ROA+ß6DM +ß7C*OC+ß8C*GO+ß9GO*OC+

(2)

where D is dividend policy; C is free cash flow; GO is growth opportunities; OC is dummy

variable of CEO overconfidence; U is control variable of company size; ROA is variable

control of profitability; DM is variable control of debt maturity; α is a constant; and is an

error term.

The first step in conducting hypothesis testing was by carrying out multiple linear regression

for each independent variable of (C and GO) and control variables (U, ROA, DM) (equation

1). This step aims to show if there is any influence of each independent variable and control

variable partially without involving variable of CEO overconfidence. The second step was

conducting moderated regression to see if there is any influence of variable of CEO

overconfidence (CO) and its interaction related to the free cash flow and growth opportunities

on the dividend policy (equation 2). Hypothesis deduction was drawn based on the following

criteria:

Hypothesis 1: H1 is supported if ß7 is significantly negative, significant value of ß < 0,05

Hypothesis 2: H2 is supported if ß8 is significantly negative, significant value of ß < 0,05

Hypothesis 3: H3 is supported if ß9 is significantly positive, significance value of ß < 0,05

4. RESEARCH RESULT AND DISCUSSION

4.1. Description of Research Variable Data

Descriptive statistics provides data depiction or description for each variable used which can

be seen from minimum value, maximum value, mean, standard deviation, and variance. This

data depiction or description of each variable used in this study is shown in the following

table 1.



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Table 1 Descriptive Statistics

Research Variable Minimum Maximum Mean Std.

Deviation Variance

Free cash flow (C) 0.00 0.24 0.0687 0.09563 0.004

Growth opportunities (G) 0.62 7.78 2.0830 1.55059 2.404

CEO Overconfidence

(CO)

0.00 1.00 0.1944 0.40139 0.161

Company Size (U) 26.81 31.57 28.9686 1.59661 2.549

Profitability (ROA) 0.01 0.17 0.0749 0.04045 0.002

Debt Maturity (DM) 0.23 0.95 0.6198 0.19516 0.038

Dividend Policy (D) 0.05 2.25 0.4862 0.54412 0.296

From Table 1, it can be seen that each variable, except for variable of dividend policy, has

smaller standard deviation of mean value. It shows that data deviation of each variable is

relatively small. Dividend policy has bigger standard deviation of mean value, means that its

data deviation is relatively big. When classical assumption test conducted, dividend policy

variable had an abnormal data distribution, and then dividend policy algorithm was used to

meet that classical assumption.

4.2. Classical assumption test

Classical assumption test conducted here consists of normality test, multicollinearity test,

heteroscedasticity test, and autocorrelation test. The result of normality test for each research variable

used the Kolmogorov-Smirnov (K-S) test shows that all research variables have normal distribution for

their asymptotic significance (2-tailed) value was above 0.05 (insignificant).

To determine if there is any multicollinearity symptom among independent variables in this study thus

can be seen from their collinearity statistics value (tolerance value and VIF). The result of

multicollinearity test for each research variable shows that all independent variables in this study have

tolerance value above 0.1 and VIF value is below 10, therefore can be concluded that there was no

multicollinearity symptom among independent variables.

At first, autocorrelation test used in this study was conducted by means of Durbin Watson test, however

due to the value of durbin watson was between dl and DU, which means any conclusion cannot be

drawn, thereby the researcher determine the autocorrelation symptom by using residual runt test. The

results of runt test showed that residual value had asymptotic significance (2-tailed) of 0.237, higher

than 0.05, means that there is no autocorrelation symptom. As to heteroscedasticity test, it was viewed

from plot distribution in the scatterplot graph (Figure 1). It can be seen from the scatterplot graph that

the plots scatter randomly on diagonal x and y and do not form any particular pattern thus can be

inferred that there is no heteroscedasticity symptom.

Figure 1. Scatterplot Graph

4.3. Hypothesis Testing and Discussion



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Statistically, the accuracy of regression function of the sample in predicting actual value can

be measured by its goodness of fit that can be seen from its coefficient of determination

value, F statistic value, and t statistic value. From regression test value of regression model 1

and 2, regression coefficient value and F statistic value are shown in the following Table 2.

Table 2 Coefficient of determination value and F statistic value

Test result Regression Model 1 Regression Model 2

Coefficients of

determination:

R square 0.527 0.625

Adjusted R square 0.448 0.495

F statistic:

F count 6.677 4.809

Significance F 0.000 0.001

Coefficients of determination are used to see the overall ability of independent variables in

explaining variations in dependent variables. Based on Table 2, regression model 1 has

coefficients of determination value shown by its adjusted R square value of 0.448. It means

that variation in dependent variable (dividend policy) can be explained by overall

independent variables (free cash flow, growth opportunities, company size, profitability, and

debt maturity) of 44.8%. The remaining 55.2% can be explained by other variables which are

not included in this study. Meanwhile, in regression model 2, coefficient of determination

value was shown by adjusted R square of 0.495, which means that any variation in dividend

policy can be explained by all independent variables involving overconfident CEO and its

interaction of 49.5%. The remaining 50.5% can be explained by other variables outside this

study. Results from those two regression models demonstrate the effect of variable of

overconfident CEO on dividend policy in companies of basic industry and chemicals sector

that are categorized quite a few in number, i.e. only 4.7%.

F statistic test was used to see the feasibility of the regression model used in this study. Based

on Table 2, significance F value in regression model 1 was 0.000 and in regression model 2

was 0.001, or far below 0.05. It means that regression model 1 and regression model 2 are

feasible to be used to predict dividend policy.

T statistic test was used to see to what extent the influence of independent variables on

dependent variables, partially. In this study, regression model 1 was used to partially test the

influence of independent variables (free cash flow, growth opportunities, company size,

profitability, and debt maturity) on dependent variable (dividend policy) without involving

the variable of overconfident CEO, whereas regression model 2 was used to see the influence

of independent variables that involving the variable of overconfident CEO and its interaction

related to free cash flow and growth opportunities on dividend policy. The results of t statistic

test for both regression models are presented in Table 3.



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Table 3 Results of t statistic test

Hypothesis Coefficient T count Significance

Regression Model 1:

Constant -3.636

C DPR (D) 2.176 2.256 0.032

GO DPR (D) 0.025 0.635 0.530

U DPR (D) 0.114 3.169 0.004

ROA DPR (D) -7.130 -4.674 0.000

DM DPR (D) 0.260 0.781 0.441

Regression Model 2:

Constant -4.217

C DPR (D) 3.237 1.797 0.084

GO DPR (D) 0.019 0.436 0.667

OC DPR (D) 0.762 1.290 0.208

U DPR (D) 0.134 3.208 0.004

ROA DPR (D) -7.012 -4.683 0.000

DM DPR (D) 0.224 0.605 0.550

C*OC DPR (D) (H1) -9.772 -2.499 0.019

C*GO DPR (D) (H2) -0.320 -0.438 0.665

GO*OC DPR (D) (H3) -0.227 -1.026 0.314

Based on Table 3 thus regression model equation can be formulated as follows:

D = 3,636+2,176C+ 0,025GO+ 0,114U-7,130ROA+ 0,260DM+ (1)

D = -4,217+3,237C+0,019GO+0,762OC+0,134U-7,012ROA+0,224DM-9,772C*OC-

0,320C*GO-0,227GO*OC+ (2)

From regression model 1, partial testing was conducted to 5 independent variables (namely

free cash flow, growth opportunities, company size, profitability, and debt maturity) that were

assumed to influence dividend policy of manufactures in basic industry and chemicals sector

in Indonesia. It was found that free cash flow, company size and profitability had significant

influence on dividend policy, whereas growth opportunities and debt maturity had no

significant influence on dividend policy. Meanwhile, in regression model 2 testing, it was

discovered that company size and profitability had significant influence on dividend policy

and overconfident CEO weakened the relation between free cash flow and dividend policy.

Partially, growth opportunities and overconfident CEO had no significant influence on

dividend policy. Overconfident CEO also did not moderate the relation between growth

opportunities and dividend policy, and growth opportunities did not strengthen the relation

between free cash flow and dividend policy.

This research proves that overconfident CEO weakens the relation between free cash flow

and dividend policy with its significance value of 0.019<0.05 and negative regression

coefficient of 9.772. Similar result is shown by the change in significance value of regression

model 1 and 2. In regression model 1, free cash flow had positive influence on dividend

policy of 2.176 with significance value of 0.032<0.05. However, in regression model 2, free

cash flow had no significant influence on dividend policy with significance value of

0.084>0.05. It proves that a company with an overconfident CEO tends to hold the existing



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or available cash and does not distribute it as dividend. The cash is used to finance positive

NPV projects predicted to be able to generate positive results to the company. This study

results support the study by Malmendier and Tate (2005, 2008) which stated that an

overconfident CEO in a company that has undue cash will be more likely to make distortion

of capital expenditure by carrying out excessive merger and acquisition activities.

This study has found that growth opportunities did not weaken the relation between free cash

flow and dividend policy with significance value of 0.665>0.05 and negative regression

coefficient of 0.320. By this, the second hypothesis (hypothesis 2) in this study is not

accepted. Even though the growth of companies in basic industry and chemicals sector in

Indonesia is relatively great with average of 208% per year and free cash flow available is

comparatively small, still the companies pay the dividend with the reason that dividend

payment policy is one of strategies for the company to maintain its investors so they will not

sell their shares. This finding supports the theory of The Bird in The Hand developed by

Gordon (1956) and Lintner (1962) stated that investors prefer dividend to capital gain as

dividend has greater certainty.

The variable of overconfident CEO in moderating the relation between growth opportunities

and dividend policy had negative coefficient of 0.227 and significance value of 0.314>0.05. It

shows that overconfident CEO does not strengthen the relation between growth opportunities

and dividend policy. Research data exhibited that the growth level of companies in basic

industry and chemicals sector in Indonesia is quite high with average of 208% per year.

Meanwhile, the available free cash flow is relatively low with average only 2.71% of existing

total asset, thence in order to fulfill its investment funding need, an overconfident CEO is

more likely to strengthen its internal funding through company shares. According to Aktas

(2019), if internal funding is not sufficient to finance all positive NPV projects, an

overconfident CEO considers the company is lack of investment due to financial problems

and considers that external funding is higher than perceived investment return. As a result, an

overconfident CEO will strengthen the company value to generate internal funding by

distributing cash to the shareholders to show to the investors the company’s growth prospect.

Signaling theory by (Lintner, 1956) stated that company’s decision to distribute dividend is a

kind of signal from the company to show its optimism and conviction to the investors

concerning company’s future prospect.

Control variable of company size in this study had positive influence on dividend policy with

its significance value of 0.004<0.05 in regression model 1 and 2. The bigger the company is

the bigger asset it manages to run its operations thus able to generate higher gain or profits.

The higher the profit generated, the more dividend paid. This result supports the studies by

Lucyanda and Lilyana (2012) and Silaban and Pangestuti (2007) that found the positive

influence of free cash flow on dividend policy. Profitability that had been proxied with ROA

showed negative influence on dividend policy. The greater profit gained, the less dividend

paid since the profits have been allocated more to finance investment projects so that the

dividend paid is lessening.

Control variable of debt maturity demonstrated positive regression coefficient and

significance value of 0.441>0.05 in regression model 1 and 0.314>0.05 in regression model

2, so it can inferred that debt maturity has no influence on dividend policy. The quantity of



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dividend distributed is not determined by total short-term debt due since the average basic

industry and chemicals companies have quite high liquidity level, i.e. 62% per year, thereby

has no influence on dividend policy.

5. CONCLUSION

This study shows that an overconfident CEO weakens the relation between free cash flow and

dividend policy, whereas growth opportunities do not weaken the free cash flow on dividend

policy, and an overconfident CEO does not strengthen the relation between growth

opportunities and dividend policy, so that the first hypothesis in this study is accepted while

the second and third hypothesis in this study are rejected. Independent variables in overall

have influence of 49.5%, and the remaining 50.5% can be explained by other variables

outside this study.

Based on this study results, it is better for investors to be more careful in considering the

dividend they are going to receive from their investments since not all of the available free

cash flow and gained profits will be used to pay as dividend. Investors also need to take into

account the behaviors of overconfident CEOs in making their financial decisions. Future

studies can further develop this study into other companies in other sectors, thereby the study

results can be generalized to all companies in Indonesia.

REFERENCE

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