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Vol XXIV, No. 8, Special Issue, 2016

Transylvanian Review
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Kisman Z.

Transylvanian Review: Vol XXIV, No. 8, Special Issue, 2016

Disappearing Dividend Phenomenon: A Review of

Theories and Evidence
1,2

Kisman Z.

Department of Management (Finance), Universitas Trilogi (formerly STEKPI), Jakarta, Indonesia.

Management Science (DIM), Economics and Business Faculty, Universitas Padjadjaran, Bandung Indonesia.

Abstract
One of dividend phenomenon on the stock exchange is disappearing dividend that is declining of companies
willingness to pay dividends. A bit confusing, why in some stock exchange such as Indonesian Stock Exchange
2001-2008, in NYSE 1978-1999, in the developed countries in 1994-2002 and many others. When the issuer's
earnings rose do not influence the probability firm pays dividen. The question is actually what factors influence the
probability of firms willingness to pay dividend. The purpose of this paper was to find the answers to solve
disappearing dividend phenomenon by reviewing theories and empirical evidence. After reviewing many theoties
and literature including all debates about dividend policy, finally this paper reach conclusions that there are some
variables like Profit, Agency Costs, Investment Opportunity, Solvency, Size and Liquidity influence the probability
of the company reluctantant to pay dividends.

Keywords: Dividends, profit, agency cost, investment opportunity, solvency, size, liquidity.

Corresponding Author: Department of Management (Finance), Universitas Trilogi (formerly STEKPI), Jakarta, Indonesia.
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that country show that many issuers make a profit but

does not pay dividend . Research of Fama and French
(2001) on firms listed companies on the NYSE, AMEX and
NASDAQ find issuers that do not pay dividends increased
dramatically from 33.5% in 1978 to 79.2% in 1999. On
average there are about 5% of the company which the
dividend was paid then do not pay dividends from 1978 to
1999.Another research on this phenomenon in 6 countries
(1994-2002) in America, Britain, Canada, Germany, France
and Japan (Denis and Osobov 2008). This study also finds a
decline in the issuer's willingness to pay a dividend.
Illustration above is one phenomenon that indicates a
decrease in the proportion of issuers desire to pay
dividends in the capital market. This phenomenon in the
financial management known as disappearing dividend
phenomenon. The phenomenon when the companies in the
stock market, on average, make profits increase but why
many companies that do not pay dividends (disappear).
This phenomenon raises questions for this study and also
become the aim of this research: actually, what factors
that influence the probability firm's willingness to pay
dividends by reviewing theories and empirical evidence.
The phenomenon of decreasing willingness of issuers
to pay dividends or an increased desire not to pay a
dividend would be a problem for the development of
exchanges that are trying to attract more number of
investors in order to maintain the continuity of the capital
market industry.
This phenomenon is also a problem for investors
whose motivation to buy or hold stock for dividend (safety
player/investor), such as institutional investors. Moreover,
the current number of financial institutions in developing
countries is increase and these institutions is a player who
needs the assurance of safety and motivation to invest in
stocks is the dividend. If this problem is not considered to
be a lot of investors are becoming not interested in
investing in the stock market and stock transaction
declined Then leave a negative market response.

Introduction
Dividend policy is the choice of corporate decision
concerning how much of the profits are distributed to
shareholders in the form of cash or stock dividends.
Dividend decision problem is an ongoing issue received
much attention from researchers, owners, managers,
investors, creditors and other stakeholders. They try to
solve the problems associated with formulating decisions
about new theories and models in order to explain the
behavior of dividend. On the top of that many financial
experts as well as researchers previously declared
dividend decision problem as a "puzzle".
After Miller and Modigliani (1961) appeared with
irrelevant hypothesis and followed by Bishop et al., (2000)
and then Barman (2008). They said that dividend policy
does not affect the value of the company or its stock
price.So many researchers that tries to explain why that
dividend decision is important and relevant in affecting
stock prices. Those study found that dividend decisiont is
important, in part because in reality there are the tax
differential and dividend clientele effects (Allen et al.,
2000). Because of the clientele effect many investors will
tend to choose stocks of companies that have a dividend
policy that suits to particular preferences.
There is another study found that dividend decision
problem arises because the dividend decision is influenced
by market imperfections such as asymmetric information
(signaling theory) and agency costs. Signalling theory
predicts that the company can deliver information to the
market by paying dividends (Miller and Rock 1985) and the
signal is expected to obtain a reaction from investors.
While agency costs found that dividends can reduce the
costs of shareholder-manager conflict (Rozeff 1982; Jensen
1986 and Al-Makawi 2008). Many financial experts or
observers in their study explained that the dividend
payment patterns generally follow the pattern of earnings
(Fama & French 2001; DeAngelo, DeAngelo and Skinner
2004; Denis and Osobov 2008; Baker and Wurgler 2004).
Theoretically, they argue that the pay or not to pay or the
size of the dividend depends on the companys earnings
(profitability) . Agree with that, Kurniasih (Kurniasih, et al.,
2011) on the Indonesia Stock Exchange also found the
same thing that the relationship between dividend
payments (DPS = dividend per share) to the movement
patterns of earnings (EPS = earnings per share). Higher
earning, the greater the company's dividend to
shareholders, and vice versa.
Unfortunately and this is a problem that from the fact
that there are several research such studies by Kurniasih
et al., (2011) found in the Indonesia Stock Exchange (IDX)
of the year 2001-2008 despite Dividend Payout Ratio (DPR)
increased significantly from 26% in 2001 to 42% in 2008
was the company that pays dividends lower by 50%
compared with those not paying dividends. But conditions
on IDX is still better than in the United States. Research in

Grand Theory and Empirical Evidence

In this section we will examine the literature and

formulation of hypothesis: relating to the factors that
influence dividend decision. For the literature review
discussed the development of theories and empirical
studies about dividen decision. The discussion begins by
reviewing the main theories (Grand Theory) and start with
the dividend irrelevance hypothesis.

Grand Theory
Dividend Irrelevance Theory

Miller and Modigliani (1961) on their theory posits in

the conditions and certain assumption such as perfect
capital market where there are no transaction costs, the
cost of emissions (floatation cost), no tax, information
symmetry and no agency costs. According to this theory,
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dividend not relevant in influencing the value of the

company or its share price. Miller and Modigliani states
that retained earnings as a result of a dividend is only a
small part of the company's sources of funding. Because
too small, not affect the value of the company.
Furthermore, they argue that the firm's value is
determined by the ability of the company's assets in
generating earning or investment decisions.In line with the
dividend irrelevance hypothesis, besides Black and
Scholes (1974) there are many other studies that support
the idea of Miller and Modigliani such as Miller and
Scholes (1978; 1982) and last reviewed by Bernstein (1996)
Bishop et al., (2000) and then Barman (2008). All of them
found no influence dividend decisions on firm value or
stock price. So the decision to pay dividends to
shareholders is useless (irrelevant). According to this
theory, this is the reason why companies are reluctant to
pay dividend.

the tax effect, company paying the dividends should be

lower or reluctant because it will affect the company's
stock price increases.

Signalling Theory

According to Miller and Rock (1985), signalling is a

way for management reassure investors about the
company's prospects in the future. Signal provided
because management considers better know and have
accurate information about the company than an outsider
(asymmetric information). Signal supplied to the market,
an incentive and is expected to respond positively. Thus
affect the price and trading volume of stock. As a result
will increase the company's value in the eyes of investors.
Miller and Rock (1985) found that in his writings on
dividends that a signal is good enough to convey the
intention of the company to investors. Dividend
announcements useful to minimize the gap or asymmetry
of information to the manager. When the asymmetry can
be minimized that the real intrinsic value of shares can be
estimated to be better by investors. Pettit (1972) explains
that the dividend announcement is communication
valuable information from the company to the market. His
research proves that the market or stock prices react
positively when a dividend increase announcements and
negative when there is a decrease in the dividend
announcement. A lot of literature supporting the signaling
theory, among others, research Woolridge (1983), Asquith
and Mullins (1986) and Yilmaz and Gulay (2006).

Bird-In-The-Hand Theory

The business world is full of uncertainty and

imperfect information, investors found that cash dividend
payment decision is considered as being a definite
decision. Therefore, this decision will affect and may
increase the value of the company. Investors would rather
have cash dividends in the hands (bird in the hand) as
compared with the future capital gain is definitely
uncertain (two in the bush). If the dividend payment
increases and the other remains (cateris paribus) is
expected to increase the company's value.
According to the "bird-in-the hand" theory: a high
dividend payout will maximize value of company. Lintner
(1956) when conducting a survey about the factors that
influence the decision of dividend, find results that
companies generally want to maintain the stable dividend
decision. Most managers avoid dividend decisions are
declining or changing. Even if the change will be
considered carefully. According to the results of this
survey that most determines the dividend decision: pay or
not to pay or willingnesst to pay is the company's
profitability, size, price-earnings ratio, liquidity, stability of
earnings, capitalization and capital structure. So why
dividend disappear determined by the size of these
variables. The findings of this research are supported by
Denis and Osobov (2008).

Agency Theory

One of assumption of Irrelevent Theory that the stock

market is perfect means there is no conflict of interest
between managers and shareholders. However, in reality
this assumption is questionable because so often different
interests of the owners of the company with manager
(agency problem). So this raises the cost of the so-called
agency costs.
Agency costs (Jensen, Meckling 1976) arises when the
owner-managers to sell some of its shares to the "outside"
security holders who do not have a vote in management.
Degree of the difference between the value of 100% ownermanaged (in which the owner of 100% managing company)
with less than 100% owner-managed firm is a measure of
agency costs. When this percentage is higher (closer to
100% owner-managed firm) means low dispersion of
ownership and ownership concentrated in a few
shareholders. If it is so it will be easier for shareholders
affect behavior insiders (management), so that will reduce
agency costs. When agency costs are lower then the
shareholders should not feel worried about insider
behavior and this will result in a low probability of paying
dividends . Likewise, the more spread dispersion of
ownership among outside stockholders (investors that no
direct role in managing the company) means higher agency
costs. If so then investors feel the need to pay high

Tax-Effect Hypothesis

The tax-effect hypothesis found that low dividend

payout ratios will lower the cost of capital and will further
affect the increased stock price. In other words, low
dividend payout ratios will maximize firm value. This
theory assumes that if the dividend charged to tax is
greater than capital gain, the shareholders will choose
stocks that have a dividend yield is low in order to obtain
tax savings. The results Litzenberger and Ramaswamy
(1979) support the tax-effects hypothesis that is because of
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dividends (the greater the probability of paying dividends).

So here is the dividend payment instruments, such as
bonding or auditing cost (monitoring costs) were used to
reduce agency costs. So according to the agency theory,
the probability to pay dividends will be determined by
agency costs. And to reduce agency costs besides the
payment of dividends, the other way is by increasing
insider ownership or debt policy.
As mentioned above that one of the way to reduce
agency costs (in the context of monitoring the manager's
behavior) is by paying dividends .Paying dividend means
reducing the free cash flow that is in the hands of
managers and reduce the "power" manager (Rozeff 1982). If
the company requires additional funds for investment, the
managers will look for other sources such as debt or
looking through the capital market. The above ways will
make the owner easier and cheaper to monitor
manager.Because having successfully asked creditors and
new investors to monitor managers. (Jensen and Meckling
1976).
Rozeff (1982), is one of the researchers that use the
agency costs hypothesis to explain the dividend decision.
Rozeff in his research proved that the higher the inside
ownership (dispersion of ownership is low) then the
negative effect on dividend payout ratio and vice versa, the
greater number of shareholders (a large dispersion of
ownership), the positive effect on the amount of the
dividend payout. Rozeff'study is one of that supports and
consistent with the agency cost hypothesis of dividend
policy. Whereas other researchers are in line with the
agency cost is Holder, Langrehr and Hexterr (1998) then
Saxena (1999).
In general, the contribution of researchers of the
agency costs theory to the dividend decision is the result
of their research proved that there was an influence of
agency costs on dividend payments. And why firms pay
small dividend or disappear due to low agency cost.

The company's decision to pay or not to pay dividends

would first see whether the company profit or not. Size of
dividends are determined by the size of the company's
ability to generate earnings or profitability (Fama & French
2001; DeAngelo, DeAngelo and Skinner 2004; DeAngelo,
DeAngelo and Stulz 2006; Denis & Osobov 2008).
Fama and French (2001), using a logit model found
evidence of the influence of profitability (earnings before
interest to total assets) and Size significant and positive
impact on the decision to pay dividends and a negative
association with growth/investment opportunity (market to
book ratio).
DeAngelo, DeAngelo and Skinner (2004) research
results provide evidence for the influence of profitability as
measured by earnings to the increase in dividends. Then
DeAngelo, DeAngelo, and Stulz (2006) using a multivariate
logit models find evidence of a relationship/strong
relationship between profitability (proxy with ROA) with
the decision to pay dividends.
Furthermore Denis and Osobov (2008) conducted a
study using a logit regression models in developed
countries strengthen the studies above that the
profitability (measured by EBIT/Book value of total assets)
significantly and positively influence the tendency to pay
dividend. There are more research on dividend from
capital markets in developing countries that provide
evidence confirming that profitability (ROE) is one of the
important factors affecting the dividend policy (Aivazian et
al., 2003).
Based on several studies in the literature which is
done, then hypothesized about this variable as follows:
H1: Company's profitability has a positive effect on
the probability the company to pay dividend or not to pay
(disappear).

Dividend Decision and the Agency Costs Variables

Agency hypothesis of dividends proves that the

payment dividend is one way to reduce the agency
problem (Rozeff 1982; Holder, Langrehr and Hexter 1998)
then (Saxena 1999). Agency costs are the costs borne by
shareholders in order to prevent or minimize agency
problems (total agency costs and transaction costs) so that
maximizes the value of the firm (Jensen & Meckling 1976).
The hardest thing here is to choose the appropriate
proxy for agency costs. Rozeff and other researchers found
that the greater number of shareholders , the greater
spread of ownership the more difficult and more costly
monitoring manager. It also means that agency costs
increase with the increasing spread of ownership.In order
to control agency costs in companies where shareholder
spread (dispersion of ownership) there is usually a
tendency to ask the shareholders approved a payment of
more (high dividend-payout). The greater the dividend
payout means the less free cash flow that is under the
control of managers (discretionary funds available to
managers) and the smaller agency problems. (Rozeff 1982;

Empirical Evidence

Factors that influence the dividend decision and

hypothesis formulation.
This section will discuss some of the factors or
variables that affect corporate dividend decisions,also why
disappear. There are many variables to be considered
because dividends not just a firm payout policy, but this
policy reflects a complicated combination of the
investment strategy, financial decision and private
information (Miller and Rock, 1985). Factors or variables
are selected based on consideration of studies or previous
research that many use these variables and their
relevance to emerging market conditions like in the IDX.
Some of these variables are discussed in the literature
review above.Based on the discussion and then formulated
hypotheses.

Dividend Decision and the Profitability Variable

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Easterbrook 1984, Jensen 1986; Alli et al., 1993). In short,

the higher agency costs (independent variable), the greater
the desire to to pay dividend which is dependent variable
(positive relationship).
Rozeff, a proxy for agency costs using 2 variables
namely STOCK (number of common stockholder) shows
the number of shareholders at the end of the fiscal year
and the INS (insiders ownership). To cope with the scale
effects, number of common stockholder will be natural
logarithm. STOCK is a reflection of the spread of
ownership, the higher the more diffuse ownership of stock
(dispersion of ownership) and increasing agency cost. To
overcome this problem then the greater probability of
dividend paid (positive relationship) to shareholders.
Rozeff found that the benefits of dividend in reducing
agency costs would be lower for the spread of companies
shareholding lower than which greater spread. Rozeff in
his study (1974-1980, in the U.S.) found a significant and
positive relationship between agency costs (STOCK) with
the payment of dividends and the negative to the INS. The
findings of this Rozeff, then reinforced by research
Easterbrook (1984).
Jensen et al., (1992) in his study using three-stage
least squares test the influence of insider ownership, debt
to dividend policy in several countries. Based on the
statistical test result that insider ownership (agency cost)
has significantly negative effect on dividend policy. The
finding is consistent with the results of Rozeff (1982) and
the agency costs hypothesis. Other research also supports
the influence of agency costs on dividend policy is
research conducted by Alli et al., (1993). Alli et al,, using
factorial analysis found that insider ownership variables
(agency costs) have a significant (negative) impact on
dividend policy.
Based on a study and some of the research results
above, we conclude that the relationship between agency
costs to the payment of dividend (dependent variable) is
expected to be positive.
H2: Agency Cost influence positively to the probability
of companies to pay dividend or not to pay (disappear).

they will have investment problem and to overcome this

problem that companies will provide huge dividends (Lang
and Litzenberger 1989).
H3: Investment opportunities negatively affect the
probability of companies to pay dividend or not to pay
(disappear).

Dividend Decision and Solvency Variable

The structure of financing company consists of debt

(liabilities) and equity.Debt in long-term often seen as a
reflection of companies's capital structure. How extent the
company using long-term debt shows the companies
solvency (financial leverage). Benefit of debt financing for
the company in terms of tax savings that can increase
return on equity (ROE). However, the use of debt also has a
side that is less advantageous because it increases the
risk of companies. The higher the debt level, the smaller
the company pay dividends (negative relationship) because
the company prefers to pay interest obligations than
dividing net profit in dividends for shareholders. In
addition, another reason is in order to minimize
transaction costs when using external financing and the
limitations from existing creditors on debt covenants
(Rozeff 1982).
Research of Aivazian et al., (2003) found evidence that
there is a significant negative relationship between debt
(debt to total assets) with dividends both in the U.S. and in
Emerging Market Firm. Jensen (1986) noted that the
issuance of debt will make funds available to manager
reduced because it is used to pay interest and the
principal so that dividend payments can be deferred until
the debt is repaid. Suharli Research (2006) obtain different
results with studies above that the solvency/leverage
(DER) no significant effect on the amount of dividend.
Different results is one encouraging to put leverage in this
study in Indonesia.
Debt has very big role in the companies in developing
countries like Indonesia. Most of the firms here rely
financing through bank loans. So that the debt is expected
to determine the company dividend decision. Based on
above researches it is expected that the relationship
between the two variables is negative (Rozeff 1982;
Aivazian et al., 2003, Al-Malkawi (2008).
H4: Solvency (higher debt) negatively affect the
probability to pay dividend or not to pay (disappear).

Dividend Decision and Investment Opportunity

Variables

Although according to Miller and Modigliani, in

perfect capital markets, investment decisions with
dividend decision is not mutual influence (independent).
However because of the tax, flotation costs and agency
costs, capital market is not perfect (imperfect capital
markets).
These two decisions, namely investment and dividend
was likely to have which increasingly close relationship or
inter-related (interdependent). Intuitively relationship like
this, companies that have which large investment
opportunities tend to pay dividend smaller and smaller.
Because they need funding to expand. On the contrary, in
general companies with small investment opportunities

Dividend Decision and Size Variable

When a company needs funds from the capital

markets. In general, large companies have access which
sufficiently large with lower costs and the fewer
constraints than smaller companies. It shows the company
is getting smaller dependence on funding from within the
company (internal financing) as company size increases.
Therefore, cateris paribus, large companies typically will
pay big dividends to shareholders and less feel the need to
restrain profits for expansion because it has easy access
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to the capital markets. Many empirical studies have prove

this point (Holder et al., 1998; Fama & French 2001; Denis
& Osobov 2008).
There are several measures of company size such as
sales, assets, and capitalisation. Holder et al., (1998) on
research proves that the existence of a significant and
positive relationship between Size (using proxy log of
sales) with the dividend payout. Then Fama and French
(2001) also found similar results that there is a significant
and positive effect from Size (here using proxy market
capitalization) to the decision to pay dividend. Similarly,
Denis and Osobov (2008) support the above research
results regarding the influence of this on the dividend
payout. That study, using proxy Size with the book value of
total assets.
Based on previous studies that there is a positive
relationship between Size (independent variable) with the
dividend payout (dependent variable). Hence can be made
the following hypothesis:
H5: The size of company has a positive effect on the
probability to pay dividend or not to pay (disappear).

Geoffrey 1987). His study reported that there was a

significant and positive relationship between cash position
and dividend. And these variable was more dominant
compared to other variables such as size, potential growth
, debt and profitability. Other researchers those were
Suharli (2007) in Indonesia and Gupta and Banga (2010) in
India, from the results of research also agreed that
liquidity as measured by the Current Ratio significant and
positive influence on dividend policy companies . Similarly
Sawitri (2004) in his dissertation research found evidence
of the liquidity effect of the decision to pay or not to pay
dividend.
H6: Liquidity company has positive effect on
probability of company to pay or not to pay (disappear).
Conclusion
For investors who expect dividends, understanding
the behavior of firms in the determination of dividend in
practice is not easy. Problem arises because of the
uncertainty about the dividend, the dividend puzzle, the
dilemma faced by the company, doubt and inconsistency.
Often on the stock exchanges in developed countries,
certain factors influence but does not apply to dividends on
the stock exchanges in developing countries like
Indonesia. One issue that happened in the stock exchanges
recently is decreasing willingness to pay dividend. This
phenomenon of company is known as the disappearing
dividend phenomenon. This phenomenon occurs in many
stock exchanges, not only in developed countries but also
in developing countries such as Indonesia. What factors
that influence probability of firms to pay or not pay dividen
(disappear). The purpose of this study was to find answers
to the problem.
For that developed the hypothesis. The hypothesis is
built on the theory of dividends, previous research, logic
and judgment of researcher.Hipotesis which is generated
for this paper is that there were the influence of
Profitability, Agency Costs, Investment Opportunity,
Solvency, Size and Liquidity variable against the
probability of the company to pay dividends or not to pay
(disappear).

Dividend Decision and Liquidity Constraints

A company called liquid that is company's ability to

meet its obligations due soon. This situation must be
considered when companies want to decide to pay
dividend. Because in general, to pay cash dividends, the
ability of company to pay will depend on the amount of
liquid assets (cash and securities investments) owned
company. Although it may be, if the company does not
have sufficient liquid assets could borrow from lender. But
usually the lender will be reluctant.
Baker, Farrelly and Edelman (1985) conducted a
survey to chief financial officers (CFOs) in companies
listed on the New York Stock Exchange (the utilities
industry, manufacturing, wholesale/retail) to identify what
factors which most important affect the company dividend
policy there. The survey shows that in there, CFO
considers the most important factor is the profit coming
year, the pattern of the previous year's dividend, the
availability of cash (liquidity), and the desire to maintain or
increase the stock price.
Baker et al., (2006) also conducted a survey to
managers companies that pay dividend on the Oslo Stock
Exchange in 2004, they also found the same thing that one
of the most defining decision of dividend is the issuer
liquidity conditions besides other variables such as profit
in coming year, stability of earnings, and leverage.
According Sutrisno (2001) the company's cash
position will determine the size of pay dividends. Because
dividend are considered as cash outflows. The greater the
company's cash position, the greater the company's ability
to pay dividend. In his research on the Indonesia Stock
Exchange 1991-1996, Sutrisno assign cash position
(liquidity) as the ratio between the year-end cash balance
to net profit after tax (Sutrisno,cited in Stanley and

Acknowledgments
I am grateful and deeply indebted to my supervisor
Prof. Dr. Hj. Rina Indiastuti, MSIE, Dr. Sumarno Zain, MBA
and Dr A.Kemal Hidayat, M.Sc from DIM-Unpad who help,
stimulate, advice, encouragement and willingness to
supervise my dissertation research which is the source of
a paper that I wrote this. All errors are mine.
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