The Simultaneity of Dividend and Capital Structure Decisions: The Case of Indonesian Capital Market

Abstract

This study explains the simultaneity of dividend and capital structure decisions using the agency cost framework. Noronha, et al. (1996) found that the simultaneity of dividend and capital structure decisions only occurred on low growth and no blockholder firms. Increasing dividend payment and debt simultaneously is used to decrease the agency cost by shifting the monitoring activity to capital market. The findings of this study can be summarized as follows. Simultaneity of dividend and capital structure decisions occurs only on the firms with characteristics of low growth and no block holder. Four variables are tested as determinant of the simultaneity. These variables are; insider holding, number of shareholders, earning volatility and non debt tax shield. Only non-debt tax shield is found to be a significant determinant.

Keywords: agency theory, simultaneity of dividend and capital structure, monitoring activity

JEL Classification: G3, G31, G32