Cost Structure and Payout Policy in Indonesia 2011-2015

Abstract

This study aims to examine the impact of cost structure on payout policy within Indonesian non-financial firms. Previously, there has not been much prior research regarding cost structure and payout policy in emerging markets, especially Indonesia. Most Indonesian firms still prefer to distribute dividends over repurchases. Cost structure can be defined as the portion of the firms’ fixed and variable costs. By using logistic panel regression method, the results show that Indonesian nonfinancial firms’ cost structure plays a significant role in payout policy, specifically dividend payout. When the cost structure decrease, firms become more flexible in changing their profits as the sales change. The higher values of cost structure mean the more inflexible the firms become, these firms tend to have a high proportion of fixed costs in their operating costs. This study reaches the understanding that firms with a high-cost structure usually compensate less in dividends and repurchases. Indonesian non-financial firms, which distributes payout, have a lower cost structure, higher retained earnings, higher cash, and more variable operating income. Based on the conducted study, it is more rational for Indonesian non-financial firms to administer payout on dividend compared to repurchasing. Although the trend of repurchasing shares has recently escalated in emerging countries, especially Indonesia, the majority of Indonesian nonfinancial firms still have the tendency to spend money on dividend instead of repurchases due to unclear repurchases regulation and several limitations.