PERTANIKA JOURNAL OF TROPICAL AGRICULTURAL SCIENCE

This paper aims to investigate the relationship between firms’ profitability and the level of insiders’ ownership, government ownership, and foreign ownership and its effect on the dividend distribution for manufacturing firms in Indonesia over the period of 2009 to 2015. Two main proxies were employed for a firm’s profitability: (namely) return on asset (ROA) and net profit margin (NPM). Using panel data regression, the results revealed that profitability had a positive impact on dividend distribution; this finding supports dividend-signaling theory. The association between dividends and insiders’ ownership was consistently negative, but not significant. Thus, the cash flow expropriation by insiders at the cost of minority shareholders was not proven in this study. However, this early warning signal must serve as an alarm for the regulators, even though, not all public listed firms were examined in this study. Furthermore, the higher government ownership resulted in an increase in dividend payment, thus political factors and cash needed to fund country budget might influence this decision. This study also found a negative relationship between the level of foreign ownership and dividend payment, so when firms cut dividend payments, it serves as a signal to the market that foreigners are not tunneling cash to its principal abroad. These results are expected to raise concern regarding corporate governance issues, especially regarding minority shareholder protection.