When Dividends Speak: Corporate Strategy or Market Signal?

Abstract

This study focuses on analyzing whether dividend policy acts as an intervening variable in the relationship between investment opportunities, leverage, and foreign ownership and the market reaction in Indonesia’s energy and basic materials sectors. The analysis employs multiple linear regression with a mediation model on 133 firm-year observations from 2017 to 2023, using EViews 13 software. Classical assumption tests and the Sobel test are applied to validate the mediation effect of dividend policy. The empirical evidence suggests that investment opportunities have a significant negative association with dividend policy, and foreign ownership exerts a significant positive effect, whereas leverage demonstrates no statistically significant impact. Dividend policy exhibits a positive and significant influence on market reaction, providing empirical support for the signaling theory. Moreover, dividend policy significantly mediates the effects of investment opportunities and foreign ownership on market reaction, but not leverage, underscoring the nuanced role of dividends in shaping investor perception. These results imply that firms with high growth prospects should strategically manage dividend payouts to avoid negative market responses, while foreign ownership can enhance dividend policy as a monitoring mechanism. Practically, this research yields practical insights for both corporate decision makers and investors in emerging markets to better align dividend strategies with market expectations. This research offers novelty by incorporating foreign ownership as a bridge that mediates the link between dividend policy and market reaction in energy and basic material sectors within a dynamic emerging market context.