Investors consider stock prices as one of the main considerations in investing in the capital market. Before making an investment decision, investors consider various factors such as the rate of return and risk. Information related to stock prices, financial performance, and policies set by the company are important considerations for investors. One of the company policies that often attracts investors' attention is dividend policy. The rate of return and risk are the main factors that investors pay attention to in making investment decisions. Dividend policy, especially related to the dividend distribution ratio, is one policy that is often in the spotlight for investors.
Dividend policy is one of the important decisions in relation to efforts to maximize company value which results in stock price movements (Lapian, 2018). Dividend policy determines whether the company's profits at the end of the year will be given dividends to shareholders or not. Saved to increase capital for future investment. Dividend policies set by companies vary and have an impact on the amount of dividends paid to shareholders. The amount of dividends that shareholders will receive depends on the dividend policy set by the company.
To determine the dividend payout ratio, companies use the dividend payout ratio (DPR). If the ratio falls, the level of profit generated by the company will fall. As a result, the company chooses to hold cash flow, which impacts the value of dividends to be paid. According to signalling theory, a decrease in dividend payments indicates that projected profits are lower than actual profits, which has an impact on stock demand and its correlation with the company's stock price.
There are several theories related to dividend policy and its effect on stock prices. Dividend Irrelevance Theory argues that dividend policy has no effect on stock prices. In contrast, the bird in the hand theory or relevant dividend theory, introduced by Gordon and Lintner in 1969, states that investors tend to prefer cash dividends rather than expecting capital gains in the future. This is because cash dividends are considered a form of certainty and minimize risk for investors.
If the dividend policy increases the amount of dividend distribution, the stock price will increase (Fikri Hakami, 2018). According to the bird in the hand theory, investors prefer investment returns in the form of dividends rather than capital gains because dividends are considered to reduce the risk of uncertainty over the funds that have been invested in the company. Indirectly, this theory explains that dividend policies that offer high dividend distributions will be more attractive to investors. High investor interest in the company's shares will increase demand for these shares, which in turn will encourage an increase in the company's share price.
As such, businesses must carefully consider their dividend policy. The demand for the company's shares can rise in response to regular and alluring dividend payments to investors, which will raise the share price. On the other hand, a less alluring dividend policy may turn off investors and hurt the stock price of the company.
In the face of intense business competition, companies must be able to balance between dividend distribution and the need for funds for investment and business expansion. Proper dividend policies are crucial toining investor confidence and raising the company's value, as demonstrated by its high share price.
