1

Table of Contents
ABSTRACT

Table of Contents

I. INTRODUCTION
I.1. Background
I.2. Statement of the Problem
I.3. Objective of the Study
I.4. Contribution
II. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
II.1.
Dividend Payout and Earning Growth
12
II.2.

Return on Asset and Earning Growth

19
II.3.

Earning/Price Ratio and Earning Growth

20
II.4.

Leverage Ratio and Earning Growth

23
II.5.

Hypothesis Development

28
III. RESEARCH METHOD
III.1.
Data and Sample

Empirical Model

35
III.4.

Data Analysis Method

37
IV. Findings and Discussions
IV.1.
Descriptive Statistic
39
IV.2.

6
10
10
11
12

32

32
III.1.1. Data
III.1.2. Sample
III.2.
Operational Definition of Variables
33
III.3.

32
33

39

Findings

41
IV.2.1. Dividend Payout Ratio and Earning Growth
IV.2.2. Return on Asset and Earning Growth
IV.2.3. Earning Yield and Earning Growth

42
43
45

IV.2.4. Debt Ratio and Earning Growth

IV.3.
Discussions
47
IV.4.

46

Classic Assumptions Result

48
V. CONCLUSION, LIMITATIONS, AND RECOMMENDATIONS
V.1.
Conclusions
53
V.2.

Limitations

53
V.3.

Recommendations

53

54
References

55

List of Tables
Table 4.1. Descriptive Statistic
Table 4.2. Regression 2002-2010
Table 4.4.1. Normality Test
Table 4.4.2 Heteroscedasticity Test

40
41
49
50

Table 4.4.3 Autocorrelation Test

Table 4.4.4 Multicollinearity Test

50
51

List of Appendices
Appendix 1. Descriptive Statistic

58

Appendix 2. Analysis of Regression

59

Appendix 3. Classical Assumption

60

Chapter 1
Introduction

1.1 Background

In Indonesia, investment is still developing sector. The number of investor

in financial product is still very low. This condition should be changed to help
improve the quality of living in Indonesia. In the future, saving money in the bank
will only receive a very low interest. Comparing Indonesia one year saving
interest right now with developed country which paying very low interest, if the
economy condition in Indonesia getting better and better so the one year interest
rate will be lower.
BI rate right now stay in around 7,5%-7.75% after the economy that hit by
high inflation after the rising price of fuel. This impact will slowly reduced by
time since Indonesia consumption is growing which make a better economy
growth. After the economy gets better the deposit interest for one year will
decrease again. If the interest for one year is only 6%, like in the past or might be
like in some other countries which only less than 3% per year, I think we should
change our children mindset that they should save their money in the bank like
what we are told when we are in elementary school. Indonesia give interest rate
for 7.5%-7.75% per year, compared to other Asian country such as Hong Kong,
Singapore, and South Korea with interest rate lower than 2.5% per year, and with
the expectation of developing Indonesian economy, it will result in lower future
interest rate compared. If interest rate is very low, there will be very few little
people interested save money and instead finding another investment oppotunites
that will produce more return.
One of the most popular and still developing choice is stock market. Stock
market is investments that considered high risk and high return. There are many

success stories like people becoming rich after investing their money in the stock
market. Therefore, many people choose to make their choice on stock market to
invest their money. The problem is that people started without a good
understanding of how to invest in the stock market and in the end achieving huge
loss and never play again.
Before investing in the stock market, knowledge about stock market and
determinant factor of stock price movement should be known. Some simple
example are what is the business, how the growth of the industry in the business,
is there growth slump in the sector, how the profit of the company, how much is
the debt of the company, how about the dividend record, how about the profit
margin and many more. This is like knowing a land quality before it is going to
grow fruits. Imagine the company as land, the quality of the land can be measured
by a lot of things such as wetness, softness, and many more. To grow a tree
needed fertilizer which can be assumed as money invested. The tree finally grow
fruits that is the profit of the company. The return will be small portion of the fruit
from the tree. This should be known because in the stock market, small player is
like a small fish that will not make significant change in the market. Individual
investor is the smallest fish compared to big players, brokers and investment
companies. Larger investor which invest bigger money will have bigger risk but
also have bigger power in the market and sometimes able to control the movement
of the stock price.
There are two ways to do the analysis in the stock market, the fundamental
and the modern way of technical analysis. Fundamental analysis is using the

income statement of the company and look for some important point such as
profit and growth. Technical analysis is using more modern tools that is chart.
Technical analysis views believe the old pattern will be played again in the future
and also the chart is drawing everything that happens in the market. There is no
right or wrong in doing the analysis using technical and fundamental as many
investor using both to choose good stock nowadays.

There are two kinds of stock according to their capitalization, big capital
stock and small capital stock. Big capital stocks are stocks that are having higher
market capitalization compared to the small one. In Indonesia, there is an index
called LQ45 or Liquid 45 which consists of mostly big capital stocks that are play
more significant role in bringing the IHSG index movement. The stock listed in
LQ45 is usually better than stocks that are not listed especially in fundamental
value but this is not always true. Some of the stocks are big capital stock because
of the formula of market capitalization is number of shares outstanding times the
market price.
One of the reasons is that most likely the popular blue chip stocks are
listed in LQ45. Blue chip is originally derived from poker. In poker, there are red,
white, and blue chips. In playing poker, blue chip is the highest value. Usually the
white chip is $1, the red chip is $5, while the blue chip is $25. According to
investopedia.com, blue chip stocks are defined as stock of a large, wellestablished and financially sound company that has operated for many years. A
blue-chip stock typically has a market capitalization in the billions, is generally

the market leader or among the top three companies in its sector, and is more often
than not a household name. While dividend payments are not absolutely necessary
for a stock to be considered blue-chips, most blue-chips have a record of paying
stable or rising dividends for years, if not decades . Therefore, blue chip stocks can
be said as stock with good fundamental and also big capitalization in the capital
market.

The analysts nowadays tend to combine the fundamental analysis and also
the technical analysis. The stocks are chosen using the fundamental analysis
because it is important to determine the solid footing of the stock and then
following the movement of the stock price with the help of technical analysis.
Some of the basic questions are are corporate profit growing consistently?,
how the company makes money?, are their operation rely on debt?, and many
more, but the main point is that the understanding of the company. Some ways to
choose the stock is using the financial ratios. Some of them are related to the
growth of the company, profitability, and also the leverage, which is debt.
Dividend payout is the one the factor related to growth of the company while
profit margin is related to profitability of the company. Debt to equity is used to
measure leverage. Leverage is how much the company able to finance its own
operation using equity.
Among all factors above, there is still earning growth. Earning growth is
measured by the measuring the change in percentage the earning per share
increase in percentage per year. This is related to the profit of the company and

also related how much the profit growth that is earned per share. The increase in
earning growth is also related to the better performance of the company in the
stock market. Therefore, high growth of earning growth will most likely effect in
raise of stock price.

1.2. Statement of the Problem

Problem raised in this research are :
1. Does dividend payout ratio effect earning growth in Indonesia
stock market?
2. Does return on asset ratio effect earning growth in Indonesia
stock market?
3. Does long term debt to equity ratio effect earning growth in
Indonesia stock market?
4. Does earning yield effect earning growth in Indonesia stock
market?

1.3. Objective of the Study

The purpose of this research are :
1. To test the effect of dividend payout ratio to earning growth in
Indonesian Stock Exchange
2. To test the effect of return on asset to earning growth in
Indonesian Stock Exchange
3. To test the effect of long-term debt to equity ratio to earning
growth in Indonesian Stock Exchange
4. To test the effect of earning yield to earning growth in
Indonesian Stock Exchange

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1.4. Contribution
These research contributions are:
1. To Investors
This research is able to help investor to choose better
investment based on dividend payout ratio, earning yield,
return on asset, and long-term debt to equity ratio.
2. To Company
This research is to help companies to understand which part of
the companies need to be fixed to meet investor expectation in
the company financial report.

Chapter 2
Literature Review and Hypothesis Development

Earning growth is based on earning per share variable. Earning per share is
calculated by distributing net income minus dividend by the number of
outstanding shares. Earning per share is also popular tools used to analyze firm
profitability.

11

In general, revenue growth tends to be more persistent and predictable

than earning growth. This is because accounting choices have a far smaller effect
on revenues than earnings. Revenue growth is consistently more correlated over
time than earnings growth. The implication is that historical growth in revenues is
a far more useful number when it comes to forecasting than historical growth in
earnings (Damodaran, 2002).

2.1. Dividend Payout Ratio and Earning Growth

Dividends are payments made by corporation to shareholder members. It
is the portion of corporate profits that distributed to stockholders. On the other
hand, retained earnings is defined as the portion of net income that is retained by
the corporation rather than distributed to its owners as dividends. Similarly, if the
corporation experiences loss, then that loss is retained and called variously
retained losses, accumulated losses or accumulated deficit. Retained earnings and
losses are cumulative from year to year with losses offsetting earnings. Many
corporations retain a portion of their earnings and pay the remainder as a
dividend.
A dividend is allocated as a fixed amount per share. Therefore, a
shareholder receives a dividend in proportion to their shareholding. Retained
earnings are shown in the shareholder equity section in the company's balance
sheetthe same as its issued share capital.
Public companies usually pay dividends on a fixed schedule, but may
declare a dividend at any time, sometimes called a "special dividend" to

12

distinguish it from the fixed schedule dividends. Dividends are usually paid in the
form of cash, store credits (common among retail consumers' cooperatives), or
shares in the company (either newly created shares or existing shares bought in
the market). Further, many public companies offer dividend reinvestment plans,
which automatically use the cash dividend to purchase additional shares for the
shareholder.
Cash dividends (most common) are those paid out in currency, usually via
electronic funds transfer or a printed paper check. Such dividends are a form of
investment income and are usually taxable to the recipient in the year they are
paid. This is the most common method of sharing corporate profits with the
shareholders of the company. For each share owned, a declared amount of money
is distributed. Thus, if a person owns 100 shares and the cash dividend is $0.50
per share, the holder of the stock will be paid $50. Dividends paid are not
classified as an expense but rather a deduction of retained earnings. Dividends
paid do not show up on an income statement but do appear on the balance sheet.
Stock dividends are those paid out in the form of additional stock shares of
the issuing corporation or another corporation (such as its subsidiary corporation).
They are usually issued in proportion to shares owned (for example, for every 100
shares of stock owned, a 5% stock dividend will yield five extra shares). If the
payment involves the issue of new shares, it is similar to a stock split in that it
increases the total number of shares while lowering the price of each share
without changing the market capitalization, or total value, of the shares held.

13

There are many theories about dividend, such as Gordon (1962), Miller
and Modigliani (1961), and also Ibbotson and Chen (2003), as cited by Zhou and
Ruland (2006). Gordon (1962) say that constant dividend growth model is linear
with constant expected return, high dividend payout should be equivalent by
either a high P/E or low expected earnings growth. Miller and Modigliani (1961)
argue about dividend irrelevance theory, the explanation is with unaltered
investments and constant expected return, higher dividend payout will be
followed by lower growth. The same thing, Miller and Modigliani dividend
irrelevance theory, also has been argued by Ibbotson and Chen (2003). Ibbotson
and Chen explain the extension of Miller and Modigliani dividend irrelevance
theory. This extension predicts that with unaltered investment and constant
expected return, higher dividend payout will be followed by lower growth.

Another supporting perspective comes from the capital structure

introduced by Myers (1984) with pecking order theory as cited by Zhou and
Ruland (2006). This pecking order theory hypothesizes that companies with great
growth opportunities will prefer internally generated cash flow to external source
funds. Based on this hypothesis, companies with high growth potential tend to pay
lower dividend payout ratio. Some researchers on determinants of dividend
payout, such as Fama and French (2001) and Rozeff (1982), as cited by Zhou and
Ruland, also shown that dividend payout is inversely correlated with investment
opportunities. According to this perspective, if more income reinvested in the
company there will more money to produce higher earning growth which also

14

mean lower payout ratio. This finding is consistent with the bird in the hand
theory. The bird in the hand theory believes that the more money reinvested in the
company there will be more future capital gain.
However, there is new finding that opposite with this perspective. This
finding was introduced by Arnott and Asness (2003). They did their research by
investigating the relationship between payout and future earnings growth by
focusing on the market portfolio. Arnott and Asness (2003) finding a positive
relationship between the payout ratio and ten-year future earnings growth over the
period 1871 to 2001. Robert and Asness (2003) examined that companies with
higher payout ratios e.g. dividends actually have higher real earnings growth over
the following 10-year period. They analyzed data from the S&P 500 index over
the years 1946 to 2001. Over every rolling 10-year period the highest dividend
payers had the highest earnings growth. This finding is consistent with dividend
signaling theory. The stability in dividend distribution shows confidence in the
company future prospect.
After Arnott and Asness, more and more researchers doing the test in
many other countries in the world such as Parker (2005), Gwilym et al (2006),
Vivan (2006), and also Zhou and Ruland (2006) as cited by Parsian, Koloukhi,
and Abdolnejad (2013). Their result is not much different. Parker (2005) found the
strong and positive relation between earnings growth and dividend payout ratio
across America, Canada, and Australia during 1956 to 2005. Gwilym et al (2006)
researches 10 countries and find the consistent result. Vivan (2006) found the
same result by testing 20 industries in England. Zhou and Ruland (2006) tested

15

the dividend-earnings relationship at the firm level, given the large sample the
results at the market level may potentially be dominated by a few large firms.
Flint, Tan, Tian (2010), examines the use of the payout ratio as a predictor of a
firms future earnings growth. According to the result it rejects the hypothesis that
the firms that retain large portion of their earnings have strong future earnings
growth. They provided further evidence that the dividend payout ratio is
positively linked to future earnings growth and found that no evidence to support
the cash flow signaling and free cash flow hypotheses as an explanation for this
relationship. Their test was based on Australian markets. The results also
supported Arnott and Asness (2003), while holding under numerous specification
tests. Koch and Sun (2004) examined whether the market interprets changes in
dividends as an indication about the persistence of past earnings changes and also
defined whether a change in dividends alters investors' as assessments about the
valuation inferences of past earnings. The result concluded that the changes in
dividends cause investors to revise their expectations about the persistence of past
earnings changes.
There were some researchers who found similar result with Arnott and
Asness, they use different variable but its in the same way with Arnott and
Asness. Nissim and Ziv (2001), investigated that the relationship between
dividend changes and future earnings, they found that the dividend changes
provide information about the level of profitability in subsequent years, the result
shows that the dividend changes are positively related with future earnings.
Nissim and Ziv argue that previous studies have failed to uncover the true relation

16

between dividends and future earnings because researchers have been using the
thw wrong model to control for the expected changes in earnings. Specifically,
they report that when using a regression analysis that controls for a particular
form of mean reversion in earnings, dividend changes are positively correlated
with future earnings changes. Benartzi et al (2005), examined that the dividend
changes are positively related with future earnings in sense of profitability, they
also showed that the dividend changes are negatively co-related with future
earnings changes in sense of return on assets while controlling the non-linear
pattern behavior of earnings. Sloan (1996) examined that the stock prices that
reflects the information about future earnings that controlled in increases and cash
flow mechanism of current earnings. The degree to which current earnings show
into the future earning which is depending on the relative magnitudes of cash flow
and current earnings. However investors grip on earnings, failing to reflect full
information about the degree to which cash flow components of current earnings
impacts on the future earnings.
According to Arnott and Asness research, higher future earnings growth is
associated with high rather than low dividend payout. This is in contrast with
Miller and Modigliani theorem. However, according to Arnott and Asness, Miller
and Modigliani was said proving the theorem in ideal assumption. One of their
assumptions is about no tax charged. In no tax world, dividend policy is not
important. In this assumption, company has no reason to collect capital from
bond, stock, or earnings but to choose the lowest cost of capital possible. On the
other side, investor has no reason to care for the whether an investment pays a

17

dividend that the investor can reinvest or the company can reinvest to maximize
growth equivalent to forgone dividend yield. Therefore, any changes in dividend
policy will not affect firm value, which means that investment policy and dividend
policy should be standing on different ground.
Arnott and Asness provide some possible explanations for this finding.
First, as cited by Arnott and Asness (2003), managers are loath to cut dividend
(Lintner, 1956). The reason behind this is the stable dividend payment indicating
the confidence in stability and growth of future earnings. The confidences can be
based on public or private information (Miller and Rock, 1985). Second, the
possibility of managers retaining too much earnings as a result of the managers
desire to built empires (Jensen, 1986) as cited by Arnott and Asness (2003). Third,
dividend is related with volatile earnings. The relation between dividend and
earnings is possibly positively related because temporary peaks and through in
earning could cause the payout ratio raise and down according to earning raise and
down. Fourth, the possibility of this data or experimental design is in error.
Possibility of this experimental design that is too time-period specific (either the
year covered study or the length of forecast period) or the result may be proxy for
other more fundamental variable that forecast economic activity.
Arnott and Asness suggested that the positive current payout-future growth
relationship in consistent with free cash flow theory. Jensen (1986) explained that
in free cash flow theory the managers of companies with abundant free cash flows
have incentives to overinvest. This could be explaining the low dividend-low
growth as a result of overinvestment on the part of low payout companies. In one

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test of free cash flow theory by Lang and Litzenberger (1989), they examined
stock returns with announcements of dividend changes. They found, holding the
magnitude of dividend increases constant, companies with limited growth
experience larger share price increase. Lang and Linzenberger interpreted this
result as consistent with free cash flow theories. They argue that stronger market
reaction for the low-growth companies indicating decrease in agency cost by
increasing dividend.

2.2. Return on Asset Ratio and Earning Growth

Return on asset consist of two variables. They are net income and total
assets. Firms net income is the amount of money generated after minus by tax
and many other interest. Total assets is measured by total value of asset owned.
Return on asset measures the income available to debt and equity investors
per dollar of the firms total assets. Total assets (which equal total liabilities plus
shareholders equity) are greater than total capital because total capital does not
include total liabilities (Brealey, Myers, and Marcus, 2010).
The return on assets (ROA) ratio illustrates how well management is
employing the company's total assets to make a profit. The higher the return, the
more efficient management is in utilizing its asset base. The ROA ratio is
calculated by comparing net income to average total assets, and is expressed as a
percentage. Return on asset usually
Return on asset is a financial ratio that shows the percentage of profit that
a company earns in relation to its overall resources. It is commonly defined as net

19

income (or pretax profit) / total assets. Return on asset is known as a profitability
or productivity ratio, because it provides information about management
performance in using the asset to generate income. ROA act as tool to measure the
performance of the company. The profit percentage of assets varies by industry,
but in general, the higher the ROA the better. For this reason, it is often more
effective to compare a company's ROA to that of other companies in the same
industry or against its own ROA figures from previous periods. Falling ROA is
almost always a problem, but investors and analysts should bear in mind that
the ROA does not account for outstanding liabilities and may indicate a
higher profit level than actually derived.

2.3. Earning/Price Ratio and Earning Growth

Earning yield consist of two variables. They are earning per share and
price per share. Earning per share is the net income of the company that is
distributed to every outstanding shares. Due to the changing number of
outstanding shares every reporting, weighted average is used. Price per share is is
the price of the stock in the market that is not in book value but based on market
value. The book value is basically the difference between the asset and the
liability which is defined as the company value. For example, if company B has
total assets of 200 millions and total liability of 150 millions then the book value
of the company is 50 millions. This 50 millions amount is basically the same with
equity or can be explained as if the company sold all assets and pay all liabilities
then 50 millions is left as the net value of the business. The market value on the

20

other side, depends on stock market. The value of the stock in the market times
the outstanding shares will define the market value of the company.
Earning yield is a very unique variable in this research. This variable based
on both book value and market value. Earning per share is measured by book
value and price per share is defined by market value that is determined by a lot of
factor in the market. Price is also one factor that determines the profit of investors
since price increase is related to capital gain in stock investing which gives direct
profit while earning per share gives signal about how well the company
performing the whole period.
The earnings yield is a way to measure returns, and it helps investors
evaluate the return that can compensates investment risk. Earning yield does not
always in form of cash due to the possibility of reinvesting earning in the
company. Earning yield is different with dividend yield which depend on manager
capital allocation decision.
In the modern period, as shown by Arnott and Asness (2003) a low
earnings yield (high P/E) signals high future 10-year real earnings growth. This
finding supports the view that the market correctly anticipates faster future
earning growth and pays up for it. This relation is weaker compared with the
relation between payout ratio and future earning growth.
The sign of E/P is reversed from P/E ratio and a lower E/P (higher P/E)
indicating slightly lower earnings growth. In previous research, the success of E/P
is greater when older data are included. So, the power of market valuation levels
to forecast future returns is weaker than the power of the payout ratio, particularly

21

in the modern period. According to the result by Arnott and Asness, a high P/E has
almost no power to forecast future earnings growth in the presence of the payout
ratio.
Essentially, like the prior drop in earnings in 2001, where investors faced a
situation of very high P/E and very low payout ratios. History says such a period
is a time of poor expected long-term future earnings growth. By the very end of
2001, the situation had changed, where one year earning had dropped, sending
payout ratio somewhat upward but sending P/E ratio high. In both situation, the
conclusion imply that forward looking forecast of equity premium are very low
compared with history.
The recent condition of very high P/E and very low payout ratios
combines expensive valuation and a low forecast on earning growth. History
suggests that this combination is clearly a sign for low expected returns. In the
current condition, now that earnings have tumbled and payout ratios have returned
closer to normal, suggests more reasonable forecasts of earnings growth but from
a now reduced earnings base. With historically off the charts P/E, this change
provides little solace.

2.4. Leverage Ratio and Earning Growth

leverage ratio consist of long-term debt and total equity. Long term debt
defined as obligations lasting over one year. This would include any financing or
leasing obligations that are to come due in greater than 12- month period.

22

Leverage ratios measure how much financial leverage the firm has taken
on. Companies usually maintain the level of leverage ratios to make sure that
lenders continue to take on the firms debt. Debt ratio usually measured by longterm debt and total debt ratio.
When the debt ratio is high, the company has a lot more responsibility to
lenders. Therefore, the higher the debt ratio, the burden or responsibility will also
higher (a higher interest payment) and also more sensitive to interest rate changes.
On the other side, the lower the debt ratio, there will be lower amount of income
used to pay for interest which is also lower the sensitivity to interest rate increase
or changes.
High debt-to-equity ratio may indicate that a company may not be able to
generate enough cash to satisfy its debt obligations. However, low debt-to-equity
ratios may also indicate that a company is not taking advantage of the increased
profits that financial leverage may have.
Lenders and investors usually prefer low leverage ratios because the
lenders' interests are better protected in the event of a business decline and the
shareholders

are

more

likely

to

receive

at

least

some

of

their

original investment back in the event of liquidation. This is generally why high
leverage ratios may prevent a company from attracting additional capital.
As Myers (1989) explained, profitability is the single largest determinant
of debt / asset ratios. Specially, a one standard deviation increase in profitability
causes a 4.8 percent decrease in the long term debt ratio in Japan and 9.6 percent
decrease in the long term debt-asset ratio in the United States. Rajan and Zingales

23

(1995) also find a significantly negative correlation between profitability and

debt/asset ratios for Japan, the United States, and the United Kingdom, with a
significantly more negative coefficient on profitability for Japan than for the
United States.

Myers (1989) claims that negative coefficient on profitability

implies evidence for the pecking order hypothesis. Under this theory, the
more negative coefficient on probability in Japan is puzzling. If firms use a
sequence of financing alternatives because of information asymmetries as
described by Myers and Majluf (1984), and if Japanese governance
systems decrease information asymmetries as described by Roe (1993),
profitability should be less tied to debt/asset ratios in Japan. Yet, the
opposite result seems to hold.
One possible reason for this difference is that higher debt/asset
ratios might exist in Japanese keiretsu, and that the most highly profitable
firms do not enter into these industrial organizations. Another possibility is
that the firms might follow a pecking order in seeking financing, but these
preferences may be driven partly by variations in tax rate and not by the
information effects modeled by Myers and Majluf (1984) possibly a more
detailed examination of keiretsu member and nonmember firms as well as
tax structures could differentiate between these hypotheses.
The significantly less negative coefficient in the United Kingdom,
Germany, and France require additional explanation. One possible

24

explanation would be that institutional features in these countries are

successful at reducing information asymmetries, although prior research
for the Unite Kingdom suggests otherwise. Alternatively, debt may be
more frequently used as a management discipline device in the manner
suggested by Jensen (1986) in these countries. Wald (1999).

In different terms, debt could be a better option. Companies have choices

to fund their operations based on debt, or equity, or hybrid. However, there is cost
for every choice for financing. Cost of equity is not explicitly displayed on the
income statement, while cost of debt in included in interest expense, sometimes it
is easy to forget that debt is cheaper source of funding for the company compared
to equity.
Debt is cheaper for two reasons. First, debtors have a prior claim if the
company goes bankrupt that makes debt is safer than equity and warrants lower
return to investors. Lower returns means lower interest payments to shareholder.
Second, interest paid is tax deductible, therefore lower tax payments which creates
more cash for the company. This is called as interest tax shield that often used
nowadays. For example, with pretax 40%, company C have $1000 before tax and
company D have the same amount but have $700 long term debt at 10% interest
rate. Based on calculation, company C will have tax interest for $1000 x 40% that
equal $400 which left $600 for net income. Company D will have income cut by
debt interest by $700 x 10% equal $70 that makes after-tax earnings will be
($1000 - $70) equal $930 times 40% equal $372 which left 558. This is lower

25

amount of income but also lower tax payment because income is cut by debt
interest first then reduced by tax. Imagine that by long term debt, company can
change some of their source of income, for example not from shareholder but
from debt. This will create lower amount of shares outstanding but on the other
side, higher earning per share.
Simple example above can show why not all debt is bad, sometimes even
better. Debt can lowers the weighted average cost of capital. This with
understanding that not too high debt is good for companies. It is better to achieve
the optimal level of debt to maintain the optimal capital structure that is good for
the companies. It is difficult to say how much is good because it is different in
each type of industries. Some industries need more asset than others like
industries with high investment in fixed assets such as property and plant. The
greater the investment in fixed asset, the greater average use of debt especially
long-term debt. Bank is in different situation, banking industries need more
money to be distributed and therefore have completely different capital structure.
Another reason is company life cycle. Rapid growing companies, early stage
companies, often favor equity over debt because their shareholders will not
demand high dividend payout ratio because this kind of companies usually have
high growth in stock price. Companies with high growth usually have higher raise
in stock price do not need to give high dividend or do not even need to distribute
since it is compensated by high growth in stock price.
The reason why company issues long term debt also important for
investors. The company usually will give explanation about the new debt specific

26

purpose. There are some purposes of new long term debt. First is to fund growth.
This is to raise cash by using debt issuance used for specific investment. This
commonly happen in company that need heavy investment in fixed asset. This is
normally a good sign. Second is to refinance old debt. There are some company
that need the use of debt in their operation. So, when old debt is retires the
company will issue new debt, usually at different with the previous interest rate.
This is also a good sign for the company. Third is to change the capital structure.
The amount of cash from debt is used to change the equity balance. The cash can
be used to repurchase stock, issue dividend, or buyout big equity investor. Usually
buying back equity is a good sign for the company but this is also depending on
the situation in the market. Fourth is to fund operating needs. This means issuing
debt to pay operating expenses because cash flow generated in not enough. This is
usually not a good sign for the company. This is also depend on the condition of
the company.

2.5. Hypothesis Development

After all explanation above, there are two contradicts finding where then
said as the old conventional wisdom and the new finding. Based on the
finding from the previous study by Zhou and Ruland, the following hypothesis is
constructed based from the financial ratio stated above.
The first is between dividend payout ratio and earning growth. Based from
on previous by Arnott and Asness, there is positive relationship between the
dividend payout ratio and earning growth. So, if the dividend payout ratio is

27

increasing the earning growth will also increasing. This is not the same with
Miller and Modigliani that proposed the opposite ideas, where if the higher the
payout ratio there will be lower growth since there is lower amount of money
reinvested in the firm.
However according to Arnott and Asness, as cited by Zhou and Ruland,
Miller and Modigliani doing the research in ideal word since there is too much
assumption such as no tax and many more. There are also many researchers
showing the same result with Arnott and Asness view. There are also many
evidences from many researchers that support Arnott and Asness point of view
such as Zhou and Ruland, Gwylim et al, Parker, and many more. There are also
many contradict views that support the conventional wisdom. Gordon and Lintner
are some of those that support the conventional or bird in the hand theory. This
theory arguing that the more amount of dividend distributed there will be less
growth in the future. This bird in the hand theory has been the basic of many
dividend theory. Based on all those possible explanation about the effect of
dividend payout ratio to earning growth, the hypothesis developed is

H1

: dividend payout ratio negatively effect earning growth in

Indonesian stock market

The second determinant of earning growth in this research is return on
asset. Return on asset defined as the amount of money generated (net income)
divided by total asset. This ratio basically showing the ability of the company to
generate profit and how well company manage the asset to generate profit.

28

High return on asset ratio is showing better condition compared to the

company that having lower return on asset ratio. Therefore, return on asset
concluded as important part of determining earning growth since it is related with
net income. Higher return on asset also more indicating good company which
usually many investors see as one their requirements before investing their money
in the company. Based on explanation about return on asset, the hypothesis
developed is

H2

: return on asset positively effect return on assets and earning

growth in Indonesian stock market

The third determinant of earning growth is earning yield. Earning yield is

the opposite of price earning ratio. Therefore, the relation between earning growth
will also the opposite. Based on previous research, the relation between earning
yield and earning growth is positive. Therefore price-earning ratio will have
negative relation with earning growth. Higher earning yield will be more income
distributed from the retained earnings which will reduce earning growth.
Whenever the price goes down the earning yield ratio will raise since the
denominator (price) is decreasing and at the same time price-earning ratio will
drop since the price value is decreasing and it also work the other way. Price is
very volatile in stock market and affected by so many uncontrollable things. Price
will easily raise or drop with rumour which is one of the most simple factor yet so
uncontrollable factor in stock price. Therefore the hypothesis developed will be

29

H3

: earning yield negatively effect earning growth in Indonesian

stock market

The last but not least important determinant is leverage ratio that will be
long-term debt to equity ratio. This is showing the level of debt in the company.
Debt is not bad thing since its also needed to help the company when the
company is short in cash but high debt is never a good sign in the company and it
is important to maintain optimal level of debt. High leverage is showing that the
company might not able to generate enough money to pay their cost. Therefore
high long-term debt to equity ratio will have negative relation with earning
growth. The hypothesis developed will be

H4

: leverage (long-term debt) positively effect earning growth in

Indonesian stock market

30

Chapter 3
Research Method

This research in conducted as a hypothesis testing, as it tries to investigate

the correlation between variables, especially the influence of independent
variables toward dependent variables, using correlational investigation. The study
setting will be non-contrived which means the study will be done in naturally
where everything will proceed normally without artificially conditioned situation.
Researcher interference will be minimal since there is no need for to change any
situation since there is nothing needed to be changed. The study will be classified
as longitudinal studies since the data can be gathered at more than two or more
points in time to answer the research question.

31

3.1. Data and Sample

3.1.1. Data
The main data needed are dividend payout ratio, return on asset
ratio, earning yield ratio, long-term debt to equity ratio, and earning
growth between 2001 2011. The data for control variable are size, price
earning growth ratio, and compounded annual growth. All the data will be
gathered from the Indonesian Capital Market Directory book.

3.1.2. Sample
The sampling method used in this research is purposive sampling,
since there are some criteria before the stock is chosen as sample. The
stocks included in the sample should fulfill the following criterias :
1. Listed in Indonesian stock market since 2002 and having
positive earnings during 2002-2010
2. Book value of equity is positive
3. Paying dividend during 2002-2010
3.2. Operational Definition of Variables

Following Arnott and Asness, as cited by Zhou and Ruland, the writer use
the same measurement by Arnott and Asness. Therefore, the measurement of each
variables in this research are as stated below :

32

EG =

earning growth, formulated as earning per share yeat r

minus earning per share year t-1 =EPStEPSt-1, measured as
compounded annual earnings for common shareholder
growth from year 0 to year t; growth was calculated over 1,
2, 3 and 4 year periods.

Payout =

dividend payout, formulated as dividend paid divided by

net income generated in current year = dividend / net
income, measured as year 0 dividends divided by year 0
earnings

ROA=

return on assets, formulated as net income generated in

current year divided by total asset in the current year =
ROA / total assets, measured as earnings divided by total
assets at the end of year 0

LEV =

leverage, formulated as long-term debt to equity in current

year divided by total equity in the current year = LTD / total
equity, measured as the book value of debt to total assets,
with all measurements at the end of year 0

E/P =

earnings yield, formulated as net income generated in the

current year divided by the average market price in the
current year = net income / av. Market price, measured as
earnings for year 0 divided by the end of year market value
equity

Size=

natural logarithm of market value of equity

33

PER=

price earning ratio, formulated as earning per share divided

by price per share, measured as compounded annual
earnings growth from year t to year 0, with t= 1, 2, 3 and 4

AG=

compounded annual growth in total assets from year 0 to

year t with t = 1, 2, 3 and 4 with period t designations as for
EG, formulated as growth per year.

3.3. Empirical Model

Following Arnott and Asness, as cited by Zhou and Ruland, the writer
measured earnings growth as the compounded annual growth rate. The writer will
tests the relationship between payout ratio and future earnings growth by using the
following multivariate regression as cited by Zhou and Ruland :

EG 0,t=0 + 1 pa yout+ 2 3 ROA + 4

E
+ LEV + 6 PER t ,0 + 7 AG 0,t +e
P 5

where
EG =

earning growth

Payout =

dividend payout ratio

Size=

natural logarithm of market value of equity

ROA=

return on assets

LEV =

leverage

E/P =

earnings yield

34

PER=

price earning ratio

AG=

compounded annual growth

This model will be tested for BLUE and the detail will be shown and
proven in the next chapter. The first is to find out which model suit this empirical
model best, fixed effect model or random effect. The test will be conducted using
eviews. If needed this empirical model will be tested for classical assumption. The
purpose of the test is to achieve BLUE (best linear unbiased estimator). This
model will be tested with normality test, homogeneity test, linearity test,
multicollinearity test, heteroskedasticity test, and autocollinearity test.
In this study, following Zhou and Ruland, so the writer examined earnings
growth over short (1 year ahead), intermediate (3 year ahead), and long (5 year
ahead) horizons but the writer examined the result with all year regression also.
According to Zhou and Ruland, short horizon is considered important for two
reasons. First is that, investors and analysts are also interested in short and
intermediate besides long-term growth. Second, long-term growth needs large
number observations where also increases bias as the observation period
increases.
The key independent variable is dividend payout ratio as cited in Zhou and
Ruland (2006). A negative coefficient on payout would support the conventional
wisdom that low earnings growth follows high payout. A positive coefficient on
payout would be consistent with the result presented in Arnott and Asness that is
also cited by Zhou and Ruland.

35

Size is controlled, as cited by Zhou and Ruland, because large companies

are more established and mature than small companies and thus likely to exhibit
stronger growth. Inverse relationship is expected between company size and
future earnings growth. Return on asset is also controlled because when
profitability is already high (other factor being equal), companies should find it
difficult to demonstrate strong earnings growth. Therefore, the writer expects
ROA also has inverse relationship with earning growth as cited in Zhou and
Ruland. The leverage control was based on the expectation that higher leverage
tend to have larger investments, as suggested by Fama and French (2001), and
higher earnings growth. Thus, the writer expects a positive relationship between
leverage and earnings growth.
Following Arnott and Asness, as cited by Zhou and Ruland, the writer also
controls earnings yield and past earning growth. Using the assumptions that the
market is reasonably efficient, investor is expected to pay more for a dollar of
current earnings if future earnings growth is high. Therefore, as cited by Zhou and
Ruland, the relationship between E/P and future earnings growth will be inverse
relationship or negatively correlated. The writer concerned about the possibility of
mean reversion in earning growth, as cited in Zhou and Ruland, by including past
earnings growth in the regression. The tests used the same observation period for
past and future earnings growth. The writer expected a negative relationship
between past earning growth and future earnings growth.
Finally, future asset growth also controlled. With other factors being equal,
expected large companies to report higher earnings than small companies. As the

36

companies grew, the growth in earnings also observed. Thus, positive coefficient
for asset growth is expected.

3.4. Data Analysis Method

The data will be sorted by certain criteria before classified as sample of the
research. The criteria are the same with the criteria stated by Zhou and Ruland. In
the previous study all the data stated in dollar, in this research one of the
requirement is minimum equity value over $ 250,000 or total asset value over
$500,000 which will require us to change the value in rupiah for each used in the
study for every year included. The result of this sampling will be the sample size
of the study.
The data will be analyzed using with descriptive statistics, crosscorrelation matrix, and t-test. The descriptive statistics is the numbers that are
used to explain the properties of the data such as the mean, median, and standard
deviation of all variables included in the research to show the tendency in the data.
The cross correlation matrix will is used to show the correlation coefficient
between current payout ratio and past and future earnings growth over one, three,
and five year observation periods. The cross-correlations matrix will show the
relation between the payout at year 0 and the past earning growth and earning
growth over one, three, and five year period which will shown in positive or
negative number. The t-test is used to estimate regression coefficients for each
year to control for cross sectional dependence. The t-test will compare the

37

coefficient for all independent, dependent, and control variables to t-statistic over
one, three, and five-year future earning growth.

Chapter 4
Findings and Discussions

This chapter will explain more on the findings of the research. The main
topics in this chapter consist of findings result, regression result, hypothesis
testing and discussion, and classic assumptions. The data is collected from
secondary sources. The research data is twenty three companies used as samples
that fulfill the requirements.

4.1. Descriptive Statistics

Descriptive statistic was used to give a description about every
variable in this research. The descriptive statistic in this research consists of
mean value, median value, standard deviation, minimum value, and

38

maximum value. The result of descriptive statistic and correlation will be

defined in the Table 4.1.
Variabl

Payo
EG

e
0.30
Mean
Media

Debt

Size

PER

10.33

37.45

12.19

18,918,339

82.28

5
-

.5

4
-

0.11

9.384

-0.438
0.982

47.93
0
0.15
0.112

ROA

AG

ut
0.14
0.783

1
Continued to next page

0.389

Continuation from last page

Std.
Deviati

0.695

21.560

5.564

9.089

0.181

-0.820 -0.761

-1.254

-0.835

0.000

-0.463 -6.24

-0.28

3.556

52.952

4.13

4.95

1.30

on
Minim
um
Maxim
um

123.172

59.12
2

11.112

(source : secondary data, processed with spss, 2002-2009)

Based on the Table 4.1.1 above, it can be shown the highest mean value in
those variables is the variable payout which is 12.955 and also can be shown the
lowest mean value in those variable is the variable size, price earning ratio and
debt which is 0.000. The highest standard deviation is in variable payout which is
21.560 and the lowest standard deviation is in variable annual growth which is
0.181. The adjusted R2 is 0.034 and f-stat is 13.870. The f-stat is significant and
therefore none of the independent variables in the model are correlated with the

39

dependent variable beyond what could be explained by pure chance ( due to

random sampling error). Meanwhile, the R 2 shows only 3,4% variance are able to
be explained by the variables.

4.2 Findings of the Research

Table 4.2 Regression 2002-2010
Continued to next page
Continuation from last page
Variable
Coefficient
Payout
-1.544
ROA
2.318
Debt
3.404
E
-0.488
Size
0.433
PER
0.573
AG
0.096
F-test
13.870
Adj R2
0.304

T-Stat
-2.002
3.466
2.226
-1.478
0.566
2.158
0.364

Sig
0.295**
0.179***
0.269**
0.379
0.672
0.276**
0.778
0.000

(source
:
secondary
data,
processed
with
spss,
2002-2009)
*significant
at the 10
percent level

in a two tailed test

** significant at the 5 percent level in a two tailed test
*** significant at the 1 percent level in a two tailed test
The result of the test is shown in the table above. The payout t-stat value is
-2.002, which means the value is significant at 5% t-table with two-tailed. Payout
coefficient is negative, Pearson correlation, which means the correlation between
earning growth and payout is not linear. Negative correlation shows if earning
growth increase then the payout will decrease. ROA, t-stat 3.466, is significant at
one percent. ROA, coefficient 2.318, has positive correlation, which means the
correlation between earning growth and ROA is linear. If earning growth increase
then ROA will also increase and as the opposite. Debt, t-stat is 2.226, is

40

significant at five percent. Debt, coefficient is 3.404, has positive correlation,

which means the correlation between earning growth and debt is linear. If earning
growth increase then debt will also increase and as the opposite. Earning yield tstat is not significant. Therefore, there is no relationship between earning yield
and earning growth.
4.2.1. Dividend Payout Ratio and Earning Growth
As shown in table 4.2, the dividend payout ratio has negative
correlation to earning growth. Negative correlation means if dividend
payout ratio increase then earning growth will decrease and as the
opposite. This result is not consistent with Arnott and Asness (2003) but
consistent with the dividend irrelevance theory by Miller and Modigliani
(1963).
Gordon (1962) say that constant dividend growth model is linear
with constant expected return, high dividend payout should be equivalent
by either a high P/E or low expected earnings growth. Miller and
Modigliani (1961) argue about dividend irrelevance theory, the
explanation is with unaltered investments and constant expected return,
higher dividend payout will be followed by lower growth. The same thing,
Miller and Modigliani dividend irrelevance theory, also has been argued
by Ibbotson and Chen (2003). Ibbotson and Chen explain the extension of
Miller and Modigliani dividend irrelevance theory. This extension predicts
that with unaltered investment and constant expected return, higher
dividend payout will be followed by lower growth. The result is consistent

41

with bird in the hand theory. That the more income reinvested will result to
more future prospect of the company.
Another supporting perspective comes from the capital structure
introduced by Myers (1984) with pecking order theory as cited by Zhou
and Ruland (2006). This pecking order theory hypothesizes that companies
with great growth opportunities will prefer internally generated cash flow
to external source funds. Based on this hypothesis, companies with high
growth potential tend to pay lower dividend payout ratio. Some
researchers on determinants of dividend payout, such as Fama and French
(2001) and Rozeff (1982), as cited by Zhou and Ruland, also shown that
dividend payout is inversely correlated with investment opportunities.
According to this perspective, if more income reinvested in the company
there will more money to produce higher earning growth which also mean
lower payout ratio.
Therefore, in Indonesia Stock Market, the correlation between
dividend payout ratio and earning growth in Indonesia is negative.
Therefore, the decrease in dividend payout ratio will increase earning
growth. Therefore, the first hypothesis is not rejected.

4.2.2. Return on Asset and Earning Growth

As shown in table 4.2, the return on asset ratio has positive
correlation to earning growth. Therefore, the correlation goes linear, if

42

there is increase in return on asset ratio then earning growth will also
increase and as the opposite.
Earning growth also measured from annual growth in asset and
return on asset measure the income generated from the relative asset
invested. Higher return on asset means the company is more efficient in
generating income using its asset which is will also increase the annual
growth in asset.
Return on asset ratio can be difficult to be high in already mature
company. Therefore in developed company, the return on asset ratio is
expected to be lower in mature company than in developing company.
This explains why the hypothesis expects to have negative correlation
earning growth in developed company. In the previous research, there is
assumption that return on asset on well developed country like United
States is low due to the maturing companies. Return on asset tend to be
high in developing countries because companies still growing to reach
maturity.
Therefore in Indonesian stock market return on asset ratio move is
linear with earning growth. This finding is not consistent with Arnott and
Asness but consistent with conventional knowledge. If return on asset ratio
increase, earning growth will increase and also as the opposite. This is
showing that in Indonesia the result is consistent with conventional
knowledge. That higher return on asset will result in higher earning
growth.

43

In this research, the result is not to reject the second hypothesis.

Since return on asset ratio is positively correlated to earning growth,
therefore the raise in return on asset will also raise the earning growth.

4.2.3. Earning Yield and Earning Growth

As shown in table 4.2, the earning yield ratio has not effect earning
growth. The hypothesis suggests there is negative correlation between
earning growth and earning yield but the t-statistic is not significant.
Therefore, the research result is that the hypothesis is not accepted.
As explained in literature review, accoirding to Gordon (1962) say
that constant dividend growth model is linear with constant expected
return, high dividend payout should be equivalent by either a high P/E or
low expected earnings growth. The sign of E/P is reversed from P/E ratio
and a lower E/P (higher P/E) indicating slightly lower earnings growth.
According to the result by Arnott and Asness, a high P/E has
almost no power to forecast future earnings growth in the presence of the
payout ratio. History says such a period of high P/E and low payout ratios
is a time of poor expected long-term future earnings growth. By the very
end of 2001, the situation had changed, where one year earning had
dropped, sending payout ratio somewhat upward but sending P/E ratio
high. In both situation, the conclusion imply that forward looking forecast
of equity premium are very low compared with history. The recent
condition of very high P/E and very low payout ratios combines expensive

44

valuation and a low forecast on earning growth. History suggests that this
combination is clearly a sign for low expected returns.
Indonesia, in this case, tends to have no correlation between earning
yield and earning growth. This is not consistent with Arnott and Asness
finding but the coefficient indicating that the result is negative correlation
between earning yield and earning growth.
There are some possible reasoning behind this result. There is some
other factor that might influence this correlation. One of them is stock
price factor in the variable. Stock price is very volatile, affected by many
other factors such as rumours, bad news, politics, and many more. This
could be the reason why the t-statistic between these variables are not
significant.

4.2.4. Debt Ratio and Earning Growth

As shown in table 4.2, the debt ratio has positive correlation to
earning growth. The correlation is linear between debt ratio and earning
growth, therefore is debt ratio increase there will be increase in earning
growth and as the opposite.
High long-term debt ratio often found in developing company. This
condition usually signaling the company is growing. The company with
higher borrowing will tend to have higher investment. Higher investment
could lead to more earnings to the company and that is why the hypothesis
suggested positive correlation.

45

Usually bigger company tend to have more debt to finance their

operational and investment to generate bigger profit. Developing company
usually will also have higher debt ratio to grow to expand their operation.
The second is the type or condition of the company that investor looking
to invest their cash. Growing companies tend to have higher return to
investor compared to big company and tend to need lower investment
cash.
Based on the result, the fourth hypothesis is not rejected. The debt
ratio shows positive correlation. Therefore the result is consistent with the
expected outcome.
4.3. Discussions
Based on the result, there is only one hypothesis that is can not
accepted. Dividend payout ratio, return on asset, and debt variables
showing consistent result with the previous research, only earning yield
ratio shows no relationship. There are some possible reasons behind this
result.
The possibility of external factor in earning yield variable. Earning
yield is created from earning per share and price per share. Price per share
is driven from by many external variable which can not be controlled by
company which can affect this factor which can be very volatile. Second
possibility is error in experimental data. Perhaps the result are time-period
specific, only the year included in the study.

46

The three hypothesis that are accepted are dividend payout ratio,
return on asset, and debt ratio. Dividend payout ratio shows consistency
with hypothesis with negative correlation. This result is consistent with
bird in the hand theory by Gordon and Lintner. Return on asset also shows
consistency with the hypothesis with positive correlation. This result
indicating that higher return will be better signal for growth. The higher
the earning generated and reinvested will be generating more income in
the future. This is indicating for higher future growth. The result for debt is
consistent with the hypothesis with positive correlation. This shows that
company with higher debt will have higher earning growth. This is
indicating that the more money invested in the company will create higher
future growth.
The earning yield variable shows no correlation with earning
growth because of unsignificant t-statistic. If t-statistic is not considered,
the result of the coefficient of earning yield showing consistency with the
hypothesis. This is indicating that the result is not going too far with what
expected. Therefore even is the result is not consistent with the hypothesis
but the result is still considered going the same way with the hypothesis.

4.4 Classic Assumption Result

The purpose of this test is for showing that the data is BLUE (Best Linear
Unbiassed Estimator).

They are normality test, heteroscedasticity test,

multicollinearity test, and autocorrelation test.

47

Table 4.4.1 Normality test

One-Sample Kolmogorov-Smirnov Test

Continued to next page

Unstandardized
Residual
N
Normal Parametersa
Most Extreme Differences

207
0
0.820
0.091
0.091
-0.057
1.306
0.066

Mean
Std. Deviation
Absolute
Positive
Negative

Kolmogorov-Smirnov Z
Asymp. Sig. (2-tailed)
a. Test distribution is Normal.

Table 4.4.2 Heteroscedasticity Test

Standardized
Unstandardized Coefficients
Model

Std. Error

(Constant)

0.610

0.038

payout

-0.006

0.039

roa

0.023

debt

Coefficients
Beta

Sig.

16.051

-0.012

-0.166

0.869

0.043

0.043

0.540

0.590

-0.032

0.043

-0.058

-0.744

0.458

-0.013

0.040

-0.023

-0.313

0.754

size

-0.073

0.040

-0.134

-1.853

0.065

per

0.024

0.038

0.045

0.637

0.525

ag

-0.027

0.042

-0.050

-0.646

0.519

a.

Dependent Variable: eg

The normality measures the data distribution of the sample. As shown in

table 4.4.1, the result of Kolmogorov-Smirnov normality test shows that the data

48

is normally distributed. This can be seen from the Kolmogorov-Smirnov z value

that is 1.306 which is less than 1.96 (Z-stat < z-table,

= 0.05 at two-sided

critical region). Asymptotic significance (2-tailed) result is insignificant at 0.66

which mean there is no significant difference between the normality curve and the
data. Therefore, based on the result, it can be concluded that the data distribution
in this research in normally distribute
The heteroscedasticity occurs when the variance of the error terms differ
across observations. In this research the data is free from heteroscedasticity that
means the data have same variance of the error variance. This can be seen from
the result in the table, there are no variable with significant value. In
heteroscedasticty test if the test value does not lower than 0.05 (significant) then
the data are free from heteroscedasticity.
Table 4.4.3. Autocorrelation test
Model Summary

Std. Error of the

Model
1

R
0.573

R Square

Adjusted R Square

Estimate

Durbin-Watson

0.328

0.304

0.834

2.021

a. Predictors: (Constant), ag, per, size, payout, debt, e, roa

b. Dependent Variable: eg

The autocorrelation occurs when there is strong relationship between

periods in one variable. In this research, Durbin-Watson is used to measure the
autocorrelation. The value of Durbin-Watson test will be around zero to four. In
this research the result is free from autocorrelation. The Durbin-Watson result is
2.021 (closer to two) which means there is no autocorrelation.

49

Table 4.4.4 Multicollinearity Test

Coefficientsa
Model

Unstandardized

Standardized

Coefficients

Coefficients

Std. Error

0.000

0.058

payout

-0.058

0.059

roa

0.313

debt

1 (Constant

Sig.

Beta

Collinearity Statistics
Tolerance

VIF

-0.004

0.997

-0.058

-0.979

0.329

0.966

1.035

0.066

0.313

4.743

0.000

0.776

1.289

0.168

0.065

0.168

2.581

0.011

0.794

1.259

0.430

0.061

0.430

7.000

0.000

0.895

1.117

size

0.039

0.060

0.039

0.649

0.517

0.931

1.075

per

-0.002

0.058

-0.002

-0.028

0.978

0.991

1.009

ag

0.009

0.065

0.009

0.138

0.890

0.809

1.237

a.

Dependent
Variable: eg

The multicollinearity occurs when there is correlation between

independent variable. In this research, there is no multicollinearity. As shown in
the table above, the value of VIF does not exceed ten (< 10).
From all the result above we can assume that the data is BLUE (Best
Linear Unbiased Estimator). The data concluded as unbiased and efficient.
Efficiency is implied when an unbiased estimator also has the minimum variance
among the class of all unbiased estimator, that is, the estimator estimates the
parameter of interest in the best possible manner.

Chapter 5
50

Conclusions, Limitations, and Recommendations

5.1 Conclusions
According to the regression result, there are three hypotheses that are
showing correct relationship. They are dividend payout ratio, return on asset, and
debt ratio. Dividend payout ratio showing negative relationship, return on asset
ratio showing positive relationship, and debt ratio showing positive relationship.
Earning yield is the only hypothesis that is not showing any correlation with
earning growth. Based from all statement above, dividend payout ratio, return on
asset, and debt ratio affect earning growth in Indonesian Stock Market but with
different correlation. So, based from the result about dividend payout ratio, return
on asset, debt ratio, and earning yield, can be concluded that higher dividend
payout ratio will create lower future returns, while higher return on asset ratio
moves linear with earning growth means increase in return on asset will also raise
earning growth, and higher debt moves linear with earning growth, indicating
higher debt will result in higher income generated in the future as sign of growth.

5.2 Limitations
This study has some limitations. The sample for this research is just twenty
three companies from all industries in Indonesia. This sample might not enough to
be cover all company listed in Indonesian Stock Market. This amount of sample is
result from requirements needed to be fulfilled such as constant dividend
distribution from 2002-2010 and positive earning during 2002-2010. There is also

51

problem from completeness of the data, there are many companies that do not
have complete data from 2002-2010 which result in discarding of the company
from the samples.
There also still another variables that could affect earning growth in
Indonesia that is still not included in this research. It is possible because earning
growth is also related to many different factors such as macro economic which
could related to inflation, currency change, and many others.

5.3 Recommendations
For future research, it is good to add some new variables. The earning
growth in the company can be affected by many external and internal factors. In
this research, all variables are considered as internal factors such as dividend,
return on asset, and debt. Earning yield could be considered as internal factor
because company can also issue good news to increase stock price. However,
there still many factors that can affect earning growth that can not be controlled
by company such as inflation and many more. Therefore, it is recommended to
add some macro economics variables or other external factors.
It is also recommended to do the research based on industry. Each industry
has different characteristic in the data. For example, banking industry has different
company structures which might be better to be researched on banking sector
alone. Other industries such as agriculture and construction might also have
different company structure that could result in different correlation for each
sector. Therefore, it is possible to do research on each classified industry.

52

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53

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Appendix 1. Descriptive Statistic

eg

payout

roa

debt

56

size

per

ag

Mean 0.300
Media
0.151
n
Std.

12.954

2.952

0.000

0.112

0.783

-0.389 9.387

-0.438 -0.098 0.117

Deviati 0.695

21.560

5.564

1.000

1.000

0.181

82.618 1.000

1.000

0.033

on
Varian
ce
Minim
um
Maxim

0.483

9.089

464.861 30.963 1.000

-0.819 -0.761

12.192 0.000

-1.253 -0.835 0.000

0.000

0.014

-0.464 -6.240 -0.281

3.556 123.172 52.951 4.130 59.122 4.947

um
a. Calculated from grouped data.
b. Multiple modes exist. The smallest value is shown

11.119 1.306

Appendix 2. Analysis of Regression

Coefficientsa
Unstandardized
Standardized
Model

Coefficients
B
Std. Error

57

Coefficients
Beta

Sig.

(Constant)
-.006
Payout
-1.544
roa
2.318
debt
3.404
e
-.488
size
.433
per
.573
ag
.096
a. Dependent Variable: eg

.046
.771
.669
1.529
.330
.766
.266
.265

-.844
1.792
1.778
-.604
.433
.446
.091

Appendix 3. Classical Assumptions

58

-.123
-2.002
3.466
2.226
-1.478
.566
2.158
.364

.922
.295
.179
.269
.379
.672
.276
.778

One-Sample Kolmogorov-Smirnov Test

Unstandardized Residual
N
Normal Parametersa
Most Extreme Differences

207
.0000000
.81981368
.091
.091
-.057
1.306
.066

Mean
Std. Deviation
Absolute
Positive
Negative

Kolmogorov-Smirnov Z
Asymp. Sig. (2-tailed)
a. Test distribution is Normal.

Coefficientsa
Standardized
Unstandardized Coefficients
Model
1

Std. Error

(Constant)
payout

Coefficients
Beta

.610

.038

Sig.

16.051

.000

-.006

.039

-.012

-.166

.869

roa

.023

.043

.043

.540

.590

debt

-.032

.043

-.058

-.744

.458

-.013

.040

-.023

-.313

.754

size

-.073

.040

-.134

-1.853

.065

per

.024

.038

.045

.637

.525

ag

-.027

.042

-.050

-.646

.519

a. Dependent Variable: RESABS2

Model Summaryb
Model
1

R Square

.573a

.328

Adjusted R

Std. Error of the

Square

Estimate
.304

a. Predictors: (Constant), ag, per, size, payout, debt, e, roa

b. Dependent Variable: eg

59

.83411

Durbin-Watson
2.021

ANOVAb
Model
1

Sum of Squares
Regression

df

Mean Square

67.549

9.650

Residual

138.451

199

.696

Total

206.000

206

Sig.
.000a

13.870

a. Predictors: (Constant), ag, peg, size, payout, debt, e, roa

b. Dependent Variable: eg

Coefficientsa
Standardize
Unstandardized

Coefficients

Coefficients

Collinearity Statistics

Std.
Model

(Constant

Error

.000

.058

Beta

Sig. Tolerance

-.004

.997

VIF

)
payout

-.058

.059

-.058

-.979

.329

.966

1.035

roa

.313

.066

.313

4.743

.000

.776

1.289

debt

.168

.065

.168

2.581

.011

.794

1.259

.430

.061

.430

7.000

.000

.895

1.117

size

.039

.060

.039

.649

.517

.931

1.075

per

-.002

.058

-.002

-.028

.978

.991

1.009

ag

.009

.065

.009

.138

.890

.809

1.237

a. Dependent Variable: eg

60