The Effect of Liquidity, Profitability, Credit Risk and Profit Growth on Dividend Policy in the Banking Sector

Abstract

Background: Signaling Theory or Signal Theory states that dividend changes are considered as a signal of a company's income. The banking industry has different characteristics compared to other sectors because its main activity focuses on the intermediation function, which is collecting funds from the public and redistributing them in the form of credit. Objective: This study analyzes the effect of Loan to Deposit Ratio (LDR), Return On Assets (ROA), Non-Performing Loan (NPL), and profit growth on Dividend Payout Ratio (DPR) Study Design: This study uses a quantitative approach with multiple linear regression methods. The data used are secondary data obtained from the bank's officially published annual financial statements. Place and Duration of Study: the study examines several banking companies listed on the Indonesia Stock Exchange (IDX) from the 2019-2024 period. Methodology: Data were collected using the purposive sampling method. The analysis used included descriptive statistics, classical assumption test, determination coefficient test (R²), simultaneous test (F test), and partial test (t test). Partially, Loan to Deposit Ratio (LDR), Non-Performing Loan (NPL), and profit growth had an effect on the Dividend Payout Ratio (DPR). Meanwhile, Return on Assets (ROA) had no effect on the Dividend Payout Ratio (DPR). In addition, the results of the determination coefficient test showed that most of the Dividend Payout Ratio (DPR) could be explained by independent variables. Results: The results of the study concluded that the banking dividend distribution policy is more influenced by liquidity, credit quality, and company growth than the level of profitability. Profitability proxied by Return On Asset (ROA) has no effect on dividend policy. This finding indicates that the level of company profitability measured through the ability of assets to generate profits has not been the main factor in determining dividend distribution policies in the banking sector. Credit risk proxied with Non-Performing Loans (NPL) has a negative effect on dividend policy. Conclusion: The study shows that the level of credit risk and the quality of banking assets affect the company's ability to set dividend distribution policies to shareholders. Profit growth has a positive effect on dividend policy. These findings indicate that companies with good profit growth tend to have a greater ability to distribute dividends to shareholders.