Dividend and Debt Policy as Corporate Governance Mechanism: Indonesian Evidence

This study examines the effectiveness of dividend and debt policies as corporate governance mechanisms to reduce agency conflict. Indonesia is significant for such a study because it provides a setting where the tendency for agency problems is high. Using purposive sampling method, this study selects 187 firms which stocks are listed on Indonesia Stock Exchange between 2002 until 2006. This study employs event study methodandregression analysis to test its hypotheses. The results suggestthat dividend policy can be used as a corporate governance mechanism to mitigate agency conflict as far as its impact on market performance is concerned, in all firms and particularly so in firms with high concentrated ownership structure. Debt policy fails to serve as a corporate governance mechanism except in firms with high concentrated ownership structure and when concerns profitability. Withthe viability of financial policies function as effective corporate governance mechanisms have yet to be verified, the indonesian Capital Market Regulatory Board needs to rely on and/or formulate other corporate governance mechanisms to regulate the conducts ofthe firms.