The overinvestment conditional impact of dividend and debt policy as the governance mechanism on firm performance

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Abstract

Dividend and debt policy play the important role in supporting an effective corporate governance mechanism in term of reducing agency problem related to free cash flow and controlling managers behaviour (Jensen & Meckling, 1976; Rozeff, 1982; Easterbrook, 1984). However, previous studies about the impact dividend and debt policy on firm performance found inconsistent results (Rajverma et al., 2019; Riaz et al., 2023; Laksana et al., 2024; Njoku & Lee, 2024). The purpose of this research is to examine the debt and dividend policy as the governance mechanism affected the company’s financial performance which emphasizes overinvestment as a conditional factor. 113 manufacturing companies listed on the Indonesia Stock Exchange from 2017 until 2020 were chosen as a sample for this study using the purposive sampling technique. This study applied multiple regression and hierarchical regression models. This study found that performance of the company is negatively impacted by debt policy. This study also provided the empirical evidence that dividend policy improves the performance of the company. In the context, the conditional role of overinvestment, this study revealed that the overinvestment plays as the negative conditional impact on the debt policy-firm performance relationship and dividend policy-firm performance relationship as well. These findings concludes that the effect of debt and dividend policy on a company’ financial performance is conditional. The effect debt and dividend policy will be negative for overinvestment firm and those effect will be positive for underinvestment firms. The practical implications of these findings especially for investors and creditors decision-making must consider a company’s overinvestment when they want to predict the impact of the debt and dividend policy on the company future performance.

Keywords: Governance Mechanism, Debt Policy, Dividend Policy, Overinvestment, Financial Performance

Authors’ individual contribution: Conceptualization — S.S. and H.H.; Methodology — S.S. and N.A.; Software — S.S.; Validation — H.H.; Formal Analysis — S.S. and L.L.; Investigation — N.A. and H.H.; Resources — S.S., N.A., H.H., and L.L.; Data Curation — L.L.; Writing — Original Draft — S.S.; Writing — Review & Editing — S.S., N.A., H.H., and L.L.; Visualization — N.A.; Supervision — H.H.; Project Administration — N.A. and L.L.; Funding Acquisition — L.L.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G32, G34, G35, M41

Received: 10.01.2025
Revised: 21.04.2025; 12.09.2025
Accepted: 15.10.2025
Published online: 17.10.2025

How to cite this paper: Saiful, S., Aziza, N., Husaini, H., & Lismawati, L. (2025). The overinvestment conditional impact of dividend and debt policy as the governance mechanism on firm performance. Journal of Governance & Regulation, 14(4), 138–145. https://doi.org/10.22495/jgrv14i4art13