Profitability, Dividend Policy, and Firm Value: Evidence from Companies Listed on the Indonesia Stock Exchange

Abstract

Firm value is the most important indicator when making investment decisions, as it reflects investors' perceptions of a company's financial performance, growth prospects, and future sustainability. Beyond profitability, financial strategies such as dividend policy play a crucial role in increasing firm value by signaling to investors about management confidence and financial stability. This research aims to examine the contribution of profitability to dividend policy, the effect of profitability on firm value, the contribution of dividend policy to firm value, and the mediating role of dividend policy in the correlation between profitability and firm value. The research also focused on food and beverage companies listed on the Indonesia Stock Exchange (IDX) during the 2020–2024 period. A quantitative approach was applied using secondary data obtained from annual financial reports. The sampling was aimed at 19 companies, resulting in 95 observations. The data were analyzed using Partial Least Squares (PLS) with SmartPLS version 4.1.1.2. The results show that profitability has a positive, then significant, contribution to dividend policy and firm value. Dividend policy also has a positive, then significant, contribution to firm value. Furthermore, dividend policy has been shown to partially mediate the correlation between profitability and firm value. These findings support signalling theory, which suggests that profitability and dividend policy serve as positive signals to investors in assessing a company's value. Consequently, companies with strong profitability and consistent dividend policies tend to achieve higher market value