15
operating
income
does
not
mean
the
company
is
making
profit
because
it
does
not
considering any loss (if any) from non-operating side.
2.2.2.Firm Size
Firm size can be represented by Total Asset of the
firm. However, due to
its
large
number, a proxy variable can
be
used
to
represent
firm
size. One of
the proxy
variables
is
natural
logarithm of the
firm size.
This way, the
firm size
is
represented
by magnitude
(Ahmed
and
Javid,
2009).
Thus
Firm
Size
can
be
described
by this
formula:
According
to
Parua
and
Gupta
(2009)
companies
with
larger
asset
base
pay
more
dividend.
The
firm
life
cycle
theory also
suggests
that
larger
firm
pays
higher
dividend payout
ratio.
When
the
firm
is at
maturity stage, the
firm
is
said to require
less
capital
for expansion.
At
this stage,
shareholder
has
no
advantage to
have
the
earnings reinvested.
DeAngelo et al. (2006) studies concluded that
firm with
larger size are typical
dividend payer. Smith and Watts (1992) had
linked the firm size and dividend payout
ratio and found out interesting evidence: larger firm size does pay higher payout ratio.
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