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17
more money is paid out as dividend, the less money available for the creditors should
any trouble arises.
Research
by Smith
and
Watts
(1992)
on
the
relation
between
leverage
and
payout
ratio
concludes
that
the
higher leverage
of the
firm,
the
lower its
dividend
payout ratio.
This
research
would
expect
to
find
a negative relationship
between
dividend
payout
ratio and
DER. When
DER
is
high, creditors put pressure on the company to
limit
its dividend payment, and when DER
is
low,
the company can pay dividend as
much it want.
2.2.5.Retained Earnings /Book value of Equity
According to DeAngelo et al (2006)
Retained
Earnings /Book value of
Equity
(RE/TE) can be used to represent the maturity of a firm because longer running
firms
tend to accumulate
more retained earnings than
newly established
firms, although
in
rare occasion, it’s not the case. The formula is:
According  to  the 
firm 
life  cycle  theory,  companies 
in  growth  state  are
expected
to
pay
less
dividend
so
that
the
retained
earnings
is
used
as
a
lower
cost
source of fund. When
it pays
less dividend, the retained earnings post starts to build
up. This pattern continues until the firm is self-financing or relying on external source
of capital.
Overall,
higher RE/TE means
a mature company,
while lower RE/TE
indicates that the company’s still growing.
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