CHAPTER I

INTRODUCTION

1.1 Background
Society now is more enthusiastic to invest funds, either in the form of
stock, bond, deposit, or other forms which has expectation to get rational return in
the future. Among those forms, some people would prefer stock rather than others
because it has not definite return. It could be from 1% until 100% per capital gain.
While others usually have specific rate of return. In addition, it does not has time
limit for sale. So investors can sell them when they need.
Stock is a piece of paper that shows investors the right to obtain part of the
prospect or wealth of an organization that publishes its securities (Suad, 2005:
29). They will get return in two forms, dividend and capital gain. Dividend is part
of companys profit that will be shared to stockholders in proportion to the
amount of its share ownership (Harnanto, 2003:240). Meanwhile capital gain is
the different between selling price and purchase price that can provide gains to
investor (Tandelilin, 2001: 48).
Dictionary of Accounting Terms (1999: 441) defines that stock price is
equilibrium price levels where there is an agreement between the buyer and seller
in the capital market on the Stock Exchange. Stock price always fluctuates. The
fluctuation is based on supply and demand in capital market. In addition, it is also
based on companys value. When company performs and develops well, its price

will increase. On the contrary, when the company does not perform well, the price
will decrease (Widoatmodjo, 2004:23).
There are many factors that influence stock price. One of them is
profitability. Profit help investors to know which companies are successful, which
generally makes the shares more valuable and boosts their price. Profit can
influence stock price by changing market perception and investors confidence of
the company. Some researchers such as Clarensia et al. (2012) stated that
profitability has significant effect to stock price. On the other hand, another
researcher, Susanto (2012) stated that profitability does not have significant effect
to stock price.
Besides profitability, liquidity also influences the stock price. It is because
liquidity indicates the ability of the company to meet its short-term obligation.
Before investing, the investors usually see the capability of the company to return
their money. Moreover this variable also become consideration for investors.
Bolek and Wolski (2012) stated that sometimes higher liquidity is defined
as a positive sign for investor. It is because the greater the liquidity, the higher the
flexibility of the company in term of using working capital. Then, it will increase
the stock price. On the other hand, too high liquidity is also not good because it
indicates that the company does not manage the capital well. Then, the stock price
also will be influenced.
Not only profitability and liquidity influence the stock price but also
dividend. As we know that, investor not only expects capital gain but also
dividend. Its information can be seen from dividend payout ratio. This

information is very important for long term investment. Meanwhile for trading, it
is not really important. The higher dividend payout ratio of company, the more
favorable the companys stock. Then the stock price of the company will increase.
In this research, the author choose LQ45 companies as the target
population. One of reasons for choosing it because it is related to one of the
research variables which is liquidity. Moreover LQ45 companies are the most
liquid company among all the companies that listed on Indonesia Stock Exchange.
In addition they are the most active stock which are really interested by investors
or beginner investors (Setyorini,2005). So it will increase the accurate result of
this research.
According to Subramanyam, before investing investors will see three
analysis, those are risk analysis, profitability analysis, and valuation analysis. Risk
analysis analyze whether the company can return investors money or not,
profitability analysis is an analysis about the ability of the company in generating
profit, and valuation analysis is used to estimate of intrinsic value of a company.
Those three independent of this research are represent those analysis. Therefore
the author chooses those variables as independent varibles of this research that
will influence the stock price.
This research use LQ45 companies as population which are recognized
have high liquidity. Meanwhile the previous research uses the population in
manufacturing companies, automotive companies, banking companies, and
pharmacy companies. So the different between this research and previous research
is the level of liquidity.

These companies are consisted of 45 companies that have been chosen

which criteria of having high liquidity and market capitalization. Shetty and Samir
(2006:13) stated that market capitalization measure the total current replacement
value of the company. In other words, it is the price we would have to pay if we
want to buy out the company fully.
The compnies that included in LQ45 index are always monitored every six
months and will be held the review at the beginning of February and August. If
there are stocks do not fulfill the criteria, it will be replaced with other stocks that
are qualified.
In this research the author use financial ratio to measure the independent
variables. Financial ratio that are used in this research are current ratio for
liquidity measurement, Return on Equity for profitability measurement, and
dividend payout ratio.
According to the explanation before, the stock price is influenced by
liquidity, profitability, and dividend payout ratio. When the investors want to
invest their money to stock, of course they have to see the ability of the company
to return their money, and also they have to see how much the profit that the
company can be reached, and another one is how much dividend that they will
get. Meanwhile the stock price itself really depends on the demand and supply in
capital market that come from investors.
Based on statement above, than the author is interested in conducting
research to test the influence of liquidity, profitability, and dividend payout ratio
to stock price of LQ45 companies that listed in Indonesia Stock Exchange (IDX)

with the title: "The Influence of Liquidity, Profitability, and Dividend Payout
Ratio to Stock Price (An Empirical Study in LQ45 Index Companies Listed on
The Indonesia Stock Exchange).

1.2 Problem Statement

The problem to be discussed in this study are as follows:
1. Does Liquidity influence the stock price of LQ45 company
2. Does Profitability influence the stock price of LQ45 company
3. Does Dividend Payout Ratio influence the stock price of LQ45 company
4. Do Liquidity, Profitability, and Dividend Payout Ratio simultaneously
influence the stock price of LQ45 company

1.3 Research objective

The objectives of this research are to examine:
1. The influence of Liquidity to the LQ45company's stock price
2. The influence of Profitability to the LQ45 company's stock price
3. The influence of Dividend Payout Ratio to the LQ45 company's stock
price
4. The influence of Liquidity, Profitability, and Dividend Payout Ratio
simultaneously to LQ45 company's stock price.

1.4 Significance of Research

The following are some of significance of research :
1.4.1 Practical Significance (Operational)
1. For investors, they can use this research for analysis the stock before they
make desicion making in investment.
2. For management of the company, this research is useful to measure the
performance of the company.
1.4.2. Academic Significance (Theoretical)

1. For educators, they can use this research for additional material for
reference in teaching.
2. For the students, it can be as a resourch of study that will increase their
knowledge about the variables in this research.
3. This research can be as a reference for the future researchers.