Evidence on the Association between Dividend Information, Firm-level Productivity and Earnings Quality
Date Issued
2009
Date
2009
Author(s)
Li, Kuei-Fu
Abstract
here are two parts in this doctoral dissertation. In the first part, I examine whether the behavior of earnings management (or earnings quality) affects the dividend policy and information content of dividends. Specifically, I investigate the relationship between dividend changes and unexpected changes in future earnings. This issue has been the subject of numerous empirical studies. However, these studies have failed to document a significant relationship. allow for the fact that dividends would be as tools to mislead investors when managers could benefit from the income-increasing discretionary accruals. I find that firms with low earnings quality are less (more) likely to raise (cut) dividends, but further investigate and find the managers whose options will expire are more likely to raise dividends than managers whose options won’t in the firms with low earnings quality. The result also indicates the older managers are more likely to raise dividends than younger managers for CEOs facing turnover in low earnings quality firms.Otherwise, I also find that in high earnings quality firms, there is a significant positive relation between the magnitude of dividend change and unexpected future earnings changes, consistent with the signaling theory of dividends. However, in low earnings quality firms, the relation between dividend increases and unexpected future earnings changes is insignificant. Overall, this finding implies that signaling effect is not first order of dividend policy in low earnings quality firms. n the second part, this paper investigates whether magnitude of productivity induces different behaviors of earnings management. I use an innovative method proposed by in production theory to measure the persistence of growth to measure the potential to be high productivity in the future by applying Data envelopment Analysis (DEA) method and decomposing the labor productivity growth. Meanwhile, I follow Tucker and Zarowin (2006) to construct an income-smoothing measure. he data reveal the relations between the magnitude of income smoothing and productivity is positive. This result implies firms with high productivity (or high earnings persistence) manage discretionary accruals to make a smooth earnings series, but firms with low productivity (or low earnings persistence) use discretionary accruals opportunistically. I further investigate and find earnings and discretionary accruals in high productivity firms have more value relevance than ones in low productivity firms
Subjects
Dividends policy
Dividend signaling
Earnings quality
Income smoothing
Decomposition of labor productivity growth
Value relevance
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