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The effect of financial reporting quality on corporate dividend policy

Author

Listed:
  • David S. Koo

    (University of Illinois at Urbana-Champaign)

  • Santhosh Ramalingegowda

    (University of Georgia)

  • Yong Yu

    (University of Texas at Austin)

Abstract

This study examines how financial reporting quality affects corporate dividend policy. We find that higher quality reporting is associated with higher dividends. This positive association is more pronounced among firms with more severe free cash flow problems and among firms with higher ownership by monitoring-type institutional investors. Further analysis of the relation between reporting quality and under−/over-payment of dividends suggests that reporting quality largely mitigates underpayment of dividends. Additionally, both a granger causality test and a difference-in-difference analysis of dividend changes around a quasi-exogenous reporting event yield evidence consistent with the direction of causality going from financial reporting to dividends. Overall, these findings are consistent with financial reporting quality acting as a governance mechanism that induces managers to pay dividends by disciplining free cash flow problems. Our findings support the view that dividends are the result of enhanced monitoring (Jensen 1986; La Porta, Lopez-de-Silanes, Shleifer, and Vishny 2000).

Suggested Citation

  • David S. Koo & Santhosh Ramalingegowda & Yong Yu, 2017. "The effect of financial reporting quality on corporate dividend policy," Review of Accounting Studies, Springer, vol. 22(2), pages 753-790, June.
    • Handle: RePEc:spr:reaccs:v:22:y:2017:i:2:d:10.1007_s11142-017-9393-3
    DOI: 10.1007/s11142-017-9393-3
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    More about this item

    Keywords

    Financial reporting quality; Dividend policy; Agency theory of dividends; Outcome view; Substitute view;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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