Abstract

http://ssrn.com/abstract=2195739
 
 

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The Role of Financial Reporting Quality in Mitigating the Constraining Effect of Dividend Policy on Investment Decisions


Santhosh Ramalingegowda


University of Georgia - Terry College of Business

Chuan-San Wang


National Taiwan University - The Department and Graduate Institute of Accounting

Yong Yu


University of Texas at Austin

September 28, 2012

Accounting Review, Forthcoming

Abstract:     
Miller and Modigliani’s (1961) dividend irrelevance theorem predicts that in perfect capital markets dividend policy should not affect investment decisions. Yet in imperfect markets, external funding constraints that stem from information asymmetry can force firms to forgo valuable investment projects in order to pay dividends. We find that high quality financial reporting significantly mitigates the negative effect of dividends on investments, especially on R&D investments. Further, this mitigating role of financial reporting quality is particularly important among firms with a larger portion of firm value attributable to growth options. In addition, we show that the mitigating role of high quality financial reporting is more pronounced among firms that have decreased dividends than among firms that have increased dividends. These results highlight the important role of financial reporting quality in mitigating the conflict between firms' investment and dividend decisions and thereby reducing the likelihood that firms forgo valuable investment projects in order to pay dividends.

Number of Pages in PDF File: 52

Keywords: Financial Reporting Quality, Dividends, Investments

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Date posted: January 2, 2013 ; Last revised: January 9, 2013

Suggested Citation

Ramalingegowda, Santhosh and Wang, Chuan-San and Yu, Yong, The Role of Financial Reporting Quality in Mitigating the Constraining Effect of Dividend Policy on Investment Decisions (September 28, 2012). Accounting Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2195739

Contact Information

Santhosh Ramalingegowda
University of Georgia - Terry College of Business ( email )
Brooks Hall
Athens, GA 30602-6254
United States
706-542-3612 (Phone)
Chuan-San Wang
National Taiwan University - The Department and Graduate Institute of Accounting ( email )
1 Sec. 4, Roosevelt Road,
Taipei 106, 106
Taiwan
+886-2-33669782 (Phone)
+886-2-23638038 (Fax)
HOME PAGE: http://exp.management.ntu.edu.tw/zh-TW/Acc/teachers/147
Yong Yu (Contact Author)
University of Texas at Austin ( email )
1 University Station B6400
Austin, TX 78712
United States
(512)471-6714 (Phone)
(512)471-3904 (Fax)
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References:  51
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