Does the Pricing of Financial Reporting Quality Change Around Dividend Changes?

40 Pages Posted: 11 Dec 2007

See all articles by Shuping Chen

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

Terry J. Shevlin

University of California-Irvine

Yen H. Tong

Nanyang Technological University (NTU) - Nanyang Business School

Multiple version iconThere are 2 versions of this paper

Abstract

We examine whether accrual earnings quality is a priced information risk factor in a dividend change setting. We define information risk as the probability that firm-specific financial statement information pertinent to investor pricing decisions is of low precision, and use the factor-mimicking portfolio returns formed on the Dechow-Dichev [2002] accrual quality (AQ) metric to proxy for the information risk (IR) factor returns. We augment the Fama-French three-factor model with this IR factor, and find that dividend initiation and increase firms exhibit a decrease in the factor loadings on the IR factor while dividend decrease firms exhibit an increase in the corresponding factor loadings, but such changes in the factor loadings occur months prior to the dividend change announcements. The results are robust to further controls for operating risk and using an alternative measure of information risk. Further analysis on changes in information characteristics such as AQ, the probability of informed trading score (PIN), forecast dispersion, and return volatility surrounding dividend change events are consistent with the asset pricing results. Overall, we interpret our results as being consistent with investors treating the information risk associated with the precision of financial statement information as a priced risk factor, with both the precision and pricing changing in predictable directions around dividend changes. However, while we attempt to control for operating risk changes in additional tests, we cannot completely rule out changes in operating risk as a competing alternative explanation for our observed results.

Suggested Citation

Chen, Shuping and Shevlin, Terry J. and Tong, Yen H., Does the Pricing of Financial Reporting Quality Change Around Dividend Changes?. Journal of Accounting Research, Vol. 45, No. 1, pp. 1-40, March 2007. Available at SSRN: https://ssrn.com/abstract=1065858 or http://dx.doi.org/10.1111/j.1475-679X.2007.00225.x

Shuping Chen (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
521.471.5328 (Phone)

Terry J. Shevlin

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Yen H. Tong

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore 639798
Singapore
65-6790-5743 (Phone)

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