Reactions to Dividend Changes Conditional on Earnings Quality

Posted: 22 Aug 1999 Last revised: 9 Aug 2014

Abstract

We examine market participants' reactions to dividend changes conditional on earnings quality. We define earnings quality as the extent to which current earnings are associated with one-year, two-year, or three-year ahead operating cash flows. Controlling for the magnitude of the dividend change, the firm's information environment, the firm's investment opportunity set, the effects of dividend clienteles, and the firm's operating risk, we find that the market reacts less to dividend change announcements from firms with higher earnings quality. Similarly, controlling for the magnitude of the dividend change, the firm's information environment, and the release of other information around the dividend declaration date, we find that the magnitude of analyst forecast revisions is significantly less for firms with higher earnings quality. Overall, our results are consistent with market participants incorporating earnings quality when reacting to information in other financial disclosures.

JEL Classification: M41, M43, G35, G14, G29

Suggested Citation

Mikhail, Michael B. and Walther, Beverly R. and Willis, Richard H., Reactions to Dividend Changes Conditional on Earnings Quality. Journal of Accounting, Auditing and Finance, Vol. 18, pp. 121-151, 2003, Available at SSRN: https://ssrn.com/abstract=170559 or http://dx.doi.org/10.2139/ssrn.170559

Michael B. Mikhail (Contact Author)

University of Illinois at Chicago - College of Business Administration ( email )

601 South Morgan Street
11th Floor
Chicago, IL 60607
United States

Beverly R. Walther

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1595 (Phone)
847-467-1202 (Fax)

Richard H. Willis

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States
615-343-1050 (Phone)
615-343-7177 (Fax)

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