The Information Content of Accounting Accruals when Accompanied by Cash or Stock Dividends

27 Pages Posted: 16 Dec 2014 Last revised: 5 Sep 2015

See all articles by Elisabeth Dedman

Elisabeth Dedman

Surrey Business School

Wei Jiang

Alliance Manchester Business School, University of Manchester

Andrew W. Stark

Alliance Manchester Business School, University of Manchester

Date Written: September 4, 2015

Abstract

Unusually high accounting accruals are observable to sophisticated investors, who must then decide whether the accruals represent managerial manipulation of reported earnings or an indication of future firm performance. We hypothesise that both cash and stock dividends contain information useful to investors in making this distinction. We use China as our empirical setting, where both cash and stock dividends are common, and where the information environment is relatively weak. We find several interesting results which support out hypotheses: (i) cash dividends are associated with lower levels of abnormal accruals; (ii) when a cash dividend is paid, abnormal accruals are positively associated with current earnings and are predictive of future earnings; (iii) stock dividends are positively associated with abnormal accruals and with future earnings; and (iv) when stock dividends are paid, the market attaches a positive value to abnormal accruals. We also predict and find that it is firms with higher earnings per share growth which are more likely to distribute a stock dividend.

Keywords: cash dividends, stock dividends, earnings quality

JEL Classification: G14, G35, G32

Suggested Citation

Dedman, Elisabeth and Jiang, Wei and Stark, Andrew W., The Information Content of Accounting Accruals when Accompanied by Cash or Stock Dividends (September 4, 2015). Available at SSRN: https://ssrn.com/abstract=2538131 or http://dx.doi.org/10.2139/ssrn.2538131

Elisabeth Dedman (Contact Author)

Surrey Business School ( email )

University of Surrey
Stag Hill Campus
Guildford, GU2 7XH
United Kingdom

Wei Jiang

Alliance Manchester Business School, University of Manchester ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Andrew W. Stark

Alliance Manchester Business School, University of Manchester ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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