The Effect of Financial Reporting Quality on Corporate Dividend Policy

54 Pages Posted: 14 Oct 2016

See all articles by David S. Koo

David S. Koo

University of Illinois at Urbana-Champaign

Santhosh Ramalingegowda

University of Georgia - Terry College of Business

Yong Yu

University of Texas at Austin

Date Written: October 13, 2016

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).

Keywords: Financial Reporting, Dividend, Agency Conflict, Governance

JEL Classification: G14, M41

Suggested Citation

Koo, David S. and Ramalingegowda, Santhosh and Yu, Yong, The Effect of Financial Reporting Quality on Corporate Dividend Policy (October 13, 2016). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2851928

David S. Koo

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Santhosh Ramalingegowda

University of Georgia - Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States
706-542-3612 (Phone)

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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