AAA Spark Meeting of the Regions

Earnings Quality and the Dividend Initiation Decision

• In Event: Financial Reporting Quality

Abstract

We examine industry and earnings quality effects on the likelihood and level of dividend initiations. Results suggest that firms incorporate industry expectations for dividend levels and growth into the initiation decision. They are in general less likely to initiate a dividend if dividend levels in the industry are high or growing. Firms that do initiate seek to match industry peers in initiation levels. We also find that announcement returns to dividend initiating firms are lower when more industry peers are dividend payers and when industry dividend growth is high. Together, these results provide support for an industry equilibrium dividend policy. Firms with higher earnings quality (lower discretionary accruals) are more likely to initiate dividends. However, the dividend initiation of peers in the industry mitigates the low likelihood of dividend initiation in these firms. As we divide the sample into three categories: high competitive, median competitive, and low competitive models, the effect of discretionary accruals is only robust for the high competitive models.

Authors

• Ben Le, The University of Tennessee at Martin

• Donna Paul, Washington State University

• Huang Wei, University of Minnesota