Dividend Policy and Informativeness of Reported Earnings: Evidence from the MENA Region

• In Event: Information Content of Accounting Information

Abstract

This paper documents the effect of dividend policy on informativeness of reported earnings in the MENA region during the period 2003- 2014. The results show that informativeness of reported earnings, measured by earnings-return relation, is an increasing function of dividend payout ratio. We argue that higher dividends reduce agency conflicts by reducing the excess cash with managers. Lower agency problems lead firms to disclose information more truthfully, thereby improving credibility of reported earnings. We also show that our results hold for various proxies of dividend policy and across different sub-samples. Interestingly, our results also show that the positive impact of dividend policy on informativeness of reported earnings is more pronounced in countries with relatively poor governance environment. We argue that this result is driven by the fact that positive signal that emerges from dividends is more valuable in countries where governance environment is weak.

Authors

• Omar Farooq, American University in Cairo

• Nermeen Shehata, American University in Cairo

• Siva Nathan, Georgia State University