The moderating effect of the type of firms’ ultimate ownership on the relationship between dividends and earnings quality

Document Type : Research Paper

Authors

1 Associate Professor of Accounting, Shahid Bahonar University, kerman, Iran

2 MSc. accounting, Shahid Bahonar University of Kerman, Kerman, Iran.

3 Asistant Professor of economic, Shahid Bahonar University, kerman, Iran

Abstract

   Introduction
Building on the prior literature, this research argues that since dividends are supported by a more stable cash flow and reduce free cash flow, as well as provide corroborative evidence to investors, dividend-paying firms have higher earnings quality than non-dividend paying firms, indicated by more persistent earnings, lower discretionary accruals, and greater earnings' informativeness (Deng, Li and Liao, 2017). Besides the basic association between dividends and earnings quality, Iran’s firms also have another special feature in that firms have different ultimate owners. Government or private ownership will also affect the association between dividend payouts and earnings quality. For instance, Anderson, Chi, Ingram, and Liang (2011) show that state shareholders prefer cash dividends to stock dividends. Firms owned by the government tend to pay more dividends, which is an instrument employed by controlling shareholders for tunneling (Chen, Jian, & Xu, 2009; Chou, Chen, & Huang, 2010).  More specifically, the objective of this study is to investigate the modifying effect of the type of companies’ final ownership on the relationship between dividends and earnings quality.
 
Hypotheses
To achieve the objective of this research, the present study has two hypotheses.
H1: Dividend has a significant impact on the earnings quality.
H2: Type of ultimate ownership has a moderating effect on the relationship between dividends and earnings quality.
 
Methods
The present research is conducted following a quasi-experimental research design. Statistical population of this research includes the firms accepted in Tehran Stock Exchange. The study period is between the years 2009 to 2016 and 90 companies were investigated. In order to analyze the hypothesis, linear regression and t-test have been used. The collected data was calculated using the Excel software and was analyzed by Eviews 9 and Stat14.
 
Result
The research results showed that in companies where dividends are paid, dividends are associated with more persistent earnings, higher accrual quality, and greater earnings' informativeness, and the hypothesis of dividend information content can be confirmed for Iranian companies. But the type of ownership of companies can affect the severity of this relationship. Further analyses show that the relationship between dividends and earnings quality could change with type of ownership. We find evidence that the state ownership can reduce the information-conveying role of dividends.
 
Discussion and Conclusion
Several studies in Tehran Stock Exchange have examined the effect of dividends on earnings quality, but few studies have been conducted to examine the effect of dividends on earnings quality when the type of companies’ ownership is different. So, the purpose of this paper is investigating the moderating effect of the type of firms’ ultimate ownership on the relationship between dividends and earnings quality. We further investigate whether the relation between dividend payouts and earnings quality could change with different ultimate ownership. The empirical result show that the ownership has power to affect such an association. Firms with state ownership might use dividend to transfer resources out of the firms, so dividends of these firms have less information content to predict current earnings.

Keywords

References

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