Does earnings transparency affect corporate payout decisions?

Yogesh Kumar Chauhan · Rajesh Pathak

14 citations0/0 files storedInternational Journal of Managerial Finance

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Corporate Finance and Governance Auditing, Earnings Management, Governance Financial Analysis and Corporate Governance

Abstract

Purpose The paper examines how earnings transparency affects dividend payouts for Indian firms. The authors also explore the channels through which earnings transparency affects dividend payouts. Design/methodology/approach The authors employ panel data estimation with fixed effects to examine the role of earnings transparency on dividend payouts. The authors also use path analysis to explore causation. The paper uses a sample of more than 2000 Indian listed firms, over the period 2001–2016. Findings The authors report that firms showing grater earning transparency pay more cash dividend. Their results do not support the signaling hypothesis about the dividend. However, these results provide explicit support to the theory that corporate dividend policy is an outcome of information asymmetry. Moreover, the path analysis reveals the effect of earnings transparency on corporate payout through the financial constraint channel. The results are robust to idiosyncratic controls; alternate measures of payout; alternate models; endogeneity concerns; and the alternate channel of returning money to stockholders. Practical implications Managers should also examine earnings transparency while formulating an adequate dividend policy for their firms. This study also helps investors to identify dividend-paying stocks. Originality/value This study particularly contributes to the literature examining the effect of earnings quality on dividend payouts through its effect on financial constraints. We, therefore, connect two streams of research that contemplate the relation between accounting-based information variables and dividend payouts and the relationship between financial constraints and dividend payouts. Moreover, using path analysis uniquely, the authors provide evidence on the relative importance of both the direct and the indirect link.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1995Another look at the instrumental variable estimation of error-components models 1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1973Risk, Return, and Equilibrium: Empirical Tests 1982Asymptotic Confidence Intervals for Indirect Effects in Structural Equation Models 2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 1996Agency costs of free cash flow, corporate finance, and takeovers

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2022Dividend and investment decisions in asymmetric information environments: evidence from the restaurant industry 2023Earnings quality, institutional investors and corporate cash holdings: evidence from India

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