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Attention to dividends, inattention to earnings?

Author

Listed:
  • Charles G. Ham

    (Washington University in St. Louis)

  • Zachary R. Kaplan

    (Washington University in St. Louis)

  • Steven Utke

    (University of Connecticut)

Abstract

We examine whether dividends serve as substitutes or complements to accounting information in firm valuation. Consistent with dividends substituting for earnings information, we find that dividend paying firms have 11%–15% lower earnings response coefficients (ERCs) than non-payers. We find more substitution when the dividend provides a stronger signal of permanent earnings: when the firm is less likely to cut the dividend, when the firm is likely to fund the dividend out of earnings rather than cash reserves, or when the dividend is larger. We then show that dividend payers have lower absolute returns, less trading volume, and fewer analyst forecasts at the earnings announcement (EA), suggesting that dividend payers attract less attention to their less informative EAs. Finally, we show that the lower EA attention translates into less earnings management and fewer earnings-related disclosures for dividend payers relative to non-payers. Collectively, this evidence suggests that dividends supply information about permanent earnings and, although costly, could be an efficient way for some firms to satisfy investors’ demand for earnings information.

Suggested Citation

  • Charles G. Ham & Zachary R. Kaplan & Steven Utke, 2023. "Attention to dividends, inattention to earnings?," Review of Accounting Studies, Springer, vol. 28(1), pages 265-306, March.
  • Handle: RePEc:spr:reaccs:v:28:y:2023:i:1:d:10.1007_s11142-021-09642-4
    DOI: 10.1007/s11142-021-09642-4
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    2. Kathryn E. Easterday & Pradyot K. Sen, 2023. "Another look at the dividend-price relationship in the accounting valuation framework," Review of Quantitative Finance and Accounting, Springer, vol. 61(3), pages 879-925, October.

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    More about this item

    Keywords

    Dividends; Information environment; Earnings announcements; Earnings management;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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