Impact of financial reporting quality on corporate dividend policy in Asian emerging markets : A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University
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Date
2021
Type
Thesis
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Abstract
Dividends have long been considered a major source of income for stock investors in equity markets. Understanding this perception, businesses have paid increasing attention to their dividend policy, evident by the rising dividend pattern on a global scale in the last decade. The dividend signalling view suggests that dividend decisions convey information unknown to the public, which regards dividends as a communication channel between firms and outside investors. Since dividends are derived from firms’ earnings, dividends are liable to managers’ discretion and may be manipulated for private purposes. Several studies have investigated the relationship between corporate dividend policy (CDP) and the quality of financial reports to capture the degree to which managers distort the reporting process to accommodate their desired dividend decisions. Although those studies yield a similar conclusion that managers fabricate earnings using accounting techniques to justify their dividend decisions, the dearth of research on the topic limits the current understanding of this relationship in different markets.
This study is the first to examine the impact of accrual-based financial reporting quality (FRQ) on CDP across Asian emerging markets, including China, India, South Korea, Taiwan and Thailand. The data used in this study are collected from the Bloomberg financial database and the International Monetary Fund database from 2001 to 2018. The study uses the Tobit estimator with industry and year fixed effects to account for the property of dividends as a limited dependent variable and to mitigate estimation bias. Our results support the positive impact of FRQ on both dividend-paying status and dividend payouts in the five sample markets. Furthermore, higher FRQ implies lower overpaid dividends but does not necessarily raise dividends when underpaid. Our cross-sectional tests suggest that although the effect of FRQ, to some extent, is influenced by free cash flow (FCF), financial constraints, institutional ownership and various corporate governance (CG) practices, their effects are contingent on the market context. Further tests on the causality between CDP and FRQ indicate that increasing FRQ causes higher dividends, lending support to the outcome view of dividends. This study corroborates findings in previous studies, such as Koo et al. (2017) and Trinh et al. (2022), on the positive impact of FRQ on CDP, and broadens the existing literature documenting the influence of financial reporting on corporate policies.
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