Dividend payment and earnings quality: evidence from Indonesia

• Pages: 103-117
• DOI: https://doi.org/10.1108/IJAIM-04-2013-0034
• Published date: 29 April 2014
• Date: 29 April 2014
• Author: Febriela Sirait,Sylvia Veronica Siregar
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Dividend payment and earnings

quality: evidence from Indonesia

Febriela Sirait and Sylvia Veronica Siregar

Department of Accounting, Faculty of Economics,

Universitas Indonesia, Depok, Indonesia

Abstract

Purpose – This research aims to examine the relationship between dividend payment and earnings

quality.

Design/methodology/approach – The authors examine four dividend features: dividend-paying

status, dividend size, dividend changes, and dividend persistence. The samples consist of 90 f‌irms from

the manufacturing industry in the years 2005-2009. Multiple regression is used for testing hypotheses.

Findings – The results show that dividend-paying status, dividend increase, and persistence in

dividend payment have signif‌icant positive association with earnings quality. However, the authors

do not f‌ind evidence that larger dividend size is an indicator of higher earnings quality. Overall, the

results show that dividend-paying status, increase in dividend size, and persistence in dividend

payment are indicators or signals of higher earnings quality.

Research limitations/implications – This study examines only the manufacturing f‌irms listed on

the Indonesia Stock Exchange. Further study based on different industries and/or different emerging

markets is needed before generalizing results.

Originality/value – Few studies have examined dividend payment in emerging markets. This study

f‌ills the void.

Keywords Earnings quality,Dividend changes, Dividend persistence,Dividend size,

Dividend-payingstatus

Paper type Research paper

1. Introduction

Previous studies have examined whether a dividend is a tool chosen by f‌irms to provide

information to the market (e.g. signaling) (Bhattacharya, 1979; Miller and Modigliani,

1961). Traditional dividend-signaling models predict that a dividend reveals

information regarding future earnings (Pettit, 1972; Aharony and Swary, 1980;

Asquith and Mullins, 1983; Aharony and Dotan, 1994). The increase (decrease) in

dividend provides a good (bad) signal about a f‌irm’s future earnings (Bhattacharya,

1979; John and Williams, 1985; Miller and Rock, 1985; Arnott and Asness, 2003; Lukose

and Rao, 2004). However, there are other studies that f‌ind contradictory results that

indicate a dividend has weak information content regarding a f‌irm’s future earnings

(DeAngelo et al., 2006; Benartzi et al., 1997; Brav et al., 2005).

The previous studies examined only the association between dividends and

earnings. In addition to these studies, several other studies conducted in developed

markets showed that there is an association between dividend and earnings quality

(Caskey and Hanlon, 2005; Hanlon et al., 2007; Chen et al., 2007; Tong and Miao, 2011;

Skinner and Soltes, 2011).

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1834-7649.htm

The authors thank participants at Simposium Nasional Akuntansi XV, Universitas Lambung

Mangkurat, Banjarmasin, Indonesia, the editor, and two anonymous reviewers.

Received 28 April 2013

Revised 15 August 2013

15 September 2013

17 September 2013

Accepted 19 September 2013

International Journal of Accounting

and Information Management

Vol. 22 No. 2, 2014

pp. 103-117

qEmerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-04-2013-0034

Dividend

payment and

earnings quality

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