Dividend Policy and Informativeness of Reported Earnings: Evidence from the MENA Region

• Published date: 01 March 2018
• Date: 01 March 2018
• Author: Siva Nathan,Omar Farooq,Nermeen Shehata
• DOI: http://doi.org/10.1111/irfi.12124

Dividend Policy and

Informativeness of Reported

Earnings: Evidence from the MENA

Region

OMAR FAROOQ

†

,NERMEEN SHEHATA

†

AND SIVA NATHAN

‡

†

School of Business, American University in Cairo, Cairo, Egypt and

‡

School of Accountancy, Robinson College of Business, Georgia State University,

Atlanta, GA, USA

ABSTRACT

This paper documents that informativeness of reported earnings, measured by

earnings–return relation, is an increasing function of dividend payout ratio in

the Middle East and North Africa region during the period between 2003 and

2014. We argue that higher dividends reduce agency conflicts. Lower agency

problems lead firms to disclose information more truthfully, thereby improv-

ing credibility of reported earnings. We also show that our results hold for

various proxies of dividend policy.

JEL Codes: G32

I. INTRODUCTION

Middle East and North Africa (MENA) is, generally, characterized by ineffective

corporate governance mechanisms. Hawkamah (2008), for instance, reports that

only 14% of listed firms in the MENA region consider governance mechanisms as

of importance to them.

1

Empirical studies, such as Farooq and El Kacemi (2011),

also come to the same conclusion by documenting that traditional governance

mechanisms are weak in the region. We argue that ineffective governance

mechanisms have resulted in inadequate disclosure mechanisms in the MENA

region. Hawkamah (2008) documents that 45% of listed firms in the MENA

region do not disclose information about related party transactions. It also shows

that almost 40% of listed firms do not publish financial statements on their

website. Consequently, it has resulted in an environment where it is hard for

1 Hawkamah, Institute for Corporate Governance is a non-profit, autonomous organization

founded by the World Bank, International Finance Corporation (IFC), Organization for

Economic Co-operation and Development (OECD), Dubai International Financial Centre

(DIFC), and Union of Arab Banks (UAB). Its mission is to bridge the corporate governance

gap in the Middle East and North Africa region. (Source: http://www.hawkamah.org/).

© 2017 International Review of Finance Ltd. 2017

International Review of Finance, 2017

DOI: 10.1111/irfi.12124

International Review of Finance, 18:1, 2018: pp. 113–121

DOI:10.1111/irfi .12124

© 2017 International Review of Finance Ltd. 2017