The association between dividends and accruals quality

Abstract

This paper responds to a specific gap identified in the prior literature by examining whether dividend paying status and dividend size are associated with accruals quality, using three accruals‐based earnings quality proxies on a large sample of 2387 firm‐year observations over 17 years in a developing economy, South Africa. Univariate tests are also conducted to identify differences in characteristics between dividend and non‐dividend paying firms, and large and small dividend paying firms. The paper finds that dividend paying status is positively associated with accruals quality. This association remains robust over sub‐groups of firms that differ in size, growth, profitability, age, maturity, leverage, capital intensity and propensity to raise new capital. The prior literature is extended by using quintiles of dividend size to further investigate the association between dividend size and accruals quality. The findings include that larger dividend paying firms are associated with better accruals quality, and that this relationship is stronger among firms that pay average‐sized dividends. Additionally, there are significant differences in characteristics between dividend and non‐dividend paying firms and between large and small dividend paying firms. Based on these results, policymakers, regulators, legislators and boards may want to explore the use of dividend policy as a corporate governance mechanism.