Issue
Authors retain the copyright without restrictions for their published content in this journal. HSSR is a SHERPA ROMEO Green Journal.
Publishing License
This is an open-access article distributed under the terms of
DIVIDEND POLICY, CORPORATE GOVERNANCE AND EARNINGS QUALITY: A CASE OF NON-FINANCIAL LISTED FIRMS OF PAKISTAN
Corresponding Author(s) : Tehmina Afzal
Humanities & Social Sciences Reviews,
Vol. 9 No. 3 (2021): May
Abstract
Purpose of the study: This research empirically examined the impact of the dividend policy and corporate governance attributes (board size, board meetings, audit quality, nomination committee, board independence, remuneration committee, and CEO duality) on earnings quality (EQ) of the firms in Pakistan.
Methodology: The study used secondary data of 148 non-financial listed companies of the Pakistan Stock Exchange (PSX) with 1450 firm-year observations over 10 years from 2010 to 2019. Earning quality was assessed by the earnings management, while the values of the discretionary accruals were used to measure earnings management by employing the Modified jones model (1995). Panel regression analysis examined the impact of independent variables (dividend policy & characteristics of CG) on the dependent variable (EQ).
Main Findings: Results revealed that the dividend policy showed no significant impact on earnings quality. Also, the results indicated that the audit quality and remuneration committee have a significant negative impact on earning management and a positive impact on earning quality. However, the results illustrate that the large board size, board meetings, CEO duality, firm size, and leverage have a positive influence on earnings management and a negative impact on earnings quality. Overall the study found that the corporate governance characteristics, firm size, and leverage influence the earnings quality of the firms in Pakistan.
Applications of this study: The empirical results of the study will help to improve the understanding of dividend policy & corporate governance attributes in relationship with the EQ. Second, as dividend is considered one of the most important factors influencing investment decisions, so this endeavour will clarify to the investors and regulators that whether dividend will predict the quality of earnings in Pakistani firms.
Novelty/Originality of this study: This study extends the literature of earnings quality that is very thin in Pakistan.
Keywords
Download Citation
Endnote/Zotero/Mendeley (RIS)BibTeX
- Asiri, B. K. (2014). Dividend announcement: Is it a good news to the Bahrain Bourse. International Journal of Economics and Finance, 6(12), 223-248. https://doi.org/10.5539/ijef.v6n12p228 DOI: https://doi.org/10.5539/ijef.v6n12p228
- Azzoz, M., Abdel, A. R., & Khamees, B. A. (2016). The Impact of Corporate Governance Characteristics on Earnings Quality and Earnings Management: Evidence from Jordan. Jordan journal of business administration, 12(1), 187-207. https://doi.org/10.12816/0030061 DOI: https://doi.org/10.12816/0030061
- Bali, R. (2003). An empirical analysis of stock returns around dividend changes. Applied Economics, 35(1), 51-61. https://doi.org/10.1080/0003684020158930 DOI: https://doi.org/10.1080/0003684020158930
- Chen, R. C., & Hung, S. W. (2021). Exploring the impact of corporate social responsibility on real earning management and discretionary accruals. Corporate Social Responsibility and Environmental Management, 28(1), 333-351. https://doi.org/10.1002/csr.2052 DOI: https://doi.org/10.1002/csr.2052
- Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting Review, 70(2), 193-225.
- Deng, L., Li, S., & Liao, M. (2017). Dividends and earnings quality: Evidence from China. International Review of Economics & Finance, 48, 255-268. https://doi.org/10.1016/j.iref.2016.12.011 DOI: https://doi.org/10.1016/j.iref.2016.12.011
- Epps, R. W., & Ismail, T. H. (2009). Board of directors' governance challenges and earnings management. Journal of Accounting & Organizational Change, 5(3), 490-536. https://doi.org/10.1108/18325910910986981 DOI: https://doi.org/10.1108/18325910910986981
- Fodio, M. I., Ibikunle, J., & Oba, V. C. (2013). Corporate governance mechanisms and reported earnings quality in listed Nigerian insurance firms. International Journal of Finance and Accounting, 2(5), 279-286.
- GarcÃaâ€Sánchez, I. M., & GarcÃaâ€Meca, E. (2017). CSR engagement and earnings quality in banks. The moderating role of institutional factors. Corporate Social Responsibility and Environmental Management, 24(2), 145-158. https://doi.org/10.1002/csr.1405 DOI: https://doi.org/10.1002/csr.1405
- Goncharov, I. (2005). Earnings management and its determinants: Closing gaps in empirical accounting research. Peter Lang.
- González, J. S., & GarcÃa-Meca, E. (2014). Does corporate governance influence earnings management in Latin American markets? Journal of Business Ethics, 121(3), 419-440. https://doi.org/10.1007/s10551-013-1700-8 DOI: https://doi.org/10.1007/s10551-013-1700-8
- Grullon, G., Michaely, R., Benartzi, S., & Thaler, R. H. (2005). Dividend changes do not signal changes in future profitability. The Journal of Business, 78(5), 1659-1682. https://doi.org/10.1086/431438 DOI: https://doi.org/10.1086/431438
- Gulzar, M. A. (2011). Corporate governance characteristics and earnings management: Empirical evidence from Chinese listed firms. International Journal of Accounting and Financial Reporting, 1(1), 133. https://doi.org/10.5296/ijafr.v1i1.854 DOI: https://doi.org/10.5296/ijafr.v1i1.854
- Ham, C. G., Kaplan, Z. R., & Leary, M. T. (2020). Do dividends convey information about future earnings?. Journal of Financial Economics, 136(2), 547-570. https://doi.org/10.1016/j.jfineco.2019.10.006 DOI: https://doi.org/10.1016/j.jfineco.2019.10.006
- Hanlon, M., Myers, J. N., & Shevlin, T. J. (2007). Are dividends informative about future earnings? Available at SSRN 964279. https://doi.org/10.2139/ssrn.964279 DOI: https://doi.org/10.2139/ssrn.964279
- Hashim, H. A., & Devi, S. (2008). Board characteristics, ownership structure and earnings quality: Malaysian evidence. Research in Accounting in Emerging Economies, 8(97), 97-123. https://doi.org/10.1016/S1479-3563(08)08004-3 DOI: https://doi.org/10.1016/S1479-3563(08)08004-3
- Hassan, S. U., & Farouk, M. A. (2014). Firm attributes and earnings quality of listed oil and gas companies in Nigeria. Review of Contemporary Business Research, 3(1), 99-114.
- He, W., Ng, L., Zaiats, N., & Zhang, B. (2017). Dividend policy and earnings management across countries. Journal of Corporate Finance, 42, 267-286. https://doi.org/10.1016/j.jcorpfin.2016.11.014 DOI: https://doi.org/10.1016/j.jcorpfin.2016.11.014
- Hribar, P., & Collins, D. W. (2002). Errors in estimating accruals: Implications for empirical research. Journal of accounting research, 40(1), 105-134. https://doi.org/10.1111/1475-679X.00041 DOI: https://doi.org/10.1111/1475-679X.00041
- Huguet, D., & GandÃa, J. L. (2016). Audit and earnings management in Spanish SMEs. BRQ Business Research Quarterly, 19(3), 171-187. https://doi.org/10.1016/j.brq.2015.12.001 DOI: https://doi.org/10.1016/j.brq.2015.12.001
- Ismail, W. A. W., Kamarudin, K. A., & Sarman, S. R. (2015). The quality of earnings in Shariah-compliant companies: evidence from Malaysia. Journal of Islamic Accounting and Business Research, 6(1), 19-41. https://doi.org/10.1108/JIABR-03-2013-0005 DOI: https://doi.org/10.1108/JIABR-03-2013-0005
- Jessica, V. (2020). The Effect of firm characteristics and good corporate governance characteristics to earning management behaviors. Journal of Accounting, Finance and Auditing Studies, 6(2), 31-49. https://doi.org/10.32602/jafas.2020.009 DOI: https://doi.org/10.32602/jafas.2020.009
- Khafid, M., & Arief, S. (2017). Managerial ownership, corporate governance and earnings quality: the role of institutional ownership as moderating variable. Pertanika Journal of Social Science and Humanities, 25(3), 241-254.
- Latif, K., Bhatti, A. A., & Raheman, A. (2017). Earnings quality: A missing link between corporate governance and firm value. Business & Economic Review, 9(2), 255-280. https://doi.org/10.22547/BER/9.2.11 DOI: https://doi.org/10.22547/BER/9.2.11
- Maglio, R., Rey, A., Agliata, F., & Lombardi, R. (2020). Connecting earnings management and corporate social responsibility: A renewed perspective. Corporate Social Responsibility and Environmental Management, 27(2), 1108-1116. https://doi.org/10.1002/csr.1868 DOI: https://doi.org/10.1002/csr.1868
- Mikhai et al. (2003). The effect of experience on security analyst underreaction. Journal of accounting and economics, 35(1), 101-116. https://doi.org/10.1016/S0165-4101(02)00099-X DOI: https://doi.org/10.1016/S0165-4101(02)00099-X
- Miko, N. U., & Kamardin, H. (2015). Impact of audit committee and audit quality on preventing earnings management in the pre-and post-Nigerian corporate governance code 2011. Procedia-Social and Behavioral Sciences, 172, 651-657. https://doi.org/10.1016/j.sbspro.2015.01.415 DOI: https://doi.org/10.1016/j.sbspro.2015.01.415
- Mousa, G. A., & Desoky, A. (2019). The effect of dividend payments and firm's attributes on earnings quality: empirical evidence from Egypt. Investment management and financial innovations(16, Iss. 1), 14-29. https://doi.org/10.21511/imfi.16(1).2019.02 DOI: https://doi.org/10.21511/imfi.16(1).2019.02
- Osma, B. G., & Noguer, B. G. d. A. (2007). The effect of the board composition and its monitoring committees on earnings management: Evidence from Spain. Corporate Governance: An International Review, 15(6), 1413-1428. https://doi.org/10.1111/j.1467-8683.2007.00654.x DOI: https://doi.org/10.1111/j.1467-8683.2007.00654.x
- Pinkowitz, L., Stulz, R., & Williamson, R. (2006). Does the contribution of corporate cash holdings and dividends to firm value depend on governance? A crossâ€country analysis. The journal of finance, 61(6), 2725-2751. https://doi.org/10.1111/j.1540-6261.2006.01003.x DOI: https://doi.org/10.1111/j.1540-6261.2006.01003.x
- Sae-Lima, P., & Jermsittiparsertb, K. (2019). Audit Committee and Earnings Quality. world, 6(2).
- Saleem, F., Alifiah, M. N., & Tahir, M. S. (2016). The effectiveness of monitoring mechanisms for constraining earnings management: A literature survey for a conceptual framework. International Journal of Economics and Financial Issues, 6(3S), 209-214.
- Sirait, F., & Siregar, S. V. (2014). Dividend payment and earnings quality: evidence from Indonesia. International Journal of Accounting and Information Management, 22(2), 103-127. https://doi.org/10.1108/IJAIM-04-2013-0034 DOI: https://doi.org/10.1108/IJAIM-04-2013-0034
- Skinner, D. J., & Soltes, E. (2011). What do dividends tell us about earnings quality? Review of Accounting Studies, 16(1), 1-28. https://doi.org/10.1007/s11142-009-9113-8 DOI: https://doi.org/10.1007/s11142-009-9113-8
- Tong, Y. H., & Miao, B. (2011). Are dividends associated with the quality of earnings? Accounting horizons, 25(1), 183-205. https://doi.org/10.2308/acch.2011.25.1.183 DOI: https://doi.org/10.2308/acch.2011.25.1.183
- Waweru, N. M., & Prot, N. P. (2018). Corporate governance compliance and accrual earnings management in eastern Africa. Managerial Auditing Journal, 33(2), 171-191. https://doi.org/10.1108/MAJ-09-2016-1438 DOI: https://doi.org/10.1108/MAJ-09-2016-1438
- Wibowo, S. S. A. (2019). Effect of dividend payment on the earnings quality. Paper presented at the 1st International Conference on Applied Economics and Social Science (ICAESS 2019), Batam, Indonesia. https://doi.org/10.2991/icaess-19.2019.42 DOI: https://doi.org/10.2991/icaess-19.2019.42
- Younis, S. A., Hashmi, S. H., Khalid, G. K., & Nazir, M. I. (2016). Impact of corporate governance measures on earnings quality: evidence from Pakistan. Research Journal of Finance and Accounting, 7(3), 9-16.
References
Asiri, B. K. (2014). Dividend announcement: Is it a good news to the Bahrain Bourse. International Journal of Economics and Finance, 6(12), 223-248. https://doi.org/10.5539/ijef.v6n12p228 DOI: https://doi.org/10.5539/ijef.v6n12p228
Azzoz, M., Abdel, A. R., & Khamees, B. A. (2016). The Impact of Corporate Governance Characteristics on Earnings Quality and Earnings Management: Evidence from Jordan. Jordan journal of business administration, 12(1), 187-207. https://doi.org/10.12816/0030061 DOI: https://doi.org/10.12816/0030061
Bali, R. (2003). An empirical analysis of stock returns around dividend changes. Applied Economics, 35(1), 51-61. https://doi.org/10.1080/0003684020158930 DOI: https://doi.org/10.1080/0003684020158930
Chen, R. C., & Hung, S. W. (2021). Exploring the impact of corporate social responsibility on real earning management and discretionary accruals. Corporate Social Responsibility and Environmental Management, 28(1), 333-351. https://doi.org/10.1002/csr.2052 DOI: https://doi.org/10.1002/csr.2052
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting Review, 70(2), 193-225.
Deng, L., Li, S., & Liao, M. (2017). Dividends and earnings quality: Evidence from China. International Review of Economics & Finance, 48, 255-268. https://doi.org/10.1016/j.iref.2016.12.011 DOI: https://doi.org/10.1016/j.iref.2016.12.011
Epps, R. W., & Ismail, T. H. (2009). Board of directors' governance challenges and earnings management. Journal of Accounting & Organizational Change, 5(3), 490-536. https://doi.org/10.1108/18325910910986981 DOI: https://doi.org/10.1108/18325910910986981
Fodio, M. I., Ibikunle, J., & Oba, V. C. (2013). Corporate governance mechanisms and reported earnings quality in listed Nigerian insurance firms. International Journal of Finance and Accounting, 2(5), 279-286.
GarcÃaâ€Sánchez, I. M., & GarcÃaâ€Meca, E. (2017). CSR engagement and earnings quality in banks. The moderating role of institutional factors. Corporate Social Responsibility and Environmental Management, 24(2), 145-158. https://doi.org/10.1002/csr.1405 DOI: https://doi.org/10.1002/csr.1405
Goncharov, I. (2005). Earnings management and its determinants: Closing gaps in empirical accounting research. Peter Lang.
González, J. S., & GarcÃa-Meca, E. (2014). Does corporate governance influence earnings management in Latin American markets? Journal of Business Ethics, 121(3), 419-440. https://doi.org/10.1007/s10551-013-1700-8 DOI: https://doi.org/10.1007/s10551-013-1700-8
Grullon, G., Michaely, R., Benartzi, S., & Thaler, R. H. (2005). Dividend changes do not signal changes in future profitability. The Journal of Business, 78(5), 1659-1682. https://doi.org/10.1086/431438 DOI: https://doi.org/10.1086/431438
Gulzar, M. A. (2011). Corporate governance characteristics and earnings management: Empirical evidence from Chinese listed firms. International Journal of Accounting and Financial Reporting, 1(1), 133. https://doi.org/10.5296/ijafr.v1i1.854 DOI: https://doi.org/10.5296/ijafr.v1i1.854
Ham, C. G., Kaplan, Z. R., & Leary, M. T. (2020). Do dividends convey information about future earnings?. Journal of Financial Economics, 136(2), 547-570. https://doi.org/10.1016/j.jfineco.2019.10.006 DOI: https://doi.org/10.1016/j.jfineco.2019.10.006
Hanlon, M., Myers, J. N., & Shevlin, T. J. (2007). Are dividends informative about future earnings? Available at SSRN 964279. https://doi.org/10.2139/ssrn.964279 DOI: https://doi.org/10.2139/ssrn.964279
Hashim, H. A., & Devi, S. (2008). Board characteristics, ownership structure and earnings quality: Malaysian evidence. Research in Accounting in Emerging Economies, 8(97), 97-123. https://doi.org/10.1016/S1479-3563(08)08004-3 DOI: https://doi.org/10.1016/S1479-3563(08)08004-3
Hassan, S. U., & Farouk, M. A. (2014). Firm attributes and earnings quality of listed oil and gas companies in Nigeria. Review of Contemporary Business Research, 3(1), 99-114.
He, W., Ng, L., Zaiats, N., & Zhang, B. (2017). Dividend policy and earnings management across countries. Journal of Corporate Finance, 42, 267-286. https://doi.org/10.1016/j.jcorpfin.2016.11.014 DOI: https://doi.org/10.1016/j.jcorpfin.2016.11.014
Hribar, P., & Collins, D. W. (2002). Errors in estimating accruals: Implications for empirical research. Journal of accounting research, 40(1), 105-134. https://doi.org/10.1111/1475-679X.00041 DOI: https://doi.org/10.1111/1475-679X.00041
Huguet, D., & GandÃa, J. L. (2016). Audit and earnings management in Spanish SMEs. BRQ Business Research Quarterly, 19(3), 171-187. https://doi.org/10.1016/j.brq.2015.12.001 DOI: https://doi.org/10.1016/j.brq.2015.12.001
Ismail, W. A. W., Kamarudin, K. A., & Sarman, S. R. (2015). The quality of earnings in Shariah-compliant companies: evidence from Malaysia. Journal of Islamic Accounting and Business Research, 6(1), 19-41. https://doi.org/10.1108/JIABR-03-2013-0005 DOI: https://doi.org/10.1108/JIABR-03-2013-0005
Jessica, V. (2020). The Effect of firm characteristics and good corporate governance characteristics to earning management behaviors. Journal of Accounting, Finance and Auditing Studies, 6(2), 31-49. https://doi.org/10.32602/jafas.2020.009 DOI: https://doi.org/10.32602/jafas.2020.009
Khafid, M., & Arief, S. (2017). Managerial ownership, corporate governance and earnings quality: the role of institutional ownership as moderating variable. Pertanika Journal of Social Science and Humanities, 25(3), 241-254.
Latif, K., Bhatti, A. A., & Raheman, A. (2017). Earnings quality: A missing link between corporate governance and firm value. Business & Economic Review, 9(2), 255-280. https://doi.org/10.22547/BER/9.2.11 DOI: https://doi.org/10.22547/BER/9.2.11
Maglio, R., Rey, A., Agliata, F., & Lombardi, R. (2020). Connecting earnings management and corporate social responsibility: A renewed perspective. Corporate Social Responsibility and Environmental Management, 27(2), 1108-1116. https://doi.org/10.1002/csr.1868 DOI: https://doi.org/10.1002/csr.1868
Mikhai et al. (2003). The effect of experience on security analyst underreaction. Journal of accounting and economics, 35(1), 101-116. https://doi.org/10.1016/S0165-4101(02)00099-X DOI: https://doi.org/10.1016/S0165-4101(02)00099-X
Miko, N. U., & Kamardin, H. (2015). Impact of audit committee and audit quality on preventing earnings management in the pre-and post-Nigerian corporate governance code 2011. Procedia-Social and Behavioral Sciences, 172, 651-657. https://doi.org/10.1016/j.sbspro.2015.01.415 DOI: https://doi.org/10.1016/j.sbspro.2015.01.415
Mousa, G. A., & Desoky, A. (2019). The effect of dividend payments and firm's attributes on earnings quality: empirical evidence from Egypt. Investment management and financial innovations(16, Iss. 1), 14-29. https://doi.org/10.21511/imfi.16(1).2019.02 DOI: https://doi.org/10.21511/imfi.16(1).2019.02
Osma, B. G., & Noguer, B. G. d. A. (2007). The effect of the board composition and its monitoring committees on earnings management: Evidence from Spain. Corporate Governance: An International Review, 15(6), 1413-1428. https://doi.org/10.1111/j.1467-8683.2007.00654.x DOI: https://doi.org/10.1111/j.1467-8683.2007.00654.x
Pinkowitz, L., Stulz, R., & Williamson, R. (2006). Does the contribution of corporate cash holdings and dividends to firm value depend on governance? A crossâ€country analysis. The journal of finance, 61(6), 2725-2751. https://doi.org/10.1111/j.1540-6261.2006.01003.x DOI: https://doi.org/10.1111/j.1540-6261.2006.01003.x
Sae-Lima, P., & Jermsittiparsertb, K. (2019). Audit Committee and Earnings Quality. world, 6(2).
Saleem, F., Alifiah, M. N., & Tahir, M. S. (2016). The effectiveness of monitoring mechanisms for constraining earnings management: A literature survey for a conceptual framework. International Journal of Economics and Financial Issues, 6(3S), 209-214.
Sirait, F., & Siregar, S. V. (2014). Dividend payment and earnings quality: evidence from Indonesia. International Journal of Accounting and Information Management, 22(2), 103-127. https://doi.org/10.1108/IJAIM-04-2013-0034 DOI: https://doi.org/10.1108/IJAIM-04-2013-0034
Skinner, D. J., & Soltes, E. (2011). What do dividends tell us about earnings quality? Review of Accounting Studies, 16(1), 1-28. https://doi.org/10.1007/s11142-009-9113-8 DOI: https://doi.org/10.1007/s11142-009-9113-8
Tong, Y. H., & Miao, B. (2011). Are dividends associated with the quality of earnings? Accounting horizons, 25(1), 183-205. https://doi.org/10.2308/acch.2011.25.1.183 DOI: https://doi.org/10.2308/acch.2011.25.1.183
Waweru, N. M., & Prot, N. P. (2018). Corporate governance compliance and accrual earnings management in eastern Africa. Managerial Auditing Journal, 33(2), 171-191. https://doi.org/10.1108/MAJ-09-2016-1438 DOI: https://doi.org/10.1108/MAJ-09-2016-1438
Wibowo, S. S. A. (2019). Effect of dividend payment on the earnings quality. Paper presented at the 1st International Conference on Applied Economics and Social Science (ICAESS 2019), Batam, Indonesia. https://doi.org/10.2991/icaess-19.2019.42 DOI: https://doi.org/10.2991/icaess-19.2019.42
Younis, S. A., Hashmi, S. H., Khalid, G. K., & Nazir, M. I. (2016). Impact of corporate governance measures on earnings quality: evidence from Pakistan. Research Journal of Finance and Accounting, 7(3), 9-16.