Early evidence of short selling effects on dividends payout in Egypt: Does earnings quality make a difference?

Abstract

Purpose-This research aims to (i) test the impact of short selling (SSL) on dividends (DIV) payout in Egypt as one of the emerging markets and (ii) investigate the moderating effect of earnings quality (EQ) on this relationship.Design/methodology/approach-This research uses data extracted from the financial reports of a sample of listed firms on the Egyptian stock exchange from 2012 to 2021, where the data is processed using the logistic regression and generalised method of moment (GMM) estimator developed for dynamic panel data.Findings-The results of this research reveal that SSL positively affects the DIV payout of the listed Egyptian firms, while low EQ weakens this relationship.Originality/value-This research adds to the very little prior literature that examined the impact of SSL on DIV payout in the developed markets, where it provides evidence from Egypt as one of the emerging markets. It also contributes to the existing literature on Div payouts in emerging markets by exploring the impact of SSL on DIV payouts based on signaling and impression management theories which is a relatively rare area of research. Furthermore, this research investigates whether the relationship between SSL and DIV payouts is influenced by the firm EQ, which has not been previously examined.Practical implications-This research helps policymakers and regulators in emerging markets such as Egypt realise the implications of SSL, especially because of the modernity of this mechanism and the insufficient knowledge among market participants. Also, it helps investors and other stakeholders realise the SSL effects on firm decisions such as DIV payout. Furthermore, it offers insights to corporate managers on the negative impacts of SSL, including reputational damage, limited financial opportunities, regulatory scrutiny, and legal implications.Limitations-This research has some limitations. The analysis does not explore the long-term effect of SSL on DIV payout, and the sample does not include firms in other emerging markets.