The Effect of Earnings Quality on Financial Analysts’ Dividend Forecast Accuracy: Evidence from Korea

Abstract

Dividend policy is an important business decision and is considered a channel to communicate a firm's performance to shareholders. Given the empirical findings that earnings quality significantly affects financial analysts' forecasting activities, it is predicted that higher earnings quality would positively influence forecast accuracy. Specifically, it is expected that financial analysts would forecast dividends more accurately for firms with higher earning quality. Unlike the research on financial analysts' earnings forecasts was heavily conducted, there is little study about financial analysts' dividend forecasts. This paper examines the effect of earnings quality on financial analysts' dividend forecast accuracy. We use a sample of South Korean firms for the period of 2011-2015 for multivariate regression. Earnings quality is measured by accruals quality and performance-adjusted discretionary accruals followed by prior studies. We first compare the accuracy between dividend forecasts and earnings forecasts using t-test and Wilcoxon singed-rank test. It is confirmed that financial analysts' dividend forecasts are more accurate than earnings forecasts in Korea. We find that financial analysts' dividend forecasts are more accurate for firms with higher earnings quality. We also find that the result is still valid after controlling for the accuracy of financial analysts' earnings forecasts. This confirms that earnings quality positively affects financial analysts' dividend forecasts.

Does Earnings Quality Affect Companies’ Performance? New Evidence from the Jordanian Market

“…Al Deeb (2018) provided evidence from an emerging market in the role of earnings quality as a mediating factor in the relationship between earnings management, returns variability, and corporate governance, with shares performance. He confirmed that earnings quality mediates the relationship between earnings management, returns variability, and corporate governance, with shares performance, where earnings quality supports other factors in order to improve the shares performance, and this also supported by the work of Nam (2019). Kormendi and Lipe (1987) discussed that earnings association depends on earnings persistence, and it measures the extent to which current earnings are associated with the future earnings.…”

Effect of Liquidity, Profitability, Leverage, and Firm Size on Dividend Policy

“…Dividends are profits from companies that are distributed to shareholders. Dividend policy is an integral part of a company's funding decision, which will be distributed to shareholders and reinvested or retained in the company (Hoang et al, 2020;Nam, 2019). If the company chooses to distribute profits as dividends, it will reduce retained earnings and subsequently reduce total internal or internal financing sources.…”

The Impact of Earnings Quality on Firm Value: The Case of Vietnam

“…Firm value is a topic that attracts a great deal of attention from firm executives and researchers, which determinants influence firm value? There have been a number of studies conducted such as Varaiya, Kerin, and Weeks (1987), Liow (2010), Hermuningsih (2014), Kodongo, Mokoaleli-Mokoteli, and Maina (2015), Mule (2015), Sucuahi and Cambarihan (2016), Handoko (2017), and Nam (2019), who studied the impact of information on financial statements on firm value. The results of these studies have agreements and disagreements because of employing different techniques and measurements.…”