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Does earnings transparency affect corporate payout decisions?

Yogesh Chauhan (Department of Finance, Indian Institute of Management, Raipur and Atal Nagar, Kurru (Abhanpur), Raipur (C.G.), India)
Rajesh Pathak (Goa Institute of Management, Sattari, India)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 12 June 2020

Issue publication date: 8 March 2021

690

Abstract

Purpose

The paper examines how earnings transparency affects dividend payouts for Indian firms. The authors also explore the channels through which earnings transparency affects dividend payouts.

Design/methodology/approach

The authors employ panel data estimation with fixed effects to examine the role of earnings transparency on dividend payouts. The authors also use path analysis to explore causation. The paper uses a sample of more than 2000 Indian listed firms, over the period 2001–2016.

Findings

The authors report that firms showing grater earning transparency pay more cash dividend. Their results do not support the signaling hypothesis about the dividend. However, these results provide explicit support to the theory that corporate dividend policy is an outcome of information asymmetry. Moreover, the path analysis reveals the effect of earnings transparency on corporate payout through the financial constraint channel. The results are robust to idiosyncratic controls; alternate measures of payout; alternate models; endogeneity concerns; and the alternate channel of returning money to stockholders.

Practical implications

Managers should also examine earnings transparency while formulating an adequate dividend policy for their firms. This study also helps investors to identify dividend-paying stocks.

Originality/value

This study particularly contributes to the literature examining the effect of earnings quality on dividend payouts through its effect on financial constraints. We, therefore, connect two streams of research that contemplate the relation between accounting-based information variables and dividend payouts and the relationship between financial constraints and dividend payouts. Moreover, using path analysis uniquely, the authors provide evidence on the relative importance of both the direct and the indirect link.

Keywords

Citation

Chauhan, Y. and Pathak, R. (2021), "Does earnings transparency affect corporate payout decisions?", International Journal of Managerial Finance, Vol. 17 No. 2, pp. 237-255. https://doi.org/10.1108/IJMF-11-2019-0441

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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