Evidence on the Relationship Between Cash Dividend and Earnings Quality

Abstract

This study investigated the relationship between the distribution of cash dividends and earnings quality of nonfinancial companies listed in Indonesia Stock Exchange. The quality of earnings was measured by using the absolute value of performance-adjusted discretionary accruals (ADA). With 300 firm-year observations over the period 2011–2013, this study found that companies that pay dividends have better earnings quality than companies that do not pay dividends. Companies that pay dividends in large amounts have better earnings quality than companies that distribute dividend in small amounts. Companies that increase the size of the dividend from the previous period have better earnings quality than the companies that do not raise the size of dividend from the previous period. In addition, this study also showed that companies that have persistent dividends have better earnings quality than the companies that do not have persistent dividend payment during the period of observation.