Are Dividends Signaling the Earnings Quality? Evidence from Canada
Purpose: The purpose of this research is to investigate the informativeness of dividend payouts with respect to the earnings quality. Design/methodology/approach: A sample of 756 firm-year observations listed on the TSX 300 index during 14 years, from 2011 to 2024, was examined. The quality of earnings was estimated by the accrual-based earnings management and the real earnings management. Findings: Results show that dividend-paying Canadian firms and those with high dividend payouts exhibit higher quality in discretionary accruals but poorer quality in abnormal real earnings management. Neverthless, no significant association was found between increases in the dividend payout ratio and earnings quality. Research implications: The results confirm that dividend signaling theory exhibits certain weaknesses. They show that it is limited in its ability to detect sophisticated forms of earnings management, namely real earnings management. Consequently, while dividend distributions reassure the firm’s stakeholders about the authenticity of the financial statements and the absence of accounting manipulations, they do not provide absolute assurance against hidden operational manipulations. Originality/value: This study adds to the empirical literature on the informativeness of dividend payouts by examining whether the dividend policy of a firm could be an indicator of its earnings quality. To the best of our knowledge, no previous study has examined the relationship between the dividend payouts and the real earnings management and this is the first study that examines, in the Canadian context, the effect of the dividend payouts on the earnings management quality.