Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Does the Pricing of Financial Reporting Quality Change Around Dividend Changes?

Does the Pricing of Financial Reporting Quality Change Around Dividend Changes? ABSTRACT We examine whether accrual earnings quality is a priced information risk factor in a dividend change setting. We define information risk as the probability that firm‐specific financial statement information pertinent to investor pricing decisions is of low precision, and use the factor‐mimicking portfolio returns formed on the Dechow‐Dichev (2002) accrual quality (AQ) metric to proxy for the information risk (IR) factor returns. We augment the Fama‐French three‐factor model with this IR factor, and find that dividend initiation and increase firms exhibit a decrease in the factor loadings on the IR factor while dividend decrease firms exhibit an increase in the corresponding factor loadings, but such changes in the factor loadings occur months prior to the dividend change announcements. The results are robust to further controls for operating risk and using an alternative measure of information risk. Further analysis on changes in information characteristics such as AQ, the probability of informed trading score (PIN), forecast dispersion, and return volatility surrounding dividend change events are consistent with the asset pricing results. Overall, we interpret our results as being consistent with investors treating the information risk associated with the precision of financial statement information as a priced risk factor, with both the precision and pricing changing in predictable directions around dividend changes. However, while we attempt to control for operating risk changes in additional tests, we cannot completely rule out changes in operating risk as a competing alternative explanation for our observed results. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

Does the Pricing of Financial Reporting Quality Change Around Dividend Changes?

Download PDF
40 pages

Loading next page...
 
/lp/wiley/does-the-pricing-of-financial-reporting-quality-change-around-dividend-95L135QdU0

References (44)

Publisher
Wiley
Copyright
Copyright © 2007 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0021-8456
eISSN
1475-679X
DOI
10.1111/j.1475-679X.2007.00225.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT We examine whether accrual earnings quality is a priced information risk factor in a dividend change setting. We define information risk as the probability that firm‐specific financial statement information pertinent to investor pricing decisions is of low precision, and use the factor‐mimicking portfolio returns formed on the Dechow‐Dichev (2002) accrual quality (AQ) metric to proxy for the information risk (IR) factor returns. We augment the Fama‐French three‐factor model with this IR factor, and find that dividend initiation and increase firms exhibit a decrease in the factor loadings on the IR factor while dividend decrease firms exhibit an increase in the corresponding factor loadings, but such changes in the factor loadings occur months prior to the dividend change announcements. The results are robust to further controls for operating risk and using an alternative measure of information risk. Further analysis on changes in information characteristics such as AQ, the probability of informed trading score (PIN), forecast dispersion, and return volatility surrounding dividend change events are consistent with the asset pricing results. Overall, we interpret our results as being consistent with investors treating the information risk associated with the precision of financial statement information as a priced risk factor, with both the precision and pricing changing in predictable directions around dividend changes. However, while we attempt to control for operating risk changes in additional tests, we cannot completely rule out changes in operating risk as a competing alternative explanation for our observed results.

Journal

Journal of Accounting Research – Wiley

Published: Mar 1, 2007

There are no references for this article.