Do dividends signal earnings quality in the emerging markets? Large sample evidence from India

This study examines the signaling power of dividends indicating the quantum of managed earnings by opportunistic managers and thereby indicating the credibility of the reported earnings. It investigates the issue from multiple directions by checking the strength and nature of the relationship for level of dividends, dividend payer versus non-payer, large versus small dividends, dividend increases and regularity in dividends. Panel data analysis using multiple measures indicating earnings quality on the data of 3928 listed non-financial Indian firms from 2001 to 2022 was used to obtain robust results. Findings of the study suggest that the level of earnings management in dividend paying firms is lower than that of non-payers. It was found that size of dividends is a significant variable indicating the reported earnings quality. The results also suggest that increase in dividends and continuity in dividend payments indicate a higher reported earnings quality. Thus, we find evidence that firms paying dividends demonstrate higher credibility in reporting earnings. Therefore, it can be aptly said that dividend decisions have signaling effect in the market. The results of the study hold important implications for the market participants in the emerging Indian market as it still suffers from a high level of information asymmetry. This will further embolden the efforts of the regulators in safeguarding the market participants’ interests.