Dividends and earnings quality: Evidence from China

- We investigate the relationship between dividends and earnings quality.
- Dividends payment is associated with higher earnings quality.
- Factors distorting incentives to pay dividends reduce information contents of dividends.
- Equity refinancing and state ownership reduce information contents of dividends.

This paper investigates the association between dividend payouts and earnings quality for Chinese listed firms. The results show that dividend payouts are associated with more persistent earnings, higher accrual quality, and greater earnings informativeness, confirming the hypothesis on information content of dividends for Chinese firms. Further analyses show that the relationship between dividends and earnings could change with factors influencing the incentives to pay dividends. We find that the positive impact of dividend payouts on earnings quality is reduced for firms conducting equity refinancing. We also find evidence that the state ownership can reduce the information-conveying role of dividends.