The Earnings Quality Information Content of Dividend Policies and Audit Pricing

Abstract

Recent studies indicate dividends are associated with higher quality earnings. Our study extends the literature by examining whether dividends’ information is associated with auditors’ assessment of their clients’ earnings quality. Our results show that auditors charge lower fees to dividend-paying clients than to non-dividend-paying clients and the average fee discount ranges from 6.0-10.6 percent. More importantly, we find dividends have an interactive effect with respect to earnings persistence and earnings manipulation: the negative association between audit fees and earnings persistence is more pronounced for dividend firms; and dividend payouts mitigate the positive relation between earnings manipulation risk and audit fees. Our results imply dividends reduce audit risk by enhancing clients’ earnings quality information. We contribute to the literature by showing that auditors reflect the earnings quality information content of firms’ dividend policies in their pricing decisions.

Keywords: dividend policy, audit pricing, information content, earnings quality

JEL Classification: G35, M41, M42