dividends and earnings quality in poland

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43

Financial Internet Quarterly bdquoe-Finanserdquo 2013 vol 9 | nr 3

42

Financial Internet Quarterly bdquoe-Finanserdquo 2013 vol 9 | nr 3


DIVIDENDS AND EARNINGS

QUALITY IN POLAND

Mieczysław Kowerski1

Ph D Mieczysław Kowerski Mieczysław Kowerski Zamość University o Management and Administration Akademicka St 4 22-400

Zamość Poland mkowerskiwsziaedupl

Abstract The purpose of this article is to show on the example of Warsaw Stock Exchange Poland (WSE) how in

emerging capital markets dividends provide information about earnings quality as measured by their

persistence In the paper the regressions models of future earnings (in years t + 1 and t + 2) wereapplied on current earnings (in year t) current dividends decision (in year t) and the interaction of

current dividend decision and earnings proposed by D J Skinner and E Soltes (2011) using pooled

cross ndash sectional time ndash series data Aset of 2263 observations coming from the companies listed on

the WSE in 1995-2009 was used for the calculation For estimating the parameters recursive modeling

was used Specic models were estimated using the heteroskedasticity-corrected general least squares

method It was shown that on the WSE the quality of earnings depends more distinctly on a rmrsquos

dividend policy than on the developed markets

Received 05062013 Accepted 11122013

JEL Classication G39

Keywords Quality of earnings earnings persistence dividend policy Warsaw Stock Exchange Performance Measurement

bdquoDividends ell the ruthrdquo (Miller 2006 p 33)

I983150983156983154983151983140983157983139983156983145983151983150

Earnings are the most synthetic measure o the

economic benefits achieved by actions undertaken

by the company (Nowak 2009 p 181) Tat is why

it is a basic measure o business activity evaluation

by shareholders and potential investors Earnings are

also quite ofen the basis or evaluating and rewarding

company managers But the act that it is a synthetic

measure which is in practice the unction o all

business transactions (both positive and negative)

occurring in an enterprise causes a lot o problems

with its unequivocal evaluation On the other hand

delivering a financial result is a complicated process

that involves decision making and as such is one

o the actions most ofen bordering on the side o

lsquocreative accountingrsquo (Wąsowski 2010 p 16) and

may fluctuate over time Consequently the quality o

financial results becomes an issue

Quality earnings may be very differently understood

and measured P Dechow W Ge and C Schrand

define earnings quality as ollows ldquoHigher quality

earnings provide more inormation about the eatures

o a firmrsquos financial perormance that are relevant

to a specific decision made by a specific decision-

makerrdquo (2010 p 344) Te same authors suggest three

categories o quality earnings indicators (Dechow et

al 2010 p 345)

1) properties o earnings

2) investor responsiveness to earnings

3) external indicators o earnings misstatements

Note they propose to proxy properties o earnings by

the ollowing indicators

1) earnings persistence

2) abnormal accruals

3) earnings smoothness

4) asymmetric timeliness and timely loss recognition

5) target beating

A simple model specification estimates earnings

persistence as

Earnings Earningst t t +

= + +1 0 1

α α ε

(1)

In model (1) earnings are typically scaled by assets

although some researchers examine margins (scaled

by sales) or scaled by the number o shares A higher

α 1 implies a more persistent earnings stream

Intuitively the logic behind earnings persistence

being a quality metric is as ollows i firm A has a more

persistent earnings stream than firm B in perpetuity

then in firm A current earnings is a more useul

summary measure o uture perormance A urther

extension o model (1) is to determine whether other

financial statement elements (or variables outside o

the financial statements) are incremental over current

earnings in predicting uture earnings (Dechow et al

2010 p 352)

Earnings Earnings Financial Statements componet + = + +

1 0 1 2α α α nnts

Other ormation

t

t t + +α ε 3

inf (2)

Tese authors also suggest six groups o thedeterminants o earnings quality (Dechow et al

2010 p 379)

1) firm characteristics (most ofen analyzed in researchare firm perormance debt growth and investmentsize)

2) financial reporting practices

3) governance and controls

4) auditors

5) equity market incentives

6) external actors (including capital requirementspolitical processes and tax and non-tax regulation)

DIVIDENDS AS A TOOL FORASSESSING EARNINGS QUALITYFOR DEVELOPED CAPITALMARKETS

Among the actors already mentioned which

determine earnings quality a very important one is

missing as pointed out by D J Skinner and E Soltes

(2011) namely ndash the fi rmrsquos dividend policies

A wealth o literature dating back to at least the

articles by J Lintner (1956) and M Miller and F

Modigliani (1961) points out that dividends are a way

to signal good prospects or high uture earnings by

the management board o a company

Later this idea took the orm o signaling theory

(Bhattacharaya 1979 Myers amp Majlu 1984 John amp

Williams 1985)

Te basis o this theory is the inormation asymmetry

between the management board and the minority

shareholders Minority shareholders usually do

not have the same inormation as management

and majority shareholders Complete inormation

especially about a companyrsquos uture (regarding orexample technologies and production processes)

is not provided by studying the company accounts

Tereore a dividend may be a way to provide

minority shareholders and potential investors

with inormation about the companyrsquos situation

and its uture profits New or increased dividends

are a positive signal about the companyrsquos financial

situation whereas their cancellation or reduction is

a negative signal

According to J Lintner (1956 p 97) dividend policy

is one o a companyrsquos primary financial decisions

Lintner conducted very detailed interviews with

the boards o 28 targeted companies For those

companies he collected financial data between

the years 1947-1953 (196 observations) Tese

interviews show that according to management

dividends are very important or shareholders Note

that shareholders are not so much interested in

a constant level o paid dividends but in a relatively

fixed percentage pay-out Te belie that the market

puts a premium on stability or gradual growth was

strong enough so that most managers sought to avoid

making changes in their dividend rates which mighthave had to be reversed within a year or so (Lintner

1956 p 99) In addition managers reduce dividend

rates very reluctantlydagger

Te results o the interviews carried out by J Lintner

concerning the dividend policy lead to the conclusion

that management will decide not to pay dividends

until they believe that they will be able to pay them

in the uture so that in the uture they will able to

dagger Sometimes in order to lsquodeendrsquo the existing payout ratiothey pay a dividend although the company has recorded a loss

(DeAngelo et al 2008 p130)





4544

Financial Internet Quarterly bdquoe-Finanserdquo 2013 vol 9 | nr 3 Financial Internet Quarterly bdquoe-Finanserdquo 2013 vol 9 | nr 3

achieve adequate (permanent) earnings Lintnerrsquos

conclusions have been confirmed by (Brav Graham

Harvey amp Michaely 2005) recently

It can thereore be hypothesized that dividends

provide inormation about earnings quality measured

by their persistence

Recent accounting scandals seem to confirm the

above hypothesis Although it is relatively easy

or management to lsquofixrsquo current profits and lsquopaintrsquo

a companyrsquos situation it is much more expensive

to pay dividends in order to inorm minority

shareholders and potential uture shareholders o

the good financial situation o the company and

its high level o profits when that level is a result o

lsquocreative accountingrsquo Management may decide on this

operation occasionally especially when that profit

is not a result o actual company perormance but

accounting interventions improving this result only

or a short period (eg through lsquoappropriatersquo booking

o liabilities at the end o the reporting period)

Skinner and Soltes (2011 p 14) in order to investigate

the relationship between dividend policy and earnings

quality suggested earnings linear models in years t +

1 and t + 2 determined by a decision to pay dividends

in year t the rate o assets return in year t and variable

product describing interaction o the decision to pay

dividends in year t and return on assets in year t Note

that earnings in year t t + 1 and t + 2 were related to

the assets at the end o year t ndash 1

E TA D E TA D E TAit it it it it it it it + minus minus minus

( ) = + + ( ) + sdot( ) +1 1 0 1 2 1 3 1

α α α α ε ε it

(3)

and


( ) = + + ( ) + sdot( ) +2 1 0 1 2 1 3 1


(4)

where

E TAit it

minus1 mdash firmrsquos earnings in year t to total assets in the end o year t ndash 1 and in (return on assets)

E TAit it + minus1 1

mdash firmrsquos earnings in year t +1 in relation to total assets in the end o year t ndash 1 in



Dit

mdash an indicator variable set to 1 i a dividend is paid by firm and in year t and 0 otherwise

D E TAit it it sdot

minus

( )1mdash interaction between D

it and E

it A

it ndash1

I we assume that variable Eit A

it ndash 1 is a measure o

total assets profitability then variable Dit (E

it A

it ndash 1 )

is profitability o companies paying dividends in

year t Tus the authors believe that earnings quality

is determined by their earnings persistence Hence

the above models can be called earnings persistence

models Model (3) indicates how persistent are

earnings achieved by companies in year t in the

ollowing year (t + 1) while the model (4) indicates

how persistent are earnings achieved by companies in

year t two years later (t + 2)

In this regression coefficient α2 measures the

persistence o earnings o all firms (irrespective i the

firm pays a dividend or not) Under the hypothesis

that dividends are inormative about the quality o

reported earnings it is expected that the coefficient

on earnings will be larger or dividend-paying firms

indicating that their earnings are more persistent

(α3 gt 0) Te sum o the coefficients α2 and α3 inorms

us about the earnings persistence o companies

paying dividends (Skinner amp Soltes 2011 p 14)

Skinner and Soltes analyzed a sample including all

non-utility non-financial domestic firms quoted

on the NYSE AMEX and NASDAQ rom 1974 to

2005 Altogether they gathered a total o 123728

observations (Skinner amp Soltes 2011 p 10) Tey

estimated all regressions using the ordinary least

squares method with two-way robust standard errors

(clustered by firm and time) to account or cross-

sectional and time series dependence Models were

estimated separately or the three sub-periods 1974-

1983 1984-1994 and 1994-2005

In models describing earnings persistence in year

t + 1 (model 3) values o estimated coefficients α2

oscillated around 08 (respectively 0781 0812

0835) and were significant at the 001 level which

according to the authors means that the profits are

airly persistent Furthermore these parameters

confirm the results o R G Sloanrsquos study (1996) who

received the value o the coefficient α2 = 084 Tere

is evidence o a modest increase in persistence over

time with the coefficient on earnings increasing

rom 078 in the earlier sub-period (1974 through

1983) to 084 in the most recent sub-period (1994

through 2005) Coefficients on a variable which

is the product o a decision o dividend paying

and earnings in relation to the value o assets

(Dit (E

it A

it ndash 1 )) are positive and statistically significant

in all three sub-periods (respectively 0031 0080

and 0064) It means that profits are more persistent

or dividend payers Since 1984 the sum o α2 and α3

coefficients or dividend payers has been around 090

Also similar results are provided by models

describing earnings persistence achieved in year t in

two years later (model 4) However coefficient values

on variables describing earnings α2 are a little lower

than in the previous models In this case the sum o

coefficients on the variables describing earnings ordividend payers in the period 1994ndash2005 is 0730

+ 0099 = 0829 (Skinner amp Soltes 2011 p 15) It

is worth emphasizing that the estimated models

are characterized by a high degree o explanation

Adjusted coefficients o determination (Adj R 2)

values or earnings persistence models o year t + 1

range rom 063 to 070 and or earnings persistence

models or year t + 2 are slightly worse ranging rom

043 to 054

Te estimation results have shown that dividend

payers have higher persistence (and thus quality) o

earnings than those not paying dividends and this

relationship does not depend on the level o dividends

paid

METHODS PROPOSED FOR

ASSESSING EARNINGS QUALITY

OF COMPANIES LISTED ON THE

WARSAW STOCK EXCHANGE

D983137983156983137

Te Warsaw Stock Exchange (WSE) is the most

dynamically growing market in Central and EasternEurope (Warsaw Stock Exchange Wiener Boumlrse

Prague Stock Exchange Budapest Stock Exchange

Bucharest Stock Exchange Bulgarian Stock

Exchange) Te WSE is the regional leader in terms o

key market ratios such as the value o equities trading

the number o domestic and oreign companies

the number o IPOs and since 2009 capitalization

which in the end o 2009 was 105 billion euro and

in the end o 2010 142 billion euro Te GDP share

o capitalization o domestic companies leapt rom

31 in the end o 2009 to 38 in the end o 2010 At

the end o 2009 the WSE Main List comprised 397

companies (354 domestic and 25 oreign) and at the

end o 2010 the number o quoted firms increased to

400 (373 domestic and 27 oreign)Dagger2

Te database o all domestic companies listed on

the Warsaw Stock Exchange rom 1995 to 2009 sect was

a starting point or the calculation It must be

considered that only the companies whose shares

were listed on the stock exchange throughout the

entire year were taken into account From the set o

domestic companies national investment unds were

excluded due to their different method o financial

reporting Some companies were removed which

in act were recorded throughout the year but were

excluded rom the stock exchanges in the first hal o

the next year4Moreover companies with negative

equity values and companies with zero net revenues

rom sales o products services goods and materials(not engaged in any operating activities in a certain

year) were excluded rom the calculation

With the development o the stock exchange

the number o companies admitted to the study

each year increased In 1995 the study included

44 companies while in 2008 293 companies In

this way cross-section datasets or 14 years were

obtained Every year this set consists o different

numbers o observations and can be analyzed or

each year separately Also annual data rom all years

can be combined and a set o pooled cross-sectional

time-series data can be obtained In total this set

consists o 2263 observations (companies ndash years)

It should be emphasized that in this pooled set each

observation ought to be treated as a separate entity

Te propensity to pay dividends o companies listed

on the Warsaw Stock Exchange is much lower than

in developed capital markets (Bartram Brown How

amp Verhoeven 2009 DeAngelo H DeAngelo L amp

Skinner 2008 von Eije amp Megginson 2008 Denis amp

Osobov 2008) But on the Warsaw Stock Exchange

the characteristic or developed capital market

process o lsquodisappearing dividendsrsquo (Fama amp French2001) was not observed Te research results suggest

the decision to equalize dividends and capital profits

tax rate rom 2004 and systematic CI reduction was

beneficial to increasing the share o companies paying

dividends in the total number o listed companies

Tis allowed companies to allocate larger earnings to

dividends (Kowerski 2010)

Dagger Warsaw Stock Exchange Annual Report 2010

httpwwwgpwplraporty_roczne (accessed 4 February 2012)sect Data rom Notoria Service httpirnotoriapl (accessed4 February 2012)

Such companies usually did not submit reports to Notoria

Service





4746


Figure 1 Changes in the number of companies under survey from 1996 to 2009 and share of dividend payers

Source Own calculations

Te dividend policy o companies listed on the Warsaw

Stock Exchange has become more and more similar

to the behavior o companies in developed capital

markets Dividend value not only in current prices

but also in constant prices is growing rapidly In 2009

the average dividend payout made by a company

listed on the Warsaw Stock Exchange amounted to

843 million zloty and it was in current prices twenty

six times higher while in constant prices five times

higher than the average payout in 1992 But the

relation o dividends to GDP remains very low and

does not exceed 1 Also we can obser ve an increase

o payout concentration mdash a relatively small number

o major companies pay increasing dividends whichrepresent a significant part o all payouts Companies

pay an increasing share o profits which makes the

dividend payout ratio increase the dividend yield

ratio also increases

From 1996 to 2009 shares o companies paying

dividends underwent multidirectional changes Tey

were particularly high (above 40) rom 1996 to

1997 Ten they ell to a minimum in 2002 (215)

From 2003 to 2006 they increased again to 375

Since 2007 shares o dividend-paying companies

have been alling

M983141983156983144983151983140 983151983142 983141983155983156983145983149983137983156983145983151983150

Te method and models suggested and discussed by

Skinner and Soltes in the previous chapter were used

to test earnings quality o domestic companies listed

on the Warsaw Stock Exchange

According to model (3) a relation o earnings in year

t + 1 to value o total assets at the end o year t ndash 1 is

a unction o dividend in year t earnings in year t to

the value o total assets at the end o year t ndash 1 and the

product o two previous variables Tis means that to

calculate the values o dependent and independent

variables it is necessary to have data about companies

listed or the successive three years In a baseline

collection not all companies met this criteria

thereore only 1481 observations could be included

in the study According to model (4) earnings in year

t + 2 to the value o total assets at the end o year t ndash 1

is a unction o dividend in year t earnings in year t to


product o the two previous variables Consequently

this means that to calculate the values o dependent

and independent variables it is necessary to have data

on companies listed or the successive our years Tis

limited the initial collection to 1195 observations

In both sets o data there are single outlier

observations o a dependent variable Observations

o this type can significantly change the final result

o the analysis and their disregard can be atal Te

simplest but quite effective method o lsquocopingrsquo with

outliers is to remove them rom the collection o data

under consideration which increases the robustness

o the estimated coefficients Estimators obtained in

this way are called lsquorobust estimatorsrsquo and estimated

models that can be called lsquorobust regressionrsquo denote

a set o estimation techniques which are less sensitive

than the ordinary least squares to the effect o

possible influential observations (Baldau amp Santos

Silva 2009 p 2)

In the present study observations or which

dependent variable values were lower thanndash100 or higher than 100 were removed As

a result the output set o observations or model 3

was reduced to 1468 while or model 4 to 1174

It must be emphasized that the method used or

selection o companies in the models (3) and (4)

especially or robust estimation can cause a sample

selection bias (Heckman 1976) with companies o

a slightly better economic and financial situation

Firms with negative equity and those that were not

listed or did not meet any o the criteria or creating

the output database respectively by three or our

successive years were removed rom samples On the

other hand the situation o companies excluded rom

the calculation usually so considerably deviates rom

the vast majority o companies included in samples

that their presence not only would not h elp to explain

changes in earnings quality but also could darken the

depiction o the phenomenondaggerdagger

Because o the act that the number o observations

in particular years are different and still there is no

inormation as to what time period (how many years)

observations should be selected recursive modeling

was used consisting o estimating consecutive modelso with increasingly shorter series emerging by

removing the oldest data every year (Charemza amp

Deadman 1997 p 62-65)

Te best method or estimating coefficients o

models (3) and (4) proved to be a heteroskedasticity-

corrected general least squares method

daggerdagger In the case o companies with negative equities some

indicators incorrectly inorm about the situation o the company

For example when such a company records a negative earning

(which is very probable) then the rate o return on equity is positive

mdash which could indicate a good inancial situation

THE RESULTS OF THEESTIMATION OF EARNINGSPERSISTENCE MODELS OFCOMPANIES LISTED ON THEWARSAW STOCK EXCHANGE

In 10 models o earnings persistence in the ollowing

year using recursive modeling and starting rom the

initial set o observations (1481 observations rom

1997 to 2008) coefficients on variable Dt were negative

and statistically insignificant A detailed analysis o

results leads to the conclusion that a catalysis effect

occurred (Hellwig 1977) which caused the lack o

coincidence o coefficients on Dt variable (Hellwig

1976)DaggerDagger Correlation coefficients between Et +1A

t ndash 1

and Dt variables are positive and coefficients on D

t

variable are negative

DaggerDagger Coeicient αi ulills the coincidence rule when sign αi = sign

ri where ri is correlation coeicient between dependent variable

and i-th independent variable





4948


Table 1 The results of estimation of earnings persistence models in yeart + 1with heteroskedasticity-corrected general l east squares method

Source Own calculations in GREL (Corttrell amp Luchetti 2010)



Only in the models or 2007-2008 and or 2008

parameters on the Dt variable were coincident but

also statistically insignificant Tereore it was

decided to reject the Dt variable and to estimate

models o earnings persistence in the ollowing year

dependent on the two other variables

Figure 2 Changes in values of coefficients in earnings persistence modelsin the following year (t + 1) estimated by recursive modeling method


Estimated by a recursive method coefficients are

characterized by very high stability Te model

estimated on data rom the years 2002 to 2008 (1039

observations) is characterized by the highest value o

the adjusted determination coefficient although this

value (02000) is much lower than in Skinner-Soltes

modelssectsect Tis model will serve or a more detailed

analysis

Estimated in this model coefficient α2 is 0467 and

thus is about 034 lower than estimated by Skinner-

Soltes coefficient α2 or the US Stock Exchanges

Furthermore estimated coefficient α3 is 0416 and ismany times higher than coefficient α3 estimated by

sectsect On the other hand the value o F statistic indicates the

signiicance o the multiple correlation coeicient R

( p = 300E-29) and thus the overall signiicant eect o both

variables on the earnings persistence in the ollowing year A

relatively low determination coeicient value in cross-section

models and cross-time models estimated on large sets o micro

data is quite common (Gruszczyński 2002 p 55)

It should be emphasized however that other earningspersistence models in the ollowing year obtained rom recursive

modeling are characterized by eatures similar to the discussed

model

Skinner-Soltes or the US Stock Exchangesdaggerdaggerdagger Tis

means that in Warsaw earnings o companies paying

dividends are more persistent than companies not

paying dividends than in New York In Warsaw

in year t the increase o return on total assets o

the company paying the dividend by 1 percentage

point caused the increase o earnings value in year

t + 1 to the value o total assets in year t ndash 1 by 0883

percentage points while in the case o a company not

paying dividends only by 0416 percentage points On

the New York Stock Exchanges the difference in avor

o companies paying dividends in the test period di dnot exceed 008 o a percentage point

Applying similar procedures as in the case o earnings

persistence models in the ollowing year models o

earnings persistence two years later were estimated

In this case removing 21 outliers provided models

that can be used to assess the phenomenon As in the

case o earnings persistence models in the ollowing

year again coefficients on the Dt variable proved to

daggerdaggerdagger O course comparisons o results obtained or the WarsawStock Exchange and or New York Stock Exchanges should be

treated with caution mainly because o the much smaller number

o observations on WSE





5150


be not coincidental Tereore models with two

exogenous variables were estimated Te estimated

models o earnings persistence two years later have

much lower quality than the models o earnings

persistence in the ollowing yearDaggerDaggerDagger Te highest

value o the adjusted determination coe fficient does

not exceed 012 Estimated values o coefficients α2

are significantly lower than in previous models

whereas the values o coefficients α3 are rising as

the number o observations decreases Starting rom

a model estimated on data rom 2001-2008 with

the exception o a model estimated on data rom

2005-2008 estimated coefficients o α3 are higher

than estimated coefficients o α2 For example in

2003-2008 the increase o return on total assets

o the company paying the dividend in year t by 1percentage point caused an increase in earnings in

year t + 2 to the value o assets in year t ndash 1 by 0787


paying dividends the increase was only about 0324

percentage points Tese results are even stronger

DaggerDaggerDagger Also estimated by Skinner and Soltes models o earnings

persistence two years later were characterized by slightly lower

quality than earnings persistence models in the ollowing year still

the dierences were small

support or the argument that companies paying

dividends have higher earnings persistence quality

Te impact o dividend policy on improving earnings

persistence has been particularly evident in recent

years

C983151983150983139983148983157983155983145983151983150983155

Te study has shown that it is more clearly visible

on the Warsaw Stock Exchange than on developed

capital markets that companies paying dividends are

characterized by higher quality o earnings measured

by their persistence It could be said that Warsaw

Stock Exchange is ull justification or the motto o

this study that lsquodividends tell the truthrsquo mdash in this

case about the quality o a companyrsquos profit From

the other side the results o the presented studies are

biased with the small samples So the calculations

should be repeated in subsequent years with the

urther development o the Warsaw Stock Exchange

and the increase o the number o quoted stocks (the

increase o the number o observations)

Te presented method o evaluation o earnings

quality can be recommended to other emerging

markets

R983141983142983141983154983141983150983139983141983155

Baldau M amp Santos Silva J M C (2009 January) Onthe use o robust regression in econometrics University ofEssex Discussion Paper Series 664

Bartram S M Brown P How J C Y amp Verhoeven P(2009) Agency Conflicts and Corporate Payout PoliciesA Global Studyrdquo Retrieved romhttpssrncomabstract=1068281

Bhattacharaya S (1979) Imperect InormationsDividend Policy and lsquoTe Bird in the Handrsquo Fallacy Bell

Journal of Economics 10(1) 259-270

Brav A Graham J R Harvey C R amp Michaely R(2005 September) Payout policy in the 21st century

Journal of Financial of Economics 77(3) 483-527

Charemza W W amp Deadman D F (1997) New

Directions in Econometric Practice (2nd ed) Lyme NHEdward Elgar

Cottrell A amp Lucchetti R bdquoJackrdquo (2010) Gretl UserrsquosGuide Retrieved romhttpwwwgnuorglicenses-dlhtml

DeAngelo H DeAngelo L amp Skinner D J (2008)Corporate Payout Policy Foundations and rendsreg inFinance 3(2-3) 95ndash287

Dechow P Ge W amp Schrand C (2010 December)Understanding earnings quality a review o the proxiestheir determinants and their consequences Journal of

Accounting and Economics 50(2-3) 344ndash401

Denis D amp Osobov I (2008 July) Why do firms paydividends International evidence on the determinantso dividend policy Journal of Financial Economics 89(1)62-82

von Eije H amp Megginson W (2008 August) Dividendsand share repurchases in the European Union Journal ofFinancial Economics 89(2) 347-374

Fama E F amp French K F (2001 April) Disappearingdividends changing firm characteristics or lowerpropensity to pay Journal of Financial Economics 60(1)3-43

Gruszczyński M (2002) Modele i prognozy zmiennych jakościowych w finansach i bankowości Warszawa OficynaWydawnicza Szkoły Głoacutewnej Handlowej w Warszawie

Heckman J J (1976) Te common structure o statisticalmodels o truncation sample selection and a limited

dependent variables and a simple estimator or suchmodels Annales of Economic and Social Measurement 5(4) 120-137

Hellwig Z (1976) Przechodniość relacji skorelowaniazmiennych losowych i płynące stąd wnioskiekonometryczne Przegląd Statystyczny 23(1) 3-20

Hellwig Z (1977) Eekt katalizy w modeluekonometrycznym jego wykrywanie i usuwanie PrzeglądStatystyczny 24(2) 179-191

John K amp Williams J (1985 September) DividendsDilution and axes A Signaling Equilibrium Te Journalof Finance 40(4) 1053-1070

Kowalewski O Stetsyuk I amp alavera O (2007) Docorporate governance and ownership determine dividendpolicy in Poland Bank i Kredyt 38(11-12) 60-86

Kowerski M (2010) Wpływ opodatkowania na p olitykędywidend spoacutełek handlowych Ekonomista 3 409-422

Lintner J (1956 May) Distribution o Incomes oCorporation Among Dividends Retained Earnings andaxes American Economic Review 46(2) 97-113

Miller L (2006) Te Single Best Investment CreatingWealth with Dividend Growth Chicago IndependentPublishers Group

Miller M amp Modigliani F (1961 October) DividendPolicy Growth and Valuation o Shares Te Journal ofBusiness 34(4) 411-433

Myers S C amp Majlu N S (1984 June) Corporatefinancing and investment decisions when firms haveinormation that investors do not have Journal ofFinancial Economics 13(2) 187-221

Nowak E (2009) Wynik finansowy przedsiębiorstwa InK Czubakowska W Gabrusewicz amp E Nowak (Eds)Przychody mdash Koszty mdash Wynik finansowy przedsiębiorstwa Warszawa Polskie Wydawnictwo Ekonomiczne

Skinner D J amp Soltes E (2011 March) What DoDividends ell Us About Earnings Quality Review of

Accounting Studies 16(1) 1-28

Sloan R G (1996 July) Do Stock Prices Fully ReflectInormation in Accruals and Cash Flows About Future

Earnings Te Accounting Review 71(3) 289-315

Wąsowski W (2010) Kreatywna rachunkowość Fałszowanie sprawozdań finansowych Warszawa Difin



Reproduced with permission of the copyright owner Further reproduction prohibited without

permission





4544


achieve adequate (permanent) earnings Lintnerrsquos

conclusions have been confirmed by (Brav Graham

Harvey amp Michaely 2005) recently

It can thereore be hypothesized that dividends

provide inormation about earnings quality measured

by their persistence

Recent accounting scandals seem to confirm the

above hypothesis Although it is relatively easy

or management to lsquofixrsquo current profits and lsquopaintrsquo

a companyrsquos situation it is much more expensive

to pay dividends in order to inorm minority

shareholders and potential uture shareholders o

the good financial situation o the company and

its high level o profits when that level is a result o

lsquocreative accountingrsquo Management may decide on this

operation occasionally especially when that profit

is not a result o actual company perormance but

accounting interventions improving this result only

or a short period (eg through lsquoappropriatersquo booking

o liabilities at the end o the reporting period)

Skinner and Soltes (2011 p 14) in order to investigate

the relationship between dividend policy and earnings

quality suggested earnings linear models in years t +

1 and t + 2 determined by a decision to pay dividends

in year t the rate o assets return in year t and variable

product describing interaction o the decision to pay

dividends in year t and return on assets in year t Note

that earnings in year t t + 1 and t + 2 were related to

the assets at the end o year t ndash 1


( ) = + + ( ) + sdot( ) +1 1 0 1 2 1 3 1


(3)

and


( ) = + + ( ) + sdot( ) +2 1 0 1 2 1 3 1


(4)

where

E TAit it

minus1 mdash firmrsquos earnings in year t to total assets in the end o year t ndash 1 and in (return on assets)





Dit

mdash an indicator variable set to 1 i a dividend is paid by firm and in year t and 0 otherwise

D E TAit it it sdot

minus

( )1mdash interaction between D

it and E

it A

it ndash1

I we assume that variable Eit A

it ndash 1 is a measure o

total assets profitability then variable Dit (E

it A

it ndash 1 )

is profitability o companies paying dividends in

year t Tus the authors believe that earnings quality

is determined by their earnings persistence Hence

the above models can be called earnings persistence

models Model (3) indicates how persistent are

earnings achieved by companies in year t in the

ollowing year (t + 1) while the model (4) indicates

how persistent are earnings achieved by companies in

year t two years later (t + 2)

In this regression coefficient α2 measures the

persistence o earnings o all firms (irrespective i the

firm pays a dividend or not) Under the hypothesis

that dividends are inormative about the quality o

reported earnings it is expected that the coefficient

on earnings will be larger or dividend-paying firms

indicating that their earnings are more persistent

(α3 gt 0) Te sum o the coefficients α2 and α3 inorms

us about the earnings persistence o companies

paying dividends (Skinner amp Soltes 2011 p 14)

Skinner and Soltes analyzed a sample including all

non-utility non-financial domestic firms quoted

on the NYSE AMEX and NASDAQ rom 1974 to

2005 Altogether they gathered a total o 123728

observations (Skinner amp Soltes 2011 p 10) Tey

estimated all regressions using the ordinary least

squares method with two-way robust standard errors

(clustered by firm and time) to account or cross-

sectional and time series dependence Models were

estimated separately or the three sub-periods 1974-

1983 1984-1994 and 1994-2005

In models describing earnings persistence in year

t + 1 (model 3) values o estimated coefficients α2

oscillated around 08 (respectively 0781 0812

0835) and were significant at the 001 level which

according to the authors means that the profits are

airly persistent Furthermore these parameters

confirm the results o R G Sloanrsquos study (1996) who

received the value o the coefficient α2 = 084 Tere

is evidence o a modest increase in persistence over

time with the coefficient on earnings increasing

rom 078 in the earlier sub-period (1974 through

1983) to 084 in the most recent sub-period (1994

through 2005) Coefficients on a variable which

is the product o a decision o dividend paying

and earnings in relation to the value o assets

(Dit (E

it A

it ndash 1 )) are positive and statistically significant

in all three sub-periods (respectively 0031 0080

and 0064) It means that profits are more persistent

or dividend payers Since 1984 the sum o α2 and α3

coefficients or dividend payers has been around 090

Also similar results are provided by models

describing earnings persistence achieved in year t in

two years later (model 4) However coefficient values

on variables describing earnings α2 are a little lower

than in the previous models In this case the sum o

coefficients on the variables describing earnings ordividend payers in the period 1994ndash2005 is 0730

+ 0099 = 0829 (Skinner amp Soltes 2011 p 15) It

is worth emphasizing that the estimated models

are characterized by a high degree o explanation

Adjusted coefficients o determination (Adj R 2)

values or earnings persistence models o year t + 1

range rom 063 to 070 and or earnings persistence

models or year t + 2 are slightly worse ranging rom

043 to 054

Te estimation results have shown that dividend

payers have higher persistence (and thus quality) o

earnings than those not paying dividends and this

relationship does not depend on the level o dividends

paid

METHODS PROPOSED FOR

ASSESSING EARNINGS QUALITY

OF COMPANIES LISTED ON THE

WARSAW STOCK EXCHANGE

D983137983156983137

Te Warsaw Stock Exchange (WSE) is the most

dynamically growing market in Central and EasternEurope (Warsaw Stock Exchange Wiener Boumlrse

Prague Stock Exchange Budapest Stock Exchange

Bucharest Stock Exchange Bulgarian Stock

Exchange) Te WSE is the regional leader in terms o

key market ratios such as the value o equities trading

the number o domestic and oreign companies

the number o IPOs and since 2009 capitalization

which in the end o 2009 was 105 billion euro and

in the end o 2010 142 billion euro Te GDP share

o capitalization o domestic companies leapt rom

31 in the end o 2009 to 38 in the end o 2010 At

the end o 2009 the WSE Main List comprised 397

companies (354 domestic and 25 oreign) and at the

end o 2010 the number o quoted firms increased to

400 (373 domestic and 27 oreign)Dagger2

Te database o all domestic companies listed on

the Warsaw Stock Exchange rom 1995 to 2009 sect was

a starting point or the calculation It must be

considered that only the companies whose shares

were listed on the stock exchange throughout the

entire year were taken into account From the set o

domestic companies national investment unds were

excluded due to their different method o financial

reporting Some companies were removed which

in act were recorded throughout the year but were

excluded rom the stock exchanges in the first hal o

the next year4Moreover companies with negative

equity values and companies with zero net revenues

rom sales o products services goods and materials(not engaged in any operating activities in a certain

year) were excluded rom the calculation

With the development o the stock exchange

the number o companies admitted to the study

each year increased In 1995 the study included

44 companies while in 2008 293 companies In

this way cross-section datasets or 14 years were

obtained Every year this set consists o different

numbers o observations and can be analyzed or

each year separately Also annual data rom all years

can be combined and a set o pooled cross-sectional

time-series data can be obtained In total this set

consists o 2263 observations (companies ndash years)

It should be emphasized that in this pooled set each

observation ought to be treated as a separate entity

Te propensity to pay dividends o companies listed

on the Warsaw Stock Exchange is much lower than

in developed capital markets (Bartram Brown How

amp Verhoeven 2009 DeAngelo H DeAngelo L amp

Skinner 2008 von Eije amp Megginson 2008 Denis amp

Osobov 2008) But on the Warsaw Stock Exchange

the characteristic or developed capital market

process o lsquodisappearing dividendsrsquo (Fama amp French2001) was not observed Te research results suggest

the decision to equalize dividends and capital profits

tax rate rom 2004 and systematic CI reduction was

beneficial to increasing the share o companies paying

dividends in the total number o listed companies

Tis allowed companies to allocate larger earnings to

dividends (Kowerski 2010)

Dagger Warsaw Stock Exchange Annual Report 2010

httpwwwgpwplraporty_roczne (accessed 4 February 2012)sect Data rom Notoria Service httpirnotoriapl (accessed4 February 2012)

Such companies usually did not submit reports to Notoria

Service





4746



























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Deadman 1997 p 62-65)



















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Deadman 1997 p 62-65)



















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t









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5150






























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C983151983150983139983148983157983155983145983151983150983155

















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permission




permission

dividends and earnings quality in poland

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