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    The Earnings Quality Information Content of Dividend...
    research summary posted February 16, 2017 by Jennifer M Mueller-Phillips, tagged 02.0 Client Acceptance and Continuance, 02.01 Audit Fee Decisions 
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    Title:
    The Earnings Quality Information Content of Dividend Policies and Audit Pricing
    Practical Implications:

    Taken together, the results of this study suggest that dividends provide information to auditors and mitigate concerns over their clients’ earnings quality. It appears dividends provide incremental information to auditors beyond other audit risk indicators, such as low earnings persistence or high accruals. These findings also suggest that firms’ dividend-paying status provides an easily observable cue to auditors and others that can be used when assessing a firms’ earnings quality. 

    Citation:

    Lawson, B. P. and D. Wang. 2016. The Earnings Quality Information Content of Dividend Policies and Audit Pricing. Contemporary Accounting Research 33 (4): 1685 – 1719. 

    Purpose of the Study:

    This study further explores the earnings quality information content of firms’ dividend policies by examining whether auditors incorporate this information into the assessment of their clients’ earnings quality as reflected in their audit pricing decisions. The authors choose to delve into the question of whether dividends’ association with higher earnings quality influences auditors’ risk assessment of their clients. In addition, they examine the incremental earnings quality information that dividends can provide auditors by testing two separate earnings risk settings. 

    Design/Method/ Approach:

    The authors test two separate earnings risk settings by using audit fees and financial statement data from 2004 to 2012. 

    Findings:
    • The authors find that dividend-paying firms pay lower audit fees than nondividend-paying firms after controlling for various determinants of audit pricing decisions.
    • The authors find that audit fees are significantly lower (higher) for dividend-initiating (-omitting) firms compared to benchmark audit fees.
    • The authors find that the negative association between audit fees and earnings persistence is more pronounced for dividend firms, suggesting that as earnings persistence increases, dividends provide auditors with assurance regarding the lower audit risk embedded in more persistent earnings. 
    Category:
    Client Acceptance and Continuance
    Sub-category:
    Audit Fee Decisions