The effect of earnings quality on financial analysts' dividend forecast accuracy: Evidence from Korea

Dividend policy is an important business decision and is considered a channel to communicate a Aim's performance to shareholders. Given the empirical findings that earnings quality significantly affects financial analysts' forecasting activities, it is predicted that higher earnings quality would positively influence forecast accuracy Specifically, it is expected that financial analysts would forecast dividends more accurately for funis with higher earning quality. Unlike the research on financial analysts' earnings forecasts was heavily conducted, there is little study about financial analysts' dividend forecasts. This paper examines the effect of earnings quality on financial analysts' dividend forecast accuracy We use a sample of South Korean firms for the period of 2011-2015 for multivariate regression. Earnings quality is measured by accruals quality and performance-adjusted discretionary accruals followed by prior snidies. We first compare the accuracy between dividend forecasts and earnings forecasts using t-test and Wilcoxon singed-rank test. It is confirmed that financial analysts' dividend forecasts are more accurate than earnings forecasts in Korea. We find that financial analysts' dividend forecasts are more accurate for firms with higher earnings quality. We also find that the result is still valid after controlling for the accuracy of financial analysts' earnings forecasts. This confirms that earnings quality positively affects financial analvsts' dividend forecasts.