“The effect of dividend payments and firm’s attributes on earnings quality: empirical evidence from Egypt”

This empirical study aims mainly to investigate the effect of both dividend payments (DP) and five firm`s attributes (firm size, firm leverage, firm performance, legal form and audit quality) on earnings quality (EQ) of the most active listed firms in Egypt. A sample of 552 firm-year observations during four years from 2014 to 2017 was used. Hierarchical Multiple Regression (HMR) was used to regress the six independent vari- ables on firms’ EQ through the absence of firms’ earnings management (EM), which was estimated through discretionary accruals (DAC). Main results show that there is some divergence in EM practices over the four years and might suggest that EM by listed firms in Egypt exists especially in the first two years (2014 and 2015); how- ever, relatively lower EM practices are found in the last two years (2016 and 2017). Correlation results show a number of significant relationships between the EM and three independent variables (firm leverage, legal form and audit quality). HMR results are in line with the results obtained via Pearson correlation.


INTRODUCTION
The research area of the corporate dividends has attracted a large number of researchers in various fields and many studies have appeared in different streams. One of these streams is studies examining the relationship between dividend payments (DP) and earnings quality (EQ) based on the argument that dividends reveal information regarding EQ such as future earnings, sustainable earnings and stable cash flows (Caskey & Hanlon, 2005;Skinner & Soltes, 2011;Tong & Miao, 2011). The current study has been motivated by this stream of literature. It investigates the effect of both the DP and firms' attributes on EQ in the Egyptian capital market. Jensen et al. (2010) pointed out that a reduction in firm dividends is associated with a decrease in its value. Therefore, managers who tend to decrease their dividends keep such action as a "last resort".
Managers use DP as a tool to communicate with corporate shareholders to demonstrate its performance. Cash dividends are normally founded on actual profits of a given form that reflect its performance, because it is difficult and problematical for managers distributing dividends when there are no profits (Sirait & Siregar, 2014). One character of the fairness of reported earnings is dividends (Breeden, 2003). Skinner and Soltes (2011) provided evidence on DP as a better indication of EQ. The authors found that firms with DP have higher EQ than non-dividend paying firms. In addition, dividends provide strong evidence to investors on a good corporate financial performance that can be maintained with a solid cash basis (Caskey & Hanlon, 2005).
On the other hand, EQ considers one of the unique characteristics of financial reporting. It has attracted the interest of a wide range of stakeholders of the company such as credit rating agencies, analysts, accounting researchers, regulators and standard setters. As a result, there are various benchmarks and views used to measure the EQ. Ismail et al. (2015, p. 20) stated that "a high quality of reported earnings is demanded, especially for the purpose of making investing and financing decisions. However, earnings management (EM) practices may affect the quality of accounting earnings. This behavior occurs when managers manipulate the earnings figure during the preparation of financial statements through the use of discretionary provisions allowed by certain accounting standards".
Dividends consider a sign for reliability and credibility of reported earnings (Malkiel, 2003). Firms with high EQ are willing and able to regularly pay dividends, because their future earnings can be sustained in contrast firms that engage in EM practices, which will not produce cash. Earnings derived from such practices are not sustainable. Firms with higher DP have higher EQ, because they must be sustained by a strong cash basis. Firms tend to raise their DP if they are expecting an increase in their future earnings (Caskey & Hanlon, 2005). Gopalan and Jayaraman (2012) argued that DP can help to reduce EM, because dividends will limit private control benefits for managers inside the company, which may reduce the possibility to manipulate earnings. In this line, Leuz et al. (2003) provided evidence on when private control benefits of corporate managers are limited, EM is less pervasive.
The current study contributes in the following directions. First, our study builds on the rising literature in EQ and DP through extending previous research on EQ and corporate attributes in emerging markets such as Egypt especially, relatively little is identified about this important area of research in such markets. For example, Adaoglu (2000) argued that there are substantial differences in corporate DP policy between the developing and developed markets; therefore, research on emerging markets is a crucial matter. Second, findings of the current study may help to improve the understanding of corporate dividend policy and its relationship with the EQ. Consequently, investors, regulators and different interested parties can benefit from our findings. Third, this study could support in investigating other capital markets in the Middle East area, which might reflect a general contribution on dividend policy and EQ areas. Finally, it is interesting to evaluate the relationship between DP and EQ in different environments such as Egypt especially, prior studies have documented mixed results such as Chemmanur et al. (2010) who found that firms in Hong Kong use more flexible policies for DP and are less engaged in dividend smoothing than USA firms.
The study is structured as follows. Section 1 presents the theoretical framework of the study. Section 2 provides the related literature and the development of hypotheses. Section 3 offers background on Egyptian capital market. Sections 4 and 5 report research methods and empirical findings. Lastly, final section presents the conclusion and limitations of the study.

THEORETICAL FRAMEWORK OF THE STUDY (AGENCY AND SIGNALING THEORIES)
The topic of corporate dividend policy has a historical development with a great interest in the literature. Therefore, several theories with different ex-planations and hypotheses are appeared starting from dividend policy irrelevance theory that was provided by Miller and Modigliani (1961). Such theory is based on certain assumptions such as a firm works in an advanced stock market and investors are able to make rational decisions. Miller and Modigliani (1961) argued that DP could notify information on corporate future cash flow. Other theories such as the tax preference theory and the tax penalty have addressed the preference of investors related to ratios of DP in the light of tax rate, the required rate of return, capital gains and their desire to improve the market valuation of a given firm's stocks (Al-Malkawi, 2007). Moreover, the agency and signaling theories are the most widely used theories for the interpretation of the corporate dividend policy.
Signaling theory is built on the information asymmetry, which exists between managers of the firm (insiders) and its shareholders (outsiders). Firm managers may use their private information on firm's financial performance to broadcast information to others engaged in the market for a specific purpose such as influence on share price or to posit that firms could pay dividends to signal their upcoming prospects. In other words, firm managers use dividends to signal particular information to investors (Miller & Rock, 1985).
In signaling theory, DP is seen as signals for good news on good-quality firms (Bali, 2003). Sirait and Siregar (2014) argued that firms with DP are expected to have higher EQ than others. Several studies argued that change in dividends (increase or decrease) reveals a signal (good or bad) on corporate future earnings (Hanlon et al., 2007). On contrast, other studies found no relationship or weak impact of the information content of dividends on firm's future earnings (Grullon et al., 2005;Brav et al., 2005).
On the other hand, recent changes in business and changing ownership patterns have led to the emergence of agency problems, which result from the separation of control and ownership in business. Consequently, owners face agency problems like moral hazard and adverse selection, as well as information asymmetry (Jensen & Meckling, 1976). According to agency theory, managers of a firm use dividends as a tool in resolving agencybased conflicts, which may occur between firm managers and outside shareholders (Jensen, 1986). It was reported that investors prefer an increase in dividends, because this leads to decreased cash free that managers can use in their private benefits, consequently, they may invest in unsuccessful projects (Jensen, 1986). Dividends reflect efficient contracting between firm managers and minority shareholders, at the same time, they convey a commitment of a firm to act in the highest interests of firm shareholders (La Porta et al., 2000). Faccio et al. (2001) compared DP in East Asia and Europe to address the significance of agency conflicts between majority and minority shareholders. They found that large shareholders are supporting lower dividends, because they can get private benefits from assets under their control and the cash flows. DP consider an important tool that help shareholders to decrease the free cash flows available for managers inside the firm for discretionary spending, hence imposing better control on financial resources, while managers may prefer not paying dividends or reduce the level of dividends.
They have incentives to keep more cash free inside the firm, which gives them the chance to enhance personal benefits. La Porta et al. (2000, p. 2) stated that "unless profits are paid out to shareholders, they may be diverted by the insiders for personal use or committed to unprofitable projects that provide benefits for insiders". From the agency perspective, firms with high DP will decrease the agency costs of free cash flow and reduce the opportunities to exploit company resources for personal interests (Pinkowitz et al., 2006). Based on earlier arguments, it can be claimed that although both theories (agency and signaling) can help in providing a reasonable basis for explaining the relationship between DP and EQ, the results for studying such relationship may be varied in different environments with variety of corporate attributes. Financial Accounting Concepts (SFAC) No. 1 defined EQ as "higher quality earnings provide more information about the features of a firm's financial performance that is relevant to specific decision makers". Ewert and Wagenhofer (2010) defined EQ as "the reduction of the market's uncertainty about the firm's terminal value due to the earnings report". The authors developed a measure for EQ to reflect the effects of a variation of the manager's incentives and information, and of accounting risk. The findings of their study supported that persistence, value relevance, predictability, and accrual quality are narrowly related to their EQ measure. H1: There is a significant association between DP and EQ.

Firm's size
Extensive literature has provided evidence on the critical role that firm size may play in manipulating the earnings (Hutchinson & Leung, 2007). In USA, Jones (1991) argued that large firms might have incentives to manage their earnings as they are targeted by pressure groups, lobbies, analyst and institutional investor scrutiny. Large firms have an incentive to smooth or reduced earnings.
In contrast, small firms manage their earnings to avoid losses (Lee & Choi, 2002 (2010) and Howeidi (1998) in Kuwait. It can be argued that the literature on the impact of firm size on EQ provides mixed results. Accordingly, the following hypothesis is suggested as: H2: There is a significant association between firm size and EQ.

Firm's leverage
The literature on the association between EM and financial leverage has shown conflicting findings. H3: There is a significant association between firm leverage and EQ.  Yoon and Miller (2002) found that Korean industrial firms are likely to select income-increasing strategies when they have negative performance; while firms are likely to select income-decreasing strategies when they have positive performance. It is clear that mixed findings were provided regarding the relationship between firm performance and EQ. Hence, the following research hypothesis can be formulated:

Firm's performance
H4: There is a significant association between firm performance and EQ.

Legal form
Egypt has implemented a privatization program since the 1990s. As a result of such practice, a large number of public sector firms were sold to individual or institutional investors in the sense of converting some firms from public ownership to private ownership. In addition, the government remains as a partner in some public firms by a certain percentage. Consequently, there are two types of legal form of the listed firms, which are privately owned and jointly owned firms (with partially government ownership). The literature has documented the importance of regulations that impose a protecting legal framework, which outlines the terms and methods of execution of transactions involving conflicts of interest and related-party transactions (Ducassy & Guyot, 2017). The interest of legislators is to protect different stakeholders' interests from such actions. For example, Aguilera and Jackson (2003) reported that the government force is an important factor to activate governance, since it sets the legal framework aiming to protect the interests of minority stockholders. La Porta et al. (2000) reported that DP are an indication for an effective legal system that protects shareholders and forces corporate managers to pay dividends. Moreover, prior studies found that legal form of the firm plays a critical role in financial disclosure (Hope, 2003). Based on the above arguments, it is expected that legal form of the firm can affect many corporate decisions, including the practice of EM. In light of the above, our fifth hypothesis is formulated as follows: 1 Information in this section is based on the 2016 and 2017 EGX annual reports and EGX website. http://www.egx.com.eg/arabic/homepage.aspx H5: There is a significant association between legal form and EQ.

Audit quality
Huguet and Gandía (2016) pointed out that audit quality can play a significant role in improving the credibility of the financial statements and accounting information, helping to reduce financing costs, and reducing the opportunistic behavior of managers. Top audit firms such as the Big Four auditors have the ability to provide quality audit work, because they have many clients with many different resources such as technology and qualified staff for the audit process (Miko & Kamardin, 2015). Therefore, it is expected that the higher the quality of an external auditor, the lower EM and the higher the EQ.  (2008) found that audit quality has no significant impact on EQ. In light of the above discussion, the effect of audit quality on EQ has mixed findings, therefore, the final hypothesis is formulated as follows: H6: There is a significant association between audit quality and EQ. . EGX is keen to promote best CG practices among listed firms through the listing and disclosure rules, in addition, to play a significant role in establishing sustainability frameworks for global and regional capital markets. EGX strives to improve transparency in Egyptian capital market and ensure that sustainability is well defined and disclosed by listed firms.

CAPITAL MARKET 1
Based on the 2017 report of EGX, year 2017 witnessed the continued recovery in the performance of the global economy as international institutions raised their forecasts for economic growth from 3.6% to 3.7% despite this improvement is limited, but it is a confirmation of the continuation of the positive trend in many countries.

The sample
This empirical investigation is based on a sample, which contains the most active listed firms in the Egyptian Exchange (EGX) covering the 2014-2017 financial periods. The EGX 100 Index, which was created in August 2009, includes the most active 100 firms. The construction of the EGX 100 is reviewed semi-annually to include some firms and exclude others. The total number of listed firms was 222, 222, 221 and 214 in 2014, 2015, 2016 and 2016 financial years, respectively. 138 listed firms were selected in the study presenting 552 firmyear observations in the four financial years. To be included in the sample, a firm should be one of the EGX 100 firms in one or more financial period. The selected firms represent most sectors in the EGX as shown in Table 1. Annual reports of each sampled firm were investigated to obtain the information needed for the study variables.

Estimation of the dependent variable (DAC)
In the current study, the absence of EM is used to measure EQ. Consistent with the previous literature, absolute value of DAC is used as a proxy for EQ ( where it TAC -total accruals for year t for firm , i In this study, EQ is measured by the absence of EM. In other words, the absolute value of DAC is used in this investigation as a proxy for EQ.

Control and independent variables
Considering the objective of the study, independent variables used include a set of six variables on both DP and corporate attributes, namely, dividend payment, firm size, firm leverage, legal form and audit quality. As discussed earlier in this study, the literature provided varied results on the association between the EQ and some of the independent variables. The literature provides evidence on the association between a number of variables, among them firm industry type, board independence and board size and EQ. Accordingly, the above three variables were used to control for potential influences on EQ (Jaggi et al., 2009;Xie et al., 2003). Definitions and related proxies of all variables used in this investigation are presented in Table 2.

Data analysis
Descriptive, univariate (Pearson correlation), multivariate statistics were used in the current study. The linear regression (Hierarchical Multiple Regression -HMR, which also referred to as sequential regression) has been used for the EM as a dependent variable and 6 independent variables (DIVPAY, FSIZE, FLEVER, FPERFO, LEGFOR and AUDQUA) after statistically controlling for three control variables (FINDUS, BSIZE and BINDEP). The aim of the HMR usage is to remove the possible effect of control variables. Control variables were entered at step 1 followed by dependent variables in step 2 (Pallant, 2013). The HMR model was estimated in this study as follows: The model (all variables): ii β = is parameters, then ε is for error term. Moreover, regression analysis was carried out to assess the opportunity for any multicollinearity, which may occur among two or more independent variables. Results revealed that intercorrelation among variables was not appearing to be problematical, therefore multicollinearity would not be a thoughtful worry in this study (values of variance inflation factors (VIF) and related tolerance levels for independent variables were less than 2 and more than 0.60, respectively).  (Khalil, 2005(Khalil, , 2006Abulkhair, 1997, 1999, Mousa, 2011Riyadh, 2012). In general, the above finding may reveal that EM practices by the listed firm in Egypt tend to be lower in the last years compared to previous years. As lesser practice of EM refers to more EQ, the above finding may propose that EQ was little improved in the last two years.

Descriptive results
Furthermore, Table 3 shows that the maximum and minimum of board size is 19 and 2, respectively; and the mean score for board size is 8.22 members with a standard deviation of about 3. Board independence ranged between 0% and 100% with a mean of 53.15% (a standard deviation of 30.14%). The above finding indicates that, on average, more than half of board members of the sampled firms are independent, but in some firms there are no independent members, while in others all members are independent.
Concerning independent variables, Table 3 reveals that the average mean of firm DP (cash dividend per share/the closing share price) is 0.042% of the sample firm-years (standard deviation of 0.172%

The univariate analysis
Correlation results show findings on the association between EM (DAC) from one side and dividend payment and firm characteristics (the independent variables) and control variables from the other. Table 4 presents coefficient correlations and reveals a number of significant relationships between the EM and three out of six independent variables (FLEVER, LEGFOR and AUDQUA); and two out of three control variables (FINDUS and BINDEP).
For example, as predicted, Table 4 reveals that EM is significantly negatively associated with three independent variables, namely, firm leverage (FLEVER), firm legal form (LEGFOR) and quality of the audit firm (AUDQUA) with correlation values of -0.220, -0.174 and -0.308, respectively. However, the correlation results are weak for FLEVER and LEGFOR, while it is moderate for AUDQUA. Concerning firm leverage, the result may confirm the argument that firms of high leverage may experience further monitoring by various external parties (e.g. creditors and bankers) and this may decrease the adoption of EM resulting in increased EQ. This result is in line with findings Moreover, Table 4 revealed that there is very weak and non-significant association between the EM  Table 4 shows that two out of three control variables (FINDUS and BINDEP) are significantly correlated with EM, but the third (BSIZE) is not.
Although the univariate analysis shows significant association between two independent variables (FPERFO vs. FLEVER), it does not refer to a serious problem of multicollinearity in this study, because it is only 0.449 and does not exceed 0.700 (Pallant, 2013). In conclusion, only three out of six independent variables are significantly correlated with EM, then impact the firm EQ. They are firm leverage (FLEVERG), legal form (LEGFOR) and audit quality (AUDQUA). However, other variables are not.

The multivariate analysis
As mentioned earlier in subsection 4.3 above, the Hierarchical Multiple Regression (HMR) has been used in this investigation. The aim to use HMR is to remove the possible effect of control variables and to identify which independent variable(s) included in this study contribute to the prediction of its dependent variables (EM), then impact the EQ. Table 5 shows two sets of regression results (model 1 and model 2), which are both significant models. Control variables (FINDUS, BSIZE and BINDEP) were entered at step 1 of the HMR (representing model 1), which is significant (p-value is 0.033) in the explanation of EM with F-value of 2.925 and an adjusted R 2 of 8.8%. All variables are included in model 2, which is significant (p-value is 0.000) in the explanation of EM with F-value of 8.143 and a total adjusted R 2 of 21.6%. Importantly, Table 5 shows the value of the R 2 change, which is 15.5%, meaning that independent variables explain an additional 15.5% of the firm's EM.
In general, it is possible to conclude that results of the HMR analysis are consistent with Pearson Therefore, H1, which stated that "There is a significant association between DP and EQ", is rejected and the alternative one is accepted.  Howeidi (1998) in Kuwait who found no impact of firm size on EM. According to this result, H2, which stated that "There is a significant association be- tween firm size and EQ", is rejected and the alternative one is accepted. Similar finding is revealed concerning firm performance (FPERFO), which does not support the argument that firms with poor performance conduct EM practices to evade losses and decreases on earnings (Charoenwong & Jiraporn, 2009;Yoon & Miller, 2002). Based on this result, H4, which stated that "There is a significant association between firm performance and EQ", is rejected and the alternative one is accepted. In summary, HMR results support accepting H3, H5 and H6 and rejecting the alternative ones; but they support rejecting H1, H2 and H4 and accepting the alternative hypotheses.

CONCLUSION
This study aims mainly to empirically investigate the impact of DP and five firm attributes (independent variables, namely, firm size, firm leverage, firm performance, legal form and audit quality) on EQ of the most active listed firms on EGX after statistically controlling for three control variables. This investigation was based on 552 firm-year observations during a period from 2014 to 2017. Pearson correlation and Hierarchical Multiple Regression were used to regress the six independent variables on firms' EQ through the absence of firms' EM, which was assessed through firms' DAC. The modified Jones' (1991) model, which is one of the most common models to estimate the EM, was used. Descriptive statistics showed that there is some divergence in EM practices over the four years and might suggest that EM by listed Egyptian firms exist especially in the first two years (2014 and 2015); however, relatively lower results were found in the last two years (2016 and 2017). This finding may propose that firms' EQ was little improved in the last two years. A number of significant relationships between EM and three out of six independent variables (FLEVER, LEGFOR and AUDQUA) were found. Results of the regression analysis (HMR) were in line with the results obtained via Pearson correlation. In summary, HMR results support accepting H3, H5 and H6; but they support rejecting H1, H2 and H4.
The current study is not free from limitations. Even though it can contribute to understanding the effect of DP and other firm attributes on EQ of firms listed in EGX, results of such investigation could not be generalizable to other countries with various stages of development, culture and business environment characteristics. Accordingly, it is encouraging to replicate this study in other countries having many similarities to the Egyptian environment. This study concentrates only on DP and a limited number of firm's attributes. It is highly recommended and will be of great benefits if some CG mechanisms such as size and independence of audit committee, the experience and number of meeting of BOD, and the presence of nomination and remuneration committee to be included in a future study. This investigation was based only on a sample of the most active listed firms included in the EGX 100. It is recommended that future research may extend the sample to include other listed firms not included in EGX 100 ignored in the current investigation. This study focused on a relatively short period of four years (2014-2017). It is recommended to extend future research to include longer period covering earlier years. A comparative study of the impact of DP and other firm attributes of EQ for different countries with emerging capital markets might also be fruitful. Finally, several gaps in the EQ research area still need to be filled, for example studying the reasons why companies with similar activities could have different behavior in EM is still fertile ground for future research.