Does the Interaction between Dividend Policy and Earnings Quality Affect Market Value?

[Purpose] This study analyzes how shareholder return (dividend) policies and earnings quality interact to affect market value. Previous studies have shown that higher levels of shareholder returns (dividends) and earnings quality positively affect market value. However, few studies analyze whether increasing dividends in a firm with low earnings quality affects market value. [Methodology] A sample of 20,114 firms listed in South Korea over a 20－year period spanning 2002 to 2021 is analyzed using both pooled ordinary least squares (OLS) and panel data generalized least squares (GLS) regression techniques. The study uses the Hausman test to measure the heteroscedasticity of individual firms and years. [Findings] In the pooled OLS regression, higher dividends and earnings quality increase market value. However, for firms with low earnings quality, higher dividends decrease market value. In the panel GLS analysis, market value increases with higher dividends. However, earnings quality and market value are not correlated. This finding suggests that investors do not value discretionary adjusted accounting earnings. Firms with lower－quality earnings also show a negative but nonsignificant relationship between dividends and market value. [Implications] Overall, for firms with lower earnings quality, higher dividend levels either damage their market value or are not significantly related. The results suggest that it is necessary to consider sophisticated accounting earnings quality, in addition to dividend policies, to enhance market value.