The effects of contextual factors on disaggregated earnings in explaining dividend changes in Jordanian firms

The purpose of this study is to examine if the cash flow and short-term accruals and long-term accruals together have a role to play in explaining the change in dividends.

The authors’ mainly used the same models developed by Atieh and Hussain (2008) and expanded on this model by including contextual factors: firm growth, firm size, gearing and quality of earnings. Using 344 observations from Jordanian firms, the association of variables with dividend changes was analyzed using the generalized least square regression.

The results reveal consistency with previous studies that disaggregated earnings outperforms the cash flow model in explaining the changes in dividends. Also, the explanatory power of the Lintner (1956) model is improved by replacing earnings with cash flow and short-term and long-term accruals, which is in line with previous studies. Regarding the effect of contextual factors, the superiority of the accrual model is affected by the contextual factors proposed, except for geared firms. The accrual model is superior for high growth, large firms and poor quality of earnings.

The paper contributes to the existing literature that the Lintner (1956) model’s explanatory power can be improved by replacing earnings with its components mainly cash flows and short-term and long-term accruals. These results support the evidence related to developed markets. The paper also provides evidence of the importance of firm characteristics on the information content of the components of earnings.