50 ACCOUNTING AND BUSINESS RESEARCH
on DDivX
t3
, it is not safe to assume that the combined effect of disclosure and dividends is
additive. Therefore, we reject hypothesis 9. For high-growth firms, we also find some evi-
dence of a substitution effect. The coefficient on the interaction variable DDivX
t3
is negative –1.68 and significantly significant at the 10
level. This indicates that disclosure and dividends provide related information, but some of the infor-
mation is common to both. Thus, it is not safe to assume that the combined effect of high disclosure
and dividend propensity is perfectly additive. Our best estimate is that the combined effect of divi-
dend propensity and high disclosure is 1.57 i.e. 1.63 + 1.62 – 1.68 with a p-value of 0.001 not re-
ported in Table 2, which is below the first order effect for high disclosure and below the first order
effect of dividend propensity. In this case, the in- ference is that both dividend propensity and vol-
untary disclosure are strict substitutes for high-growth firms. Based on these findings we re-
ject hypothesis 10.
As the results for the low-growth firms indicate that there is no first order effects either for divi-
dend propensity or voluntary disclosure, we find that the coefficient on DDivX
t3
is positive close to zero and statistically insignificant at an accept-
ed level. Based on these findings we reject hy- pothesis 11.
Finally, we test for differences between high- growth and low-growth firms by including an ad-
ditional dummy variable for high-growth firms. We test the extent to which the association be-
tween the joint effect of voluntary disclosure and the payments of dividends on prices leading earn-
ings are significantly stronger for high-growth firms than for low-growth firms. The analysis
shows a negative significant coefficient on GrowthDDivX
t3
of –1.83 with a p-value of 0.067 not reported in Table 2. This significantly
negative coefficient indicates that dividend propensity and high voluntary disclosure are strict
substitutes for high-growth firms. We do not find such evidence for low-growth firms. This leads us
to reject hypothesis 12.
7. Robustness analysis
In this section we examine the sensitivity of our re- sults to the determinants of the earnings response
coefficients. Lundholm and Myers 2002 examine a number of determinants of current earnings re-
sponse coefficient when exploring the association between share price anticipation of earnings and
corporate disclosure. These determinants include loss status, growth, beta, earnings persistence, size
and the sign of the current return. Hanlon et al. 2007 examine a similar set of determinants when
exploring the association between share price an- ticipation of earnings and dividend propensity. The
results of both studies after the inclusion of con- trol variables remain consistent with the original
findings indicating that these control variables do not drive the association between disclosure and
dividends and share price anticipation of earn- ings.
Schleicher et al. 2007 provide evidence that the association between annual report narratives and
share price anticipation of earnings is not the same for profitable and unprofitable firms. They find
that the ability of stock returns to anticipate the next year’s earnings change is significantly
stronger for high-disclosure unprofitable firms. They do not find the same result for profitable
firms. Therefore, based on the results in Schleicher et al. 2007, we examine the sensitivity of our
results to firm profitability status. Similar to Schleicher et al. 2007 we define a loss profit as
negative positive operating income before all operating and non-operating exceptional items
Worldscope item 01250.
To examine the effect of losses on the association between disclosure, dividends and prices leading
earnings, we divide our sample into two categories; unprofitable firms and profitable firms. Then, we
run our regression model equation 4 for each cat- egory. The results are reported in Table 3.
Consistent with Schleicher et al. 2007, columns 2.1 and 3.1 of Table 3 show that high dis-
closure increases the market’s ability to anticipate future earnings changes for unprofitable firms –
but not for profitable firms. The coefficient on DX
t3
is positive 1.01 and statistically significant at the 5 level for unprofitable firms, whilst it is
smaller and insignificant for profitable firms. Table 3 shows that several of our previous find-
ings still hold after separating our sample into un- profitable firms and profitable firms. In particular,
column 3.3 shows that the market is able to antic- ipate future earnings changes for low-growth prof-
itable firms the coefficient on X
t3
is significantly positive at the 5 level. This ability is neither
linked to nor improved by high disclosure or divi- dend propensity. In addition, columns 2.2 and 3.2
show that the market has particular difficulties in anticipating future earnings changes for high-
growth profitable and unprofitable firms. The co- efficient on X
t3
for these firms is negative. Consistent with results in Table 2, we find that
the effect of high disclosure on prices leading earnings is positive for high-growth firms regard-
less of their profitability status. The coefficient on DX
t3
is 0.93 with a p-value of 0.209 for high- growth unprofitable firms and 1.47 with a p-value
of 0.160 for high-growth profitable firms. Table 3 also shows that the effect of disclosure on prices
leading earnings for high-growth firms is greater than the effect for low-growth firms regardless
of the profitability of the firms. In particular, the Downloaded by [Universitas Dian Nuswantoro], [Ririh Dian Pratiwi SE Msi] at 20:19 29 September 2013
Vol. 39 No. 1. 2009 51
Table 3 Robustness analysis: comparing unprofitable with profitable firms
Independent Unprofitable Profitable
variable 1 firms 2
firms 3 Full
High-growth Low-growth
Full High-growth
Low-growth sample
firms firms
sample firms firms
2.1 2.2
2.3 3.1
3.2 3.3
Intercept –0.14
–0.01 –0.26
0.08 0.06
0.05 0.087
0.957 0.001 0.285 0.556 0.617
X
t
–0.28 –0.90
0.21 1.13
1.50 1.36
0.343 0.122
0.470 0.009 0.029 0.014 X
t3
–0.56 –1.12
0.10 0.18
–0.28 0.68
0.025 0.019
0.645 0.585 0.451 0.015 R
t3
–0.09 –0.12
–0.07 –0.10
–0.06 –0.19
0.006 0.012
0.051 0.028 0.316 0.001 AG
t
0.09 0.05
0.13 0.08
0.11 0.03
0.141 0.522
0.207 0.440 0.280 0.885 EP
t–1
–0.30 –0.88
0.18 0.51
0.35 0.89
0.269 0.108
0.468 0.217 0.657 0.064 D
–0.13 –0.16
0.02 –0.14
–0.19 0.07
0.048 0.098
0.864 0.177 0.224 0.654 DX
t
0.69 2.24
0.29 0.74
0.24 0.60
0.125 0.030
0.512 0.270 0.802 0.481 DX
t3
1.01 0.93
0.59 0.58
1.47 –0.08
0.011 0.209
0.101 0.184 0.160 0.809
DR
t3
0.10 0.10
0.09 0.01
0.02 –0.02
0.109 0.242
0.178 0.965 0.849 0.873 DAG
t
0.02 0.03
–0.03 0.28
0.23 0.33
0.854 0.763
0.808 0.118 0.358 0.232 DEP
t–1
0.29 0.66
0.60 0.38
0.98 –0.42
0.488 0.325
0.134 0.429 0.3029 0.421
Div 0.06
–0.04 0.18
–0.04 –0.01
–0.04 0.494
0.804 0.084
0.580 0.978 0.706 DivX
t
0.85 1.03
1.05 0.90
2.15 0.43
0.075 0.275
0.036 0.098 0.023 0.511 DivX
t3
0.53 1.08
0.08 0.32
1.51 –0.37
0.248 0.390
0.883 0.370 0.004 0.219 DivR
t3
0.24 0.33
0.20 0.04
–0.02 0.14
0.016 0.044
0.039 0.402 0.775 0.029
DivAG
t
–0.01 –0.19
0.40 0.07
0.01 0.11
0.974 0.692
0.149 0.510 0.935 0.604 DivEP
t–1
0.19 –0.13
0.79 0.38
0.55 0.03
0.674 0.894
0.229 0.395 0.528 0.958
DDiv 0.05
0.23 –0.25
0.17 0.19
–0.01 0.661
0.357 0.088 0.118 0.250 0.930
DDivX
t
–2.02 –1.81
–3.91 –0.90
–1.90 –0.55
0.098 0.583
0.001 0.254 0.136 0.566
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52 ACCOUNTING AND BUSINESS RESEARCH
Table 3 Robustness analysis: comparing unprofitable with profitable firms
continued Independent
Unprofitable Profitable variable 1
firms 2 firms 3
Full High-growth
Low-growth Full
High-growth Low-growth
sample firms
firms sample
firms firms 2.1
2.2 2.3
3.1 3.2
3.3 DDivX
t3
–0.23 1.68
–1.00 –0.40
–1.79 0.36
0.749 0.332
0.184 0.404 0.113 0.384 DDivR
t3
–0.23 –0.40
–0.26 0.02
0.03 0.03
0.052 0.037
0.023 0.765 0.761 0.794 DDivAG
t
0.47 0.86
–0.41 –0.34
–0.23 –0.42
0.251 0.173
0.227 0.068 0.367 0.144 DDivEP
t–1
–2.15 –1.96
–4.66 –0.88
–1.42 –0.14
0.072 0.592
0.001 0.096 0.186 0.814 Observations
439 232
207 3,064
1,538 1,526
R
2
0.170 0.304
0.164 0.143
0.162 0.174
Table 3 reports robustness results. The results for unprofitable and profitable firms are reported in columns 2 and 3, respectively. In each category, we report the results for the full sample, high-growth firms and low-
growth firms. P-values are reported in parentheses. Returns, R
t
, is calculated as buy-and-hold returns from eight months before the financial year-end to four months after the financial year-end. R
t3
is the aggregated three years’ future returns. The earnings variable, X
t
, is defined as earnings change per share deflated by the share price four months after the end of the financial year t–1. X
t3
is the aggregated three years’ future earnings change. Earnings measure is the Worldscope item 01250 which is operating income before all exceptional
items. EP
t–1
is defined as period t–1’s earnings over price four months after the financial year-end of period t–1. AG
t
is the growth rate of total book value of assets for period t Datastream item 392. Firms with a dis- closure score in the top bottom 50 of the distribution of disclosure scores are defined as high- low- dis-
closure firms. The dummy variable, D, is set equal to 1 0 for high- low- disclosure firms. Dividends measure is dividends per share, Worldscope item 05101. The dummy variable, Div, is set equal to 1 0 for firms pay-
ing not paying dividends at the current year. High-growth firms are defined as those having below median levels of BTMV, while low-growth firms are defined as those having above median levels of BTMV. BTMV
ratio is calculated as the inverse of the market-to-book value of equity ratio Datastream item MTBV. The sig- nificance levels two-tail test are: = 10, = 5, = 1.
coefficient on DX
t3
is higher for high-growth un- profitable firms than for low-growth unprofitable
firms. However, the difference between high- growth unprofitable firms and low-growth unprof-
itable firms is not statistically significant not reported in Table 3.
14
On the other hand, the effect of disclosure on prices leading earnings for high-
growth profitable firms is significantly greater than the effect for low-growth profitable firms
significant at the 10 level; not reported in Table 3. The results suggest that the strength of the de-
gree of association between share price anticipa- tion of earnings and voluntary disclosure is greater
for high-growth firms than for low-growth firms. Consistent with results in Table 2, we find that
the effect of dividend propensity on prices leading earnings is positive for high-growth firms, while it
is negative or close to zero for low-growth firms. However, the effect for high-growth firms is only
statistically significant for high-growth profitable firms at the 1 level.
The effect of dividend propensity on prices lead- ing earnings is significantly greater for high-
growth firms than for low-growth firms, in both profitability subsamples. For unprofitable firms
the coefficient on DivX
t3
is 1.08 with a p-value of 0.390 for high-growth unprofitable firms, while it
is 0.08 with a p-value of 0.883 for low-growth un- profitable firms. The difference between high and
low-growth unprofitable firms is statistically sig- nificant at the 10 level not reported in Table 3.
For profitable firms the coefficient on DivX
t3
is
14
As mentioned earlier, we statistically test the actual differ- ences between high- and low-growth firms by interacting a
dummy variable for high growth throughout Equation 4.
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Vol. 39 No. 1. 2009 53
1.51 and significant at the 1 level for high- growth firms, while it is negative and insignificant
for low-growth firms. The difference between high and low-growth profitable firms is statistically sig-
nificant at the 1 level not reported in Table 3. These results confirm that the strength of the de-
gree of association between share price anticipa- tion of earnings and dividend propensity is greater
for high-growth firms than for low-growth firms.
A particularly interesting feature of Table 3 is the way that the joint effect of dividend propensity and
disclosure varies between profitable and unprof- itable firms. In particular the results suggest some
weak evidence of a complementary effect for high-growth unprofitable firms. The subsitution
effect that we reported in Table 2 is confirmed in the high-growth profitable subsample, although it
is no longer statistically significant. The difference between high-growth unprofitable and high-
growth profitable firms for the coefficient on DDivX
t3
is significant at the 1 level not re- ported in Table 3.
Finally, it is worth noting that for high-growth unprofitable firms the combined effects of high
disclosure and dividend propensity are very con- siderable 0.93 + 1.08 + 1.68 = 3.69. High-growth
unprofitable firms are the firms for which current earnings is least relevant revealed by a negative
current earnings response coefficient ERC, and for which the combined effects of narrative disclo-
sure and dividend propensity are the most useful for predicting future earnings.
8. Conclusion
