The Dividend Payout and Analysts' Optimistic Forecasts Bias
Asian Tax Journal Vol. 13 No. 1 (2012), pp. 189-219
Abstract
This paper examines the effect of dividend payout on analysts' forecast bias. Specifically, this paper investigates whether analysts who forecast a firms with high level of dividend payout in the previous year are more likely to have a optimistic forecast bias or not. It is well－known that analysts'forecasts have a optimistic bias and many variables such as previous earnings, dividend payout trend,or governance affect the characteristics of analysts' forecasts. Among these variables, dividend information is one of the important factors because a firm's value can be represented as a discounted present value of dividend. In addition, financial analysts use dividend information as one of the important resources to evaluate a firm's future prospect and heavily cite dividend information in their reports. However, there is little study to investigate the effect of dividend information on analysts'forecast bias. This paper tries to fill the gap. According to the prior studies, financial analysts tend to overweight on a positive news and underweight a negative news (Easterwood and Nutt 1999；Elton et al. 1984；Amir and Ganzach 1998). Given that the dividend information is regarded as the good news, I predict that if financial analysts adhere to dividend payouts itself as the positive information, financial analysts tend to optimistically forecast. This paper further investigates the effect of foreign investors on this association. Since 1992, the power of foreign investors on the Korean stock market rapidly increases. However, the empirical evidences on the role of foreign investors on dividend decision are still controversial. Some papers suggest the positive relationship between the level of foreign investors and dividend payout. They interpretate the results as the evidence that foreign investors force a firm to pay dividend more. Others argue that foreign investors have a positive role in the Korean stock market. They find that a negative relationship between the level of foreign investors and dividend payout by applying elaborated methods like GMM. Therefore, the role of foreign investors in Korea stock market is still a empirical question. To test these predictions, this paper use 1,724 firm－year observations from 2000 to 2007. A difference between analysts' earnings forecast and actual earnings (OPT) is used a analyst's optimistic bias as a dependent variable. If OPT has a positive value, it can be interpreted as a optimistic forecast bias. And total dividend payout (LDIV) and cash dividend payout (LCDIV) are used as independent variables in the model. Other variables such as SIZE, GROWTH, LEV, PADAC, LOSS,EARN, CEARN, INTERV, COV, DISP, FOR, and LARGE are used as control variables. In addition,to control the effect of specific year and industry, each dummy variable is included in the model. Empirical results of this paper are following. The first, there is a positive association between firm's dividend payout and analysts' optimistic forecast bias. The coefficient on LDIV is 0.024 (t value ：2.98), significantly positive which means that analysts who forecast firms with high dividend payout in prior year are more likely to have optimistic forecast bias. This result is still hold when both total dividend and cash dividend variables are applied as a independent variable. The result suggests that analysts' forecasts are systematically affected by a firm's dividend payout. The second, the positive association between a firm's dividend payout and analysts' optimistic forecast bias is reduced for firms with high ratio of foreign institutional investors. This result implies that analysts tend to forecast pessimistic for firms with high dividend payout and high level of foreign institutional investors. It suggests that analysts are more likely to perceive foreign institutional investors as investors demand a higher dividend payout regardless of a firm's future performance. The findings in this study provide an important and innovative way to extend traditional research into a new variable：dividend payout. The results indicate that dividend information is one of the important factors that affect analysts' optimistic forecast bias and foreign investors play a significant role in changing analysts' optimistic forecast bias. This should provide valuable insights for accounting researchers, practitioners, and regulators. Moreover, this paper has contributions on related researches, specifically, dividend information theory in terms of analysts' forecast characteristics. In addition, the results of this paper provide rich information about dividend behavior in Korea by using recent data. Finally, this paper provides implications about the effect of foreign investors in Korea stock market. By considering the high portion of foreign investors in the Korean stock market,importance of dividend decision as a investment criteria increases. So the findings of this paper suggest that portion of foreign investors is one of the important factors to evaluate a firm's intrinsic value by reducing optimistic bias of analysts' forecast.
Keywords
- Dividend payout
- Analysts' forecast
- Optimistic forecast bias
- Foreign investors
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