Applied Economics

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Professionals inside the board room: accounting

expertise of directors and dividend policy

Zheng Qiao, Ken Y. Chen & Shengmin Hung

To cite this article: Zheng Qiao, Ken Y. Chen & Shengmin Hung (2018): Professionals inside
the board room: accounting expertise of directors and dividend policy, Applied Economics, DOI:
10.1080/00036846.2018.1489501

To link to this article: https://doi.org/10.1080/00036846.2018.1489501

Published online: 16 Jul 2018.

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APPLIED ECONOMICS, 2018
https://doi.org/10.1080/00036846.2018.1489501

Professionals inside the board room: accounting expertise of directors and

dividend policy
Zheng Qiaoa, Ken Y. Chenb and Shengmin Hungc
a
Department of Finance, School of Management, Xiamen University, Xiamen, China; bDepartment of Accounting, College of Management,
National Taiwan University, Taipei, Taiwan; cDepartment of Accounting, School of Business, Soochow University, Taipei, Taiwan

ABSTRACT KEYWORDS
Directors’ personal attributes have significant impacts on governance effectiveness. We study Audit committee;
whether directors’ accounting expertise affects corporate financial policy and investigate divi- accounting expert; corporate
dend in specific. We construct a dataset of audit committee directors’ accounting expertise for governance; dividend policy
Standard & Poor 500 firms from 2005 to 2012. We first verify directors’ monitoring roles by
JEL CLASSIFICATION
showing that firms with accounting expert sitting on their audit committees demonstrate
G32; G34; K22
stronger accounting conservatism. In our main tests, we find that these firms maintain lower
dividend payment level, which are less sensitive to earnings volatility. This suggests directors’
advisory roles in financial policy. We further show that our accounting expertise cannot be
subsumed by management ability. In additional test, we further examine the baseline results
conditional on analyst forecast error. Our findings highlight the importance of directors’ profes-
sional expertise in fulfilling their governance roles.

I. Introduction harmful to shareholders, we conjecture that they

should also be able to provide more optimal advice
Directors’ personal attributes, such as gender, min-
on expertise-related policies. This article adds to the
ority, nationality, working experience in banks or
literature of directors’ expertise and focuses on
venture capitals, etc., are important determinants of
dividend policy as the outcome variable in specific.
their governance effectiveness (see, e.g., Booth and
Dividend policy, as one of the most important
Deli 1996; Baker and Gompers 2003; Byrd and
financial decisions that require research attentions,
Mizruchi 2005; Farrell and Hersch 2005; Erhardt,
requires professional expertise to set optimal
Werbel, and Shrader 2003; Ruigrok, Peck, and
arrangements. As a result, dividend policy provides
Tacheva 2007; Kroll, Walters, and Wright 2008).
us a great setting to examine whether directors with
Professional expertise, especially accounting exper-
accounting expertise play their advisory roles.1
tise, is also deemed to be crucial in fulfilling direc-
We employ a dataset hand-collected from the
tors’ roles in monitoring financial disclosure quality
proxy statement of the Standard & Poor’s (S&P)
(Klein 2002; Carcello et al. 2006; Qin 2007; Chan
500 firms. Section 407 of Sarbanes-Oxley Act
and Li 2008; Krishnan and Visvanathan 2008;
(SOX) requires the audit committee of public
Dhaliwal, Naiker, and Navissi 2010; Bryan et al.
firms to include at least one expert with account-
2013). Prior literature emphasizes directors’ mon-
ing experience or supervising the process of finan-
itoring roles when they possess relevant accounting
cial reporting. Otherwise, they are required to
knowledge. However, directors play both monitor-
disclose why the audit committee fails to include
ing and advisory roles in corporate governance,
any expert with accounting experience or super-
while very few studies address the advisory roles.
vising the process of financial reporting. Following
Besides directors’ monitoring pressure out of their
the requirements of SOX, we focus on the roles
expertise that help them see through decisions

CONTACT Shengmin Hung shung@scu.edu.tw Department of Accounting, College of Business, Soochow University, Taipei 100, Taiwan
1
The two roles have no conflict with each other, but can possibly co-exist when directors serve on board of directors. On top of director’ monitoring roles
which mitigate the agency problem of management teams, directors can further help advise the management team to make better decisions in order to
maximize shareholder value. With respect to accounting experts, they can not only ensure the integrity of the financial disclosure through their monitoring
roles, but also help management teams make more optimal dividend policies to better signal corporate information at the lowest cost.
© 2018 Informa UK Limited, trading as Taylor & Francis Group
2 Z. QIAO ET AL.
played by accounting expertise of audit committee
in this study, and this dataset enables us to iden-
tify whether an audit committee has an accounting
expert or not. Previous studies have covered other
dimensions of director characteristics such as gen-
der and nationality. However, to our best knowl-
edge, we are the first to study how audit
committee members with accounting expertise
affect dividend policy.
We use multivariate regression analysis to test our
main hypotheses. We first set dividend payment level
as the dependent variable and accounting expert
dummy to indicate whether a board has directors
with accounting expertise. To test the dividend-earn-
ings sensitivity, we follow model specification by
Caskey and Hanlon (2013), in which the coefficient
of lagged dividend per share proxies for dividend
adjustment speed to earnings changes. Our empirical
results indicate that firms with accounting experts on
their audit committee on average maintain lower
levels of dividend payment. Furthermore, we find
that dividend changes in firms with accounting
experts on their audit committees are less sensitive
to earnings changes. In other words, directors with
accounting expertise on board of directors help
smooth corporate dividend payment, making it less
sensitive to earnings volatility. As expected, we find
that audit committee members with management
expertise do not affect dividend policy, which suggests
that dividend policy advice requires specialized exper-
tise in accounting and finance. Finally, we confirm
that firms with accounting experts on their audit
committee tend to pull up dividend level in face of
greater information asymmetry, which is consistent
with the signalling theory of dividend policy, and also
provides evidence on the advisory role of accounting
expert on the audit committee of board of directors.
The accounting expertise of directors can affect divi-
dend policy through both monitoring and advisory
channels.
One the one hand, accounting experts on the audit
committee can reduce information asymmetry
through their monitoring roles by improving earn-
ings quality (Klein 2002). Accounting experts are
more familiar with the process of financial reporting
than non-accounting experts on boards (Carcello
2
Skinner and Soltes (2011) find that dividend paying status is more likely to be related with high earnings quality. Tong and Miao (2011) find that higher
dividend payment is used to signal higher earnings quality.
et al. 2006; Qin 2007; Krishnan and Visvanathan
2008; Dhaliwal, Naiker, and Navissi 2010; Bryan
et al. 2013). Consequently, if accounting experts on
the audit committee help improve financial reporting
quality and further decrease information asymmetry
between public investors and managers, they would
affect dividend policy accordingly.2 For example,
accounting conservatism, which emphasizes the
timely recognition of losses, is expected to be
strengthened when accounting experts sit on the
audit committee. Watts (2003) states that given stron-
ger accounting conservatism, firms are more likely to
pay lower dividend in face of the pressure from debt-
holders, who require firms to maintain its liquidity in
order to guarantee its debt repayment. Moreover,
dividend payment is often used to signal corporate
commitment of further cash flow in order to reduce
information asymmetry (Allen and Michaely 2003;
Brav et al. 2005). When accounting experts in audit
committees can be used as a substitute mechanism for
dividend signalling, we expect the dividend payment
to be lower, which suggests that it is less necessary for
managers to use costly cash dividends payments to
employ the signal.
On the other hand, directors with accounting
expertise can also provide direct advice on optimal
dividend payment strategies, in order to better signal
corporate prospect. Adams and Ferreira (2007) pro-
pose a model in which managers are willing to reveal
its private information in order to obtain advice
from directors, so that they can avoid larger losses
afterwards. The model implies the importance of the
advisory function of directors. Accounting experts
can help maximize shareholder value by advising
managers to set more optimal dividend policy. In
this article, we consider both dividend payment level
and dividend smoothness. First, lower dividend pay-
ment can lower the ‘tax penalty’, since shareholders
have to pay income tax when they receive cash
dividends. Prior literature has discussed the divi-
dend tax penalty, i.e. investors ask for higher
expected returns for firms paying higher cash divi-
dend (Brennan 1970; Litzenberger and Ramaswamy
1979, 1980; Dhaliwal, Li, and Trezevant 2003). If
accounting experts play their advisory roles, less
dividend payment would reduce tax penalty and
 APPLIED ECONOMICS 3

further lower the cost of equity for these firms.
Second, accounting experts on boards may help
smooth dividend payment in order to make the
best of dividend signalling effect. Skinner and
Soltes (2011) address that when managers set the
dividend policy, they will assess the stableness of
earnings, and thus, the dividend policy considering
the long-run sustainable earnings are more likely to
be informative of earnings quality.
This article contributes to the literature in two
ways. Firstly, we use the hand-collected dataset of
accounting experts on the audit committee of board
of directors and study their impact on dividend
policy for the first time. Dividend policy is an impor-
tant corporate decision and is affected by informa-
tion asymmetry between managers and investors,
which could be altered by the existence of account-
ing experts. Secondly, this article adds to the litera-
ture on the advisory role of directors by studying
audit committee members with accounting back-
ground on corporate dividend policy. It is a distinc-
tive dimension of director attributes and it would be
interesting to explore more on the consequences of
having accounting experts on board of directors.
This article is organized as follows. Section II
summarizes the literature and proposes four
hypotheses. Section III lays out empirical research
design and describes the sample. Section IV
reports the results. Section V concludes.
II. Literature review and hypotheses
development
Literature review
There have been extensive studies on distinct direc-
tor attributes including gender, nationality, experi-
ence, and political network.3 This article specifically
focuses on directors with accounting expertise, since
professional expertise is more directly related to cor-
porate decisions.4 Most of the previous studies focus
on director’s disciplinary role in corporate govern-
ance by looking into management turnover, M&A
decision and managerial compensation. Besides the
conventional monitoring roles, this article empha-
sizes directors’ advisory roles with his or her profes-
sional expertise. A relevant paper by Kroll, Walters,
and Wright (2008) states that director vigilance is not
enough, relevant knowledge from past working
experience is also necessary to help directors both
monitor and advise the management team. We
choose accounting expertise as one characteristic of
directors and examine dividend policy as one rele-
vant outcome policy which requires professional
knowledge to make optimal decisions.
Miller and Modigliani (1961) point out the divi-
dend policy irrelevance in a perfect world. They argue
that what affects the value of firms is the investment
policy rather than dividend policy. This pioneering
work of Miller and Modigliani becomes the founda-
tion of subsequent works discussing dividend policy.
People turn to the imperfections in MM theory
assumptions and explore their implications to the
real world. Two most important imperfections are
asymmetric information and tax (see, e.g., Allen and
Michaely 2003). Given the information asymmetry
between the manager and the shareholders, when a
firm is undervalued, manager can signal this informa-
tion by increasing the dividend payment level, i.e. the
signalling hypothesis. Empirical studies on signalling
hypothesis focus on the information content of
dividend.5 Consequently, earnings disclosure enters
the radar of researchers when people want to investi-
gate corporate information disclosure. Researchers
have been studying the relation between earnings
quality and dividend payment but with mixed find-
ings. Watts (2003) finds that firms pay lower dividend
in face of stronger accounting conservatism. Setia-
Atmaja (2009) finds that ownership concentration
affects the independence of audit committee adversely

3
Farrell and Hersch (2005) document how firms choose female directors. Erhardt, Werbel, and Shrader (2003) examine the demographic diversity of board of
directors and how it is associated with firm performance. Ruigrok, Peck, and Tacheva (2007) use Swiss firm data to re-examine the determinants of
corporate decisions in choosing directors of different genders and nationalities. Directors affiliated to banks may affect corporate financing decisions,
especially with respect to debt financing (Booth and Deli 1996; Byrd and Mizruchi 2005). Baker and Gompers (2003) find that venture capitalist as directors
could effectively reduce CEO’s bargaining power. In addition, firms more dependent on government policies tend to hire more politically-connected
directors in order to better interact with government decision makers (Agrawal and Knoeber 2001).
4
There are some papers using audit committee membership to investigate accounting issues. See, e.g., Anderson, Deli, and Gillan (2003), Karamanou and
Vafeas (2005), Anderson, Mansi, and Reeb (2004), Deli and Gillan (2000), Klein (2002) and Xie, Davidson, and DaDalt (2003).
5
For example, Charest (1978) and Michaely, Thaler, and Womack (1995) find that positive (negative) abnormal return exists in the two years after the firm
announces a dividend increase (decrease). Meanwhile, little evidence is found between current dividends and future earnings (Watts 1973; Gonedes 1978;
Penman 1983).
4 Z. QIAO ET AL.
and that audit committee independence is positively
related with firm value and negatively related with
dividend payout level. Skinner and Soltes (2011) and
Tong and Miao (2011) find that earnings quality of
dividend paying firm will be higher. Caskey and
Hanlon (2013) further find that fraud firms pay less
dividends than do non-fraud firms. These findings
provide evidence that earnings quality or financial
reporting quality is related to dividend policy.
Another important concern in dividend policy
is tax. In most of the countries, the capital gain tax
rate is much lower than income tax. Therefore,
investors receiving cash dividends might ask for
higher expected stock return to compensate for
their loss in dividend tax payment. Prior studies
examine the dividend tax penalty hypothesis and
document that dividend tax penalty exists and
how it is incorporated into stock prices (e.g.
Brennan 1970; Litzenberger and Ramaswamy
1979, 1980; Dhaliwal, Li, and Trezevant 2003).
Hypotheses development
When firms have accounting experts sitting on their
audit committees, the monitoring roles played by
these directors help alleviate the information asym-
metry between management and outside investors.
One straightforward channel for accounting experts
to reduce information asymmetry is to strengthen
internal monitoring by enhancing accounting conser-
vatism. Accounting experts in the audit committee
could thus improve accounting quality and disclosure
informativeness. But stronger conservatism would
restrict dividend payment to avoid default in debt
payment (Watts 2003). Meanwhile, accounting
experts can act as a substitute for dividend signalling
function, inducing lower demand for dividend in
equilibrium. We therefore posit that firms with
accounting expert directors maintain relatively
lower dividend payment levels in general.
H1: Firms with accounting expert on their audit
committees maintain relatively lower dividend pay-
ment level.
Accounting experts not only improve corporate
governance by their monitoring roles, but also help
make optimal financial policies by utilizing their
professional expertise, because they have better
knowledge in dividend payment capacity, tax plan-
ning and corporate financial conditions. Firms with
smoother dividend payment can better signal corpo-
rate future earnings sustainability (Skinner and
Soltes 2011). As a result, when firms pay dividends,
we expect firms with accounting experts to maintain
smoother dividends.
H2: Dividends are smoother in firms with account-
ing experts on their audit committees than firms
without accounting experts on their audit committee.
To indirectly verify the impact on financial
policies from accounting experts in audit commit-
tees, we further examine whether directors with
management expertise also affect dividend poli-
cies. We expect that director’s accounting exper-
tise is a distinctive entry barrier and enables
accounting expert directors to play different roles
from those with management background only.
H3: management experts on the audit committee
do not affect dividend policy
When firms have greater information asymmetry
between management and outside investors, it is
more necessary for the firm to issue dividend as a
signalling tool. Although accounting experts in gen-
eral reduce corporate dividend payment through
their monitoring roles, they, embedded with profes-
sional expertise, would also help managers strategi-
cally adjust dividend policies through their advisory
roles. When information asymmetry is greater, the
marginal contribution of dividend payment signalling
effect is larger. As a result, conditional on larger
analyst forecast errors, we expect accounting experts
to step in and advise managers to make the best of
dividend signalling functions.
H4: Firms with accounting experts on their audit
committees are more likely to maintain higher
dividend payment levels, as analyst forecast errors
become larger.
III. Research design and sample description
We download the proxy statements of all firms in
S&P 500 from EDGAR. We focus on the S&P 500
 APPLIED ECONOMICS 5

firms as our sample firms, because S&P 500 firms Table 1. Sample description.
are large firms, whose dividend policy is more Observations
Panel A: Sample selection procedure
representative. The sample period spans from S&P 500 firms from 2005 to 2012 4000
2005 to 2012 to avoid confounding effect from Less: observations without accounting expert data (553)
3447
the SOX regulation. Following the requirements Less: observations without dividend data (617)
of SOX, we focus on the roles played by the audit 2830
Less: observations without EPS data (50)
committee members.6 We manually extract direc- Total sample 2780
tors’ background information from proxy state- Notes: This panel demonstrates the sample selection procedure. The
sample is from S&P 500 firms. The sample period is from 2005 to 2012.
ments. We define a director from audit Therefore, we originally have 4000 observations. After deleting the 553
committee as accounting expert when he or she observations without accounting expert data, we have 3447
observations. After deleting the 617 observations without dividend
has working experience as a public accountant, data, we have 2830 observations. After deleting the 50 observations
auditor, controller, chief accounting officer or without EPS data, we have 2780 observations finally.
chief financial officer (CFO). Directors with these Panel B: Sample distribution by SIC industry code
Industry SIC codes Observations
backgrounds are deemed as accounting experts in
Agriculture 0–999 8
our study.7 We employ a dummy variable which Mining and construction 1000–1299, 68
equals to one if an audit committee has at least 1400–1999
Food 2000–2111 129
one director with accounting expertise. Textile, printing, and publishing 2200–2790 121
We collect the accounting expert data of these S&P Chemicals 2800–2824, 108
2840–2899
500 firms from EDGAR. Table 1 provides sample Pharmaceuticals 2830–2836 118
Extractive industries 2900–2999, 142
description of this study. After dropping observations 1300–1399
with missing accounting expert information, divi- Durable manufacturers 3000–3569, 473
3580–3669,
dend data or EPS data, we obtain a final sample of 3680–3999
2780 firm-year observations. Panel B of Table 1 lists Computers 7370–7379, 367
3570–3579,
the industry distribution of our sample. Table 2 pre- 3670–3679
sents the summary statistics of variables used in this Transportation 4000–4899 112
Utilities 4900–4999 220
paper. We end up with 2780 firm-year observations. Retail 5000–5999 310
The mean value of EXPi;t
1 is 0.616, i.e. 61.6% firm- Service 7000–7369, 108
7380–9999
year observations has at least one accounting expert Finance and Insurance 6000–6999 496
in audit committee. ΔDPSi;t is the annual change of Total 2,780
Notes: This panel demonstrates sample distribution by SIC (Standard
dividends per share for firm i in year t. EXPi;t
1 Industrial Classification) industry code. According to the SIC code, we
equals to 1 if at least one director on the audit com- divide the firm observations into 14 industries.

mittee of firm i in year t − 1 has accounting expertise.

We follow DeFond, Hann, and Hu (2005) and define
accounting expertise according to initial version of
SOX issued by the SEC. Directors with working
experiences as a public accountant, auditor, principal
or chief financial officer, controller or principal or
chief accounting officer are deemed as accounting
experts. EPSi;tðt
1Þ is the earnings per share for firm
i in year t (t − 1). DPSi;t
1 is the annual dividends per
share for firm i in year t (t − 1). Both of them display
very high variations in our sample, suggesting signifi-
cant changes in earnings and dividend policies across
different firm years. Table 3 presents the correlation
matrix of variables mentioned earlier. We observe
that dividend change is positively correlated with
past and current earnings, which is quite intuitive.
Dividend change is negatively correlated with lagged
dividend payment level, suggesting a mean-reverting
process in dividend change.
We follow the classic model specifications as in
Lintner (1956), Fama and Babiak (1968) and
Caskey and Hanlon (2013) to measure the annual
change of dividends per share.

6
This study does not consider other random cases where non-audit committee directors also happen to have accounting backgrounds. Since we need to
hand collect director professional backgrounds, we restrict our sample within directors in audit committee according to Section 407 of SOX.
7
A CEO, who has supervised the financial reporting, can be taken as an accounting (financial) expert by the definition of SEC. However, these cases are
not taken as an accounting expert in this study. DeFond, Hann, and Hu (2005) find that market reacts positively when a firm assigns the audit
committee accounting expert but does not react positively when a firm assigns its CEO as the accounting expert. We examine the impact of
management expertise in Table 6.
6 Z. QIAO ET AL.

Table 2. Descriptive statistics.

N Mean SD Min. p25 Median p75 Max.
EXPi;t
1 2780 0.616 0.486 0.000 0.000 1.000 1.000 1.000
EPSi;t 2780 2.454 3.146 −27.380 1.190 2.265 3.605 44.640
EPSi;t
1 2780 2.445 3.032 −27.380 1.180 2.220 3.555 28.050
DPSi;t 2780 0.668 0.978 0.000 0.134 0.450 0.915 21.000
DPSi;t
1 2780 0.601 0.783 0.000 0.120 0.420 0.847 15.990
ΔDPSi;t 2780 0.067 0.852 −15.690 0.000 0.030 0.090 21.000
Ei;t 2723 0.067 0.076 −0.872 0.026 0.060 0.105 0.408
RETi;t 2723 0.075 0.317 −0.913 −0.102 0.083 0.258 0.994
Di;t 2723 0.373 0.484 0.000 0.000 0.000 1.000 1.000
MEXPi;t
1 2780 0.923 0.266 0.000 1.000 1.000 1.000 1.000
DIVi;t 2506 0.799 0.401 0.000 1.000 1.000 1.000 1.000
ERRORi;t
1 2506 0.002 0.010 0.000 0.000 0.001 0.002 0.300
ROAi;t
1 2506 0.067 0.074 −0.872 0.026 0.058 0.106 0.391
LOSSi;t
1 2506 0.070 0.256 0.000 0.000 0.000 0.000 1.000
LEVi;t
1 2506 0.221 0.156 0.000 0.099 0.204 0.314 0.783
Qi;t
1 2506 1.855 0.975 0.726 1.175 1.529 2.219 8.232
SIZEi;t
1 2506 9.597 1.370 6.229 8.567 9.538 10.402 14.633
Notes: This table presents the summary statistics of variables used in this article. EXPi;t
1 is an indicator and equals to 1 if at least one director on the audit
committee of firm i in year t − 1 has accounting expertise, which is defined according to initial version of SOX issued by the SEC. Directors with working
experiences as a public accountant, auditor, principal or chief financial officer, controller, or principal or chief accounting officer are deemed as accounting
experts. EXPi;tðt
1Þ is the earnings per share for firm i in year tðt
1Þ. DPSi;tðt
1Þ is the annual dividends per share for firm i in year t (t − 1). ΔDPSi;t is the
annual change of dividends per share for firm i in year t. Ei;t is the income before extraordinary items divided by the total assets at the beginning of the
period. RETi;t is the buy-and-hold return over the period from nine months prior to fiscal year end to three months after fiscal year end. Di;t is an indicator
and equals to 1 if RETi;t is negative, 0 otherwise. MEXPi;t
1 ¼ 1 if the audit committee member of firm i in year t
1with experience as a CEO or company
president. DIVi,t is an indicator which equals to 1 if DPSi;t
1 > 0and 0 otherwise. ERRORi;t
1 ¼ the analyst forecast error is measured as the absolute
difference between the median analyst earnings forecast prior to a quarterly earnings announcement and the actual earnings for firm i in year t − 1,
normalized by the firm’s total book assets and averaged across four quarters in a given year. ROAi,,t−1 is the income before extraordinary items divided by
lagged total assets for firm i in year t − 1. LOSSi,t−1 is an indicator which equals to 1 if ROAi;t
1 < 0 and 0 otherwise. LEVi;t
1 is the total of long-term debts
divided by total assets for firm i in year t. Qi;t
1 ¼ Tobin’s Q of the firm i in year t
1, Tobin’s Q is measured by (firm’s market value of equity + book
value of total liability)/firm’s book value of total assets. SIZEi;t
1 is the natural log value of total asset for firm i in year t
1.

Table 3. Coefficient of correlation. empirical model to test our hypotheses. ΔDPSi;t is

ΔDPSi;t EXPi;t
1 EPSi;t EPSi;t
1 DPSi;t
1 the annual change of dividends per share for firm i
ΔDPSi;t 1.000
EXPi;t
1 −0.010 1.000
in year t. EXPi;t
1 is an indicator and equals to 1 if at
(0.606) least one director on the audit committee of firm i in
EPSi;t 0.097*** −0.086*** 1.000
(0.000) (0.000) year t − 1 has accounting expertise, which is defined
EPSi;t
1 0.046** −0.105*** 0.548*** 1.000 according to initial version of SOX issued by the SEC.
(0.016) (0.000) (0.000)
DPSi;t
1 −0.287*** −0.043** 0.114*** 0.198*** 1.000 Directors with working experiences as a public
(0.000) (0.025) (0.000) (0.000) accountant, auditor, principal or chief financial offi-
Notes: p-values in parentheses. *p < 0.1, **p < 0.05, ***p < 0.01. cer, controller, or principal or chief accounting officer
Variables are defined in Table 2.
are deemed as accounting experts. EPSi;tðt
1Þ is earn-
ings per share for firm i in year t (t − 1). DPSi;t
1 is the
ΔDPSt ¼ c½rðEPSt
λEPSt
1 Þ
DPSt
1  þ rλEPSt
1 annual dividends per share for firm i in year t (t − 1).
þ εt
ΔDPSi;t ¼ β0 þ β1 EXPi;t
1 þ β2 EPSi;t þ β3 EPSi;t
1
DPS ¼ EPS  r, where r is the payout ratio and is þ β4 DPSi;t
1 þ β5 EPSi;t  EXPi;t
1
expected to be positive on average. EPS is þ β6 EPSi;t
1  EXPi;t
1 þ β7 DPSi;t
1  EXPi;t
1
assumed to be an autoregressive process. þ Industry Dummy þ Year Dummy þ εi;t
EPSt ¼ ð1 þ λÞEPSt
1 þ ut . ðEPSt
λEPSt
1 Þ is
the unexpected EPS change and λEPSt
1 is the where,
expected EPS change. Consequently, c is the partial EXPi;t
1 = 1 if at least one director on the audit
adjustment speed of dividend change to unexpected committee of firm i in year t − 1 has accounting
earnings change, which is expected to be between 0 expertise, which is defined according to initial
and 1. version of SOX issued by the SEC. Directors with
Given the classic model mentioned earlier, we fol- working experiences as a public accountant, audi-
low Caskey and Hanlon (2013) to construct an tor, principal or chief financial officer, controller,
 APPLIED ECONOMICS 7

or principal or chief accounting officer are Table 4. Accounting expert in audit committee and accounting
deemed as accounting experts. conservatism.
Ei;t ¼ β0 þ β1 RETi;t þ β2 Di;t þ β3 Di;t  RETi;t þ β4 EXPi;t
1
EPSi;tðt
1Þ = earnings per share for firm i in
þ β5 Di;t  RETi;t  EXPi;t
1 þ Industry Dummy
year t (t − 1),
þ Year Dummy þ εi;t
DPSi;t
1 = Annual dividends per share for firm
(1) (2)
i in year t –1, Predicted Sign Ei;t Ei;t
ΔDPSi;t = Annual change of dividends per share Constant 0.094*** 0.093***
for firm i in year t, (19.402) (3.740)
RETi;t + 0.014 0.014*
Ei;t = income before extraordinary items divided (1.441) (1.672)
by the total assets at the beginning of the period, Di;t 0.005 0.005
(1.082) (1.267)
RETi;t = buy-and-hold return over the period Di;t :RETi;t + 0.121*** 0.089***
from nine months prior to fiscal year end to three (5.812) (4.925)
EXPi;t
1 0.004
months after fiscal year end, (1.366)
Di;t = 1 if RETi;t is negative, 0 otherwise Di;t :RETi;t :EXPi;t
1 + 0.051***
(3.117)
In the above regression model to test our hypoth- Industry Dummy Yes Yes
Year Dummy Yes Yes
eses, we explain the two coefficients that can be N 2723 2723
interpreted in accordance to formula in Caskey Adj. R2 0.174 0.177
and Hanlon (2013), β2 ¼ c  r and β4 ¼
c. β2 is Notes: Each column reports coefficient estimates from a single regression,
with t-statistic (robust and clustered by firm) in parentheses.*, (**) and
the interaction between dividend partial adjustment (***) indicate significance at the 0.10, (0.05) and (0.01) levels,
ratio and dividend payout ratio. β4 is the opposite of respectively.
Variables are defined in Table 2.
partial adjustment ratio. Moreover, the two coeffi-
cients of EPSi;t  EXPi;t
1 and DPSi;t
1  EXPi;t
1 ,
β5 and β7 are the key variables in the model because
demonstrating stronger accounting conservatism in
they document how accounting experts affect divi-
firms with accounting experts sitting on audit com-
dend payout ratios and whether dividend payout
mittees. Watts (2003) proposes that accounting con-
adjusts to earnings changes.
servatism is likely to induce lower dividend level,
because accounting conservatism affects dividend
payment through earnings-based formulas, and
IV. Empirical results debtholders would tend to request restricting corpo-
In order to investigate how accounting experts on rate dividend payments and maintaining corporate
audit committees enhance internal monitoring, we net asset value for the safety of their debt repayment.
examine whether firms having accounting experts As a result, we will examine whether firms with
sitting on the audit committees are associated with accounting experts sitting on audit committees,
greater accounting conservatism, which leads to who tends to strengthen accounting conservatism
stricter constraints on earnings disclosure (see, e.g., for internal monitoring, are associated with lower
Basu 1997; Khan and Watts 2009). Similar with prior dividend payment, as presented in Table 5.
research in accounting conservatism, we insert an Table 5 presents the main regression results.
interaction term with accounting expert dummy in Based on the specification proposed by Fama and
the classic Basu (1997) model and test its marginal Babiak (1968), we strictly follow in examining the
impact on the asymmetric timeliness of earnings. In additional impact from EXPi;t
1 on dividend poli-
the first column of Table 4, we replicate the classic cies. The coefficients of EPSi;t is significantly posi-
Basu (1997) model and document a significant tive, suggesting high dividend payout ratio
and positive coefficient on the interaction conditional on higher concurrent earnings. The
term Di;t  RETi;t , showing more timely impact on coefficient of DPSi;t
1 , the opposite of dividend
earnings with respect to losses. Furthermore, we adjustment speed to earnings change, is significantly
examine the marginal impact from accounting expert negative, suggesting that dividends adjust accord-
dummy in column (2), we find the interaction term ingly to earnings change. In order to test H1 and
Di;t  RETi;t  EXPi;t
1 to be significant and positive, H2, we interact EXPi;t
1 with variables mentioned
8 Z. QIAO ET AL.

Table 5. Accounting expert in audit committee and dividend Table 6. Management expert in audit committee and dividend
policy. policy.
ΔDPSi;t ¼ β0 þ β1 EXPi;t
1 þ β2 EPSi;t þ β3 EPSi;t
1 þ β4 DPSi;t
1 ΔDPSi;t ¼ β0 þ β1 MEXPi;t
1 þ β2 EPSi;t þ β3 EPSi;t
1 þ β4 DPSi;t
1
þ β5 EPSi;t  EXPi;t
1 þ β6 EPSi;t
1  EXPi;t
1 þ β5 EPSi;t  MEXPi;t
1 þ β6 EPSi;t
1  MEXPi;t
1
þ β7 DPSi;t
1  EXPi;t
1 þ Industry Dummy þ β7 DPSi;t
1  MEXPi;t
1 þ Industry Dummy
þ Year Dummy þ εi;t þ Year Dummy þ εi;t þ Year Dummy þ εi;t
Predicted sign ΔDPSi;t Predicted sign ΔDPSi;t
Constant 0.172** Constant 0.179
(2.555) (0.984)
EXPi;t
1 − −0.180* MEXPi;t
1 ? −0.109
(−1.820) (−0.534)
EPSi;t + 0.047* EPSi;t + 0.002
(1.840) (0.121)
EPSi;t
1 + 0.015 EPSi;t
1 + 0.006
(0.828) (0.948)
DPSi;t
1 − −0.561*** DPSi;t
1 − −0.223
(−2.795) (−1.439)
EPSi;t . EXPi;t
1 − −0.035 EPSi;t . MEXPi;t
1 ? 0.025
(−1.383) (1.045)
EPSi;t
1 . EXPi;t
1 ? 0.000 EPSi;t
1 . MEXPi;t
1 ? 0.010
(0.025) (0.938)
DPSi;t
1 . EXPi;t
1 + 0.388** DPSi;t
1 . MEXPi;t
1 ? −0.151
(2.095) (−0.791)
Industry Dummy Yes Industry Dummy Yes
Year Dummy Yes Year Dummy Yes
N 2780 N 2780
Adj. R2 0.143 Adj. R2 0.112
Notes: Each column reports coefficient estimates from a single regression, with Notes: The column reports coefficient estimates from a regression, with t
t statistic (robust and clustered by firm) in parentheses.*, (**) and (***) statistic (robust and clustered by firm) in parentheses.*, (**) and (***)
indicate significance at the 0.10, (0.05) and (0.01) levels, respectively. indicate significance at the 0.10, (0.05) and (0.01) levels, respectively.
Variables are defined in Table 2. Variables are defined in Table 2.

earlier in the classic dividend-earnings model, as in
Caskey and Hanlon (2013). Consistent with Setia-
Atmaja (2009), the coefficient of EXPi;t
1 is signifi-
cant and negative, suggesting that firms with
accounting experts on their audit committee on
average maintain lower levels of dividend payment.
The findings on the interactions are interesting.
The coefficients of interactions between EXPi;t
1
and EPSi;tðt
1Þ are insignificant, showing no addi-
tional impact on payout ratio by directors who are
accounting expert. However, the coefficients of
interaction between EXPi;t
1 and DPSi;t
1 are sig-
nificantly positive, indicating that dividend
changes in firms with accounting experts on
their audit committees are less sensitive to earn-
ings changes. In other words, directors with
accounting expertise on audit committees help
smooth corporate dividend payment, making it
less sensitive to earnings volatility.
In Table 6 we use the same model specification
except for replacing accounting expert dummy
EXPi;t
1 with management expert dummy
MEXPi;t
1 . This enables use test whether audit com-
mittee members with corporate management experi-
ence affect dividend policy as well. The interactions
here are all insignificant from zero in Table 5, show-
ing that directors with management expertise do not
affect dividend policy. Our empirical results imply
that dividend policy advice requires specialized exper-
tise in accounting, and therefore the entry barrier
provides an explanation for the distinct role played
by directors with accounting expertise.
We further examine whether directors with
accounting expertise take advantage of the signal-
ling function of dividend policy. Conditional on
high information asymmetry between insiders and
outside investors, dividend payment provides a
positive signal of its future prospect. If directors
with accounting experience do have the expertise
to advise on the optimal dividend policy, we
expect them to increase dividend level in face of
greater information asymmetry. Here, we use ana-
lyst forecast error as the measure of information
asymmetry. Greater analyst forecast error implies
lower corporate transparency and insufficient
information available to public investors. In
Table 7, we test this hypothesis by examining the
coefficient of analyst forecast error ERRORi;t
1
interacted with EXPi;t
1 . First, we find that the
coefficient of ERRORi;t
1 is significant and
 APPLIED ECONOMICS 9

Table 7. Accounting expert in audit committee and providing professional advice on making optimal
dividend policy – conditional on analyst forecast error. financial policies. In this article, we focus on account-
DIVi;t ¼ β0 þ β1 EXPi;t
1 þ β2 ERRORi;t þ β3 ERRORi;t
1
ing expertise and dividend policy in specific. For
 EXPi;t
1 þ β4 DIVi;t
1 þ β5 ROAi;t þ β6 LOSSi;t
1
future studies, it would be interesting to expand this
þ β7 LEVi;t
1 þ β8 Qi;t
1 þ β9 SIZEi;t
1 þ εi;t
topic and examine how directors’ professional exper-
(1) (2)
tise (e.g. industry-specific expertise as engineers or
Predicted sign DIVi;t DIVi;t
Constant 1.217*** −3.597***
scientists, law firm experience, etc.) of various dimen-
(14.715) (−6.157) sions are associated with different types of financial
EXPi;t
1 − −0.240* −0.310**
(−1.756) (−2.180) policies (e.g. merger and acquisition, capital expendi-
ERRORi;t
1 − −41.675*** −49.601** ture, innovation, etc.) inside a firm.
(−2.712) (−2.557)
ERRORi;t
1 . EXPi;t
1 + 33.879** 49.131**
(2.157) (2.537)
DIVi;t
1 + 3.720***
(20.621) V. Conclusion
ROAi;t
1 + 2.564**
(2.032)
LOSSi;t
1 − −0.561* In this article, we investigate whether director’s
(−1.901) accounting expertise affects corporate dividend pol-
LEVi;t
1 − 0.022
(0.054) icy, which to our best knowledge has not been exam-
Qi;t
1 − −0.173** ined by prior studies. We first examine the relation
(−2.019)
SIZEi;t
1 + 0.224*** between the existence of accounting expert on the
(4.352) audit committee of board of directors (EXP ¼ 1)
Industry Dummy Yes Yes
Year Dummy Yes Yes with and dividend payment level and stability.
N 2506 2506 Consistent with signalling story by Bhattacharya
Pseudo-R2 0.210 0.823
Notes: Each column reports coefficient estimates from a probit regression, with
(1979), we find that firms with accounting experts
z statistic (robust and clustered by firm) in parentheses.*, (**) and (***) sitting on board on average maintain relatively lower
indicate significance at the 0.10, (0.05) and (0.01) levels, respectively.
Variables are defined in Table 2. dividend level. Strengthened accounting conserva-
tism, which tends to restrict dividend payment, is
the potential explanation. Moreover, we find that
negative. However, the coefficient of interaction director’s accounting expertise on the audit commit-
term ERROR and EXP is significant and positive, tee helps smooth corporate dividend payment, mak-
suggesting that firms with accounting experts on ing it less sensitive to earnings volatility. However, we
their audit committee tend to pull up dividend fail to find any impact on dividend policy from direc-
level in face of greater information asymmetry. tors with management expertise (rather than
This is consistent with the signalling theory of accounting expertise), suggesting the importance of
dividend policy. It also provides evidence on the the professional requirement of accounting experts in
advisory role of accounting expert on the audit their advisory roles. When firms are facing greater
committee of board of directors. information asymmetry, which is proxied by larger
The implications of our empirical findings can be analyst forecast error, the existence of accounting
summarized into two aspects. First, we confirm the experts on board of directors helps elevate dividend
conventional monitoring function from directors level in order to better signal corporate future cash
with professional expertise. We find that accounting flow and growth prospect. Overall, our findings not
expert sitting on board is associated with stronger only verify the monitoring roles by audit committee
accounting conservatism and lower dividend pay- members with accounting expertise, but more impor-
ment level. Second, we further provide evidence of tantly highlight the importance of advisory roles by
directors’ advisory roles; we find firms with account- directors with professional expertise. For future
ing experts on board maintain smoother dividend research, it would be interesting to examine other
and relatively higher dividend payment level when dimensions of directors’ professional expertise and
information asymmetry is more severe. This lends how they exert impacts on specific corporate deci-
support to our conjecture that directors with account- sions which require professional knowledge to
ing expertise are playing their advisory roles by optimize.
10 Z. QIAO ET AL.
Acknowledgments
We would like to thank the editor and two anonymous refer-
ees for their helpful suggestions. We are grateful to Taychang
Wang and seminar participants at the AAA 2017 Annual
Meeting for their helpful comments. Zheng Qiao acknowl-
edges the support bythe National Natural Science
Foundation of China (71790601) and the MOE (Ministry of
Education in China) Project of Humanities and Social
Sciences (16YJC790082). Shengmin Hung acknowleges the
support by the Ministry of Science and Technology of
Taiwan [MOST 103-2410-H-031-011-].
Disclosure statement
No potential conflict of interest was reported by the authors.
Funding
The authors acknowledge the support by the National Natural
Science Foundation of China [71790601], the MOE (Ministry
of Education in China) Project of Humanities and Social
Sciences [16YJC790082], and the Ministry of Science and
Technology of Taiwan [MOST 103-2410-H-031-011-].
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Appendix: Variable definition

Variable name Definitions Literature

EXP An indicator which equals to 1 if at least one director on the DeFond, Hann, and Hu (2005)
audit committee of firm i in year t − 1 has accounting
expertise. We define accounting expertise according to initial
version of SOX issued by the SEC. Directors with working
experiences as a public accountant, auditor, principal or chief
financial officer, controller, or principal or chief accounting
officer are deemed as accounting experts
EPS Earnings per share Fama and Babiak (1968); Caskey and Hanlon (2013)
ΔDPS Annual change of dividends per share Fama and Babiak (1968); Caskey and Hanlon (2013)
DPS Annual dividends per share Fama and Babiak (1968); Caskey and Hanlon (2013)
E Income before extraordinary items divided by the total assets at Following the accounting conservatism model of Basu (1997)
the beginning of the period
RET Buy-and-hold return over the period from nine months prior to Following the accounting conservatism model of Basu (1997)
fiscal year end to three months after fiscal year end
D An indicator, and it equals to 1if RET is negative, 0 otherwise Following the accounting conservatism model of Basu (1997)
MEXP An indicator which equals to 1 if the audit committee member DeFond, Hann, and Hu (2005)
with experience as a CEO or company president, who has the
experience of supervising the process of financial reporting,
and 0, otherwise
DIV An indicator which equals to 1 if DPS > 0 and 0 otherwise Skinner and Soltes (2011);
Caskey and Hanlon (2013)
ERROR The analyst forecast error is measured as the absolute difference Li and Zhao (2008)
between the median analyst earnings forecast prior to a
quarterly earnings announcement and the actual earnings,
normalized by the firm’s total book assets and averaged across
four quarters in a given year
ROA The income before extraordinary items divided by lagged total Caskey and Hanlon (2013)
assets
LOSS An indicator which equals to 1 if ROA < 0 and 0 otherwise. Skinner and Soltes (2011)
LEV The total of long-term debts divided by total assets Brockman and Unlu (2009)
Q Tobin’s Q is measured by (firm’s market value of equity + book Lang and Litzenberger (1989)
value of total liability)/firm’s book value of total assets
SIZE The natural log value of total asset Caskey and Hanlon (2013)