Accounting‐Based Equity Valuation Techniques and the Value Relevance of Dividend Information: Empirical Evidence from Japan

This paper empirically examines whether dividends are value‐relevant in Japan by employing Ohlson’s (1995) accounting‐based equity valuation technique. The substantial U.S.‐based literature on dividends has confirmed the signalling role of dividends in mitigating information asymmetry between managers and investors, and is consistent with an environment characterized by dispersion of ownership. However, the most important corporate governance characteristic that distinguishes Japan from the U.S. is the predominance of inter‐corporate, interlocking ownership in Japan, which reduces information asymmetry and is therefore likely to diminish the role of dividends in mitigating such asymmetries. Pooled regression results provide evidence consistent with this hypothesis. However, even in such an environment, dividends are value relevant for firms that incur losses whilst paying dividends, and also for firms with permanent earnings.