Article2014

Does Dividend Policy Drive Earnings Smoothing?

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

SYNOPSIS This paper examines the earnings-smoothing behavior of dividend-paying firms. We show that dividend-paying firms engage in more earnings smoothing than non-payers through both real activities and accrual choices. More specifically, dividend-paying firms with positive (negative) pre-managed earnings changes engage in more downward (upward) earnings management than non-payers. Additional tests suggest that the results are driven by dividend-related incentives and not the differences in the economic characteristics of dividend-paying firms, are robust to alternative measures of earnings management, and are not due to spurious correlation. We also show that earnings smoothing, in part, explains the higher earnings persistence of dividend-paying firms. These findings are consistent with a firm's dividend policy having an incremental impact on earnings-smoothing behavior. JEL Classifications: M41; G35

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References

2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 1991Earnings Management During Import Relief Investigations 2005Performance matched discretionary accrual measures 1995Detecting Earnings Management.2005The economic implications of corporate financial reporting 2003Earnings Management through Real Activities Manipulation 2010Understanding earnings quality: A review of the proxies, their determinants and their consequences 1997Earnings management to avoid earnings decreases and losses

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