Posted by Joel CHUA Yong Sheng , Year 3 undergrad at the School of Business, Singapore Management University
Expected dividend and earnings management: Evidence from Taiwan
Szu-Hsien Lin, Li-Hua Lin, Huei-Hwa Lai, Chien-Chung Tu
Abstract
The earnings of a firm are not only relevant to its survival, but also affect managers’ performance and stakeholder’s decision. The accrual basis of accounting provides managers the discretion of financial statements. Since the funding of dividends often comes from and is often limited to earnings or equity increased, the accounting earnings are one of the important factors that determine the level of dividend payouts. In other words, when accounting earnings are lower than expected dividend levels, managers will have the incentive for an upward earnings management to prevent decreases in dividends. Daniel, et al. (2008) found that managers treat the expected dividend as an important earnings threshold. This paper followed Daniel, et al. (2008), and adopted the 6145 companies that listed in Taiwan Stock Exchange and OTC market, from 2005 to 2010, to examine the association between dividend threshold and earnings management. The empirical results support our hypothesis that the dividend threshold is an important incentive for managers to engage in earnings management. This is worth the attention of stakeholders and researchers.
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