Dividend policy and earnings management across countries

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Vol. 42; pp. 267 - 286
• Main Authors: He, Wen, Ng, Lilian, Zaiats, Nataliya, Zhang, Bohui
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.02.2017
• Subjects: Agency problems; Dividends; Earnings management; Equity issuance; Investor protection; Dividends; Investor protection; Agency problems; Equity issuance; Earnings management; G35; G34; G15; M41; G38
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2016.11.014

This paper examines whether dividend policy is associated with earnings management and whether the relationship varies across countries with wide-ranging degrees of institutional strength and transparency. Based on a sample of 23,429 corporations from 29 countries, we show that dividend payers manage earnings less than dividend non-payers, and that this evidence is stronger in countries with weak investor protection and high opacity. Further, we find that dividend payers manage earnings less when they issue equity following dividend payments, and that this result is more pronounced in countries with weak institutions and low transparency. Overall, our evidence suggests that firms may employ dividend policies associated with less earnings manipulation to mitigate agency concerns and to establish credible reputation, thereby facilitating access to external funds. •Dividend payers manage earnings less than dividend non-payers.•Dividend payers manage earnings less when they issue equity subsequently to payouts.•The above findings are stronger in countries with weak institutions and high opacity.•Dividends may help mitigate agency concerns and facilitate access to external funds.