Do Firms Manage Earnings to Meet Dividend Thresholds?

Posted: 16 Nov 2007

See all articles by Naveen D. Daniel

Naveen D. Daniel

Drexel University - Department of Finance

David J. Denis

University of Pittsburgh

Lalitha Naveen

Temple University - Department of Finance

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Abstract

Dividend paying firms tend to manage earnings upward when their earnings would otherwise fall short of expected dividend levels. This behavior is evident only in firms with positive debt and is more aggressive prior to the Sarbanes-Oxley Act, subsequent to the 2003 dividend tax cut, in high payout firms, in firms whose CEOs receive higher dollar dividends and have higher pay-performance sensitivities, and in firms that raise less outside equity. Moreover, this earnings management behavior appears to significantly impact the likelihood of a dividend cut. Our findings imply that managers treat expected dividend levels as an important earnings threshold.

Keywords: dividend policy, dividend smoothing, earnings management, accruals

JEL Classification: G35, M41, M43, G34, G38, H25

Suggested Citation

Daniel, Naveen D. and Denis, David J. and Naveen, Lalitha, Do Firms Manage Earnings to Meet Dividend Thresholds?. Journal of Accounting & Economics (JAE), Forthcoming, Drexel College of Business Research Paper No. 2008-07, Available at SSRN: https://ssrn.com/abstract=1030322

Naveen D. Daniel (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-5858 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://lebow.drexel.edu/Faculty/DanielN

David J. Denis

University of Pittsburgh ( email )

Katz Graduate School of Business
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)

Lalitha Naveen

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-6435 (Phone)

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