Do Firms Manage Earnings to Meet Dividend Thresholds?

57 Pages Posted: 11 Mar 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

Multiple version iconThere are 2 versions of this paper

Date Written: March 2007

Abstract

We find that firms are more likely to manage earnings upward when their earnings would otherwise fall short of expected dividend levels. This earnings management behavior appears to significantly impact the likelihood of a dividend cut. Firms whose discretionary accruals cause reported earnings to exceed expected dividend levels are significantly less likely to cut dividends than are firms whose reported earnings fall short of expected dividend levels. These findings are robust to controls for other determinants of discretionary accruals and other determinants of the likelihood of a dividend cut. Finally, we report that, in response to an earnings shortfall, earnings management is more aggressive prior to the passing of the Sarbanes-Oxley Act, subsequent to the 2003 dividend tax cut, in firms with high payout ratios, in firms whose CEOs receive higher dollar dividends, in firms whose CEOs have higher pay-performance sensitivities, and in firms that raise less outside equity. Collectively, these findings imply that managers treat expected dividend levels as an important earnings threshold.

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

JEL Classification: M41, M43, G35, G38

Suggested Citation

Daniel, Naveen D. and Denis, David J. and Naveen, Lalitha, Do Firms Manage Earnings to Meet Dividend Thresholds? (March 2007). AFA 2008 New Orleans Meetings Paper, Available at SSRN: https://ssrn.com/abstract=969792 or http://dx.doi.org/10.2139/ssrn.969792

Naveen D. Daniel

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 (Contact Author)

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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