Abstract
For the first time in the literature, we provide evidence of dividend-based earnings management. The credibility of the contracting view of earnings management is enhanced by studies in different institutional settings. In this paper, the institutional setting is a debt-dominated capital market. On one hand, the implicit contract driving the earnings management behavior in our (keiretsu-type) financial environment is the smooth dividend stream expected by the large institutional equity holders. This creates a need for companies to report earnings high enough to pay out dividends. On the other hand, managing earnings upwards is costly because of tax consequences. We find that the predicted and actual earnings management are in the same direction, and the reported earnings depend on the dividend-based target earnings in Finland during 1970–1989. Our results provide new testable hypotheses for earnings management in companies that have owners with preference for stable dividends.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.