Does Conservative Accounting Matter to the Cash Dividend Policy‘

Abstract

Conservative accounting can help creditors to lower their risk because conservatism will affect the reported net income and retain earnings to put more restrictions on cash dividend payouts. Based on data from Chinese firms, this study shows that firms with conservative accounting have more agency problems and higher agency costs which lead to a higher demand for conservative accounting reports. The reporting policy can significantly influence the cash dividend policy. Our results indicate that firms with aggressive accounting reports are more likely to pay more cash dividends. It is implied that accounting conservatism may lower the probability of paying cash dividends and the amount of cash dividend payouts. The evidence supports the governance role of conservative accounting on the dividend policy to reduce agency costs and to protect the interest of creditors.