Earnings Management and Dividend Policy: Evidence from a Frontier Market

Abstract

Profit or the earnings figure of an entity plays a vibrant role in transmitting information to the decision-makers especially, for the investors. However, if that figure is manipulated, the main objective of the financial reporting becomes valueless. This study investigates the manifestation of earnings management in two selected sectors at the Colombo Stock Exchange and tests the impact of earnings management on dividend policy. The study selected the manufacturing sector and hotel and travel sector companies from 2012 to 2019 as the sample. We employed descriptive statistics, rankings, and panel regression analysis as the main tools of analysis in the study. Dividend policy is measured via dividend yield and dividend payout ratio, while real earnings management approach and total accruals are used as proxies to measure earnings management. In addition, the size of the firm and leverage are used as control variables of the study. The findings reveal that there is no significant impact of earnings management on dividend policy in both sectors. However, the results discovered that the company's preceding year dividend policy is the primary concern to decide the current year dividend policy of the selected sectors. The study becomes original as the first attempt to investigate the impact of earnings management on dividend policy in the Sri Lankan context and compare two vital sectors. The findings assist stakeholders, especially investors and managers, in their decision-making process.