Opportunistic earnings management or performance-related effects? Evidence from dividend-paying firms

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We propose that much of the variation in standard (accruals and real-activities) earnings management metrics can be explained by firms' performance trajectories. We test our proposition using dividend change to distinguish high from low performance trajectory firms. We find that standard earnings management metrics have a stronger relation with performance trajectories than with unexpected earnings, a presumed target of earnings management. Firms that appear to manage earnings more are likelier to increase their dividends, but standard earnings management metrics do not explain changes in firm value around dividend change announcements. Applying standard earnings management metrics without taking performance trajectories into account can result in mistaking managers' efforts to increase firm value for earnings management.