Abstract
We examine the impact of unrealized fair value adjustments on dividend policy. Dividend payouts should include only persistent income [Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings and taxes. American Economic Review, 46(2), 97–113]. In our institutional setting, however, regulators recommend the non-distribution of any income from fair value adjustments, which suggests that they interpret them as transitory. We empirically demonstrate that fair value adjustments on investment property are persistent, while those on financial securities are transitory. We further show that only fair value adjustments from investment properties are distributed. We argue that managers perceive the persistence of the two fair value components correctly, and by doing so, they distribute income consistent with the Lintner framework rather than on regulatory recommendations. Finally, by focusing on managerial optimism, debt contracting, and insider ownership, we demonstrate the conditions under which firms choose to deviate from regulator recommendations and to distribute fair value profits.
Highlights
In this study, we investigate whether the adjustments of investment properties and financial securities influence dividend policy by examining the extent of dividend changes related to those adjustments
We examine the impact of unrealized fair value adjustments on dividend policy
This paper examines the impact of fair value adjustments on dividend policy
Summary
We investigate whether the adjustments of investment properties and financial securities influence dividend policy by examining the extent of dividend changes related to those adjustments. We investigate the impact of mark-to-market adjustments on dividend policy to examine whether FVA affects managerial decision-making. Our results suggest that companies which revalue investment properties significantly increase the amounts of their dividend payouts, which is not the case for companies revaluing financial securities These results suggest that managers perceive the persistence of fair value components correctly. In contrast to the polemics of FVA (Poon, 2004; Wallison, 2008) but in line with theory, we demonstrate that investment property adjustments are persistent, similar to other historical cost income, while financial security adjustments are transitory. We provide evidence on the role of insider ownership and the importance of managerial optimism and debt contracting
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