The Role of Accruals as a Signal in Earnings and Dividend Announcements: NZ Evidence

Abstract

In this study we examine whether managers deliberately use accruals to convey information regarding firm future profitability. We use contemporaneous earnings and dividend announcement data as our research setting, as this setting reduces the possibility of opportunistic income smoothing by managers and hence increases the validity of the inference on the accrual signaling hypothesis. Employing New Zealand data from 1992 to 2003, we find evidence consistent with managers using both accruals and changes in dividends to communicate private information regarding firm future profitability to the market. In particular, we observe that the market's reaction to dividend increase announcements is significantly positive. More importantly, we find that dividend-increasing firms report positive accruals that are positively correlated with future profitability. This finding is robust to performance, growth, and post-earnings announcement drift effects.