Can Dividend Payments Mitigate the Influence of Covid-19 Crisis on Earnings Management?

Abstract

This paper examines whether dividend payments mitigate the influence of COVID-19 crisis on earnings management practices in Brazil. For this purpose, we use a sample of 264 Brazilian public firms from 2010 to 2021, applying System Generalized Method of Moments (SYS-GMM) regressions. Our main results indicate that, although firms are more prone to engage in earnings management practices during the COVID-19 period, the dividend payout ratio mitigates this influence on earnings management level. Therefore, we show that dividend payment can act as a substitute corporate governance mechanism in times of crisis, since it can reduce the occurrence of earnings management. Additional analyses also support this view, showing that big levels of dividends play a role in minimizing agency conflicts by reducing the level of earnings management. Hence, we contribute to the literature on dividend policy and earnings management, which calls for research to better understand the influence of dividends on earnings management practices in financial crises periods. Further, we shed light on how firms can use dividend policies as a substitute corporate governance mechanism to maintain or establish its reputation during periods of financial crises, benefiting investors, boards, creditors, financial analysts, and policymakers due the increase on the financial reporting quality.