Do UK firms manage earnings to meet dividend thresholds?

Abstract

This paper examines earnings management by dividend-paying firms in cases where premanaged earnings would fall below the expected dividend, and by non-dividend paying firms aiming to avoid reporting losses. We find that within the UK market the likelihood of upward earnings management is significantly greater in the former case than the latter, though both are drivers for earnings management. Large firms are less likely to upwardly manage earnings to reach dividend thresholds, consistent with prior UK evidence on the ability of the largest firms to avoid restrictive debt covenants. We also find that earnings management is more clearly observable through examining working capital discretionary accruals than through examining total discretionary accruals.

Earnings Management by Non‐profit Organisations: Evidence from UK Charities

“…; Peasnell et al. ; Leone and Van Horn ; Atieh and Hussain ; Verbruggen and Christiaens ): …”

“…This suggests that the application of those models may not generate more reliable results compared to the Jones (1991) model. Furthermore, the Jones (1991) model has been applied by Leone and Van Horn (2005) and Verbruggen and Christiaens (2012) in the non-profit context as well as in the corporate sector (Peasnell et al 2000;Atieh and Hussain 2012). Furthermore, following Leone and Van Horn (2005), this study adopts the Jones (1991) model in the non-profit context, where the existence of accruals in relation to revenue and depreciation might be construed as a strategy by large NPOs (whose total income exceeds £250 000) to manage the bottom line (Charity Commission 2005).…”

The Impact of Earnings Management on Dividend Policy: Evidence From Kuwait

“…This proposition was supported by some studies which argued that large firms distribute higher amounts of their net profits as cash dividends than small firms (Fama & Frensh, 2000). However, other studies argued that in most cases, SME's managers feel more reluctant to distribute dividends than managers in large companies (Atieh & Hussain, 2012).…”

Dividends and tax avoidance as drivers of earnings management: Evidence from dividend-paying private SMEs in Finland

“…Contracts implicitly tied to accounting numbers include labor union contracts (Liberty & Zimmerman, 1986), management buyouts (DeAngelo, 1986;Perry & Williams, 1994), auditing contracts (Becker et al, 1998;, executive changes (Pourciau, 1993), equity offerings (Aharony, Lin and Loeb 1993;Teoh et al, 1998), corporate governance systems (Dempsey et al, 1993), and general stakeholder relationships (Bowen et al, 1995;Burgstahler & Dichev, 1997), as well as dividend policy (Atieh & Hussain, 2012;Daniel et al, 2008;Kasanen et al, 1996;Wen et al, 2017). Compared to the results on the role of explicit contracts, the existing evidence for earnings management driven by these implicit contracts is more mixed.…”