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Do UK firms manage earnings to meet dividend thresholds?

Do UK firms manage earnings to meet dividend thresholds? This paper examines earnings management by dividend-paying firms in cases where pre-managed 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting and Business Research Taylor & Francis

Do UK firms manage earnings to meet dividend thresholds?

Accounting and Business Research , Volume 42 (1): 18 – Mar 1, 2012
18 pages

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References (38)

Publisher
Taylor & Francis
Copyright
Copyright Taylor & Francis Group, LLC
ISSN
2159-4260
eISSN
0001-4788
DOI
10.1080/00014788.2012.622187
Publisher site
See Article on Publisher Site

Abstract

This paper examines earnings management by dividend-paying firms in cases where pre-managed 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.

Journal

Accounting and Business ResearchTaylor & Francis

Published: Mar 1, 2012

Keywords: accruals; debt covenants; dividend payments; dividend thresholds; earnings management; loss-avoidance

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