Dividend Policy On The Influence Of Earnings Management And The Corresponding Market Reaction

As companies’ earnings management behavior become increasingly frequent, the problem has been paid more attention from all sectors of society. Because this behavior will influence the formulation of accounting standards and regulatory supervision policy, the protection of investors’ interests, and even affecting resource allocation optimization function of securities market, the research on earnings management has great significance. In general, earnings management behavior can be divided into two kinds. First, earnings management may be part of manager’s attempts to mislead investors. Alternatively, managers may use their reporting discretion to signal their private information to the market. However, most scholars home and abroad focus on the opportunistic type, especially the listed companies’ behavior in the process of financing from the capital market. This kind of earnings management behavior is mostly oriented by supervision policy. By contrast, this paper discusses the earnings management behavior of the listed companies that pay dividends and how the capital market response to it.Previous literature confirms that managers have the motivation to use earnings management to signal positive private information. However, this behavior might be regarded by the market as opportunistic. So managers may use other signals with the earnings management tools to enhance the credibility of private information. One such signal is dividend. According to the dividend theory, the listed company can use dividend policy to transfer optimistic private information about the company’s prospect to the outside investors. But the efficiency of China’s stock market is not high, the private information behind the dividend policy could not be fully recognized by the market. For this reason, managers have the motivation to cooperate other ways with dividend policy to strengthen the efficiency of transfer private information. This paper argues that managers may use earnings management and dividends to fully signal private information. The accrual signal reinforces the dividend signal whereas the dividend signal leads credibility to the accrual signal. This way will reduce the degree of information asymmetry between managers and investors and help to increase the company’s stock price.This paper uses A Shares companies of Shanghai Stock Exchange between the year2003and2010as research samples. We first estimate discretionary total accruals and discretionary current accruals using the modified-Jones(1991)model and use these two indexes to measure the degree of earning management. We then test the discretionary accruals’significance of companies issuing stock dividend and cash dividend. The empirical results show that firms that issue dividends report positive discretionary accruals and the discretionary accruals are larger for firms that issue stock dividends than cash dividends. This suggests that companies issuing dividends have motivation to adjust earnings and different types of dividends have different effects on earnings management.On this basis, this paper also tests how the stock market response to discretionary accruals of the companies issuing dividends. We use the cumulative abnormal return of the company computed over three days before and after annual bonus plan announcement as the dependent variable and use discretionary accruals, unexpected non-discretionary accruals and expected earnings as explanatory variable to make a regression model. The empirical results show that the cumulative abnormal return is positively associated with the discretionary accruals for companies issuing dividends and the association between the cumulative abnormal return with the discretionary accruals is stronger for companies that issue stock dividends. This suggests that the market has a positive attitude towards managers’ earnings management behavior and the market reaction to companies that implement different dividend polices is discrepant. Analyst coverage represents the richness degree of a company’s informationenvironment. This paper also studies how analyst coverage influence the market reaction towards earnings management. We divided the research samples into two groups by analyst coverage, and make a regression analysis using the market reaction model respectively. The empirical results show that the association between the cumulative abnormal return with the discretionary accruals is stronger for companies that have high analyst coverage. This means that securities analysts play an important role in reducing information asymmetry between managers and small and medium-sized investors and improving the efficiency of stock market.According to our research perspective and conclusion, the article finally gives some suggestions from inhibiting excessive earnings management behaviors and developing professional institutional investors.