Largest Shareholder, Cash Dividends And Earnings Management

In recent years, cash dividend has received much attention from the public andgovernment. Experience in foreign mature capital markets shows efficient and stablecash bonus is not only the foundation of attracting long-term funds and fostering theidea of value investment but also an important factor for market pricing. Since2000theadministration has issued a series of policies and measures to encourage listedcompanies to payout cash bonus and achieved remarkable achievement. As the figuresshow, the non-dividend and low-distribution phenomenon has declined and there is anupward trend in cash dividend per share. Meanwhile, many companies are paying cashbonus with a high level that out of line with their ability to generate cash flow.Considering cash dividend has the functions of signal transmission and catering toinvestors, one of purposes of this paper is to discuss whether cash bonus is an incentivefor companies’ earnings management. More specifically, will listed companies enhancereport earnings by earnings management when unmanaged earnings could not meet thedemand for cash dividends? As more and more studies have found that cash dividendcould be used to transfer interest in the context of major shareholder controlling in mostof listed companies in our country, will controlling shareholders tunnel the listedcompanies through the cash dividend and earnings management coordination? Facingthis tunneling, could other big shareholders make effective check and supervision ofcontrolling shareholders? These are the focus of our study.On the basis of relevant theories and literature review, we first analyze therelationship between cash dividend and earnings management of listed companies fromthe perspective of managers, discuss haw largest shareholders’ behavior of tunnelingwill affect the relationship between cash dividend and earnings management combinedwith the ownership structure featured with one stock’s dominance, then study theinfluence of ownership balance and make corresponding hypotheses. This dissertationchooses eligible companies in Shenzhen and Shanghai Stock Exchange from2009to2011as sample and empirically examines above-mentioned hypotheses. The empiricalresults show: Listed companies would enhance report earnings by earnings managementwhen unmanaged earnings could not meet the demand for cash dividends, proving thatcash bonus is one of the reasons for listed companies’ earnings management. The higherproportion that control stockholders stock, the more earnings management companies do. This result provides empirical evidence that controlling shareholders tunnel thelisted companies through the cash dividend and earnings management coordination. Inaddition, balanced concentrated ownership structure has negative correlation withearnings management, indicating that faced with largest shareholders’ tunneling; otherbig shareholders make effective check and supervision of controlling shareholders.Those findings can help investors to understand earnings management behind cashdividend and remind them treating cash bonus with caution, enriches the literature onthe relationship between earnings management and cash dividend, provide reference forregulators to make reasonable dividend policies, and also lend a hand to optimizegovernance structure.