The contractual and value relevance of reported earnings in a dividend-focused environment

This study investigates the relevance of reported earnings in the context of an institutional environment, i.e., Switzerland, in which investors focus on dividends. In conjunction with a dividend focus, the financial reporting environment faced by Swiss firms provides their managers with more accounting discretion than managers of Anglo-Saxon firms typically have. From a contractual perspective, dividendbased earnings management is expected since Swiss corporate law explicitly states that dividends, which must be voted on by stockholders, are to be based upon a firm's reported earnings. From a value perspective, thin trading conditions and a long-term investment horizon are expected to increase the importance of dividend payments and to influence the informativeness of reported earnings. Results indicate that Swiss managers do engage in dividend-based earnings management, that earnings quality signals are used by managers to voluntarily constrain their accounting choices and that the value relevance of earnings is conditional upon dividend payments.     

On the financial characteristics of firms that initiated new dividends during a period of economic recession and financial market turmoil

The initiation of new dividends and increases in dividend payout ratios occur infrequently because once initiated it would be expected by most investors that the new dividends will be maintained. Dividend announcements are said to have informational content concerning the value of the firm, and financial signaling theory would lead investors to conclude that the initiation of new dividends is an indication that the firm expects increased cash flows in the future. Thus, unless the initiation is identified beforehand as a special dividend resulting from unanticipated cash inflows, it is difficult to reverse the action without having an adverse effect on the value of the firm. In periods of economic recession and financial turmoil most firms conserve cash and the initiation of new dividends or increases in the dividend payout ratio in such periods are extraordinary and noteworthy. The purpose of this study is to provide a financial analysis of those firms described by Value Line as having initiated or increased the dividend payout ratio in the most recent period of economic recession and financial market turmoil. Specifically, the analysis will test for significant differences in the financial profiles of those firms that initiated new dividends in such a period, and companies selected at random but from the same industries. A unique financial profile is established for the dividend initiating firms, and it is suggested that the profile may be used to identify firms that will initiate new dividends in future periods of economic downturn. As in previous studies of this nature Multiple Discriminant Analysis is used.     

An investigation into the financial characteristics of dividend initiating firms

Dividend announcements are said to have an informational content concerning the value of the firm. Most studies on dividend announcements have involved models to predict change or to analyze that informational content. The purpose of this study is to establish the financial characteristics of firms that initiate or significantly increase dividends. One hundred firms were selected for study. Fifty of the firms had recently either initiated or significantly increased dividends; the other fifty were selected at random. Significant differences were found in the financial characteristics of the two groups. The results were generally consistent with previous studies and finance theory. There were however, two genuine surprises. The dividend initiating firms possessed lower levels of liquidity and activity than firms selected at random. This suggests that dividends may not be paid to dispose of excess cash, but to provide shareholders with some tangible reward in periods of low liquidity and little activity.     

Optimal dividend policy with random interest rates

Several recent papers have studied the impact of macroeconomic shocks on the financial policies of firms. However, they only consider the case where these macroeconomic shocks affect the profitability of firms but not the financial markets conditions. We study the polar case where the profitability of firms is stationary, but interest rates and issuance costs are governed by an exogenous Markov chain. We characterize the optimal dividend policy and show that these two macroeconomic factors have opposing effects: all things being equal, firms distribute more dividends when interest rates are high and less when issuing costs are high.     

Hard Times or Great Expectations? Dividend Omissions and Dividend Cuts by UK Firms*

This paper uncovers an increasing proportion of quoted UK companies omitting cash dividends. Using a large panel of quoted UK firms, we estimate panel data probit models for the incidence of dividend omissions and cuts as functions of financial characteristics including cash flow, leverage, investment opportunities, investment and company size. These variables account for most of the increase in omission since 1995. There is relatively little evidence to link this to the major tax reform of 1997 that abolished tax refunds on dividend income payable to tax‐exempt institutions. Significant persistence effects indicate companies are slow to adjust their balance sheets through their dividend.     

Insider Privatisation and Restructuring Incentives

In the literature on privatisation and restructuring it is a generally held belief that manager owned firms will be restructured more rigorously than worker owned companies. This gives the clear recommendation that property rights and control rights should be allocated to managers in the process of (insider-) privatisation. One of the implied arguments is, that managers' career concerns will make them eager to prove their ability by improving company efficiency. The present model shows that in the transition context managers' career concerns might result in the opposite effect. If the bulk of job opportunities are in worker controlled firms, the managers of the few manager controlled firms will want to appear soft on excess labour capacity – hence, restructure less harshly – in order to improve their career opportunities.     

Bridging the GAAP: the Changing Attitude of German Managers towards Anglo-American Accounting and Accounting Harmonization

This paper presents and compares results from two empirical studies into the attitudes of financial executives of large German corporations towards a global harmonization of accounting principles and towards the adaptation of German accounting to Anglo-American Standards. The first of the studies was conducted in 1994, the second in late 1997, early 1998. A comparison of the results reveals that German managers' attitudes have changed profoundly over the course of only three years. In 1994, they objected to the view that German accounting is inferior to Anglo-American accounting; they had a negative attitude towards US accounting; and they were highly sceptical about adapting German accounting to Anglo-American accounting rules. Today, German managers openly concede that German financial accounts have a lower information value for investors and that the use of German accounting rules reduces the demand for German shares abroad. They are also more willing to accept far-reaching changes in the German accounting system. The survey shows that numerous large corporations have already adopted international standards, or are planning to do so in the near future. A further finding is that opinion among German managers and firms has shifted significantly towards accepting IAS rather than US-GAAP as the basis for the internationalization of German accounting. In fact, more than 80%of managers believe that five years from now the great majority of German firms will publish their consolidated financial accounts according to either IAS or US-GAAP.     

The Impact of Unrealized Fair Value Adjustments on Dividend Policy

We examine the impact of unrealized fair value adjustments on dividend policy. Dividend payouts should include only persistent income [Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings and taxes. American Economic Review, 46(2), 97–113]. In our institutional setting, however, regulators recommend the non-distribution of any income from fair value adjustments, which suggests that they interpret them as transitory. We empirically demonstrate that fair value adjustments on investment property are persistent, while those on financial securities are transitory. We further show that only fair value adjustments from investment properties are distributed. We argue that managers perceive the persistence of the two fair value components correctly, and by doing so, they distribute income consistent with the Lintner framework rather than on regulatory recommendations. Finally, by focusing on managerial optimism, debt contracting, and insider ownership, we demonstrate the conditions under which firms choose to deviate from regulator recommendations and to distribute fair value profits.     

LIFO adoption and dividend payout

Adoption of the LIFO inventory costing method tends to decrease reported earnings but increases cash flows to adopting firms. This study examines the change in dividend payout ratios (cash dividends divided by earnings) accompanying LIFO adoption. The question addressed is whether adopting firms likely paid out incremental cash flows or retained them to the benefit of management. The evidence suggests that managers and directors adjusted payout ratios to partially offset the negative earnings effect of LIFO. The adjustments made were not sufficient in magnitude to achieve a neutral LIFO effect on dividend payout, and the net result was the retention of incremental cash flows generated by LIFO adoption.     

Financial Pressure and Balance Sheet Adjustment by Firms*

This paper examines the financial policies and balance sheet adjustment of companies. Using a large panel of UK‐listed firms we consider how companies resolve pressures on their balance sheet, estimating models for dividends, new equity issuance and investment. The results indicate that companies resolve balance sheet pressures by each of these means. Financial policies, through dividends and new equity issuance, and real investment decisions, respond to the underlying level of debt and the borrowing cost of servicing that debt. Dividends are estimated to be slow to adjust in the short run.     

Does audit report information improve financial distress prediction over Altman's traditional Z‐Score model?

We analyze empirically the usefulness of combining accounting and auditing data in order to predict corporate financial distress. Concretely, we examine whether audit report information incrementally predicts distress over a traditional accounting model: the Altman's Z‐Score model. Although the audit report seems to play a critical part in financial distress prediction because auditors should warn investors about any default risks, this is the first study that uses audit report disclosures for predicting purposes. From a dataset of 1,821 Spanish distressed private firms, we analyze a sample of distressed and non‐distressed firms and develop logit prediction models. Our results show that while the only accounting model registers a classification accuracy of 77%, combined models of accounting and auditing data exhibit considerably higher accuracy (about 87%). Specifically, our findings indicate that the number of disclosures included in the audit report, as well as disclosures related to a firm's going concern status, firms’ assets, and firms’ recognition of revenues and expenses contribute the most to the prediction. Our empirical evidence has implications for financial distress practice. For managers, our study highlights the importance of audit report disclosures for anticipating a financial distress situation. For regulators and auditors, our study underscores the importance of recent changes in regulation worldwide intended to increase auditor's transparency through a more informative audit report.     

The effect of board independence on dividend payouts: A quasi-natural experiment

Motivated by agency theory, we investigate the effect of board independence on dividend policy. We exploit as a quasi-natural experiment the passage of the Sarbanes-Oxley Act and the associated exchange listing requirement, mandating firms to have a majority of independent directors. Our difference-in-difference estimates show that firms forced to raise board independence are significantly more likely to pay dividends than firms not required to change board independence. Our results are consistent with the notion that stronger board independence forces managers to disgorge more cash to shareholders, thereby reducing what is left for possible expropriation by opportunistic managers. Based on an exogenous regulatory shock, our results are more likely to show a casual effect, rather than merely an association.     

财务报告成本和税收利益之间的权衡--基于存货计价方法选择的理论分析

文章以存货计价方法选择为例分析了企业如何选择会计政策的问题。当企业不考虑税收利益时,存在薪酬计划和处于债务违约边缘的公司将选择先进先出法,面临较大政治成本的公司将选择后进先出法;当企业考虑税收利益时,管理者权益比例较高且财务杠杆比例较低的公司将选择后进先出法。最后,文章指出在进行会计政策选择时,还必须综合考虑政府政策的影响。     

A Real Options Approach to Economic Exposure Management

Exchange rate volatility is not only a source of concern for firms but also of profit opportunities. If adjustment costs and lags are low, managers can adjust their input or output decisions to raise the firm's expected profits. Notwithstanding the resulting higher profit variability, the actual risk perceived by the managers may fall as they are probably more averse to downside risk—such as financial distress—than to risk in general. Hence, this paper argues that optimal economic exposure management consists of exploiting the upward profit potential of real exchange rate volatility, while keeping downside risk under control. It is shown that option theory provides useful new principles for economic exposure management by bringing out the crucial role of adjustment costs.     

Templates for financial control? Management and employees under the private equity business model

The term ‘private equity business model’ (PEBM) refers to private equity investors that delist publicly quoted firms, managing them as private equity‐controlled portfolio firms. But how and in what form do these investors diffuse a preferred template for the PEBM in portfolio firms? Is diffusion codified, institutionalised or merely tacit? What is the difference between these forms of diffusion? As a method of financial control, how is diffusion evident for managers and workers? Theoretically, while ‘financialisation’ is a contemporary pressure on the British economy, there is a ‘disconnection’ between competitive pressures for financialisation and the diffusion of practices to manage these pressures in portfolio firms. Forty‐two interviews in eight portfolio firms and five associated private equity firms concludes that potentially transformative and decisive restructuring for managers and workers is more evident than a defined template.     

利益相关者视角下的财务困境成本与收益

本文认为,传统的财务理论仅从企业的角度考虑负债所导致的财务困境成本与收益,忽视了负债经营对债权人、客户、供应商、雇员及竞争对手等利益相关者交易行为的影响。企业财务杠杆过高会给潜在的债权人、客户、供应商和雇员带来了隐性成本,而理性的利益相关者通常可以事先预见到这些成本,最终将由负债企业承担。企业财务杠杆过高还会导致竞争对手趁机掠夺其市场份额,从而使企业未来利润大幅度下降。尽管有企业可以利用财务困境获得一些收益,但是相对于其财务困境成本,这些收益通常是微不足道的。     

The relationship between entrepreneurial orientation and speed to the market: The case of incubator firms in Norway

Incubators and incubator firms work to promote the development and commercialization of technology and products. This study shows that entrepreneurial orientation can help achieve this aim. Using survey data from incubator firms, we show that entrepreneurial orientation has a statistically significant positive effect on ability to bring technology and products quickly to the market. This finding is important for managers of incubator firms and managers of incubators alike as they have a common interest in speed to the market. An implication of our study is that managers of incubators should try to enhance the entrepreneurial orientation of the incubator firms.     

The influence of executive compensation on the dispersion of security analyst forecasts

This study examines the association between executive compensation and security analyst forecast dispersion in an agency setting. It is hypothesized that firms that compensate their managers with long-term performance plans and high percentages of managerial stock will be less likely to engage in manipulation of financial statements and their financial performance will be easier to predict, thus resulting in less disperse forecasts. The results provide evidence that firms that compensate their managers with long-term performance plans and higher levels of the company stock have less dispersion associated with their security analyst forecasts and greater dispersion of their long-term growth in earnings.     

Institutional investors' corporate site visits and aggressive financial reporting

This paper investigates the impact of institutional investors' corporate site visits on financial reporting aggressiveness. While prior research has shed light on the monitoring impact of institutional shareholding on firms' financial reporting practices, institutional investors' preference regarding financial reporting remains unclear. Using a sample of Chinese firms listed on the Shenzhen Stock Exchange from 2012 to 2019, we find that institutional investors' on-site visits significantly increase financial reporting aggressiveness of hosting firms. The on-site visit effect is more salient in firms that are more sensitive to the influence of institutional investors, for example, firms with a less powerful chief executive officer, financially constrained firms, and firms operating in competitive industries. Our study highlights that under a setting of weak minority shareholder protection such as in China, managers are likely to recognize revenue aggressively to please powerful shareholders who paid intensive attention to them.     

Revisiting managerial perspectives on dividend policy

We survey managers of Nasdaq firms that consistently pay cash dividends to determine their views about dividend policy, the relationship between dividend policy and value, and four common explanations for paying dividends. The evidence shows that managers stress the importance of maintaining dividend continuity and widely agree that changes in dividends affect firm value. Managers give the strongest support to a signaling explanation for paying dividends, weak to little support for the tax-preference and agency cost explanations, and no support to the bird-in-the-hand explanation. The study provides new evidence about how managers view dividend life cycles and residual dividend policy. The authors would like to thank two anonymous referees for helpful comments and suggestions, and Maheshan Fernando and Sumeet Chawla for providing research assistance.