The Role of Accruals as a Signal in Earnings and Dividend Announcements: NZ Evidence

30 Pages Posted: 25 Aug 2008 Last revised: 23 Nov 2008

See all articles by Hardjo Koerniadi

Hardjo Koerniadi

Auckland University of Technology

Alireza Tourani-Rad

Auckland University of Technology - Faculty of Business & Law

Date Written: August 24, 2008

Abstract

In this study we examine whether managers deliberately use accruals to convey information regarding firm future profitability. We use contemporaneous earnings and dividend announcement data as our research setting, as this setting reduces the possibility of opportunistic income smoothing by managers and hence increases the validity of the inference on the accrual signaling hypothesis. Employing New Zealand data from 1992 to 2003, we find evidence consistent with managers using both accruals and changes in dividends to communicate private information regarding firm future profitability to the market. In particular, we observe that the market's reaction to dividend increase announcements is significantly positive. More importantly, we find that dividend-increasing firms report positive accruals that are positively correlated with future profitability. This finding is robust to performance, growth, and post-earnings announcement drift effects.

Keywords: Accruals, Signaling, Earnings and Dividend Announcements

JEL Classification: M41, G14, G30

Suggested Citation

Koerniadi, Hardjo and Tourani-Rad, Alireza, The Role of Accruals as a Signal in Earnings and Dividend Announcements: NZ Evidence (August 24, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1252202 or http://dx.doi.org/10.2139/ssrn.1252202

Hardjo Koerniadi (Contact Author)

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand

Alireza Tourani-Rad

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

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