Do Fair Value Adjustments Influence Dividend Policy?

Accounting and Business Research, Vol. 42, No. 1, 2011

34 Pages Posted: 23 Feb 2009 Last revised: 8 Jun 2010

See all articles by Igor Goncharov

Igor Goncharov

Lancaster University - Department of Accounting and Finance

Sander van Triest

University of Amsterdam - Amsterdam Business School

Date Written: April 1, 2010

Abstract

We examine the impact of positive fair value adjustments on dividend policy. If fair value adjustments are transitory in nature and managers are able to assess their implications for future earnings, including fair value adjustments in net income is expected to have no distribution consequences. However, positive fair value adjustments may lead to higher dividends when management incorrectly assesses their persistence. This can have a procyclical impact because higher dividends increase leverage, and thus risk. We use a Russian setting that mandates fair value accounting for financial instruments and requires disclosure of unrealised fair value adjustments in income. We find no empirical support for the concern that dividends increase in response to positive fair value adjustments. Rather, there is a negative relationship between positive fair value adjustments and dividend changes, which holds after controlling for dividend policy determinants and any endogenous nature of the revaluation decision. We discuss several possible explanations for this finding.

Keywords: fair value accounting, dividend policy, earnings persistence

JEL Classification: M41, G35

Suggested Citation

Goncharov, Igor and van Triest, Sander, Do Fair Value Adjustments Influence Dividend Policy? (April 1, 2010). Accounting and Business Research, Vol. 42, No. 1, 2011, Available at SSRN: https://ssrn.com/abstract=1348264

Igor Goncharov (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

Sander Van Triest

University of Amsterdam - Amsterdam Business School ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

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