Dividend Stickiness, Debt Covenants, and Earnings Management

Contemporary Accounting Research, Volume 34, Issue 4, Winter 2017, Pages 2022-2050

56 Pages Posted: 6 Nov 2012 Last revised: 15 Feb 2019

See all articles by Jaewoo Kim

Jaewoo Kim

University of Oregon - Department of Accounting

Kyeong Hun Lee

Norwegian School of Economics (NHH) - Department of Finance

Erik Lie

University of Iowa - Henry B. Tippie College of Business

Date Written: August 5, 2017

Abstract

Consistent with the notion that dividends are very sticky, Daniel, Denis, and Naveen (2008) report evidence that firms manage earnings upward when pre-managed earnings are expected to fall short of dividend payments. However, we find that this evidence is not robust when controlling for firms’ tendency to manage earnings upward to avoid reporting earnings declines; only firms with high leverage exhibit a statistically weak tendency to manage earnings to close deficits of pre-managed earnings relative to dividends. We further report that the decision to cut dividends depends on whether reported earnings fall short of past dividends, but not on earnings management that eliminates a shortfall in pre-managed earnings relative to dividend payments. Overall, our evidence suggests that firms that face dividend constraints are more likely to cut dividends than to manage earnings to avoid dividend cuts.

Keywords: Dividend policy, Earnings management

JEL Classification: G35, M41

Suggested Citation

Kim, Jaewoo and Lee, Kyeong Hun and Lie, Erik, Dividend Stickiness, Debt Covenants, and Earnings Management (August 5, 2017). Contemporary Accounting Research, Volume 34, Issue 4, Winter 2017, Pages 2022-2050. Available at SSRN: https://ssrn.com/abstract=2171425 or http://dx.doi.org/10.2139/ssrn.2171425

Jaewoo Kim

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

Kyeong Hun Lee

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Erik Lie (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States

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