Unrealized Earnings, Dividends and Reporting Aggressiveness: An Examination of Firms’ Behavior in the Era of Fair Value Accounting

34 Pages Posted: 3 Mar 2016

See all articles by Ester Chen

Ester Chen

Peres Academic Center

Ilanit Gavious

Ben-Gurion University of the Negev

Date Written: March 2016

Abstract

This study explores changes in the dividend policy of companies following the adoption of fair value accounting rules. Using a sample of Israeli firms that adopted International Financial Reporting Standards (IFRS), we document a dramatic increase in the payout ratios of firms that distributed dividends based on revaluation gains from 32 percent of realized earnings in the pre‐IFRS period to 115 percent in the post‐IFRS period. Furthermore, we reveal that firms paying dividends from unrealized earnings are more aggressive both in their book and tax reporting behaviors. We demonstrate that this increased aggressiveness is associated with the payment of cash dividends from paper profits.

Keywords: Dividend policy, Earnings management, Fair value, International Financial Reporting Standards, Revaluation, Unrealized earnings

Suggested Citation

Chen, Ester and Gavious, Ilanit, Unrealized Earnings, Dividends and Reporting Aggressiveness: An Examination of Firms’ Behavior in the Era of Fair Value Accounting (March 2016). Accounting & Finance, Vol. 56, Issue 1, pp. 217-250, 2016, Available at SSRN: https://ssrn.com/abstract=2741351 or http://dx.doi.org/10.1111/acfi.12187

Ester Chen (Contact Author)

Peres Academic Center

P.O.Box 328
Rehovot, 76120
Israel

Ilanit Gavious

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheva 84105, 84105
Israel

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