The Impact of Earnings Management on Dividend Policy: An Empirical Study of Selected Non-financial Listed Companies of Pakista
Abstract
Studying dividend policy has become an inspiring catch all in the eyes of investors. Firms
oftoday are in need of such mangers that may help them in establishing a strong dividend
policy to the best interest ofthe organization as well as of stakeholders. Literature is also
clear about the fact that managers are involved in establishing such dividend policies that
could benefit their stakeholders. Past studies have established a link among profitability,
retained earnings, size of the firm and dividend policy, but how earnings management
effect an organization's dividend policy needs further attention. Therefore, this study
aims at identifying the impact of earnings management on dividend policy. A set of 41
companies have been selected among non-financial listed companies of Pakistan Stock
Exchange. Study period under review is from 2010 to 2015. Modified Cross-Sectional
Jones Model (1995) has been applied in order to determine the discretionary accruals
which is proxy of earnings management. The outcome of study with the help of random
effect model is showing a negative relationship of earnings management with dividend
policy and it is not significant in the determination of dividend payout of every firm. The
results further strengthen the fact that an effective corporate governance mechanism has
been found in the selected listed organizations. So by adding up discretionary accruals to
a larger extent the dividend payment ratio will decrease rather showing an upward trend.
Finally on the basis of research findings we may conclude that in order to facilitate or
constrains dividend payments, earnings management does not play a pivotal role, rather
managers ofthe firms have some other motives for managing accruals.