Dividend Policy and Fraudulent Financial Reporting

Abstract

This paper investigates the relation between fraudulent financialreporting and firms’ dividend policies. Specifically, this researchconcentrated on situations that it is possible to classify financialrestatement into fraudulent and non-fraudulent based on themanagement’s incentives for discretionary accounting choices .The data is related to 247 firms (consisted of 2,238 firm-yearobservation) during 1381-1390. A Meet-or-beat model was used toclassify firms as making discretionary accounting choices foropportunistic meet-or-beat. Furthermore, a fixed effects logisticregression with panel data was used to test hypothesis. Results showthat dividend-paying firms have less likelihood to engage infraudulent financial reporting furthermore, the negative associationbetween dividend paying status and fraudulent financial reporting isstronger when the size of dividend payouts is larger .Overall, resultssuggest firm’s dividend policy is indicative of its earnings quality.Specifically, dividend policy unfolds the manager’s incentives forfinancial restatements.

Keywords

• financial restatement
• dividend policies
• fraudulent financial reporting
• information content