Earnings Management and Dividend Payments during the Covid-19 Pandemic

Abstract

The recent outbreak of coronavirus has caused the worst global economic crisis in the last few decades. A substantial number of companies have experienced severe economic difficulties and were tempted to adjust their financial figures in order to reach certain business thresholds. Maintaining an existing level of dividend payments is a powerful incentive to engage in such activities. The aim of this article was to estimate the effect of the economic crisis caused by the COVID-19 pandemic on the relationship between the estimated level of earnings management and dividend payments made by companies. Research models were estimated using panel analysis. The Modified Jones model was utilized to assess the level of earnings management. A total of 56 companies listed on the Zagreb Stock Exchange in the Republic of Croatia with their financial data from 2015 to 2020 were included in the research sample. Unlike in the case of absolute and income-decreasing discretionary accruals, results indicated that the economic crisis caused by the COVID-19 pandemic positively affected the relationship between earnings management and dividend payments in the case of income-increasing accruals regarding companies that made regular dividend payments. In conclusion, the economic crisis caused by the COVID-19 pandemic was an additional incentive for certain companies to perform income-increasing earnings management to reach the desired level of dividend payments.

Keywords

• coronavirus
• covid-19
• crisis
• dividend
• earnings management