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Journal of Financial Reporting and Accounting Do discretionary accruals affect firms’ corporate dividend policy? Evidence from France Anis Ben Amar, Olfa Ben Salah, Anis Jarboui,

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Do discretionary accruals affect firms’ corporate dividend policy? Evidence from France Anis Ben Amar

Discretionary accruals

333

Department of Accounting and Law, ESC SFAX, Sfax, Tunisia

Olfa Ben Salah


Department of Finance, Faculty of Economics and Management, University of Sfax, Sfax, Tunisia, and

Received 27 March 2017 Revised 18 July 2017 17 October 2017 Accepted 12 November 2017

Anis Jarboui ISAAS, Sfax, Tunisia

Abstract Purpose – In financial literature, dividend payout decisions are determined by factors such as debt, liquidity, profitability, size and risk. The purpose of this paper is to identify the effect of earnings management measured by discretionary accruals based on Dechow et al.’s (1995) model on dividend policy.

Design/methodology/approach – This research will use panel data analysis to test the effect of earnings management on dividend policy. The authors selected 280, French non-financial companies, listed on the CAC All Tradable index for the 2008-2015 period.

Findings – Using a sample of 2108 firm-year observations, the authors find a positive impact of earnings management on dividend policies of firms. Besides, there is a positive/negative relationship between the size of the firm and the dividend policy. Moreover, this paper has dealt with some factors such as debt, the risk of the firm and liquidity which may affect the corporate dividend policy. The results are robust as the authors adopted an additional measure of dividend policy. Practical implications – The findings may have important implications for analysts, investors, regulators and academics. First, the study shows that earnings management is a common practice in the French context and constitutes a major objective of dividend policy. Better still, identifying the other variables that influence the dividend policy provides a clearer understanding of dividend policy for investors, analysts and academics alike. Second, the study provides ample evidence of agency problems between various partners in French capital markets, highlighting the necessity to establish new corporate governance mechanisms. This is highly relevant for policymakers in their quest for a better financial market. Originality/value – This study extends the literature on the impact of dividend thresholds on earnings

management by showing that firms run earnings to inform the market that the company can distribute dividends.

Keywords Discretionary accruals, Dividend policy, Information asymmetry, Corporate finance Paper type Research paper

1. Introduction Corporate finance is the field of finance which is interested in the decisions and the financial transactions of companies. It handles three main issues, namely, the investment decision, the financing decision and the decision of equity remuneration or dividend policy which has been a subject of controversy for a long time (Kazmierska-Jozwiak, 2015). Considering the problem in question, Black (1976) described it as “the dividend puzzle”.

Journal of Financial Reporting and Accounting Vol. 16 No. 2, 2018 pp. 333-347 © Emerald Publishing Limited 1985-2517 DOI 10.1108/JFRA-03-2017-0020

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In fact, many researchers specialized in the field of finance (Fairchild et al., 2014; Kighir et al., 2015; Byrne and O’Connor, 2017; Jabbouri, 2016; Baker et al., 2017; Lin et al., 2017) have conducted theoretical and empirical studies to answer the numerous unresolved questions related to the dividend policy. Many questions, however, remain unanswered. In market equilibrium where there is no imperfection, Miller and Modigliani (1961) show that the market total value of the company is independent of its dividend policy. As a perfect market does not exist in reality, several theories (agency theory, signaling theory, etc.) suppose that the dividend has an influence on the value of the company and, consequently, the investors are more and more attracted by the firms which distribute dividends. During the 1950s, Lintner (1956) conducted an empirical study on the distribution of dividends and observed the following main results. First, the firms seek the stability of dividends. Second, they decide on a rate of target distribution in relation with the earnings achieved. Third, managers think that the market puts a premium on firms having a stable dividend policy. Fourth, earnings are the most important determinants of the dividend policy. More precisely, companies do not increase the dividends unless they present a steady rise in the earnings. Fama and Babiak (1968) confirmed the results of Lintner (1956) and concluded that the changes at the level of the distributed dividends follow the variations of the published net earnings from one year to the other. According to Kighir et al. (2015), current earnings are crucial in the process of making dividends payout decisions in Malaysia non-financial firms. Taking these reports into consideration, several works highlighted that managers can run the accounting earnings positively to influence the dividend policy of firms. Indeed, by respecting the generally accepted accounting principles (GAAP), the managers of firms use discretion in depreciations, stocks, accounting provisions so as to adjust earnings according to their needs. It is worth noting that some empirical studies were conducted to test the relationship between the earnings management and the dividend policy. A close review of these studies leads us to the conclusion that empirical tests did not yield similar results. In fact, some works confirmed this relationship, while some others did not (Kasanen et al., 1996; Kinnunen et al., 2000; Daniel et al., 2008; Atieh and Hussain, 2012; Haider et al., 2012; Liu and Espahbodi, 2014; Chansarn and Chansarn, 2016). We think that the study of the impact of the earnings management on the dividend policy requires further research, especially in other institutional contexts, such as in France. In fact, France has a stakeholder corporategovernance model, which is characterized by a high degree of concentration of ownership, family-controlled firms, the presence of family members in management, the weakest protection of outside investors and the prominence of banks as the main providers of capital (La Porta et al., 2000; Othman and Zeghal, 2006). We expect that earnings management positively influences the dividend policy of the firm. We find that discretionary accruals had a significant positive impact on the dividend policy of firms. We find, also, that some factors such as size, debt and the risk of the firm affected the corporate dividend policy. Our research contributes to the finance and accounting literature in the following ways. First, as far as we know, no other piece of research examined the relationship between earnings management and dividend policy in France. Prior studies on the determinants of the dividend policy do not reach clear cut conclusions (Lee et al., 2015). A number of variables were chosen, namely, leverage, liquidity, profitability, size and risk (KazmierskaJozwiak, 2015). In this study, earnings management was chosen as an explanatory variable in light of the assumption that “dividend” and “net earnings” were closely related. Our finding is that earnings management is a major determinant of dividend policy. Second, our study offers insightful glimpses into the relationship between dividends and earnings management within the context of the signal perspective. Several authors, including


Ginglinger and L’her (2006), Ducassy and Montandrau (2015), Ducassy and Guyot (2017), argued that managers of firms with high ownership concentration aim to limit agency costs between majority and minority shareholders. Thus, these firms have the possibility to pay dividends to have a good reputation. This is a powerful asset, especially in countries where foreign investors suffer from weak legal protection (Easterbrook, 1984; Gomes, 2000; La Porta et al., 2000 and Athari et al., 2016). Our results showed that firms run earnings to inform the market that the company can distribute dividends. In fact, although most of earnings management research highlights opportunistic incentives, our findings corroborate signaling incentives in the French context. The paper proceeds as follows: In the next section, we discuss France’s institutional background. Section 3 discusses prior literature on dividend policy and earnings management. Section 4 details our hypothesis followed by the research design in Section 5. Section 6 discusses the results, and Section 7 provides concluding remarks. 2. Institutional setting/background 2.1 The French financial reporting environment The values of uniformity and statutory control are the major characteristics of the French accounting systems (Gray, 1988). French companies adopt a financial mode that relies to a large extent on bank loans. Accounting earnings and fiscal rules are inextricably bound up (Othman and Zeghal, 2006). Thus, it is very likely that some socio-economic features of the European context impact earnings management practices in France. Besides, within this system, managers capitalize on a large discretionary margin while elaborating their companies’ financial statements. In fact, the GAAP allows for much accounting flexibility that equips managers with various means to manage earnings. 2.2 Ownership structure La Porta et al. (2000), to name just a few, examined the problem of ownership concentration. In countries that adopt the continental governance model, the level of ownership concentration is high, whereas the level of minority investors’ protection is low (Othman and Zeghal, 2006). The reduction of agency costs between minority and majority shareholders is possible via the use of dividends (Easterbrook, 1984; Shleifer and Vishny, 1997; Jensen, 1986). Besides, the active involvement of managers in managerial duties is conspicuous (La Porta et al., 2000). 3. Literature review 3.1 Dividend policy literature Dividend policy is one of the most debated topics in finance (Fairchild et al., 2014, Kighir et al., 2015; Baker et al., 2017). The neutrality thesis of the dividend policy was introduced for the first time by Miller and Modigliani (1961). These researchers suggested that the dividend policy on market equilibrium, where there is no imperfection, has no impact on the value of the share. They also suggested that investors are indifferent whether to receive incomes in dividends or in capital gains. This entails that the amount of the dividend paid by the firm to its shareholders is neutral in terms of its value. Miller and Modigliani (1961) supposed in their theorem that investment and loan policies are unchanging. The investors, who want to maximize the desired earnings, can purchase and sell the shares of a company in a market. Consequently, the expected profitability is independent of the way companies pay dividends and issue shares. As a result, the stock exchange value of the firm is not affected if the amounts of paid dividends vary.


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DeAngelo and DeAngelo (2006) questioned the approach of neutrality of the dividend policy. They concluded that the dividend policy had an impact on the value of the company. Unlike Modigliani and Miller, they argued that, in a perfect market, the dividend policy was not neutral and that the investment policy was not the only determinant of the company value. They added that this dividend policy affected shareholders wealth due to its influence on the choice of investment projects as well as the imperfections of the market. Previous studies (Easterbrook, 1984; Jensen, 1986) explained the dividend policy in light of agency problems. The Agency Theory defines the problem of interests divergence which exists between managers, shareholders and creditors and aims to reduce the agency costs which appear between the various parties (Jensen and Meckling, 1976). Within the framework of the Agency Theory, the dividend policy plays a double role: on the one hand, it allows the shareholders to exercise certain control over managers to solve agency problems; on the other hand, it is considered as a source of conflicts in ailing firms. According to Easterbrook (1984), the dividend policy can serve to minimize agency costs as the shareholders ask for dividends to discipline the managers. Kalay (1982) showed that the distribution of dividends is not recommendable for the financially ailing firms as it can contribute to a transfer of wealth from creditors to shareholders. The author also focused on debt contracts which aim at protecting the creditors against managerial decisions of investment and financing of their funds. Indeed, these contracts can include restrictive covenants, such as clauses that restrict the distribution of dividends, in the form of ratios based on accounting figures. The reason why firms pay dividends can be alternatively explained by the free cash flow hypothesis which considers dividends as a means to reduce agency costs of free cash flows (Jensen, 1986). The free cash flow is defined by Jensen (1986) as the set of available flows after financing all the projects with positive net present values on the basis of a discount rate equal to the cost of the capital. This author notes that the existence of free cash flow leads to additional conflicts between managers and shareholders. In fact, the managers engage in unprofitable investments due to the existence of free cash-flow (Shleifer and Vishny, 1997). The problem is that the existence of free cash-flow within a firm is destructive of value. The available amount can be allocated to shareholders in forms of dividends to reduce the agency conflicts between shareholders and managers. Indeed, this distribution of dividend serves to reduce the available funds and pushes the firm to obtain new funds from the capital market. The signaling models were developed at the end of the 1970s and at the beginning of the 1980s. Bhattacharya (1979), Miller and Rock (1985) and John and Williams (1985) are the most well-known developers. This theory explains that the dividend is an extremely powerful means of communication between the firm and the market. The models put forward by the researchers lead us to infer that firms adjust their dividends to signal their perspectives. An increase in the amount of dividends to be distributed indicates that the company has a promising perspective, while a reduction suggests the opposite. The Signal Theory is based on the fact that the information is unevenly shared or asymmetric that is not all the various participants to the financial market have the same information. The insiders (managers and dominant shareholders) are much better informed compared to the other partners (small and potential shareholders) concerning the future potential of the firm owing to their familiarity with the firm investment projects. Thus, the managers should make the best decisions not to harm the stakeholders. In fact, managers who know more inside information can transmit signals to reduce the informative asymmetry between the managers and the external agents. The informative role of dividend is initiated in the study


of Lintner (1956). This author showed that dividends are connected with earnings. More exactly, companies distribute dividends when the published earnings are on the rise. 3.2 Research on earnings management and dividend policy The examination of accounting texts reveals a set of techniques, options and areas of freedom left to managerial discretion (Healy and Wahlen, 1999; Dechow and Skinner, 2000). Under GAAP, managers have the possibility to engage in earnings management. Indeed, they can play on depreciation, inventories and accounting provisions to modulate earnings to their benefit. Consequently, the firm presents a financial statement that is hardly true and fair (Yang et al., 2008). A detailed review of the literature in the field of accounting reveals two major perspectives of earnings management: the opportunistic perspective and the signaling or information perspective. According to the opportunistic perspective, the manager has an interest in using accounting discretion to maximize his wealth, to the detriment of the stakeholders (Schipper, 1989). Previous research suggests that managers engage in opportunistic earnings management for different reasons. For instance, Healy (1985) affirms that managers run earnings with the aim of maximizing their bonuses. Burgstahler and Dichev (1997), Degeorge et al. (1999), Jacob and Jorgensen (2007), Caramanis and Lennox (2008), Daniel et al. (2008), Atieh and Hussain (2012) and Halaoua et al. (2017) have turned to the earnings management thresholds strategy to achieve certain thresholds of earnings. Indeed, firms can manage earnings to meet or exceed the following thresholds: zero earnings, last period’s earnings, analysts’ earnings forecasts, dividend levels, etc. The informational or signaling perspective assumes that managers manage earnings to signal the company’s future prospects (Gul et al., 2003). For example, firms can smooth earnings to provide investors in the market with private information (Tucker and Zarowin, 2006). Dividend policy is linked to earnings management in various studies. The researches that examined the impact of earnings management on dividend policy yielded different results. On the one hand, several studies found that earnings management had no significant impact on dividend policy. Shah et al. (2010) conducted an empirical study dealing with a sample of 120 Pakistani firms quoted to the stock exchange of Karachi for the period from 2003 to 2007 and of 55 Chinese companies quoted to the stock exchange of Shanghai and Shenzhen during the period 2001-2007. The results relative to the estimation of the empirical model showed that earnings management had no impact on the dividend policy for both the Pakistani and Chinese companies. Abbasi et al. (2014) carried out an empirical study on a sample of 214 firms listed on the Tehran Stock Exchange for the period from 2008 to 2012 to examine the relation between earnings management and dividend policy. They concluded that discretionary accruals did not significantly influence dividend policy. Chansarn and Chansarn (2016) studied the influence of earnings management measured against discretionary accruals on the dividend policy of 51 small and medium enterprises listed in the Market for Alternative Investment of Thailand during the 2005 – 2012 period. The authors found that earnings management had no influence on dividend payout ratio. On the other hand, some studies highlighted the positive impact of earnings management on dividend policy. Kasanen et al. (1996) carried out an empirical study in the Finnish context. They examined the relationship between earnings management and dividend policy. The authors tested whether the published earrings correlate positively with the target earnings which are related to the dividend policy. They found that earnings


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management had a positive impact on dividend payout ratio during the years 1970-1989. In fact, firms adopted an increasing earnings management to respond to the pressures exerted by large institutional shareholders to pay dividends. Kinnunen et al. (2000) examined a sample of 37 Finnish companies quoted on the stock exchange of Helsinki for the period from 1984 to 1992. Their results suggest that firms use earnings management to inform the financial market of their healthy situations. They notice that the companies which issue new shares paid by an amount of high dividends are more incited to publish earnings with a regular increase. Other dividend-related earnings management works are based on the contracting motive for earnings management. Daniel et al. (2008) tried to verify if firms run earnings to reach certain dividend thresholds. The authors chose a sample of 1,500 American companies during the years 1992-2005. They found that the firms which distributed dividends tended to use accounting discretion in cases where earnings before manipulations did not reach the desirable level of dividends to be distributed. Atieh and Hussain (2012) examine this issue within the UK context. They find that managers more incited to manage earnings upwards to cater for the dividend preferences. Finally, other researchers pointed to the negative impact of earnings management on dividend policy. In their empirical study of Pakistani firms during the period from 2005 to 2009, Haider et al. (2012) found that earnings management negatively affected the dividend policy measured against the dividend payout ratio. Likewise, Aurangzeb and Dilawer (2012) conducted a similar study of Pakistani firms during the period of 1966-2008 and found a negative impact of earnings management on dividend payout ratio. 4. Hypothesis development Previous studies, such as Breton and Schatt (2003), Ben Othman and Zeghal (2006) and Kang (2006), showed that a major difference between the USA and most of the European countries, particularly France, concerns the ownership structure of firms. While the latter is relatively dispersed in the USA, this is not the case in France. Indeed, in a very large majority of companies, there are majority shareholders (La Porta et al., 2000, Ben Othman and Zeghal, 2006). For instance, Labelle and Schatt (2005) found that the largest shareholder of the SBF 120 index had a share of 29 per cent on average. Faccio and Lang (2002) showcased that families controlled 65 per cent of French listed companies holding at least 20 per cent of their capital. Similarly, Laeven and Levine (2008) found that 34 per cent of European firms had at least two large owners. Thus, in France, the distribution of dividends is not done solely from a shareholder perspective. In fact, the information asymmetry is low as shareholders themselves are the main managers (Breton and Schatt, 2003). Charlier and Du Boys (2011) note that firms are pushed for distribution by minority shareholders if they have enough power to make themselves heard and if they can rely on an efficient system of governance. Therefore, in such institutional context, it is likely that the main problem for managers is to limit agency costs between majority and minority shareholders (Ginglinger and L’her, 2006; Ducassy and Montandrau, 2015; Ducassy and Guyot, 2017). This objective is, at least, partly attributable to dividend distribution. It is possible for a firm with high ownership concentration to pay dividends to have a good reputation. This possibility proves to be a crucial asset, particularly in countries characterized by weak legal protection of outside investors. This idea comes in line with the works Easterbrook (1984), Gomes (2000), La Porta et al. (2000) and Athari et al. (2016). In addition, according to the signaling theory, there is a positive relation between information asymmetry and dividend policy. In this respect, we strongly believe that the French companies are urged to distribute dividends. It is also worth noting that the


managers can transmit signals to reduce the informative asymmetry between managers and external agents (Lin et al., 2017). It should be noted that the concepts “dividend” and “net earnings” are closely linked. Indeed, the payment base of dividends corresponds to the profit of the annual exercise. Lintner (1956), Fama and Babiak (1968) and Dewenter and Warther (1998) showed that dividends positively correlated with reported earnings. Consequently, to increase the amount of dividends to be distributed, companies have to increase earnings regularly. If the earnings released before manipulation do not satisfy the shareholders, who generally wish a high income, the manager can use earnings management to inform the market that the company can distribute dividends. La Porta et al. (2000) found that the firms with high ownership concentration levels were highly involved in management duties. Lang et al. (2006), Gopalan and Jayaraman (2012) and Halaoua et al. (2017) also found that managers from countries that lacked investor legal protection ran earnings more aggressively. In light of all of these arguments, we consider that managers can be attracted by upward earnings management to affect the dividend policy of firms. Therefore, we propose and test the following hypothesis: Earnings management positively influences the dividend policy of the firm.


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5. Research design 5.1 Sample selection Our initial sample consisted of 311 French firms listed on the CAC All Tradable index for the 2008-2015 period. We obtain financial data from Datastream. Similar to previous works, we exclude financial firms due to the specificity of their accounting methods and the format of their financial statements. Firms with missing data were also not included. Due to some other missing data, the total sample consists of just 2108 firm-year observations for the years 2008-2015. Table I outlines the sample selection procedure. 5.2 Measurement of earnings management The purpose of this paper is to investigate empirically how the earnings management in France affect firms’ corporate dividend policy. Following prior work, we use the discretionary accruals as our measure of earnings management. Therefore, we use the discretionary accruals estimated based on the modified Jones Model (Dechow et al., 1995): DSALESit DRECit PPEit TAit ¼ a0 þ a1 þ a2 (1) þ « it Ait1 Ait1 where TA is total accruals. A is total assets at the beginning of year. DSALES is changes in sales. DREC is the change in net receivables. PPE represents the amount of property, plant and equipment. The residual « it from the regression is the measure of discretionary accruals.

Sample selection French firms listed on the CAC All Tradable index Financial firms Observations with missing data Total

No. of observations 311 29 2 280

Table I. Sample selection

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5.3 Regression model To test our hypothesis, we regress dividend payout ratio on earnings management, some control variables as well as for industry and year fixed effects using the following regression model: DPOit ¼ b 0 þ b 1 DAit þ b 2 SIZEit þ b 3 DEBTit þ b 4 ROEit


340

þ b 5 LIQit þ b 6 GROWit þ b 7 RSQit þ b 8 CFOit X X þ xi Industryit þ yi Yearit þ « it

(2)

where: DPO = dividend policy of firm, measured as: Dividend per share/earnings per share; DA = earnings management, measured using discretionary accruals; SIZE = firm size, measured as the nature logarithm of total assets; DEBT = debt ratio, measured as long-term debt divided by total assets; ROE = return on equity, measured as net income over owners’ equity; LIQ = liquidity of firm, measured as current assets divided by current liabilities; GROW = sale growth of firm, measured as the annual growth rate of sale revenue; RSQ = risk of a firm, measured as price of a share divided by earnings per share; and CFO = cash flows from operations, measured as cash flows from operations divided by total assets. Industry is a dummy variable for industry membership based on nine industry groups in accordance with the Industry Classification Benchmark. To capture possible effects related to the year and the industry, year and industry dummies are incorporated. 5.4 Control variables In addition to interest variable earnings management discretionary accruals, a set of control variables may influence the dividend policy of the firm. We, thus, add several variables in the model. According to the Free Cash Flow Theory, the big companies with higher levels of free cash flow may payout more of the free cash flow as dividends (Jensen, 1986). Similar to Scott and Martin (1975), we measure the size of the company (SIZE) as the natural logarithm of total assets. According to the Agency Theory, debt has a disciplinary role for firms (Grossman and Hart, 1982; Jensen, 1986). Crutchley and Hansen (1989) and Papadopoulos and Charalambidis (2007) show a negative impact of the level of debt on dividend policy. In this study, the level of debts (DEBT) is measured as: total debt/total assets. Jensen et al. (1992) documented a positive relationship between profitability and dividend payouts because a high profitability implies a high free-cash flow. Fama and French (2001) state that companies which pay dividends are more profitable (economic profitability and profitability of own capital). According to Kazmierska-Jozwiak (2015), we use return on equity (ROE) that may affect the dividend policy of the firm, measured as net profit divided by owners’ capital. In addition, similar to prior works, we control for several other variables which have an impact on dividend policy. Thus, we include liquidity (LIQ), sale growth (GROW), risk of a firm (RSQ) and cash flows from operations (CFO) in our model. Fama and French (2001) and Chansarn and Chansarn (2016) suggested that firms with high cash flows would pay high dividends. In this study, cash flows from operations (CFO) is measured as Cash Flows from operations divided by total assets. Hoberg and Prabhala (2009) and Lin et al. (2017) argued that during the mature phase of the firm, the company’s risk decreased, and managers can send signals to the market through payout dividends. According to Kazmierska-Jozwiak (2015), we measure the risk of a firm


(RSQ) as price of a share divided by earnings per share. Rozeff (1982) found that the growth of the company negatively affects the payout dividends. Following Chansarn and Chansarn (2016), we measure the growth of the company (GROW) using the annual growth rate of sale revenue. Deshmukh (2003) documented a positive relationship between dividend payout ratio and the liquidity of the firm. According to Kazmierska-Jozwiak (2015), the liquidity of a firm is measured as current assets divided by current liabilities. 6. Empirical results Descriptive statistics of all variables used in the analyses are presented in Table II. For the period from 2008 to 2015, the table presents the mean, median and the standard deviations. The means (medians) of DPO and DA are 0.210 (0.136) and 0.051 (0.054), respectively. This suggests that, the average dividend payout ratio of France-listed firms during 2008-2015 was 21 per cent. In addition, the examination of the results in Table II shows that, on average, firms manage earnings downward. This is consistent with previous works (García Lara et al., 2005; Arnedo et al., 2007; Huguet and Gandia, 2016) which pointed that decreasing earnings management abounds among private firms. In fact, French firms engage in downward earnings management (conservative accounting) with the aim essentially of increasing underpricing and compensating politically motivated agency costs between various partners. The Pearson correlations among the independent variables in the model are shown in Table III. The highest absolute correlation coefficient is 0.54, which reflects a significant positive relation between cash flow for operation and return on equity. The absolute values of all correlation coefficients are all less than 0.75 (Kennedy, 2003; Neter et al., 1996). In addition, the variance inflation factors (VIF) value is inferior to 10 (Myers, 1990) and the tolerance values are superior to 0.10. Thus, multicollinearity does not appear to be a problem in our model.

Variable

Mean

Median

SD

DPO DA SIZE DEBT ROE RSQ GROW LIQ CFO

0.210 0.051 13.382 0.224 0.013 10.852 0.148 1.734 0.0305

0.136 0.054 13.238 0.207 0.077 10.032 0.039 1.363 0.059

0.946 0.010 2.472 0.171 0.540 20.973 1.232 1.588 0.170

Variable DA DA SIZE DEBT ROE RSQ GROW LIQ CFO

1

SIZE

DEBT

ROE

0.306*** 0.307*** 0.183*** 1 0.329*** 0.242*** 1 0.064*** 1

Note: ***Significance at 1% level

RSQ

GROW

0.083*** 0.332*** 0.183*** 0.01 0.053** 0.016 0.198*** 0.258*** 1 0.032 1

LIQ

CFO

0.062*** 0.257*** 0.354*** 0.302*** 0.419*** 0.015 0.089*** 0.540*** 0.221*** 0.129*** 0.078*** 0.090*** 1 0.102*** 1

VIF

TOLERANCE

1.158 1.312 1.241 1.276 1.041 1.044 1.270 1.475

0.863 0.761 0.805 0.783 0.959 0.957 0.786 0.677


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Table II. Descriptive statistics

Table III. Pearson correlations

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We use equation (2) to examine the impact of earnings management on dividend policy. The multivariate results are reported in Table IV. Consistent with our hypothesis, we find that the dividend policy of firms is positively affected by earnings management. In fact, as expected, the coefficient capturing the impact of discretionary accruals is positive and statistically significant (t-statistic = 2.99), which is consistent with prior studies such as Liu and Espahbodi (2014). Our findings reveal that earnings management is one of the most important factors that determine dividend policy. More precisely, managers are increasingly motivated to use the accounting discretion to signal to the market that firms can honor their commitments and distribute dividends to shareholders. The firm size variable significantly and positively influences the distribution of dividends. The coefficient of (SIZE) is 0.027 at the 1 per cent level. According to Jensen and Meckling’s (1976) free cash flow theory, our results show that the big size companies having an excessive amount of free cash flow are the most likely to pay dividends. Crutchley and Hansen (1989) and Jabbouri (2016) confirmed this link between the size of the firm and the level of dividends distribution. Indeed, the big firms have an easier access to the capital market, and, consequently, they will have interest to offer their liquidities mostly as dividends. The coefficient of (DEBT) is 0.285 and significant at the 5 per cent level. This result is in line with the agency theory and indicates that the debt ratio negatively impacts the dividend policy of the firm. More exactly, by increasing the level of debts, the available cash flows will decrease. To pay off their debts and avoid more loans via the use of their available cash flows, the companies which have a lot of debts have interest to distribute fewer dividends. The risk of a firm (RSQ) is significant at the 1 per cent level and is positively related to the dividend policy. This finding is inconsistent with Lin et al.’s (2017) results and suggests that firms tend to pay dividends to mislead investors and compensate the risk involved to shareholders. In terms of the other control variables, we find that (ROE), (LIQ),(CFO) and (GROW) do not affect the divided policy of the firm. In Table V, we use another measure of dividend policy to verify the robustness of our results. Similar to Jabbouri (2016), we measure dividend policy as total cash dividend divided by total sales revenues of the period. The results in Table V demonstrate a positive impact of our explanatory variable (DA) on dividend policy. The coefficient (DA) is 0.260 and significant at the 10 per cent level. This

Variable

Table IV. Regression results

Intercept DA SIZE DEBT ROE RSQ GROW LIQ CFO Industry Year No. of observations F-statistic Adj. R2

DPO Coefficient 0.176 6.111*** 0.027*** 0.285** 0.004 0.009*** 0.010 0.009 0.033 Yes Yes

Notes: **Significance at 5% level; ***significance at 1% level

t-Statistic 0.92 2.99 2.85 2.13 0.10 9.79 0.63 0.62 0.22 2,108 6.26*** 5.43%


Variable Intercept DA SIZE DEBT ROE RSQ GROW LIQ CFO Industry Year No. of observations F-statistic Adj. R2

DPO : dividend to sales ratio Coefficient 0.205*** 0.260* 0.012*** 0.025*** 0.001 0.000 0.000 0.003*** 0.000 Yes Yes

t-Statistic 4.74 1.77 4.10 2.41 0.49 1.16 0.28 3.16 0.03 2,108 2.98*** 2.41%

Notes: *Significance at 10% level; ***Significance at 1% level

result is similar to that in Table IV. In fact, we again find evidence to support our hypothesis. Moreover, the level of debt (DEBT) significantly and negatively influences the dividend policy (the coefficient of DEBT is 0.025 at the 1 per cent level). We find also that the size of the firm (Size) is negatively associated with dividend policy. Thus, this result is consistent with the findings of Jin (2000), who argue that market reaction of small firms’ stock prices to dividend announcements is higher than the market reaction of larger firms. However, the liquidity variable (LIQ) becomes significant and positively associated with dividend policy. This is consistent to the findings of Deshmukh (2003) and Ho (2003). In fact, the authors find positive relationship between liquidity and dividend policy. In addition, the findings of Kato et al. (2002) provide evidence that the changes in dividend policy are related to alterations in firms’ liquidity. The remaining variables are all insignificant. 7. Conclusion A close review of the literature on the impact of earnings management on the dividend policy highlights the need for similar researches in the French context. In this respect, our study has been proposed to check whether the earnings management is an important determinant of the dividend policy in French non-financial companies, listed on the CAC All Tradable index. We find that the dividend policy of firms is positively affected by discretionary accruals. This result is consistent with the signal theory which showcases managers’ high motivation to manage earnings with the aim of highlighting to the market the ability of firms to distribute dividends to shareholders. Besides, we find that both liquidity and the corporate risk positively affect the dividend policy. In contrast, the firm’s debt has a negative impact on the dividend policy, whereas the remaining variables have no impact. Finally, there is a positive/negative relationship between the size of the firm and the dividend policy. Our findings have important implications for analysts, investors, regulators and academics. First, our study shows that earnings management is a common practice in the French context and constitutes a major objective of dividend policy. Better still, identifying the other variables that influence the dividend policy provides a clearer understanding of dividend policy for investors, analysts and academics alike. Second, our study provides ample evidence of agency problems between various partners in French capital markets,


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Table V. Regression results

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