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Unrealized earnings, dividends and reporting aggressiveness: an examination of firms’ behavior in the era of fair value accounting

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  • Steven Cahan
  • Ester Chen
  • Ilanit Gavious
  • Steven Cahan

Abstract

type="main" xml:id="acfi12187-abs-0001"> 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.

Suggested Citation

  • Steven Cahan & Ester Chen & Ilanit Gavious & Steven Cahan, 2016. "Unrealized earnings, dividends and reporting aggressiveness: an examination of firms’ behavior in the era of fair value accounting," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(1), pages 217-250, March.
    • Handle: RePEc:bla:acctfi:v:56:y:2016:i:1:p:217-250
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    File URL: http://hdl.handle.net/10.1111/acfi.2016.56.issue-1
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    Cited by:

    1. Xiaomeng Chen & Andreas Hellmann & Safdar R. Mithani, 2020. "The Effect of Fair Value Adjustments on Dividend Policy Under Mandatory International Financial Reporting Standards Adoption: Australian Evidence," Abacus, Accounting Foundation, University of Sydney, vol. 56(3), pages 436-453, September.
    2. Ester Chen & Ilanit Gavious & Nadav Steinberg, 2019. "Dividends from unrealized earnings and default risk," Review of Accounting Studies, Springer, vol. 24(2), pages 491-535, June.
    3. Liyu He & Sue Wright & Elaine Evans, 2021. "The impact of managerial discretion on fair value information in the Australian agricultural sector," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 1897-1930, April.
    4. Marhaendra Kusuma & Diana Zuhroh & Prihat Assih & Grahita Chandrarin, 2021. "The Effect of Net Income and Other Comprehensive Income on Future¡¯s Comprehensive Income With Attribution of Comprehensive Income as Moderating Variable," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(3), pages 205-219, May.
    5. Stewart Jones & Nurul Alam, 2019. "A machine learning analysis of citation impact among selected Pacific Basin journals," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(4), pages 2509-2552, December.

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