Accounting data and UK dividends
Purpose – Accruals data reflect managers’ judgements and estimates. The purpose of this paper is to examine whether they provide users of accounts with additional insight into a firm's dividends beyond that conveyed by cash flows alone. Design/methodology/approach – The authors employ regression analysis to examine the relative ability of earnings, cash flows and accruals to explain dividends. Findings – It is found that both cash flows and accruals (earnings) possess significant explanatory power for dividends indicating that, on average, UK financial statements provide users with improved insight beyond that conveyed by cash flows alone. Research limitations/implications – These results demonstrate the importance of accruals data for users of accounts. However, if accruals are manipulated for opportunistic purposes then their usefulness will likely be compromised and users of accounts will loose out. The study focuses on non-financial, UK dividend-paying firms only. Practical implications – These results provide direct evidence that UK financial statement data has significant explanatory power for dividend-paying activity, which may be viewed as good news. However, this paper reiterates the need for those who prepare and audit accounts to ensure that accruals truly reflect a firm's financial situation and are not being “managed” to artificially boost reported earnings. Short-term accruals are an obvious focus for such activities. Originality/value – The paper reports the first direct test of the link between disaggregated earnings components and UK dividends.
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Volume (Year): 13 (2012)
Issue (Month): 1 ()
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References listed on IDEAS
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- Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
- Ali Al-Attar & Simon Hussain, 2004. "Corporate Data and Future Cash Flows," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(7-8), pages 861-903.
- Richard Barker, 1999. "The role of dividends in valuation models used by analysts and fund managers," European Accounting Review, Taylor & Francis Journals, vol. 8(2), pages 195-218.
- Baker, H. Kent & Mukherjee, Tarun K. & Powell, Gary E., 2004. "Distributing excess cash: the role of specially designated dividends," Working Papers 2004-07, University of New Orleans, Department of Economics and Finance.
- Daniel, Naveen D. & Denis, David J. & Naveen, Lalitha, 2008. "Do firms manage earnings to meet dividend thresholds," Journal of Accounting and Economics, Elsevier, vol. 45(1), pages 2-26, March.
- Fama, Eugene F, 1974. "The Empirical Relationships Between the Dividend and Investment Decisions of Firms," American Economic Review, American Economic Association, vol. 64(3), pages 304-18, June.
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