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    Dividend Policy at Firms Accused of Accounting Fraud
    research summary posted April 17, 2014 by Jennifer M Mueller-Phillips, tagged 06.0 Risk and Risk Management, Including Fraud Risk, 06.01 Fraud Risk Assessment, 06.06 Earnings Management 
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    Title:
    Dividend Policy at Firms Accused of Accounting Fraud
    Practical Implications:

    The results of this study greatly contribute to the literature on the relation of earnings quality to dividends. Companies that report fraudulent financial statements have caused significant problems for financial markets and economies, and additional research in this are remains vital. The evidence found in this paper is consistent with the notion that dividend-paying firms are less likely to engage in fraud because they know they cannot maintain their same dividend policies if earnings are fraudulent. Fraud firms cannot keep pace with non-fraud firms in terms of dividend policy and fraud firms’ dividends are less related to earnings that are non-fraud firms.

    For more information on this study, please contact Judson Caskey.
     

    Citation:

    Caskey, J., and M. Hanlon. 2013. Dividend Policy at Firms Accused of Accounting Fraud. Contemporary Accounting Research 30 (2).

    Keywords:
    dividends; accounting fraud; earnings management; earnings manipulation
    Purpose of the Study:

    Recent studies and some policy experts have posited that dividends constrain financial misreporting. The premise behind this idea is that managers committing fraud cannot maintain the same dividend policy as managers of firms that achieve similar reported performance without manipulating earnings. Using this logic, managers at dividend paying firms would be less likely to commit fraud, and if management at a dividend-paying firm does commit fraud, the fraudulent reporting would alter dividend changes for that firm. This study attempts to investigate the relation between accounting fraud and firms’ dividend policies.

    Design/Method/ Approach:

    The authors examine the relationship between dividends and accounting fraud by comparing firms subject to an Accounting and Auditing Enforcement Release (AAER) from the SEC, to a matched sample of firms not accused of fraud and all firms in the same industries as the AAER firms. The primary sample was obtained from the 544 firms for which the SEC issued AAERs. The original sample was narrowed to 330 and tested with a conditional logit model. Descriptive statistics were also used to test the original hypotheses.

    Findings:
    • Dividend-paying status is negatively associated with fraud, which is consistent with dividends constraining fraud and indicating higher earnings quality.
    • Earnings-dividends relation is weaker for the fraud firms relative to the non-fraud firms during the fraud period.
    • Propensity score-matched tests indicate that the commission of fraud leads to the firm being 11 to 17 percent less likely to increase dividends. 
       
    Category:
    Risk & Risk Management - Including Fraud Risk
    Sub-category:
    Earnings Management, Fraud Risk Assessment