Dividend persistence and earnings management in emerging markets

Abstract

We investigate the relationship between dividend persistence and earnings management, considering the levels of economic performance and risk in emerging countries. Earnings are important for valuation models and dividends have evidence that suggests greater persistence, however, there is no evidence on the effect of earnings management on dividend persistence in emerging countries. Despite the substantial growth of emerging markets in the last decades, the degree of informational efficiency and the legal protection for investors is inferior to developed countries, and this is a potential risk for investors who prefer to receive dividends as a way of avoiding expropriation by managers who can manage the firms’ earnings. We show that the reduction in macroeconomic volatility and the uncertainties concerning a country’s performance and risk improve dividend persistence. Thus, even in the face of earnings manipulations, dividends are better inputs for valuation models. Using the persistence models of Dechow and Schrand (2004) and Lintner (1956), we interact the dividend persistence with firms’ earnings management and some indicators of a country’s economic performance and risk for 7,536 publicly traded firms from 20 countries, included in the Morgan Stanley Capital International (MSCI) Emerging Markets Index from 2000 to 2016. We find that in emerging countries dividends are more persistent than earnings. If a company pays United States dollars (USD) 1.00 in dividends, then, on average, US$ 0.89 will persist into next year’s dividends (for earnings, only US$ 0.76 persists). We find that, in addition to the past dividends and current earnings presented by Lintner (1956), current dividends are a function of earnings management volume because this event reduces dividend persistence.

Stock Price Behaviour around the Announcement Date of Cash Dividend on the Indonesia Stock Exchange

“…The dividend relevance theory broadly states that the distribution of earnings is a factor of relevance in the company's valuation [13]. Sometimes information about dividends can create an optimistic bias on the value of the company in the future, especially when the prediction is made by a well-known (star) analyst [9].…”

Continuity risks

“…At informational levels, there are two relevant observations that differentiate the effect of asymmetry in the light of corporate governance, and auditing. One leads to the understanding of discontinuity or planned bankruptcy, being declared as a useful and necessary information to stakeholders, and another as practices related to audit activity, as a mechanism to minimize the manipulation of results (Martins et al, 2022).…”

Riscos de continuidade

“…Em níveis informacionais, há duas observações relevantes que diferenciam o efeito da assimetria à luz da governança corporativa, e à auditoria. Uma conduz ao entendimento de descontinuidade ou falência prevista, consagrando-se como uma informação útil e necessária aos stakeholders, e outra, como práticas relacionadas à atividade da auditoria, como mecanismo de minimizar a manipulação de resultados (Martins et al, 2022).…”