Evaluating the Effect of Earnings Management on Dividend Policy of Selected Indian Companies

Earnings Management is the use of accounting techniques to produce financial reports that present an overly positive view of a company’s business activities and financial position. Firms experience pressure to payout dividends from institutional and foreign investors who pursue investments in firms with high dividend policies. In such cases, managers are likely to execute high dividend payouts to meet expectations. However, in the face of lower income or losses, it will be more difficult for managers to justify the high payout of dividends to stakeholders. Therefore, firms will prefer to payout dividends with sufficient income. In turn, managers are likely to depend on earnings management as a means to increase the income from which dividends are paid. Under this rationale the aim of this research is to analyze the impact of earning management on dividend payout policy. The data has been collected from published annual reports of 30 companies for the year 2007-2016. Multiple Regression model is used by considering dividend payout as dependent variable, Discretionary accrual as independent variable and Firm Size, Return on equity and Financial leverage as control variables. Modified Jones Model is used to calculate Discretionary accruals. The result shows that earnings management has positive but insignificant effect on dividend payout ratio indicating that increase in discretionary accruals of the company will not significantly increase the dividend percentage, hence earnings management practices do not significantly affect the dividend policy of the selected companies.