The Impact of Dividend and Tax Avoidance on Earning Management of Companies
DOI:
https://doi.org/10.61506/01.00201Keywords:
Earning management, Dividend payout, Oil and gas CompaniesAbstract
Using a sample covering practically all dividend-paying oil and gas companies companies in Pakistan during 2011–2020, we document that earnings management in these companies is driven by two concurrent forces: the willingness to pay (tax-exempt) dividends and avoiding unnecessary company income tax. Moreover, we show that the need for income increasing earnings management enabling current dividend distribution is mitigated by the amount of retained earnings from prior years. This article adds to the existing literature by providing empirical evidence for dividend and tax-driven earnings management in private oil and gas companies facing neither political pressures nor capital market incentives for earnings disclosures.
References
Akers, M., Giacomino, D., & Gissel, J. L. (2007). EMand its implications. The CPA Journal.
Algharaballi, E., & Albuloushi, S. (2008). Evaluating the specification and power of discretionary accruals models in Kuwait. Journal of Derivatives & Hedge Funds, 14(3–4), 251–264.
Allayannis, G., & Mozumdar, A. (2004). The impact of negative CF and influential observations on investment–CF sensitivity estimates. Journal of Banking & Finance, 28(5), 901–930.
Almeida, H., Campello, M., & Weisbach, M. S. (2004). The CF sensitivity of cash. The Journal of Finance, 59(4), 1777–1804.
Ali, A., & Audi, M. (2018). Macroeconomic environment and taxes revenues in Pakistan: an application of ARDL approach. Bulletin of Business and Economics (BBE), 7(1), 30-39.
Andrews, W. D. (1974). A consumption-type or CF personal income tax. Harvard Law Review, 1113–1188.
Arya, A., Glover, J., & Sunder, S. (1998). EMand the revelation principle. Review of Accounting Studies, 3, 7–34.
Audi, M., Ali, A., & Roussel, Y. (2021). Measuring the Tax Buoyancy: Empirics from South Asian Association for Regional Cooperation (SAARC). Empirical Economics Letters, 20(12), 2111-2126.
Auerbach, A. J., & Bradford, D. F. (2004). Generalized cash-flow taxation. Journal of Public Economics, 88(5), 957–980.
Awan, A., Rahman, S. U., Ali, M., & Zafar, M. (2023). Institutional Performance and Tourism Arrival Nexus in BRICS Countries: Evidence from Nonlinear ARDL Cointegration Approach. IRASD Journal of Economics, 5(1), 784–796.
Baber, W. R., Kang, S.-H., & Li, Y. (2011). Modeling discretionary accrual reversal and the balance sheet as an EMconstraint. The Accounting Review, 86(4), 1189–1212.
Badertscher, B. A. (2011). Overvaluation and the choice of alternative EMmechanisms. The Accounting Review, 86(5), 1491–1518.
Barth, M. E., Beaver, W. H., Hand, J. R., & Landsman, W. R. (1999). Accruals, CFs, and equity values. Review of Accounting Studies, 4, 205–229.
Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future CFs. The Accounting Review, 76(1), 27–58.
Barton, J., & Simko, P. J. (2002). The balance sheet as an EMconstraint. The Accounting Review, 77(s-1), 1–27.
Becker, C. L., DeFond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1–24.
Beneish, M. D. (2001). Earnings management: A perspective. Managerial Finance, 27(12), 3–17.
Bernard, V. L., & Skinner, D. J. (1996). What motivates managers’ choice of discretionary accruals? Journal of Accounting and Economics, 22(1–3), 313–325.
Bernard, V. L., & Stober, T. L. (1989). The nature and amount of information in CFs and accruals. Accounting Review, 624–652.
Bowen, R. M., Burgstahler, D., & Daley, L. A. (1986). Evidence on the relationships between earnings and various measures of CF. Accounting Review, 713–725.
Broome, O. W. (2004). Statement of CFs: Time for change! Financial Analysts Journal, 60(2), 16–22.
Burgstahler, D., & Dichev, I. (1997). EMto avoid earnings decreases and losses. Journal of Accounting and Economics, 24(1), 99–126.
Caramanis, C., & Lennox, C. (2008). Audit effort and earnings management. Journal of Accounting and Economics, 45(1), 116–138.
Carpenter, R. E., & Guariglia, A. (2008). CF, investment, and investment opportunities: New tests using UK panel data. Journal of Banking & Finance, 32(9), 1894–1906.
Chang, X., Dasgupta, S., Wong, G., & Yao, J. (2014). Cash-flow sensitivities and the allocation of internal CF. The Review of Financial Studies, 27(12), 3628–3657.
Chaudhary, S., Nasir, N., Ur Rahman, S., & Masood Sheikh, S. (2023). Impact of Work Load and Stress in Call Center Employees: Evidence from Call Center Employees. Pakistan Journal of Humanities and Social Sciences, 11(1), 160–171.
Chay, J.-B., & Suh, J. (2009). Payout policy and cash-flow uncertainty. Journal of Financial Economics, 93(1), 88–107.
Cheng, Q., & Warfield, T. D. (2005). Equity incentives and earnings management. The Accounting Review, 80(2), 441–476.
Chi, J. D., & Gupta, M. (2009). Overvaluation and earnings management. Journal of Banking & Finance, 33(9), 1652–1663.
Chiu, C.-Y., & Park, C. S. (1994). Fuzzy CF analysis using present worth criterion. The Engineering Economist, 39(2), 113–138.
Cohen, R. B., Gompers, P. A., & Vuolteenaho, T. (2002). Who underreacts to cash-flow news? Evidence from trading between individuals and institutions. Journal of Financial Economics, 66(2–3), 409–462.
Das, S., Shroff, P. K., & Zhang, H. (2009). Quarterly earnings patterns and earnings management. Contemporary Accounting Research, 26(3), 797–831.
Davidson, R., Goodwin-Stewart, J., & Kent, P. (2005). Internal governance structures and earnings management. Accounting & Finance, 45(2), 241–267.
Dawood, M., Rehman, S. ur, Majeed, U., & Idress, S. (2023). Contribution the Effect of Corporate Governance on Firm Performance in Pakistan. Review of Education, Administration & Law, 6(1), 51–62.
Dechow, P. M., Hutton, A. P., Kim, J. H., & Sloan, R. G. (2012). Detecting earnings management: A new approach. Journal of Accounting Research, 50(2), 275–334.
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting Review, 193–225.
Degeorge, F., Patel, J., & Zeckhauser, R. (1999). EMto exceed thresholds. The Journal of Business, 72(1), 1–33.
Devereux, M., & Schiantarelli, F. (1990). Investment, financial factors, and CF: Evidence from UK panel data. In Asymmetric information, corporate finance, and investment (pp. 279–306). University of Chicago Press.
Doupnik, T. S. (2008). Influence of culture on earnings management: A note. Abacus, 44(3), 317–340.
Drtina, R. E., & Largay III, J. A. (1985). Pitfalls in calculating CF from operations. Accounting Review, 314–326.
Dutta, S., & Gigler, F. (2002). The effect of earnings forecasts on earnings management. Journal of Accounting Research, 40(3), 631–655.
Dye, R. A. (1988). EMin an overlapping generations model. Journal of Accounting Research, 195–235.
Ebrahim, A. (2007). EMand board activity: An additional evidence. Review of Accounting and Finance, 6(1), 42–58.
El Diri, M. (2017). Introduction to earnings management. Springer.
Faulkender, M., Flannery, M. J., Hankins, K. W., & Smith, J. M. (2012). CFs and leverage adjustments. Journal of Financial Economics, 103(3), 632–646.
Francis, J., & Smith, M. (2005). A reexamination of the persistence of accruals and CFs. Journal of Accounting Research, 43(3), 413–451.
Geiger, M. A., & North, D. S. (2006). Does hiring a new CFO change things? An investigation of changes in discretionary accruals. The Accounting Review, 81(4), 781–809.
Gilchrist, S., & Himmelberg, C. P. (1995). Evidence on the role of CF for investment. Journal of Monetary Economics, 36(3), 541–572.
Gombola, M. J., & Ketz, J. E. (1983). A note on CF and classification patterns of financial ratios. Accounting Review, 105–114.
Greenberg, R. R., Johnson, G. L., & Ramesh, K. (1986). Earnings versus CF as a predictor of future CF measures. Journal of Accounting, Auditing & Finance, 1(4), 266–277.
Gruca, T. S., & Rego, L. L. (2005). Customer satisfaction, CF, and shareholder value. Journal of Marketing, 69(3), 115–130.
Guay, W. R., Kothari, S. P., & Watts, R. L. (1996). A market-based evaluation of discretionary accrual models. Journal of Accounting Research, 34, 83–105.
Guidry, F., Leone, A. J., & Rock, S. (1999). Earnings-based bonus plans and EMby business-unit managers. Journal of Accounting and Economics, 26(1–3), 113–142.
Gunny, K. A. (2005). What are the consequences of real earnings management? University of California, Berkeley.
Gunny, K. A. (2010). The relation between EMusing real activities manipulation and future performance: Evidence from meeting earnings benchmarks. Contemporary Accounting Research, 27(3), 855–888.
Hafiza, N. S., Manzoor, M., Fatima, K., & Sheikh, S. M. (2022). Motives of Customer ’ S E -Loyalty Towards E-Banking Services : a Study in Pakistan. 19(3).
Healy, P. (1996). Discussion of a market-based evaluation of discretionary accrual models. Journal of Accounting Research, 34, 107–115.
Healy, P. M., & Wahlen, J. M. (1999). A review of the EMliterature and its implications for standard setting. Accounting Horizons, 13(4), 365–383.
Hirshleifer, D., Hou, K., & Teoh, S. H. (2009). Accruals, CFs, and aggregate stock returns. Journal of Financial Economics, 91(3), 389–406.
Houmes, R. E., & Skantz, T. R. (2010). Highly valued equity and discretionary accruals. Journal of Business Finance & Accounting, 37(1–2), 60–92.
Hovakimian, G. (2009). Determinants of investment CF sensitivity. Financial Management, 38(1), 161–183.
Hunt, A., Moyer, S., & Shevlin, T. (2000). Earnings volatility, earnings management, and equity value. Unpublished Working Paper. University of Washington.
Hussain, A. (2014). Banking Privatization and Profitability in Pakistan: A Time Series Analysis. Journal of Business and Economic Options, 1(1), 30-37.
Jackson, A. B. (2018). Discretionary accruals: Earnings management... or not? Abacus, 54(2), 136–153.
Javaid, Z., Noor, Q., Iftikhar, H., Haris, M., Rahman, S. U., & Ali, M. (2023). Assessing Mediating Role of Environment Knowledge Between Green Resource Management and Sustainable Performance, Under Moderating Effects of Green Self-Efficacy. Central European Management Journal, 31(2), 352–368.
Jo, H., & Kim, Y. (2007). Disclosure frequency and earnings management. Journal of Financial Economics, 84(2), 561–590.
Jones, J. J. (1991). EMduring import relief investigations. Journal of Accounting Research, 29(2), 193–228.
Kadapakkam, P.-R., Kumar, P. C., & Riddick, L. A. (1998). The impact of CFs and firm size on investment: The international evidence. Journal of Banking & Finance, 22(3), 293–320.
Kao, L., & Chen, A. (2004). The effects of board characteristics on earnings management. Corporate Ownership & Control, 1(3), 96–107.
Kaplan, S. N., & Ruback, R. S. (1995). The valuation of CF forecasts: An empirical analysis. The Journal of Finance, 50(4), 1059–1093.
Kenley, R. (2003). Financing construction: CFs and cash farming. Routledge.
Kent, P., Routledge, J., & Stewart, J. (2010). Innate and discretionary accruals quality and corporate governance. Accounting & Finance, 50(1), 171–195.
Khurana, I. K., Martin, X., & Pereira, R. (2006). Financial development and the CF sensitivity of cash. Journal of Financial and Quantitative Analysis, 41(4), 787–808.
Kim, J., Kim, Y., & Zhou, J. (2017). Languages and earnings management. Journal of Accounting and Economics, 63(2–3), 288–306.
Koijen, R. S., & Van Nieuwerburgh, S. (2011). Predictability of returns and CFs. Annu. Rev. Financ. Econ., 3(1), 467–491.
Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163–197.
Krishnan, G. V. (2003). Audit quality and the pricing of discretionary accruals. Auditing: A Journal of Practice & Theory, 22(1), 109–126.
Lang, L. H., & Litzenberger, R. H. (1989). Dividend announcements: CF signalling vs. free CF hypothesis? Journal of Financial Economics, 24(1), 181–191.
Lang, M., Raedy, J. S., & Wilson, W. (2006). EMand cross listing: Are reconciled earnings comparable to US earnings? Journal of Accounting and Economics, 42(1–2), 255–283.
Lee, C.-W. J., Li, L. Y., & Yue, H. (2006). Performance, growth and earnings management. Review of Accounting Studies, 11, 305–334.
Leuz, C., Nanda, D., & Wysocki, P. D. (2003). EMand investor protection: An international comparison. Journal of Financial Economics, 69(3), 505–527.
Lewellen, J., & Lewellen, K. (2016). Investment and CF: New evidence. Journal of Financial and Quantitative Analysis, 51(4), 1135–1164.
Li, D., Bai, Y., Yu, P., Meo, M. S., Anees, A., & Rahman, S. U. (2022). Does institutional quality matter for environmental sustainability? Frontiers in Environmental Science, 10(July), 1–12.
Li, X. (2011). Behavioral theories and the pricing of IPOs’ discretionary current accruals. Review of Quantitative Finance and Accounting, 37, 87–104.
Liu, J., Nissim, D., & Thomas, J. (2007). Is CF king in valuations? Financial Analysts Journal, 63(2), 56–68.
Livnat, J., & Zarowin, P. (1990). The incremental information content of cash-flow components. Journal of Accounting and Economics, 13(1), 25–46.
Ljungqvist, A., & Richardson, M. P. (2003). The CF, return and risk characteristics of private equity. National Bureau of Economic Research Cambridge, Mass., USA.
Lo, K. (2008). EMand earnings quality. Journal of Accounting and Economics, 45(2–3), 350–357.
Marciukaityte, D., & Szewczyk, S. H. (2011). Financing Decisions and Discretionary Accruals: Managerial Manipulation or ManagerialOveroptimism. Review of Behavioural Finance, 3(2), 91–114.
Marrakchi Chtourou, S., Bedard, J., & Courteau, L. (2001). Corporate governance and earnings management. Available at SSRN 275053.
McNichols, M. F. (2000). Research design issues in EMstudies. Journal of Accounting and Public Policy, 19(4–5), 313–345.
McNichols, M. F., & Stubben, S. R. (2018). Research design issues in studies using discretionary accruals. Abacus, 54(2), 227–246.
McNichols, M., & Wilson, G. P. (1988). Evidence of EMfrom the provision for bad debts. Journal of Accounting Research, 1–31.
Mills, J., & Yamamura, J. H. (1998). The power of CF ratios. Journal of Accountancy, 186(4), 53.
Minhas, A. S., Maqsood, N., Shahid, T. A., & Rehman, A. U. (2024). Investment Performance in Green Finance: Assessing the Impact of Environmental Social and Governance Integration. IRASD Journal of Economics, 6(1), 27–44.
Mohanram, P. S. (2003). How to manage earnings management. Accounting World, 10(1), 1–12.
Moradi, M., Salehi, M., Bighi, S. J. H., & Najari, M. (2012). A Study of relationship between board characteristics and earning management: Iranian scenario. Universal Journal of Management and Social Sciences, 2.
Myers, J. N., Myers, L. A., & Skinner, D. J. (2007). Earnings momentum and earnings management. Journal of Accounting, Auditing & Finance, 22(2), 249–284.
Nugroho, B. Y., & Eko, P. U. (2012). Board characteristics and earning management. BISNIS & BIROKRASI: Jurnal Ilmu Administrasi Dan Organisasi, 18(1).
Park, Y. W., & Shin, H.-H. (2004). Board composition and EMin Canada. Journal of Corporate Finance, 10(3), 431–457.
Parker, R. H. (1968). Discounted CF in historical perspective. Journal of Accounting Research, 58–71.
Payne, J. L., & Robb, S. W. (2000). Earnings management: The effect of ex ante earnings expectations. Journal of Accounting, Auditing & Finance, 15(4), 371–392.
Perry, S. E., & Williams, T. H. (1994). EMpreceding management buyout offers. Journal of Accounting and Economics, 18(2), 157–179.
Plewa Jr, F. J., & Friedlob, G. T. (1995). Understanding CF. John Wiley & Sons.
Pourciau, S. (1993). EMand nonroutine executive changes. Journal of Accounting and Economics, 16(1–3), 317–336.
Qureshi, ghaziaKhoulaQureshi G. K., Zaman, mWaheed M. W. U., Rahman, saifUrRahman S. U., & Shahzadi, hafizaNabilaShahzadi H. N. (2022). Legal Insights of Crypto-currency Market and State of Crypto-currency in Pakistan. Superior Law Review, 2(1), 77–104.
Rahman, S. ur, Chaudhry, I. S., Meo, M. S., Sheikh, S. M., & Idrees, S. (2022). Asymmetric effect of FDI and public expenditure on population health: new evidence from Pakistan based on non-linear ARDL. Environmental Science and Pollution Research, 29(16), 23871–23886.
Rayburn, J. (1986). The association of operating CF and accruals with security returns. Journal of Accounting Research, 112–133.
Reider, R., & Heyler, P. B. (2003). Managing CF: An operational focus. John Wiley & Sons.
Richardson, S. (2006). Over-investment of free CF. Review of Accounting Studies, 11, 159–189.
Ronen, J. (2008). Earnings management. Springer.
Roubi, R. R., & Richardson, A. W. (1998). Managing discretionary accruals in response to reductions in corporate tax rates in Canada, Malaysia and Singapore. The International Journal of Accounting, 33(4), 455–467.
Roussel, Y., Ali, A., & Audi, M. (2021). Measuring The Money Demand In Pakistan: A Time Series Analysis. Bulletin of Business and Economics (BBE), 10(1), 27-41.
Roychowdhury, S. (2006). EMthrough real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370.
Ruback, R. S. (2002). Capital CFs: A simple approach to valuing risky CFs. Financial Management, 85–103.
Russell, A. H. (1970). CFs in networks. Management Science, 16(5), 357–373.
Schipper, K. (1989). Earnings management. Accounting Horizons, 3(4), 91.
Shahbaz, S. (2015). Analyzing the Determinants of Dividend Policy: A Comprehensive Study on Ownership Structure and Cash Flow Characteristics in the Banking Sector of Pakistan. Journal of Business and Economic Options, 2(2), 28-40.
Shahid, A. U., Ghaffar, M., Rahman, S. U., Ali, M., Aslam Baig, M., Idrees, S., & Baig, M. A. (2022). Exploring The Impact Of Total Quality Management Mediation Between Green Supply Chain Method And Performance-Palarch’s. Journal Of Archaeology Of Egypt/Egyptology, 19(4), 1252–1270.
Shahid, T. A. (2023). A Comparative Analysis of Sustainable Growth on Health : Evidence from Asian Countries. 8(1), 1183–1188.
Shahid, T. A. (2024). Effect of Public Investment on Health Population : A Review of BRICS Countries. 6(1), 1–9.
Shahzadi, H. N., Sheikh, S. M., Sadiq, A., & Rahman, S. U. (2023). Effect of Financial Development, Economic Growth on Environment Pollution: Evidence from G-7 based ARDL Cointegration Approach. Pakistan Journal of Humanities and Social Sciences, 11(1), 68–79.
Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and CFs about future earnings? Accounting Review, 289–315.
Song, M., Anees, A., Rahman, S. U., & Ali, M. S. E. (2024). Technology transfer for green investments: exploring how technology transfer through foreign direct investments can contribute to sustainable practices and reduced environmental impact in OIC economies. Environmental Science and Pollution Research, 31(6), 8812–8827.
Stubben, S. R. (2010). Discretionary revenues as a measure of earnings management. The Accounting Review, 85(2), 695–717.
Subrahmanyam, A., & Titman, S. (2001). Feedback from stock prices to CFs. The Journal of Finance, 56(6), 2389–2413.
Suk Yoon, S., Kim, H. J., & Woodruff, G. S. (2022). A critical evaluation of the Jones models and the industry approach for the estimation of discretionary accruals. Asia-Pacific Journal of Accounting & Economics, 29(2), 432–450.
Tsai, C.-Y. (2008). On supply chain CF risks. Decision Support Systems, 44(4), 1031–1042.
Xu, R. Z., Taylor, G. K., & Dugan, M. T. (2007). Review of real EMliterature. Journal of Accounting Literature, 26, 195.
Young, S. (1999). Systematic measurement error in the estimation of discretionary accruals: An evaluation of alternative modelling procedures. Journal of Business Finance & Accounting, 26(7–8), 833–862.
Yu, F. F. (2008). Analyst coverage and earnings management. Journal of Financial Economics, 88(2), 245–271.
Zahra, A., Nasir, N., Rahman, S. U., & Idress, S. (2023). Impact of Exchange Rate, and Foreign Direct Investment on External Debt: Evidence from Pakistan Using ARDL Cointegration Approach. IRASD Journal of Economics, 5(1), 709–719.
Zarowin, P. (2015). Estimation of discretionary accruals and the detection of earnings management. The Oxford Handbook of Strategy Implementation.
Zhao, J., Rahman, S. ur, Afshan, S., Ali, M. S. E., Ashfaq, H., & Idrees, S. (2023). Green investment, institutional quality, and environmental performance: evidence from G-7 countries using panel NARDL approach. Environmental Science and Pollution Research, 30(45), 100845–100860.
Zulfiqar, M., Ansar, S., Ali, M., Hassan, K. H. U., & ... (2022). The Role of Social Economic Resources Towards Entrepreneurial Intentions. PalArch’s Journal of …, 19(1), 2219–2253.
