HỌC VIỆN NGÂN HÀNG BÁO CÁO TỔNG KẾT ĐỀ TÀI THAM DỰ CUỘC THI “SINH VIÊN NGHIÊN CỨU KHOA HỌC” CẤP HỌC VIỆN NGÂN HÀNG NĂM HỌC 2023-2024 TÊN ĐỀ TÀI: THE IMPACT OF DIVIDEND POLICY ON EARNI
The urgency of the topic
Financial statements serve as crucial reflections of a company's activities, holding significant importance for stakeholders, particularly investors The quality and transparency of the information presented in these statements are vital, as evidenced by the severe repercussions of misinformation Notable cases like Enron, which used complex accounting to hide substantial debt leading to its 2001 bankruptcy, and Wirecard, which fabricated revenue through fraudulent contracts in 2019, highlight the dangers of manipulated financial data Such practices enable management to distort profits and mislead stakeholders, underscoring the need for integrity in financial reporting.
Global researchers are increasingly examining earnings management (EM) due to evolving accounting policies and the economic landscape, which influence managers' behaviors Understanding how dividend policy impacts EM is essential for providing timely data updates to stakeholders, particularly investors EM occurs when managers manipulate financial reporting to mislead stakeholders about a company's true performance Research by Ammar Hussain and Minhas Akbar (2022) suggests that EM is less likely when private control benefits from dividend payouts are limited Therefore, a thorough investigation of the effects of dividend policy on EM is crucial to address these concerns.
Tran (2020) highlights significant distinctions in earnings management (EM) practices between companies that distribute dividends and those that do not Implementing a dividend policy can lower agency costs by bridging the gap between creditors and shareholders, which in turn leads to enhanced EM efficiency in banking institutions.
On the contrary, Tran (2020) believes that dividend policy can also reflect the relationship
Shareholders can implement a dividend policy that reduces capital, which in turn diminishes investment activities while allowing for the issuance of additional debt This highlights the significant impact of dividend policy on earnings management (EM) within the credit environment and affects the broader listed business sector.
In Vietnam, research on the impact of dividend policy on earnings management (EM) behaviors is limited, highlighting the need for further exploration, particularly in the context of its unique political and cultural landscape The financial sector in Vietnam is heavily reliant on debt, with banks as primary funding sources, leading to a high debt-to-market capitalization ratio of 3.18 Additionally, the stock market's illiquidity has increased, with trading volume days rising from 3% in 2012 to 31% in 2016, prompting investors to favor dividend income over capital gains due to high transaction costs Despite a rise in average reported earnings in 2013 after a decline in 2012 due to the global financial crisis, the percentage of dividend-paying companies dropped from 85% to 65% by 2016 This study aims to investigate the relationship between dividend policy and EM in Vietnam, where the quality of reported earnings is lower than in developed markets, dividend policies are more volatile, and investor protection frameworks are weaker.
Therefore, it is crucial to determine whether dividends in Vietnam are a good sign of EM With these reasons, the authors choose the topic " THE IMPACT OF DIVIDEND
POLICY ON EARNINGS MANAGEMENT OF LISTED FIRMS IN THE HO CHI MINH STOCK EXCHANGE" to identify the relationship between EM and dividend policy among listedfirms in the HOSE
Research aims and research questions
Firstly, synthesizing a theoretical basis and literature review on EM and dividend policy
Secondly, estimating and discussing the impact of dividend policy on EM of listed firms in the HOSE
Thirdly, proposing appropriate solutions and recommendations to limit EM behaviors of listed firms in the HOSE
Firstly, what are the theoretical foundations of EM and dividend policty?
Secondly, what is the impact of dividend policy on EM behavior?
Thirdly, does the dividend policy have the impact on EM behavior of listed firms in the
The impact of control variables such as the book-to-market equity ratio, firm size, leverage, return on assets, sales growth, year listed, free cash flow, and year dummy on earnings management (EM) is significant These factors collectively influence the extent to which firms engage in earnings management practices, highlighting the importance of considering these variables in financial analyses Understanding their effects can provide deeper insights into the dynamics of EM and its relationship with firm characteristics.
Finally, what are recommendations to the Vietnamese government and other stakeholders to reduce EM?
Research object and scope
This study investigates the relationship between dividend policy and earnings management (EM) among listed firms on the Ho Chi Minh Stock Exchange (HOSE) The authors gathered data from the financial statements of companies that are fully compliant with the required reporting criteria The analysis encompasses a total of companies over a ten-year period.
2012 to 2022 was 201 and the total of sample companies employed in 10 years was 1,568
To verify the research assumptions of the topic, the author collect data from financial statements of listed companies from Vietstock, excluding companies in the financial banking sector from 2012 to 2022
Research methodology
The authors employ a blend of quantitative and qualitative research methods, utilizing qualitative techniques to synthesize the literature review and theoretical framework, while analyzing research findings to explore the connection between dividend policy and its implications.
Earnings management (EM) is assessed through quantitative methods, utilizing three proxies: the Modified Jones model (1995), the Modified Dechow and Dichev model (2002), and Roychowdhury's real EM measurement model (2006) The analysis involves processing collected data using various statistical techniques, including Ordinary Least Squares (OLS), Fixed Effects Model (FEM), Random Effects Model (REM), Generalized Least Squares (GLS), Generalized Method of Moments (GMM), and univariate tests to derive conclusions.
Scientific and practical significance
This article provides valuable insights into the theoretical foundations of dividend payout and earnings management (EM) behavior, particularly within the context of Vietnam and companies listed on the HOSE It serves as a crucial resource for researchers and policymakers, while also assisting listed companies in effectively managing EM behavior to enhance operational efficiency Furthermore, it emphasizes the importance of maintaining professionalism and integrity among audit participants during profit management analyses Additionally, the article aids investors in conducting thorough investment analyses, ultimately helping them minimize risks and make more informed investment decisions.
Research indicates that 201 companies listed on the HOSE exchange from 2012 to 2022 demonstrate earnings management (EM) behavior Key variables influencing this behavior include the Book-to-Market equity ratio (BV_MV), Firm size (SIZE), Leverage (LEV), Return on Assets (ROA), Sales growth (SALEGROW), Year listed (YEAR_LISTED), Free cash flow (FCF), and Year dummy (I.YEAR) These insights are crucial for state management agencies, independent audit firms, listed companies, and investors, providing a more objective understanding of EM behavior to facilitate informed decision-making.
The structure of the report
The research topic comprises 4 chapters, specifically:
Chapter 1: Theoretical foundations of earning management and dividend policy of listed firms
Chapter 2: Research model and research methodology
Chapter 3: Research results and discussion
THEORETICAL FOUNDATIONS OF EARNINGS MANAGEMENT AND
Overview of earnings management
A firm's profit is calculated by deducting operating expenses from its income generated through production, financial operations, and other activities Corporate accounting must adhere to an accrual basis, meaning transactions are recorded when they occur, regardless of cash flow This flexibility in accounting methodologies allows firms to choose different methods for recording income and expenses, enabling managers to potentially manipulate profit figures in financial statements.
Earnings management (EM) is defined by Scott (2015) as a strategic decision by managers to employ specific accounting techniques to meet targeted objectives This approach encompasses the ways in which a company determines its revenue, expenses, profits, and losses, highlighting the significance of these choices in financial reporting.
Earnings management (EM) is a deliberate decision by managers, rather than a spontaneous occurrence in business As noted by Scott (2015), the objectives of EM can range from boosting earnings to minimizing reported losses Various influences, including pressure from shareholders, top executives, and specific financial targets, can impact these decisions In practice, companies frequently engage in EM during critical times, such as prior to financial result announcements, to align with market expectations and enhance long-term benefits for the company and its shareholders.
Earnings management (EM) is a strategic process aimed at achieving targeted earnings levels, as described by Schipper (1989) This allows businesses to manipulate their financial reports to present a desired earnings figure Companies can decide when to recognize revenue or expenses, influencing how their earnings appear in a given accounting period Additionally, they may obscure potential earnings through ambiguous reserves or provisions, such as allocating funds for anticipated costs.
7 risks to reduce their actual earnings in one period and then use that funds to increase earnings in the future
Managers often distort financial figures through judgment, as noted by Healy and Wahlen (1999), to influence contract outcomes or mislead stakeholders about a company's performance Techniques such as manipulating accruals and smoothing income can create a false impression of financial stability or instability This manipulation can result in significant misunderstandings and poor decision-making by investors and other parties concerned with the company's financial health.
Earnings management (EM) has a dual nature, serving as a tool for managers to fulfill stakeholder responsibilities, such as maintaining steady earnings and meeting expectations, while also posing the risk of misleading investors through deceptive accounting practices Notable examples, including research on income smoothing and the Enron scandal, highlight the importance of vigilant oversight to distinguish between legitimate and fraudulent uses of EM in financial reporting.
Matsuura (2008) categorizes earnings management (EM) into two main strategies: accruals EM and real EM Accruals EM focuses on adjusting accounting entries related to accruals and provisions to present a more stable financial performance, often to satisfy analysts' expectations or maintain dividend payments, potentially distorting the firm's reported profitability Conversely, Roychowdhury (2006) describes real EM as altering standard business operations to achieve short-term earnings targets Both forms of EM raise significant ethical and regulatory concerns, highlighted by scandals like Enron, emphasizing the critical need for transparent and responsible financial reporting in the corporate sector.
1.1.2 Classification of earnings management behavior
Miloud (2014) found that there are two types of EM behaviors, which are as follows:
Accrual based Earnings Management (AEM) is a strategy that utilizes the flexibility in selecting accounting policies and estimates allowed by regulatory guidelines, with a foundation in accrual accounting Vietnamese Accounting Standards (VAS) align with international norms by mandating that all business transactions related to assets, liabilities, equity, revenue, and expenses be recorded as they occur, rather than when cash is received or paid Specifically, VAS 01 stipulates that financial statements must be prepared on an accrual basis, excluding cash flow statements, ensuring that revenues and expenses are recognized when incurred for accurate matching This accrual methodology offers insights into the financial position of a company, encompassing past, present, and future conditions.
Accrual accounting serves as the foundation for earnings management (EM) in Vietnam by recognizing revenues and expenditures at the time transactions occur, rather than when cash is exchanged, unlike cash accounting This approach aligns revenues with corresponding expenses, offering a clearer picture of operating performance over a specific accounting period However, accrual accounting introduces a level of discretion, enabling managers to employ subjective estimates and judgments regarding uncertain future cash flows, which can lead to the manipulation of accruals and reported earnings.
Accrual-based accounting enhances the alignment of revenue with associated costs within a specific accounting period, enabling businesses to assess their performance holistically rather than focusing solely on cash flow The income statement prepared on an accrual basis reflects all income earned during the period alongside the expenses incurred to generate that income Furthermore, this approach allows for the flexible application of accounting policies and estimates, providing a clearer picture of the company's financial health through profit targets for the accounting period.
While accrual-based accounting offers several benefits, it can sometimes fail to meet key accounting standards In this method, receivables and payables, along with their related revenues and expenses, are recorded when they occur Depreciation is based on the estimated useful life of fixed assets, as outlined by current regulations Consequently, the financial statements may reflect the subjective judgments of management, allowing them the potential to manipulate profits and present financial accounting information in a favorable light.
Real Earnings Management (REM) involves managers manipulating economic operations to influence the enterprise's performance and meet desired profit levels, thereby misleading stakeholders about the company's financial health during standard business activities (Rowchowdhury, 2006) For example, managers might adjust operational levels to reduce research and development costs or implement discount programs and relaxed payment terms to increase revenue and achieve profit targets Additionally, overproducing at the end of the fiscal year can inflate inventories, decrease commodity costs, and enhance current year earnings.
1.1.3 Motives for earnings management behavior
In a corporate environment, management has a deeper understanding of the company's operations and future prospects than external stakeholders Therefore, choosing appropriate accounting policies and estimates is crucial for maintaining the company's stability However, management may also leverage accrual-based accounting and real activities to manipulate profit levels to meet their objectives.
Previous research has highlighted the motivations behind management's engagement in earnings management (EM) practices Healy (1985) provides evidence that managers use accruals strategically to enhance their bonuses Similarly, Watts and Zimmerman (1990) argue that incentive structures in bonus plans encourage managers to manipulate current accounting earnings.
Healy and Wahlen (1999) identify three main motivations for earnings management (EM): meeting market expectations, adhering to contractual agreements linked to accounting figures, and responding to government regulations Burgstahler and Eames further explore these factors, highlighting their connection to profit outcomes.
(2006) explores the capital market’s function and found that EM intensifies when companies need to meet analysts' expectations and management forecasts
In essence, various reasons motivate managers to partake in EM In the following sections, we provide an overview of some common drivers of EM:
Overview of dividend policy
Dividends represent a portion of a company's profits distributed to shareholders as a reward for their investment They can be issued in various forms, including cash or shares, but companies are not obligated to pay them Dividend payments occur at specific intervals and depend on the company's earnings and recommendations from its executive board If a company does not generate profits, dividends will not be declared The decision regarding how much profit to retain and how much to distribute as dividends is ultimately made by the company's management.
Dividend payments, while providing immediate benefits to shareholders, can limit a company's ability to accumulate retained earnings for future growth Moghri and Galogah (2013) suggest that the dividend value proposed by the board of directors often reflects management's expectations regarding the firm's future earnings and overall prospects.
A company's dividend policy refers to its decision on whether to distribute or retain a portion of undivided earnings for reinvestment (Al-Malkawi, Rafferty, & Pillai, 2010) This policy encompasses the structure, magnitude, and timing of dividend payments to shareholders However, there are often differing expectations between managers and shareholders regarding dividend policy (Priya & Mohanasundari, 2016).
The Bird in Hand theory suggests that corporate shareholders prefer receiving dividend payments over reinvesting profits for future growth (Brigham and Houston, 2007) However, within each company, diverse groups of shareholders have varying preferences regarding dividend policies; some favor high dividends while others prefer lower dividends to minimize transaction costs and continue investing in the company (Brigham and Houston, 2007) Additionally, a company's dividend policy serves not only to distribute profits but also to signal its future growth potential to investors, as noted by Black and Scholes.
(1974) argue that dividend policy is a puzzle for all businesses and is also an EM problem for senior managers (Amidu, 2007)
A company's dividend policy determines the allocation of profits between shareholder distributions and reinvestment, influencing the form and level of dividend payments When dividends are paid, they provide shareholders with immediate income but can limit the company's capital and growth potential Conversely, if a company opts to reduce or eliminate dividends, it can reinvest those funds to foster future growth Thus, a well-considered dividend policy is crucial for balancing shareholder returns and business expansion.
32 comprehensive and long-term plan since dividend decisions have a long-term influence on the growth of a corporation
1.2.2 The significance of dividend policy
Dividend policy serves as a crucial factor in balancing current income with future growth potential for businesses By distributing dividends, companies offer shareholders an immediate and tangible profit source The decision to pay high or low dividends, whether consistently or sporadically, significantly impacts shareholders' current income and their future growth prospects Additionally, this policy shapes investor perceptions of the company, potentially affecting the market value of its shares.
A company's dividend policy significantly influences the risk and growth rate of future dividends for shareholders When a company retains profits for substantial reinvestment while ensuring profitability per capita, it can enhance income and dividends for existing shareholders Conversely, if capital utilization is inefficient, it becomes challenging to boost income and dividends for investors.
Dividend policy plays a crucial role in shaping a company's financing strategy, particularly as retained profits serve as a vital source of equity financing When businesses distribute dividends, they often face a capital shortfall due to insufficient retained earnings, necessitating the mobilization of external capital This process can be complex, time-consuming, and costly compared to utilizing readily available internal resources.
A company's dividend policy significantly influences its investment philosophy, as retained earnings offer a low cost of capital This advantage enables the business to maintain a low overall cost of capital, granting it the flexibility to choose from a wider array of investment opportunities Consequently, this approach can lead to high profitability for the organization.
Dividend policy directly impacts the actual asset value of shareholders As we know, dividends are a certain amount of income that shareholders receive at present On the other
33 hand, dividend policy can affect the actual income when it reaches shareholders due to factors such as taxes income, transaction costs
Distributing dividends to investors signals a company's success, influencing the supply and demand dynamics of its shares Consequently, any changes in dividend payouts directly affect the company's stock price in the market.
1.2.3 Theoretical foundations applied to dividend policy research
The Bird in the Hand Theory, introduced by Lintner in 1956 and supported by researchers like Gordon in 1963, posits that investors prefer cash dividends over retained earnings due to the uncertainty of future capital gains Shareholders tend to assess a company's performance more favorably when they receive substantial dividends, influencing corporate dividend policy decisions Ultimately, this theory suggests that higher earnings lead to increased cash dividends, highlighting the importance of immediate returns for investors.
Signaling theory posits that investors interpret changes in dividend policies as indicators of a firm's earnings outlook, stemming from the information gap between management and shareholders According to Ross et al (2017), companies typically aim to avoid reducing dividend rates, as such a move can convey negative implications regarding their performance Consequently, managers opt to raise dividends when they possess confidence in the company's growth prospects and its ability to sustain higher payouts in the future.
Ross et al (2017) highlight the agency costs arising from the conflicting interests of creditors and shareholders, where creditors prefer that shareholders retain profits for the business, while shareholders seek to maximize their personal gains This tension can also extend to conflicts between shareholders and management, driven by management's self-interested actions To mitigate these agency costs and align interests, a more independent board of directors can foster a fairer dividend policy, encouraging companies to distribute higher dividends rather than hoarding excessive profits.
Myers' pecking order theory suggests that companies prioritize internal financing due to its lower cost of capital, leading managers to first utilize retained earnings They can adjust the dividend payout ratio to retain more profits before seeking external funding, typically through debt Only after these options are exhausted do managers consider issuing new shares for financing investment projects Consequently, the characteristics of a company's capital structure play a significant role in dividend payment decisions.
This policy dictates that businesses should determine their dividend payments based on their growth strategies and available investment opportunities, resulting in varying levels of dividends from year to year.