Earnings Management

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European Journal of Business and Management ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol 4, No.1, 2012

www.iiste.org

Earning Management and Dividend Policy: Empirical evidence from Pakistani listed companies Jahanzaib Haider (Corresponding author) Bahaudin Zakariya University, Multan Sub-Campus, Dera Ghazi Khan, Pakistan. Tel: 92-331-3312626, E-mail: haider_jahanzeb@yahoo.com Akbar Ali Bahaudin Zakariya University, Multan, Sub-Campus, Dera Ghazi Khan, Pakistan. Tel: 92-331-7304678, E-mail: baloch271@gmail.com

Tahira Sadiq Nust Business School, Islamabad, Pakistan. E-mail: tahiraasadiq@gmail.com

Abstract: The study is an effort to find out the impact of earning management on dividend policy in Pakistan. A set of listed companies from Karachi stock exchange (KSE) 100 indexes have been investigated to analyze the relationship from the year 2005 to 2009 in Pakistan. Dividend policy has been measured by dividend payout whereas earning management has been quantified by discretionary accruals and discretionary accrual is used as a proxy to determine earning management. Modified cross sectional model (1995) has been used to measure discretionary accruals. Regression analysis shows that earning management has impact on dividend policy that rejects our null hypothesis. But coefficient shows that the relationship is so weak that is near to no relationship. Reason behind this no impact is economic decline period, because earning management changes every year. In the decline period our earning management was increase and the companies starts downsizing divided payment. Key words: Dividend Policy, Earning Management, Karachi Stock Exchange.

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Introduction:

Earning management and dividend policy is among the popular topics discussed in today’s modern business. In modern businesses it is duty of the manager to make a number of decisions about the finance of the corporation. It is an important decision that the manager must come across the firm earning management and dividend policy. Earning management is manipulation or control of company’s financial income. If there are no investment opportunities then it is the responsibility of management to distribute those funds as dividend. Earning is one of the important factors that should keep in mind by the interesting parties of the companies. The quality of earning is meaningful when different companies satisfy to manage their earnings with the help of the generally accepted accounting standard (GAAS). It is very difficult to calculate earning management because of the violation of the accounting standards done by the auditors (Levitt). It can be calculated through discretionary accruals which we used as a proxy for earning management in our research. Discretionary accruals cannot be calculated directly, it can be obtained by adopting any formula or model. We have used modified Cross Sectional Jones model (1995) in our research to calculate discretionary accruals. Dividends are paid by companies to their shareholders members. When companies earn profit they pay a portion to their shareholders and remaining is kept by company as retained earning. That portion of profit

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European Journal of Business and Management ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online) Vol 4, No.1, 2012

www.iiste.org

(retained earning) is reinvested in market. While paying dividend it is also decided whether a fixed amount has to pay as dividend or some percentage of total income will be distributed as dividend. There are different factors that may be called as determinants of dividend policy such as size of firm, cash balance and capitalization of market. We know Pakistan is developing country and its economy is not flourishing with high growth. Mostly large firm are owned and controlled by families so there are many cases in which conflicts occur between management and shareholder. Earning management is a method which is used by management of a corporation to smooth their...
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