Combined Dividend and Earnings Reporting Policies: Signaling or Managerial Opportunism?

In the context of controversy over the effect of dividend policy and earnings management on corporate value, this study analyzes future stock returns to investigate whether combinations of dividend and earnings reporting policies signal true firm value or managerial opportunism. We classify firms as low, high, and no-dividend firms, and identify earnings reporting as aggressive or conservative. Our findings are summarized as follows. First, low-dividend policy firms showed the largest negative excess return, and firms that reported aggressive earnings showed negative excess returns. We also find that low dividend firms choose aggressive earnings reporting. These results suggest the possibility that managers link dividend and earnings reporting policies. Second, firms that combine low dividends with aggressive earnings reporting experience more negative excess stock returns, and this effect is more pronounced with low ownership concentration and share repurchases. This result suggests that in firms with large agency risk and information asymmetry, managers have an incentive to manipulate stock prices by combining low dividends and aggressive earnings reporting policies. Overall, our findings suggest that opportunistic managers may combine low cost signals to inflate stock prices, taking advantage of weak monitoring environments.