Accounting data and UK dividends

Abstract

PurposeAccruals data reflect managers’ judgements and estimates. The purpose of this paper is to examine whether they provide users of accounts with additional insight into a firm's dividends beyond that conveyed by cash flows alone.Design/methodology/approachThe authors employ regression analysis to examine the relative ability of earnings, cash flows and accruals to explain dividends.FindingsIt is found that both cash flows and accruals (earnings) possess significant explanatory power for dividends indicating that, on average, UK financial statements provide users with improved insight beyond that conveyed by cash flows alone.Research limitations/implicationsThese results demonstrate the importance of accruals data for users of accounts. However, if accruals are manipulated for opportunistic purposes then their usefulness will likely be compromised and users of accounts will loose out. The study focuses on non‐financial, UK dividend‐paying firms only.Practical implicationsThese results provide direct evidence that UK financial statement data has significant explanatory power for dividend‐paying activity, which may be viewed as good news. However, this paper reiterates the need for those who prepare and audit accounts to ensure that accruals truly reflect a firm's financial situation and are not being “managed” to artificially boost reported earnings. Short‐term accruals are an obvious focus for such activities.Originality/valueThe paper reports the first direct test of the link between disaggregated earnings components and UK dividends.