Dividend policy and cash flow manipulation: Evidence from China

Donghua Zhou and Yujie Zhao

China Journal of Accounting Studies, 2014, vol. 2, issue 2, 137-159

Abstract: The China Securities Regulatory Commission (CSRC) issued a dividend policy in 2006 which set minimum payout levels for firms wishing to issue seasoned equity offerings. This paper investigates how listed Chinese firms may inflate reported cash flow from operations in order to reach the threshold set by the dividend policy. The results indicate a high level of cash flow manipulation among firms issuing seasoned equity offerings after 2006, the year when the dividend policy was implemented, suggesting that this manipulation is undertaken in response to the dividend policy. We further find that firms issuing seasoned equity offerings inflate cash flow upwards through working capital items and by including tax refunds in their cash flows statements after the implementation of the dividend policy. The manipulation of real cash flow activities by firms issuing seasoned equity offerings eventually damages the value of their firm.

Date: 2014
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DOI: 10.1080/21697213.2014.926854

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