The contractual and value relevance of reported earnings in a dividend-focused environment

Denis Cormier, Michel Magnan () and Bernard Morard

European Accounting Review, 2000, vol. 9, issue 3, 387-417

Abstract: This study investigates the relevance of reported earnings in the context of an institutional environment, i.e., Switzerland, in which investors focus on dividends. In conjunction with a dividend focus, the financial reporting environment faced by Swiss firms provides their managers with more accounting discretion than managers of Anglo-Saxon firms typically have. From a contractual perspective, dividendbased earnings management is expected since Swiss corporate law explicitly states that dividends, which must be voted on by stockholders, are to be based upon a firm's reported earnings. From a value perspective, thin trading conditions and a long-term investment horizon are expected to increase the importance of dividend payments and to influence the informativeness of reported earnings. Results indicate that Swiss managers do engage in dividend-based earnings management, that earnings quality signals are used by managers to voluntarily constrain their accounting choices and that the value relevance of earnings is conditional upon dividend payments.

Date: 2000
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DOI: 10.1080/09638180020017131

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