Academic journal article International Journal of Business and Society

Earnings Management and Dividend Policy of Small and Medium Enterprises in Thailand 1

Academic journal article International Journal of Business and Society

Earnings Management and Dividend Policy of Small and Medium Enterprises in Thailand 1

Article excerpt

(ProQuest: ... denotes formulae omitted.)


In making decision for smart investment in common stocks, various financial information of listed companies such as profitability, liquidity, efficiency, capital structure and etc., is required by investors. Among such information, earnings quality of companies is considered as one of the most crucial information. It is defined as a measure of the ability of reported earnings to reflect the firm's true earnings to help predict future earnings (Aker et al., 2007). That is, earnings quality reflects the credibility of earnings numbers reported by the companies. Hence, reported earnings number of companies with high earnings quality is considered trustworthy since it can reflect the true performance of companies. Therefore, earnings quality information is likely to help investors wisely make decision in common stock investment.

One behaviour of firm which adversely affects earnings quality is earnings management. Aker et al. (2007) defined it as attempts by management to influence or manipulate reported earnings by using specific accounting methods (or changing methods), recognizing one-time non-recurring items, deferring or accelerating expense or revenue transactions, or using other methods designed to influence short-term earnings. Therefore, it is mostly utilized as the indicator of earnings quality. That is, companies with high earnings management will have low earnings quality. Thanks to its importance as the indicator of earnings quality, there have been several studies on the earnings management of listed companies worldwide.

In case of Thailand, although there are several previous studies on this topic, most of them only focus on earnings management of listed companies with specific characteristics, such as companies which had equity offering (Phakanon et al., 2009), financial distressed companies during debt restructuring negotiation (Maneemai and Sriworadetpisan, 2009) and companies with and without debt covenant (Chiengtong, 2010), while there are a few studies which focus on earnings management of all listed companies in the stock market. That is, there are only Kiatapiwat (2010) and Netrakat (2011) who examined earnings management of all companies in the Stock Exchange of Thailand (SET) and the Market for Alternative Investment (MAI), respectively. Based on these two studies, listed companies in SET, on average, were found to have higher earnings management than those in MAI.

Earnings management is considered an unfavourable behaviour of companies which can affect not only their credibility and reputation but also their stock performance. Based on literature review, earnings management also affects dividend policy of companies (Ali Shah et al., 2010; Kazemi et al., 2014).That is, as companies attempt to manipulate their earnings numbers (indicating earnings management), for some reasons such as attracting investors, satisfying shareholders and creditors and etc., their reported earnings do not reflect their real performance and also the ability to pay dividends. Consequently, earnings management certainly has an impact on dividend policy. For instance, a certain company uses earnings management to increase its reported earnings number to attract investors, leading to an increase in stock price. Unfortunately, earnings management will lead to the greater accrual component of earnings, causing this component to grow faster than the cash flow component of earnings. As a result, dividend payment is unlikely to grow despite the increase in earnings and stock price.

Dividend is considered as one of the most important factors influencing investment decision making of investors since it is one of the major returns from common stock investment. Thanks to its importance to investors, the Stock Exchange of Thailand created and launched the SET High Dividend 30 Index (SET HD) in July 2011 (SET, 2016). It is the price index of 30 selected companies which have constantly paid high dividend yield, established with the primary objective to fill the needs of investors who prefer high dividend stocks. …

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