Dividend Policy at Firms Suspected of Accounting Fraud

When earnings are managed, firms do not have the cash to support dividend payments Firms could borrow to pay dividends; however, borrowing would invite unwanted scrutiny of their financial statements. This leads to a prediction that dividend paying firms are less likely to engage in financial accounting fraud because ex ante they know they will not be able to maintain any established dividends on overstated earnings. Cash kept within the firm enables insiders to consume private control benefits, but no private benefits can be consumed from cash paid out Insiders and managers who decide to pay dividends would therefore have less private benefits to consume and also have less incentive to conceal such private benefits. As a result, reported earnings of dividend paying firms are less likely to be manipulated. The purpose of the current research is to study the relationship between dividend policy and fraud in listed firms on the stock exchange during the period 2005 to 2012. To do this, first has been examined the relation between dividend policy and fraud in order to find out whether there is a negative relation between dividend paying status and fraud or not. Then the dividend policy has been compared between fraudulent and non-fraudulent firms to determine if fraudulent firms can apply the same dividend policy that non-fraudulent firms have. The research hypotheses have been tested by using logistic regression, two-sample t-test and multiple regression. The findings suggest that there is a significant negative association between dividend and fraud which means dividend payer commit fraud less likely than others. Also the relationship between current profit and dividend is weaker for the fraudulent firms than for the non-fraudulent firms which means the dividend policy in fraudulent firms is different from non-fraudulent firms.