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Effect of dividend law changes and fair value accounting on dividend policy: evidence from Australia

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posted on 28.03.2022, 13:25 by Safdar Razzak Mithani
This study examines the effect of fair value adjustments on firms' dividend distributions under two alternate dividend law settings, i.e. profit-test-based dividend law and net-assets-test based dividend law. This is important because both firms' dividend policy and fair value adjustments have an association with reported earnings. The study contributes to the literature by combining two variables, namely dividend law and fair value adjustments, to examine firms' dividend policy. Specifically, this thesis hypothesises that, (1) positive fair value adjustments have no distribution consequences under profit-test-based dividend law; and (2) that such adjustments are distributed under net-assets-test-based dividend law. The study uses Fama and Babiak's (1968) variation of Lintner's (1956) model and a sample of 185 ASX-listed financial sector firms with 1,496 firm-year observations to test the two hypotheses. The sample period of nine financial years from 2005−06 to 2013−14 enables an analysis in both dividend law settings because Australia changed from profit-test-based dividend law to net-assets-test-based dividend law in July 2010. Under the profit-test-based dividend law, contrary to the expectations, the results show that positive fair value adjustments are distributed. Managers' inability to differentiate between persistent and transitory fair value adjustments amid non-consideration of transitory nature of fair value adjustments, while setting dividend policy, provide some explanation of the results. Under the net-assets-test-based dividend law, the study expects, but did not find any effect of positive fair value adjustments on firms' dividend payouts. Firms' preference to pursue conservative dividend policy and to attach dividend payouts with permanent earnings, provide some explanation of the findings. The results show that the statutory detachment of earnings and dividends under net-assets-test-based dividend law has not affected the conventional link between these two variables.

History

Table of Contents

Chapter 1. Introduction -- Chapter 2. Theoretical framework -- Chapter 3. Literature review and hypothesis development -- Chapter 4. Research design -- Chapter 5. Results -- Chapter 6. Conclusion.

Notes

Theoretical thesis. Bibliography: pages 62-67

Awarding Institution

Macquarie University

Degree Type

Thesis MRes

Degree

MRes, Macquarie University, Faculty of Business and Economics, Department of Accounting and Corporate Governance

Department, Centre or School

Department of Accounting and Corporate Governance

Year of Award

2016

Principal Supervisor

Andreas Hellman

Additional Supervisor 1

Charlene Chen

Rights

Copyright Safdar Razzak Mithani 2015. Copyright disclaimer: http://www.copyright.mq.edu.au

Language

English

Jurisdiction

Australia

Extent

1 online resource (72 pages) tables

Former Identifiers

mq:45202 http://hdl.handle.net/1959.14/1075722