The role of managers' ability and smoothing dividends in changing the information content of current earnings

Document Type : Research Paper

Authors

1 Assistant Professor, Accounting Department, Lorestan University

2 PhD student in Accounting, University of Tehran

Abstract

Abstract
Objective: The desire to change the dividend payment method can indicate the ability of managers to control fluctuations in the capital market, so that managers limit changes in dividends to cover the risk of these fluctuations. In this research, the aim is to investigate the role of managers' ability and dividends smoothing in changing the information content of current earnings. The main purpose of financial reporting is to provide useful information for decision making. Providing high quality information can potentially increase the ability of capital market participants to evaluate the future performance of the company. The role of dividends in transmitting useful information about the company's future performance has led to a change in the attitude of managers and investors towards fluctuations in dividends. Dividends are a function of both smoothing and signaling hypotheses due to their predictive power. The signaling hypothesis states that dividends have the ability to predict future earnings and prices, and the smoothing of dividends indicates that the dividend trend is a function of current and past earnings.
Methods: For this purpose, data related to 120 companies listed on the Tehran Stock Exchange for the period 2008 to 2019 have been extracted and the combined data regression model has been used to test research hypotheses.
Results: The results indicate the confirmation of the first and second hypotheses of the research. In other words, the research results indicate that the ability of managers leads to increased dividends smoothing. Also, the results of the second hypothesis of the research indicate a significant relationship between the managers’ ability and the information content of dividends smoothing.
Conclusion: Managers with high ability are more inclined to deliberately smooth dividends, and this smoothness is related to the company's future profitability. Managers with high ability provide information about the future earnings in the form of smoothing current dividends, given their skills in forecasting and estimating future performance. Smoothing dividends by highly capable managers increases the information content of current dividends about the future performance of the company. Managers either smooth the profits with the intention of distorting information for their own benefit or with the intention of transmitting and reporting confidential information about future earnings. Smoothing dividends in companies with capable managers contains more forward-looking information than other companies because these managers have higher skills in anticipating fundamental changes in economic activity, estimating accruals, and forecasting company revenue. This category of information in the form of current earnings increases the reporting value of dividends. Managers with limited abilities, unlike capable managers, are less skilled in predicting the economic changes of their company, and the profits they adjust lead to fluctuations for the company, which reduces the benefit of information content.

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