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Do fair value adjustments influence dividend policy?

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  • Igor Goncharov
  • Sander van Triest

Abstract

We examine the impact of positive fair value adjustments on dividend policy. If fair value adjustments are transitory in nature and managers are able to assess their implications for future earnings, fair value adjustments in net income is expected to have no distribution consequences. However, positive fair value adjustments may lead to higher dividends when management incorrectly assesses their persistence. This can have a procyclical impact because higher dividends increase leverage, and thus risk. We use a Russian setting that mandates fair value accounting for financial instruments and requires disclosure of unrealised fair value adjustments in income. We find no empirical support for the concern that dividends increase in response to positive fair value adjustments. Rather, there is a negative relationship between positive fair value adjustments and dividend changes, which holds after controlling for dividend policy determinants and any endogenous nature of the revaluation decision. We discuss several possible explanations for this finding.

Suggested Citation

  • Igor Goncharov & Sander van Triest, 2011. "Do fair value adjustments influence dividend policy?," Accounting and Business Research, Taylor & Francis Journals, vol. 41(1), pages 51-68, March.
    • Handle: RePEc:taf:acctbr:v:41:y:2011:i:1:p:51-68
    DOI: 10.1080/00014788.2011.549637
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    References listed on IDEAS

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    1. Andrea Enria & Lorenzo Cappiello & Frank Dierick & Sergio Grittini & Andrew Haralambous & Angela Maddaloni & Philippe Molitor & Fatima Pires & Paolo Poloni, 2004. "Fair value accounting and financial stability," Occasional Paper Series 13, European Central Bank.
    2. Enria, Andrea & Cappiello, Lorenzo & Dierick, Frank & Sergio, Grittini & Haralambous, Andrew & Maddaloni, Angela & Molitor, Philippe & Pires, Fatima & Poloni, Paolo, 2004. "Fair value accounting and financial stability," Occasional Paper Series 13, European Central Bank.
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    Cited by:

    1. Anita Golovkova, 2020. "IFRS implementation in healthcare facilities in the United Kingdom: (un)intended effects [Implementace IFRS ve zdravotnických zařízeních ve Velké Británii - (ne)zamyšlené dopady]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2020(3-4), pages 53-70.
    2. Xiaomeng Chen & Andreas Hellmann & Safdar R. Mithani, 2020. "The Effect of Fair Value Adjustments on Dividend Policy Under Mandatory International Financial Reporting Standards Adoption: Australian Evidence," Abacus, Accounting Foundation, University of Sydney, vol. 56(3), pages 436-453, September.
    3. Anita Golovkova, 2020. "IFRS implementation in healthcare facilities in the United Kingdom: (un)intended effects [Implementace IFRS ve zdravotnických zařízeních ve Velké Británii – (ne)zamyšlené dopady]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2020(3-4).
    4. Dasilas, Apostolos & Grose, Chris, 2019. "Valuation effects of tax-free versus taxed cash distributions," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 307-321.
    5. Sikalidis, Alexandros & Bozos, Konstantinos & Voulgaris, Georgios, 2023. "Asymmetric effects of fair value adjustments on dividend policy," International Review of Financial Analysis, Elsevier, vol. 90(C).
    6. Alexandros Sikalidis & Konstantinos Bozos & Antonios Chantziaras & Christos Grose, 2022. "Influences of family ownership on dividend policy under mandatory dividend rules," Review of Quantitative Finance and Accounting, Springer, vol. 59(3), pages 939-967, October.
    7. Johannes Thesing & Patrick Velte, 2021. "Do fair value measurements affect accounting-based earnings quality? A literature review with a focus on corporate governance as moderator," Journal of Business Economics, Springer, vol. 91(7), pages 965-1004, September.
    8. KOCHIYAMA, Takuma & 河内山, 拓磨 & SEKI, Koreyoshi, 2017. "Discretion in the Deferred Tax Valuation Allowance and Its Impact on Firms' Dividend Payouts," Working Paper Series 209, Management Innovation Research Center, School of Business Administration, Hitotsubashi University Business School.
    9. Fernau, Erik & Hirsch, Stefan, 2019. "What drives dividend smoothing? A meta regression analysis of the Lintner model," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 255-273.
    10. Wang, Haiping & Zhang, Jing, 2017. "Fair value accounting and corporate debt structure," Advances in accounting, Elsevier, vol. 37(C), pages 46-57.

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