This paper examines the conditions and variables that predict preferences for treasury stock and cash dividends in a contractionary market. While this is a highly debated topic, this study contributes to the literature primarily through its innovative research design. The study investigates corporate payout policy in a suppressed market, which is different from virtually all other studies that have been made. In addition, the study is innovative because it isolates firm specific variables by dividing firms into size and style, according to Morningstar.com's style matrix. The study finds, consistent with most research, that treasury stock transactions are positively correlated with cash flows. However, the paper also finds that cash dividends are negatively related to the performance of the market. This is new and unexpected and suggests that investors prefer cash dividends, a more secure transfer of wealth than the appreciation of stock, which may simply get lost in a suppressed market.
Given their prevalence in recent years, earnings management and financial restatements have been at the center of much of the discussion surrounding corporate malfeasance. This study builds a probability model for predicting the likelihood of earnings restatements by analyzing the trends in and the deviations from the industry averages of the return on assets, accounts receivable turnover, net profit margin, and cash flow to net income measures. Data are obtained for a sample of 104 firms (restating as well as non-restating) for the 2000 to 2001 period. The results suggest that the deviation from the industry average of the accounts receivable turnover and the variability in the cash flow to net income are good barometers for detecting fraudulent accounting. Potential restating firms have higher accounts receivable turnover rates than their industry counterparts and downward trends in their cash flow to net income, signaling the likelihood of a restatement, at least in the current study.
This study investigates whether socially responsible (CSR) firms behave responsibly in their financial reporting, specifically by constraining earnings management. This study first clarifies what a CSR firm is and identifies socially responsible firms through the KLD database. Three methods are used to detect earnings management—abnormal discretionary accruals, abnormal cash flows from operations and abnormal cash flows to net income ratios. This study concludes that CSR firms are less likely than their industry counterparts to participate in sales manipulations, are more likely to have higher cash flows from operations, and are more likely to have higher quality of earnings.