Impact of earnings management on dividend policy: does board independence matter?

Purpose This paper empirically examines whether sophisticated governance mechanism affects the relationship between earnings management and dividend policy of non-financial firms. Design/methodology/approach The sample of the study includes non-financial firms listed on the stock exchanges of twenty developed and developing economies from the period 2005–2017. The Generalized Method of Moments (GMM) was applied to estimate the econometric models. Findings The results confirm the positive association between earning management and the dividend payout ratio of the sample firms. These findings are in line with the signaling theory, which suggests that firms engage in earnings manipulation to signal to the market that they can maintain a smooth dividend distribution. Moreover, findings suggest that board independence, being a mechanism of corporate governance, significantly negatively moderated the relationship between earnings management and the dividend payout ratio of non-financial firms. Practical implications The findings provide valuable suggestions to government bodies, regulatory authorities and corporate managers to focus on the effectiveness of governance mechanisms to improve the reliability of financial reports. Originality/value These findings imply that the effect of earning management on the dividend payout ratio is less pronounced in firms with more independent directors on the company board.