| Previous research has pointed to a strong relationship between national legislations regulating company payouts (i.e. taxes and dividends) and the cross-country variation in properties of accounting earnings. The legislative link between payouts and accounting income was hypothesized to reduce the extent of value relevance and conditional conservatism, and to increase the level of earnings management worldwide. The relative importance of this driver differs across countries and institutional setups. For Germany, it is commonly assumed that financial reports are affected by payout decisions as dividends and taxes are legally linked to financial reports. This link exists however only for single accounts. It is thus unclear why group accounts should be affected by payout incentives. We perform a direct test of whether legal constraints on payouts affect group accounts' earnings properties. Using a sample of German companies, we test for the extent of earnings management and conservatism in consolidated and single accounts. We find results generally consistent with international literature over-emphasizing the link between group accounts and payouts, and the demand for accounting information originating in equity and/or debt markets, not the legal constraints on payouts, driving group and even single accounts' properties. |
Goncharov, Igor
Werner, Jörg R.
2007
in: SSRN Working Paper
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