Research on Dividend Payout of Chinese Real Estate Companies by Inflated Earnings

Abstract

This study examines the managerial incentives of earnings management of Chinese real estate companies with focuses on the high dividend payout and the effect of the “three red lines” policy which stipulates that several solvency and liquidity ratios should be higher than certain levels and then raise demand for increasing cash holding of real estate companies. The pressure from policy requirements may motivate managers to earnings management techniques related to discretionary accruals and real activities to inflate earnings for certain targets including dividend payments and debt-to-equity ratio. Accrual-based and real activities management are proxied by modified Jones’ model and Roychowdhury’s model respectively. Key findings are that managers of Chinese real estate companies tend to use discretionary accruals to inflate operating income and to manipulate real activities to increase cash holdings to meet the policy requirements and that dividend payments stickness still hold under the pressure from external stakeholders but may be supported by inflated income.