Dividend Policy and the Trade-Off Between Real and Accrual-Based Earnings Management: Empirical Evidence from the KOSPI Market

Abstract

In this study, we examine whether dividend policy is associated differently with accrual-based earnings management and real earnings management measured through abnormal operating cash flow. We analyze 8839 firm-year observations from 569 non-financial firms listed in the Korea Composite Stock Price Index (KOSPI) market from 1996 to 2024 using firm and year fixed-effects regressions with firm-clustered standard errors. We find no consistent association between dividend yield and accrual-based manipulation, but we find a negative association with abnormal operating-cash-flow manipulation. As dividend yield rises, the within-firm relation between the two measures becomes weaker. Payout burden relative to operating profit provides the primary evidence for this pattern, while the free-cash-flow and operating-cash-flow measures provide corroborating evidence. Cash holdings provide suggestive conditioning evidence, ownership concentration has no reliable moderating role, and the exploratory chaebol analysis is statistically inconclusive because only 267 affiliated firm-years limit power. Alternative real-activity measures do not reproduce the core result, so the evidence is concentrated in abnormal operating cash flow. These findings represent conditional within-firm associations, not managerial intent or a causal effect of dividend policy. These empirical patterns suggest that boards and regulators may consider dividends together with accrual and operating-cash-flow indicators, especially when payouts absorb a large share of internal resources.