Relationship among capital reserves cash dividends, dividend maintenance, and earnings management

This study aims to determine whether companies with surpluses are more capable of maintaining their dividend rate if they issue cash dividends from capital reserves. Further, it considers whether such issuance would suppress their earnings management. This study presents evidence from Taiwan, which acts as the global leader in terms of setting a precedent for allowing companies with surpluses to issue cash dividends from capital reserves. The empirical results show that (1) when the company pays cash dividends with capital reserves, the cash dividends can be maintained at a certain level, and (2) when the ratio of capital reserves to cash dividends is high, the accrual-based earnings management is low. The results obtained in this study are in line with that of previous studies and are expected to help other nations to consider making better use of capital reserves.