E/B/R ECONOMIC AND BUSINESS REVIEW | VOL. 15 | No. 2 | 2013 | 151-33 113 SHAREHOLDERS' PAY-OUT-RELATED THRESHOLDS AND EARNINGS MANAGEMENT JERNEJ KOREN1 ALJOŠA VALENTINČIČ2 Received: 24 August 2013 Accepted: 5 September 2013 ABSTRACT: We investigate the thresholds in net shareholder pay-outs (dividends, share buy-backs and issuances) of a large sample of UK quoted firms. Discretionary accruals are analysed at these thresholds in relation to earnings management. By examining distribu- tions and using a robust test for discontinuities, we show the existence of thresholds at zero bins of variables in question. Additionally, by looking at differences in means and medians of discretionary accruals in sorted distributions, we find that they are statistically different from bin to bin in vicinity of previously identified thresholds. 1. INTRODUCTION AND PRIOR RESEARCH Earnings, as the primary performance indicator of a firm, can be managed with the intent of companies reaching expectations-set performance thresholds (Burgstahler & Dichev, 1997) meeting analyst forecasts (Degeorge, Patel, & Zeckhauser, 1999), satis- fying certain contractual obligations or fulfilling liabilities stemming from borrowing activities. Earnings management is also observed around certain corporate events, for example stock offerings or acquisitions (Erickson & Wang, 1999) or in connection with managers' compensations and bonus schemes (Bergstresser & Philippon, 2006). Still, earnings management cannot only be seen in a negative light. Under certain conditions it may also be beneficial for owners - through application of manager's acquired exper- tise in forecasting earnings or not dismissing a hired manager (who is good-working) too fast (Arya, Glover, & Sunder, 1998) - or at least neutral in a way that decisions taken with managed earnings in consideration are the same as they would be had earnings not been managed (Ronen & Yaari, 2010). Among factors, assuming managers' threshold reasoning and, consequently, the possible appearance of earnings management, is also a company's dividend policy. Dividend poli- cy is determined by the company's management and, as there is no unique rule about the dividend policy, similarly efficient and successful companies can - and do - have differ- ent dividend pay-outs (Brigham & Ehrhardt, 2005). Miller & Modigliani (1961) proposed 1 University of Ljubljana, Faculty of Economics, Slovenia, Ljubljana, e-mail: jernej.koren@ef.uni-lj.si 2 University of Ljubljana, Faculty of Economics, Slovenia, Ljubljana, e-mail: aljosa.valentincic@ef.uni-lj.si 152 E/B/R ECONOMIC AND BUSINESS REVIEW | VOL. 15 | No. 2 | 2013 | 152-33 113 a model of dividend irrelevance where corporate value should not be related to pay-out policy in a perfect and frictionless capital market.3 Excluding taxes and transaction costs, investors should thus be indifferent between (cash) dividends and capital gains. Historically, this has not been the case. Lintner's (1956) first study of dividend policy found that managers are reluctant to cut dividends and are willing to increase them only gradually after they are convinced of enough support of a higher level of dividends in the form of higher future earnings. Existing dividend levels thus act as a strong benchmark. In seeking to explain investor preferences for (cash) dividends, Shefrin & Statman (1984) put forward two explanations. Firstly, one of "self-control" where investors decide to consume only from dividends, not portfolio capital and are thus demanding dividends. Secondly, following Kahneman & Tversky's (1979) behaviour theory proposition that losses loom larger than gains, dividends are preferred by people who are averse to regret (a potential increase in share price had they sold their stock instead of receiving a divi- dend). The behaviourist view can also be a potential explanation for dividend decreases having a more negative market effect than dividend increases. If dividends and their lev- els present a benchmark for investors, market reactions to dividend changes, especially downward, are found to be substantial (e.g., Grullon, Michaely, & Swaminathan, 2002). Bhattacharyya (2007, pp. 9-10), for example, also provides a short overview of stylized facts on dividends. A company's dividend policy can be affected by various factors such as market imperfec- tions, behavioural considerations, firm characteristics or managerial preferences (Baker, Powell, & Veit, 2002). They differ in importance to individual firms, but they form the basis for possible earnings management. While the latter two factors include firm- and management-specific factors, the former two factors comprise broader aspects such as different tax treatment of dividends and capital gains, overcoming information asym- metries with signalling new or additional information and shareholder and investor cli- enteles that favour dividends in various degrees at various times (see Baker & Wurgler (2004) for a catering theory of dividends). The distributional analysis and existence of thresholds was first suggested by Hayn (1995) who points out the discontinuity of earnings around zero in her study of the information content of loses.4 Building on this empirical irregularity, Burgstahler & Dichev (1997) show that firms manage earnings to avoid reporting loses or earnings decreases. They interpret low frequencies of small loss (earnings decline) observations and high frequen- cies of small profit (earnings increase) observations as a consequence of firms' active ef- forts to cross the loss (earnings decline) threshold what results in a migration of observa- tions to the right of such divide as seen if a distribution is plotted. Assuming that without 3 DeAngelo & DeAngelo (2006) contested that pay-out policy is not irrelevant as put forward by Miller & Modigliani (1961) but their proposition was reconciled as having assumed different agency costs (Handley, 2008). 4 An interesting case of goal reaching behaviour research is also the analysis of Carslaw (1988) who finds abnormal distribution of income numbers in financial statements with the bias tilting towards numbers just above multiples of powers of ten (i.e., N X 10k) as cognitive reference points. J. KOREN, A. VELENTINČIČ | SHAREHOLDERS' PAY-OUT-RELATED THRESHOLD 153 earnings management the distribution of earnings would be fairly smooth, they test the documented asymmetry around zero (earnings or changes in earnings) thresholds. Their findings are confirmed by Degeorge, Patel, & Zeckhauser (1999) who add another threshold of meeting analyst forecasts (i.e., avoid earnings surprises). Additionally, they establish a hierarchical order of the three with positive earnings threshold being pre- dominant, followed by not falling short of previous earnings and lastly meeting analyst expectations. Critique of distribution analysis is based mainly on the effect of deflator and the sample selection procedure, both of which can have an effect on the resulting distribution (Durtschi & Easton, 2005). If the deflator differs systematically between profit and loss firms it can move the scaled observations towards or away from zero, what is most commonly the case when scaling by market price, but also found for other defla- tors (Durtschi & Easton, 2009). Alternative explanations of the discontinuity include asymmetric effects of taxes and special items that also contribute to observed shapes of distributions (Beaver, McNichols, & Nelson, 2007). We therefore study thresholds and earnings management from the standpoint of attain- ing (expected) pay-outs to investors as earnings levels are often directly or at least indi- rectly connected to the pay-outs, e.g., in companies with fixed pay-out ratio policy or linked to various contractual obligations that set limits on pay-out possibilities. The first study in this area is the analysis of Finnish companies that managed earnings to ensure constant dividend pay-out to large institutional investors who prefer stable dividends (Kasanen, Kinnunen, & Niksanen, 1996), whereas, in the US, Daniel, Denis & Naveen (2008) have shown that firms manage earnings upward to reach expected levels of divi- dends (defined as last year's dividend) when they expect they would otherwise fall short of it, proving they are important thresholds for managers. Similar findings are reported by Atieh & Hussain (2012) for UK. They show that earnings may be managed by firms which also try to avoid a decrease or even elimination of dividends and show a concern for coverage ratios, but the pressure is lower for larger firms which face less restrictive debt covenants. Debt covenants can impose restrictions on dividend payments if the financial position of the firm does not appear adequate. Moir & Sudarsanam (2007) re- port three quarters of firms in their study to have covenants attached to debt contracts. Another recent study by Bennet & Bradbury (2007) proposes dividend cover to be con- sidered as a threshold as firms are likely to manage earnings to avoid cutting dividends, i.e., keeping them at least at their prior year's values. A comprehensive survey of CFOs by Brav et al. (2005) shows that managers are willing to go great lengths to avoid a dividend cut but increases in dividends are a second-order concern. The authors also observe that share repurchases have become an established alternative pay-out instrument to dividends. However, they do not convey the same sig- nals about companies' future behaviour or performance. Dividends are seen as a more permanent commitment to provide shareholders with a reasonably stable cash flow, whereas repurchases (particularly the ones on a discretionary and non-constant basis) are viewed as more flexible. Repurchases would now be the primary choice of many firms had their dividend history not existed. Interestingly, little support is found for the signal- 154 E/B/R ECONOMIC AND BUSINESS REVIEW | VOL. 15 | No. 2 | 2013 | 154-33 113 ling hypotheses, that is, not many managers state they are paying dividends to convey a company's true state (future prospects) or to intentionally separate them from competi- tors. Taxes are also not a primary concern in deciding about the payment/increase of dividend or in choosing between them and repurchases. Repurchases are gradually replacing dividends as the primary pay-out method with higher correlation to possible swings in earnings levels (with a shorter lag than for divi- dends). Skinner (2008) reports that firms which pay dividends only practically do not exist anymore. Other research has also found a decline in dividends paid by US listed firms, attributing it to both different firm characteristics and lower propensity to pay in general (Fama & French, 2001). Contrary to the latter, Grullon & Michaely (2002) find repurchases to be important in substituting dividends and US corporations financing them with funds that would have been otherwise used for dividend increases. What fur- ther motivates our research is a finding of Hribar, Jenkins & Johnson (2006) who assert that share repurchases are used by some companies to reach analysts' earnings per share forecasts. This implies that repurchases might be viewed as a possible earnings manage- ment tool. In this paper we analyse a UK sample with focus on three theoretically possible share- holder-related cash flows.5 Next to dividend pay-outs we also consider share repurchases and issuances of new shares, where the company is receiving funds from investors, re- sulting in a "negative" pay-out to shareholders. As these three shareholder-related cash flows might all be broadly regarded as dividend (pay-out) related decisions, we investi- gate the existence of thresholds in all three cases. This view is in line with Ohlson's (1995) valuation model that confirms Miller & Modigliani (1961) value displacement property as dividends are paid out of book value and consequently reduce market value on an one-for-one basis rendering dividend policy irrelevant. Ohlson's model allows (requires) negative net dividends, i.e., capital contributions (share issuances) exceeding pay-outs. As accruals, and more precisely their discretionary component, are often associated with lower earnings quality and possible earnings management, (e.g., see Dechow, Ge & Schrand (2010) for an overview) we are also interested to what extent discretionary ac- cruals are present at the hypothesized pay-out thresholds. Although Yong & Miao (2011) find that dividend paying status is associated with the quality of earnings in general, they also find that the association is stronger when dividends increase in size. Therefore, inspecting the margin of dividend payment or dividend increase would be informative since firms potentially having difficulties in reaching these thresholds could still make use of discretionary accruals to arrive to them. H1: Companies attempt to reach thresholds of net shareholders pay-outs, which results in breaks in distributions of net shareholder pay-outs. H2: Thresholds are associated with significant discretionary accruals levels. 5 Beginning of section 3 (Sample selection and description) explains our choice of the UK market. J. KOREN, A. VELENTINČIČ | SHAREHOLDERS' PAY-OUT-RELATED THRESHOLD 155 This study helps to determine if repurchases and new share issuances, although not typi- cally regular events, affect the pay-out level targeted by the management. This would broaden the perception of flows that are viewed as important in setting companies' divi- dend policy. In the process, a robust test of discontinuity of distribution is used (Gar- rod, Ratej Pirkovic, & Valentincic, 2006). Moreover, discretionary accruals as a proxy for earnings management are analysed in relation to the pay-out levels. The remainder of the paper is structured as follows. Section 2 presents the research de- sign employed in our analysis, followed by sample selection and data description in the next section. Section 4 presents main empirical results and section 5 reports additional tests. Section 6 concludes. 2. RESEARCH DESIGN We begin our investigation by constructing the variables representative of pay-out-relat- ed thresholds. Typically, dividend pay-outs are investigated, either in their total amount or as change from year to year, both relative to opening total assets to account for size differences among firms. We denote DIV as the ratio of dividends to lagged total assets and D_DIV as the ratio of change in dividends from the previous year to the current year, scaled by lagged total assets. The variable D_DIV_DIV scales the dividend change from the previous year to the current year by previous year's dividends level to get a vari- able representing relative yearly pay-out changes. We calculate net shareholder cash flows as the sum of all cash flows investors might be dealing with, i.e., dividends received plus stock repurchases (as positive cash flows from the company to shareholders) less any share issuances in a given year (negative cash flows from shareholders to the company): net shareholder cash flows = dividends + share repurchases - share isuances Analogous to the dividend variables above, NSCF denotes the ratio of net shareholder cash flows to lagged total assets, D_NSCF scales yearly changes in net shareholder cash flows by lagged total assets and D_NSCF_NSCF is the change in net shareholder cash flows scaled by its lagged value. We also calculate and perform initial analyses on the scaled sums of dividends and stock repurchases only but, as dividends are highly domi- nating this sum, the results do not differ in any important way from dividend-only find- ings and offer no incremental insights. This part is therefore not investigated further in this paper. Variables as defined above are then distributed into bins of widths 0.005 for total assets scaling and 0.01 for pay-out scaling.6 That corresponds to forming groups that contain 6 These bin widths were selected for both, comparability with prior research investigating distributions, al- though of different analysed and scaling items (Burgstahler & Dichev, 1997; Durtschi & Easton, 2005; Bennet & Bradbury, 2007) and ease of interpretation. As setting the bin width can have a huge effect on the histogram 156 ECONOMIC AND BUSINESS REVIEWI VOL.15 |No. 2 | ^013 obseenations with valnes weit lein 0 . 5% of iaüoen total assets cr 1% of k^ts0 pan-oot. IION5ce inicrem^n5^ ure otso f sed lor alf jantas^tjutnO bins. Bios widfhw fir f-y-od0 scaling ate Iwlce rs bio ac Poo OiHtaC arrete seating because ttru lotCer oea nrirasi kt-cr irr ctaolutrvalse ansi thccr uoe ac a denominator ureset 2ts 1 n intimala cmantr r^rfoa tha2 have fN be prtsentetl wttli hilgflcgr acguragy tn n»aovei:i^aräfic^lai"^istoc^^^sn(rver-smoothing" (Scott, 1979). All bins are defined to include lower bound as we want the central bin to include observations with zero onil smell. posrtivs vrluer and NxttudN the trouor bctunrl. Afthoogh debatabk, ws consrder utero las tie scaOed amaunO, or change, wlrrec appliraltlo) as teles fisrC: ceoctt negativa rignalling vahiu rwC thss aha tlroarholsl at- mvastigete. T.se go -awHed rfaen bmr ii ehennfors dafinad an inulntting x j0 0 eta. We oea tlie cxpecssions seao obsouNascanSi^wtn vakar or aeror -io dcmta ohs etvstionr ]n tdo aentcnC eit n tot which Ac nki. of the vuriablec anayissd sxvc11-1 vqoa1 Mo zero. Wa pkt Msto^dmo lstt a1 1 vai:1 alale s .n ft. loa)i er, with oats1 with oue zar o vahie r. IiWs do so trceausewn expecti largenumber of observations to have the value of zero (either no dividsndsarspaldout orAe^vickndkvslis tct rannas inAe ^evkus yrar, resukin0 m znro sUengr) and wt; mosstigato whathev zoro voluet an predommanl in thtorhoIN3 attammg necolaua ar dms shin behwoioor tx^ wó)]0liuic caroes uo well bustilermoss, w viznel mriaoEtiou of tore distiibcbont miglre aerea0 ottusa ^tentialsomte 1°iro1 oS mtas- sol: tNat would r e mntstigota al curthd r. To tonmaUy eaec oioc ascumction shoc zero binu m div)ilends ani neo: rharshokler aaori flows net a valid arts1 valwav ]e Areshold too eomponir ss we ernpkw a so0»!! ts st to s stisr eontinmO0 af a -tittiibistiuro ]Ul1o-lossd by G noeocERatoj PickovkSS Wakn5inck Seco 6) - lieovetocPh G^V taet - whion roau1rES no ctaiet asshmEoionrwpou) Eha oc ndea—acA a^:]ser1i^u.o^to^ )Vat ontn testing Rsqumn0 on asscmptino of normo1i1h 1n the tari statisti: was e shortcoming thataccomo enieW(die)ewntinoiOyoe sl^c^g^^le d^hos far inthe liter etcs e, e.g,inBurcstahier 8r Wlctoev (Ì9 E1).Develooedwch earnisge-man- ogemsh0 aapticntiaoeihmind,thaGROV ieslisaepecially reliable in samples with more than 51,000 observations, a number that we easily exceed in our analysis. being constructed (Wand, 1997), we considered "various alternative widths in the process. While title software suggested sdidtgs fup telegrams of mtervals "si tiri; folltswing snction weee beaween O.OfMß nnd 0.0048 for total ästete eeeliiig ant- be-wetn 0.010 ond O.fnU for jseyaaot rcalm^ oarinus e;rtimal liin widtlr formula (S80cr, S9n9; WandJ pc97; spcerrods Ratej Pirlsovie ScVakntindc, 2006. .roduced £t ipan rf rnsukr. These rang8d reoun widths utnek>w O.gm using Freeftpsn-Dlaconit1 Sermuia (h = ) to ose r 107 asing (hr gturgo rs' eu^e (h = "^fi^^cO), also dependent on the variable. The latter widths were drastically reduced to 0.400 or less if outliers at f% were removed before the calculation. Suggested bin widths obtained using the Scott's formula (h = 3.49 X cn^'^werebetweenthetwo extremes. J. KOREN, A. VELENTINČIČ | SHAREHOLDERS' PAY-OUT-RELATED THRESHOLD 157 Uli; GRPV tEEt sEaltEitsic; T, deriheel feom (hhebyvlscvipequaPiyiscomputed as foUowsm eduation (1 bolo—, ot^liüe pssumtn- itEtiep^nRtnl evvets HIATE utth^^ mpuRs UX.) =N x =. and ex.) =Nxp ss (l -/u), wherp Nis the to ta 1 numb AR CER bnlSPatknsmAs tn-iple and pis the xrobabihtytkat: lnobsirnation odH faHRnta (bt^ec^naIC^^,]^Klne^rAit^c^ne(^uR^d aj en aveiagi ot1 CSO sOjpRvn( interesls: p. = xi-t~xi+t. 2N X - E=Xi) Ti=7^XžT (1) whtpe^^is^Itb -ct-cpnumber rf ohvernetiopsEn l nCsrval (i). Values of the test statistic are tubulaled in Gitpcd, Rathj RtEkluk & pt-]^o7incit; (,2006) and a breakin nhe distribution st intevuoI iv iPepRifkd aT^^i^ndo^c)Rrgn%Rnee luveln oRT0%, 5% and 1% corresponding So abaolute vaiola oEThs a sEuCiatiKc bf3.16, 4.47 and10.00 respectively. UPe see htea in) evisteU IP the solv acvri als hone at SURL hypot HLsizedthr eiAa ldt and in -artkeuloD atue cooi]3oneni bi1 toEal aorvsibls^. We uie^e modified Jonecmedd eDechon, Skvn, & Ssaeeniy S-bDE^C He eslimltenon-dievi,(^^^oneryeccru- nCo wlEùch sn Avn une ta Astormius Rhe divereniAn-v- lomjvnnent uL aLanuols as the diktenen-e be ioseen eat l moim li velu ei a nd tolial ilccr Doke ^irs tlytotal accr-ok arevom- pulihO as: TACC = (ACAt - ACLt -ACa<>ht + ASTDt w DeotidT-t-i (2) wheae A(LC(is tlea rftEt nes In EURI ehi Lsie Rs, ACL(7s t Je^cloiuititl^ ln eurrenkiiabilities, ANOasht it (Eie ahenge itr c aslo stnO enih cqPTDlcnVs, ASALD( ls S lete vpange m u horT ter m dslttI D ep ore dopriciation aod amoctifd1:ion chargas andOA(g aro lagg;oill^ola^ ć^so n'^^.Tlie modifi ed Jones modelisof SSe following form: NDACC = nl(l/nAt_l) + n2(AREVt - ARECt) + n3(PPEt) (3) w^lrerere^(0ar^^^pgegi^c^1^^l assets, AREVt ia^hocJt^nje^ tal asseti , Cl jUC^s thechangelnreceinabks , se aleOly lagpsdtolai as^oels anE Piß Icgr oss psopsrtyptavr and equipment, eoake bylaggil totaiarsete, Estimatns oPal, a2 and a3 aeeoStained C^^^t^im^^Jtog^lienfodelie^ ^cge^ai^c^n tVil^^icitoslslenur^t^pjii^fol accseals on tCeleft-hanV side.TheestimaIeCaoeflìcirntsaselPen usod togenerotenan-dtpcgetionary accruals. Theresiduglsgg thlr modelaredlscreIionacp acarnale.Dlscpeflonary arciuatrarithen analysed bm-clr e forfoiclbleO^^Ufef^nscr rneh^iomrangcmedlgv valuei.For ihisp ur- y(sse,ITuIlJcsJ eormoansanPrneWikoxsog paoy-eumformedrans greodeO.We oxpect sIotiet ieoilypioni fica vidiTore ncesoOdrscso tiomaiy aceime-ii^t-^i^sang ^r^d^^ro fhee sh- olgdthatvgu1C llnksei two potential indicators of earnings management and suggest discretionary accruals' use in connection with these thresholds. 158 E/B/R ECONOMIC AND BUSINESS REVIEW | VOL. 15 | No. 2 | 2013 | 158-33 113 3. SAMPLE SELECTION AND DESCRIPTION We acquire data of publicly listed UK companies from Datastream. This market is se- lected because companies in the UK have historically paid considerable dividends that still persist. A large majority (almost 85%) of UK firms paid dividends in the 1990s and dividend pay-outs dominated proportion-wise, although repurchases have been on the rise (Renneboog & Trojanowski, 2005).7 Even recently, despite the trend of declining pure dividend pay-outs (Skinner, 2008), UK firms still tend to pay out dividends rela- tively more often than elsewhere (Denis & Osobov, 2008). As we want to have the initial sample as broad as possible, companies in the period from 1990 to 2012 are considered. Prior to 1990, the lack of data availability hinders a more detailed analysis and an in- complete set of companies' financial information was provided for 2012 at the time of data collection. A note is necessary about dividend inputs from the database. Since IFRS-compliant re- porting became mandatory for all listed companies in the EU for annual periods begin- ning on or after 1st January 2005, a provision in the standards requires companies to account differently for dividends paid. Before 2005, under the Statement of standard accounting practice (SSAP 17 - Accounting for post balance sheet events, 1980), divi- dends were accounted for as an adjusting post balance sheet event in the period to which they related. After 2005, it is prohibited to recognise dividends declared after the end of reporting period as a liability to that same reporting period (IAS 10 - Events after the reporting period). Instead, such dividends are disclosed in the notes but accounted for in the period in which they are paid. Thus, actual pay-out liability has priority over its source (earnings). This results in reported dividends in period (t) consisting of final divi- dend for period (t-1) and interim dividend(s) for period (t). Final dividend for period (t) is then recognised in period (t+1) financial statements etc.8 Table 1: Sample construction procedure firm-year observations of listed UK companies in the period 1990 - 2012 38,429 observations with missing essential data 742 observations with zero total assets or sales 2,065 observations of financial and utility firms 5,380 final sample firm-year observations (3,177 distinct firms) 30,242 Notes: This table presents sample selection process. Starting sample of listed UK companies is obtained from Datastream and identified using nation code (WC06027). All financial industry related firms and utilities are excluded due to their specific operating properties. 7 Dividend payments have been more frequent in the UK also due to the more favourable tax treatment of dividends in the past (prior to the Finance Act 1997, see section Additional tests for more information) but remained high after the change as well. 8 For example, GlaxoSmithKline (GSK) in its 2005 annual report shows a breakup of dividends into four interims of (all in £m) 568, 567, 568 and 792 for 2005 respectively and 575, 573, 571 and 684 for 2004 respec- tively. But, since GSK normally pays a dividend two quarters after the quarter it is relating to, dividends actu- ally paid in 2005 were the last two interims for 2004 and the first two interims for 2005. The sum of those, £m 2390, is then reported as dividends for 2005 and also found as the database entry. J. KOREN, A. VELENTINČIČ | SHAREHOLDERS' PAY-OUT-RELATED THRESHOLD 159 We first eliminate entries with missing data that are essential for the analysis, e.g., miss- ing total assets or industry codes. We then remove observations with zero total assets and/or zero sales as these are not believed to be truly operational and the former would imply division by zero in the construction of our variables of interest. Lastly, as a com- mon step, we remove firms from financial and utility sectors because of their operating specifics. We end up with 3,177 distinct companies and 30,242 firm-year observations as presented in Table 1. Out of these, 62% include dividend payments, 60% report proceeds from sale or issuance of stock and 11% show a change in redeemed, retired or converted stock. A substantial share of issuances indicates a possible large effect on NSCF, whereas the extent of repurchases is somewhat smaller than expected. Examination of the data also revealed some confounding entries in form of negative values of repurchases (14 identified) and negative values of issuances (134 such cases), both of them are not sup- posed to be negative following the definition of Datastream datatypes. A subset of each was, where possible, manually checked back against firms' annual reports and entries were corrected accordingly, e.g., into positive values. Lastly, otherwise sound observa- tions with missing dividends, repurchase or issuance data had those set to zero.9 Table 2 presents sample structure by years. As there are no big deviations in any specific year, we can observe a first peak in the number of listed UK companies in 1997, followed by a slight decrease and another gradual but steady increase in the years following up to 2006. However, in the last years there is quite a strong decline coinciding with the devel- opment and deepening of the financial crisis. Data for 2012 were not fully populated at the time they were collected. Table 2: Year composition Year N in % Year N in % Year N in % 1990 1,154 3.82 1998 1,462 4.83 2006 1,551 5.13 1991 1,166 3.86 1999 1,389 4.59 2007 1,491 4.93 1992 1,147 3.79 2000 1,398 4.62 2008 1,352 4.47 1993 1,152 3.81 2001 1,443 4.77 2009 1,236 4.09 1994 1,184 3.92 2002 1,474 4.87 2010 1,124 3.72 1995 1,183 3.91 2003 1,502 4.97 2011 1,063 3.51 1996 1,467 4.85 2004 1,553 5.14 2012 658 2.18 1997 1,542 5.10 2005 1,551 5.13 Notes: Year distribution of the sample in presented in this table. Total number of observations is 30,242. At the time of data collection year 2012 was not fully populated, therefore the number of observations is accord- ingly smaller. Descriptive statistics in Table 3 suggests skewed distributions in almost all variables. As we are interested in the centre of distributions and especially in specific breaks, quar- tiles are reported along with the average, but standard deviations indicate that there are 9 There were 1,521 such cases, of those only 390 with missing dividends. Remaining missing repurchases and/ or issuances would prevent the construction of NSCF with dividends mostly available. Omission of these cases does not change the results. 160 E/B/R ECONOMIC AND BUSINESS REVIEW | VOL. 15 | No. 2 | 2013 | 160-33 113 substantial extreme observations.10 The number of observations is mostly affected by the denominator, particularly when scaling by past dividends and less so when scaling by past NSCF. The first four variables use lagged total assets for scaling and are limited by that. Only DIV and D_DIV have comparable means and medians, dividends amounting on average to around 2% of previous year's total assets and dividend change being posi- tive but of minor amount compared to total assets. The remaining four variables have means and medians differing in both sign and magnitude, once more implying skewed distributions. Table 3: Descriptive statistics Variable Mean 25% Median 75% SD N DIV 0.024 0 0.015 0.033 0.086 26813 NSCF -0.256 -0.001 0.009 0.030 6.274 26813 D_DIV 0.002 0 0 0.004 0.097 26813 D_NSCF -0.156 -0.012 0.001 0.016 9.047 26813 D_DIV_DIV 0.425 -0.004 0.084 0.241 11.836 17201 D_NSCF_NSCF 39.208 -1 -0.039 0.229 2,175 22829 Notes: This table presents descriptive statistics for analysed variables. DIV = dividends (WC04551) scaled by lagged total assets (WC02999); NSCF = (dividends + repurchases (WC04751) - issuances (WC04251)) = net shareholder cash flows scaled by lagged total assets; D_DIV = change in dividends from year (t-1) to (t) scaled by lagged total assets; D_NSCF = change in net shareholder cash flows from year (t-1) to (t) scaled by lagged total assets; D_DIV_DIV = change in dividends from year (t-1) to (t) scaled by lagged dividends; D_NSCF_NSCF = change in net shareholder cash flows from year (t-1) to (t) scaled by lagged net shareholder cash flows. Number of observations varies due to availability of respective denominators used in variables' construction. For visual representation, we plot histograms of respective variables sorted into bins 0.005 or 0.01 wide as described in the previous section to arrive at distributions of inter- est. Almost all distributions imply a threshold at the zero bin, firstly in amounts relative to total assets (attaining dividends or non-negative net shareholder cash flows). Panels A and C in Figure 1 show striking mode bins of small non-negative pay-outs and a compar- ison of the two panels suggests that dividends clearly dominate also in NSCF calculation. Although halved in size (10,419 observations in bin(0) for DIV and 5,047 observations in bin(0) for NSCF), the zero bin of the latter is still clearly outstanding from the remain- ing distribution. There are also changes, with observations shifted to bins left of zero due to effect of issuances, but the distribution to the right of zero is not much different compared to DIV. Bin(0) modes disappear when observations equalling exactly zero are excluded in panels B and D. What remains is a mode in some of the subsequent positive bins (around 2-3% of lagged total assets) for both DIV and NSCF. While the zero bin in DIV is not standing 10 We did not exclude any outliers since our central analysis is concerned with specific observations at the centre of respective distributions. As all our variables are ratios, outliers can arise due to disproportionate numerators and denominators in the span of one year. This may be related to one variable only. Therefore, by excluding outliers relating to one variable we could lose economically-sound observations in other variables. J. KOREN, A. VELENTINČIČ | SHAREHOLDERS' PAY-OUT-RELATED THRESHOLD 161 out in any way, the one in NSCF is missing almost 400 observations (estimated as the difference to the average of adjacent bins) for a smooth, normal-like distribution. This case could indicate that NSCF are not a threshold of their own, in a way that firms would target its combined value as a reference point for investors. Figure 1: Histograms of selected distributions PANEL A: DIVIDENDS SCALED BY LAGGED TOTAL ASSETS fro. r £ ffl PANEL B: DIVIDENDS SCALED BY LAGGED TOTAL ASSETS (WITHOUT OS) & Is fs PANEL C: NET SHAREHOLDER CASH FLOWS SCALED BY LAGGED TOTAL ASSETS PANEL D: NET SHAREHOLDER CASH FLOWS SCALED BY LAGGED TOTAL ASSETS (WITHOUT OS) Notes: This figure presents distributions of variables of interest. Panels A and B graph DIV, with and without zero observations, and panels C and D graph NSCF, with and without zero observations. DIV = dividends (WC04551) scaled by lagged total assets (WC02999) and NSCF = (dividends + repurchases (WC04751) - is- suances (WC04251)) = net shareholder cash flows scaled by lagged total assets. Bin width is 0.005 with lower bound inclusion, i.e., "zero bin" includes x if 0 < x < 0.005, "bin one" includes x if 0.005 < x < 0.01 etc. As observations of zero in given variables have such an overwhelming effect on distribu- tions, they are not reported in FIGURE 2 but they are still included in the analysis that fol- lows. Findings of clearly modular bin(0) are confirmed for scaled changes in dividends (D_DIV, Panel A) and scaled changes in net shareholder cash flows (D_NSCF, Panel C) - even without observations equalling exactly zero. What is of interest is that, in case of D_NSCF, the bin with the second highest frequency is actually the first negative (and not positive, as more commonly expected) bin and this pattern is even repeated bin-wise as 162 E/B/R ECONOMIC AND BUSINESS REVIEW | VOL. 15 | No. 2 | 2013 | 162-33 113 we move away from zero bin. The negative effect issuances have on D_NSCF outweighs the combined positive effect of dividends and repurchases in these cases. Figure 2: Histograms of selected distributions PANEL A: DIVIDEND CHANGES SCALED BY LAGGED TOTAL ASSETS (WITHOUT OS) PANEL B: DIVIDEND CHANGES SCALED BY LAGGED DIVIDENDS (WITHOUT OS) PANEL C: NET SHAREHOLDER CASH FLOWS CHANGES SCALED BY LAGGED TOTAL ASSETS (WITHOUT OS) PANEL D: NET SHAREHOLDER CASH FLOWS CHANGES SCALED BY LAGGED NET SHAREHOLDER CASH FLOWS (WITHOUT OS) Notes: This figure presents distributions of variables of interest. Panel A graphs D_DIV, panel B graphs D_DIV_DIV, panel C graphs D_NSCF and panel D graphs D_NSCF_NSCF, all without zero observations. D_DIV = change in dividends (WC04551) from year (t-1) to (t) scaled by lagged total assets (WC02999); D_DIV_DIV = change in dividends from year (t-1) to (t) scaled by lagged dividends; D_NSCF = change in net shareholder cash flows (= dividends + repurchases (WC04751) - issuances (WC04251)) from year (t-1) to (t) scaled by lagged total assets; D_NSCF_NSCF = change in net shareholder cash flows from year (t-1) to (t) scaled by lagged net shareholder cash flows. For panels A and C bin width is 0.005 with lower bound inclusion, i.e., "zero bin" includes x if 0 < x < 0.005, "bin one" includes x if 0.005 < x < 0.01 etc., and for panels B and D bin width is 0.01 with lower bound inclu- sion, i.e., "zero bin" includes x if 0 < x < 0.01, "bin one" includes x if 0.01 < x < 0.02 etc. Lastly, looking at pay-out changes relative to their lagged values (D_DIV_DIV and D_ NSCF_NSCF, Panels B and D, respectfully), zero bin threshold mode remains obvious in dividend changes scaled by lagged dividends, but with a lot lesser difference to surround- ing bins. In the case of D_NSCF_NSCF zero bin practically blends in the distribution and does not even seem to represent a threshold on the left (negative) side, the distribu- J. KOREN, A. VELENTINČIČ | SHAREHOLDERS' PAY-OUT-RELATED THRESHOLD 163 tion itself not displaying any noticeable breaks whatsoever. This is once more suggestive that no systematic threshold attaining behaviour can be observed with regard to net shareholder cash flows. Frequencies of dividend increases and net shareholder cash flows increases relative to their lagged values rise and/or remain high up to bins denoting growth in the order of 10% (note that bin width is 0.01 in these two cases as the denominators are considerably smaller than total assets used beforehand). Another interesting observation is bin(10) of D_DIV_DIV, denoting cases of dividend increase between 10% and 11% compared to previous year's dividends. The bin in question appears to jut out of the distribution and is also statistically evaluated in the next section. 4. RESULTS We attempt to formally confirm observations derived from histograms in the previous section with the use of GRPV discontinuity of distribution test. Table 4 reports values of the GRPV test applied for all cases inspected earlier (with and without zero observations) and fully confirms our assumptions. In all six cases of zero values of variables included, zero bin represents a discontinuity from the remaining distribution, inferences being done at P-values far below 1% (critical values of the test in absolute terms for significance levels of 10%, 5% and 1% are 3.16, 4.47 and 10, respectively). The discontinuity is stronger in dividend-related variables compared to NSCF-related ones, implying that repurchases and issuances lessen the break to some extent by moving some observations away from zero bin. Scaling by total assets results in stronger breaks than scaling by lagged values of pay-out, suggesting that the choice of scaling variable also plays an important role in distribution analysis as also suggested by previous research (Dechow, Richardson, & Tuna, 2003; Durtschi & Easton, 2005). On the other hand, in cases where zero values of variables are excluded from distribu- tions, discontinuity is still statistically confirmed in four out of six cases. The H0 of conti- nuity of distribution cannot be rejected in the first (DIV) and last case (D_NSCF_NSCF) as suggested and anticipated by the histograms in the preceding section, whereas other variables have results significant at the 1% level although test values are considerably lower than before the exclusion of zeros. A comparison of the four variables represent- ing scaled changes in either dividends or net shareholder cash flows shows consistently larger breaks in dividends. We thus regard them as the driving factor for threshold exist- ence. The fact that breaks are lessened with the inclusion of repurchases and new share issuances implies that these are not used with the intent of reaching a NSCF-related threshold, but rather for other purposes. 164 E/B/R ECONOMIC AND BUSINESS REVIEW | VOL. 15 | No. 2 | 2013 | 164-33 113 Table 4: GRPV discontinuity of distribution test (1) (2) zero observations included without zero observations DIV 376.61 1.42 NSCF 115.39 -11.36 D_DIV 336.51 123.70 D_NSCF 124.24 62.61 D_DIV_DIV 73.02 21.16 D_NSCF_NSCF 39.97 1.95 Notes: Reported are T values of GRPV discontinuity of distribution test for zero bins of variables analysed. First column reports test statistics computed including observations of zero in selected variables, and second column reports test statistics computed without these observations. With H00: the distribution function is continuous, the values of T at standard levels of significance are: at 10% |T| = 3.16, at 5% |T| = 4.47, and at 1% |T| = 10. As the number of observations in adjacent bins is required by the test, in the first row (case of DIV) bins on the left of zero (negative bins) are empty (there are no negative dividends) and are as such affecting test statistic computation. DIV = dividends (WC04551) scaled by lagged total assets (WC02999); NSCF = (dividends + repurchases (WC04751) - issuances (WC04251)) = net shareholder cash flows scaled by lagged total assets; D_DIV = change in dividends from year (t-1) to (t) scaled by lagged total assets; D_NSCF = change in net shareholder cash flows from year (t-1) to (t) scaled by lagged total assets; D_DIV_DIV = change in dividends from year (t-1) to (t) scaled by lagged dividends; D_NSCF_NSCF = change in net shareholder cash flows from year (t-1) to (t) scaled by lagged net shareholder cash flows. We therefore confirm breaks at zero bins in the distributions of scaled pay-outs, which is indicative of existence of thresholds. The exclusion of zero observations has different meanings, depending on the variable in question. The DIV variable is specific, as it is bounded to the left of zero, i.e., there are no negative cash dividends. Zero observations in this case are firms that do not pay dividends at all. Therefore, their exclusion is justi- fied as they obviously do not try to attain any pay-out threshold. The majority of dividend pay-outs are concentrated in the first ten bins, i.e., up to 5% of previous year's total assets. Nevertheless, we keep the analysis of DIV in both versions as a reference. Similarly, in NSCF, it is practically never the case that the three components would sum up to exactly zero, meaning that zero observations are those of zero values in all three components and these again are validly excluded.11 This is not as straightforward in scaled changes of dividends and net shareholder cash flows. D_DIV or D_DIV_DIV equal to zero may in- dicate a non-payer, but it can also indicate a no-change in dividends, keeping their level unchanged from the previous year. Analogously, D_NSCF and D_NSCF_NSCF values of zero can mean non-payers, no-changes in the sense that the firm only pays dividends and does not use repurchases and/or issuances or rare cases of the NSCF components summing exactly to zero. We also separately evaluate bin(10) of the D_DIV_DIV distribution. The value of the test statistics of the GRPV test amounts to 6.22 and is significant at the 5% level. As the bin corresponds to a 10% to 11% increase of the dividends from the previous year, it also looks like a convenient orientation value for possible future pay-out increases. The GRPV 11 Actually, there are seven cases in which dividends, repurchases and issuances sum up to exactly zero, but only pairwise - in none of them all three at the same time. J. KOREN, A. VELENTINČIČ | SHAREHOLDERS' PAY-OUT-RELATED THRESHOLD 165 test value in bin(10) of the variable D_NSCF_NSCF is 0.33, limiting previous reasoning to cash dividend pay-outs only. Focusing back on central bins, in Table 5 we investigate statistically significant (a 5% level is tested) differences between mean (median) values of discretionary accruals from the modified Jones model across bins. For each variable, with and without zeros, mean and median discretionary accruals from the model were computed for each bin in range from (-10) to (10), representing ±5% of lagged total assets or ±10% of lagged pay-outs, the difference due to different bin widths in the two approaches. Only the values for bins from (-2) to (2) are tabulated. We do this, firstly, because this is where our research interest lies as these are the most likely places in the distributions of pay-outs where the discretionary component of accruals would be important. Secondly, because there are not many significant differences further away from the centres of distributions. Finally, we keep our analyses compact for brevity of exposition. Bin means (medians) of discre- tionary accruals are compared to the means (medians) of discretionary accruals in the next bin using a t-test for the means and the Wilcoxson rank-sum test for the medians. For example, a boldfaced mean of DIV in bin(0) (0.955) indicates that it is significantly different from the mean in bin(1) (0.032). Similarly, a boldfaced median for NSCF in bin(-1) (0.011) indicates that it is significantly different from the median in the following bin(0) (0.091). Note that seemingly missing values are actually excluded for clarity. Variable DIV does not have negative bin observations (no negative dividends), while the results for bins (-2), (1) and (2) are not listed for versions of variables without zero observations because they are exactly the same as on the left-hand version. The versions only differ in the number of observations in the central bin (bin(0)) and possible differences only arise in compari- sons of bin(-1) to bin(0) and of bin(0) to bin(1). In almost all instances significant differences in both means and medians of discretion- ary accruals are found at bin(0) or bin(-1) - the two that compare the central bin(0) with the neighbouring bins. Bin means of discretionary accruals are generally much larger than medians of discretionary accruals as a consequence of skewed distributions and are usually biggest in bin(0), means of bin(0) in first four variables being much bigger than means of other bins. Interestingly, excluding zero observations results in smaller bin(0) mean and median discretionary accruals compared to cases with all observations included and with the last two variables (D_DIV_DIV and D_NSCF_NSCF) they even become insignificantly different to other bins' means and medians. Assuming that dis- cretionary accruals are associated with some form of purposeful managerial actions, and may be a tool to manage earnings or some other operating result by the management, their size and significance in central zero bins of distribution is at least indirect evidence of such actions. 166 E/B/R ECONOMIC AND BUSINESS REVIEW | VOL. 15 | No. 2 | 2013 | 166-33 113 Table 5: Means and medians of discretionary accruals by bins Bin Mean Median Mean Median Mean Median Mean Median DIV DIV (without 0) NSCF NSCF (without 0) -2 -1 0.169* 0.114* 0.056* 0.011* 0.114* 0.011* 0 0.955* 0.128* 0.006* -0.025* 0.699* 0.091* 0.011 -0.026* 1 0.032 -0.012 0.027 -0.007 2 0.038 -0.008 0.028 -0.010 D_DIV D_DIV (without 0) D. _NSCF D_NSCF (without 0) -2 0.025* -0.030 0.063* -0.018 -1 0.003* -0.035* 0.003 -0.035* 0.028* -0.020* 0.028 -0.020 0 0.564* 0.034* 0.005* -0.023* 0.347* 0.004* 0.025 -0.022* 1 0.049* 0.006* 0.035* -0.007* 2 0.099 0.028* 0.071 0.007 D_DIV_ DIV D_DIV_DIV (wo 0) D_NSCF_NSCF D_NSCF_NSCF (wo 0) -2 -0.012 -0.039 0.056 -0.028 -1 -0.022* -0.051* -0.022 -0.051 0.099 -0.015* 0.099 -0.015 0 0.054* -0.016* -0.023 -0.043 0.102 0.007* -0.002 -0.036 1 -0.007 -0.037 0.051 -0.038 2 -0.007 -0.035 0.015 -0.033 Notes: This table reports means and medians of discretionary accruals form the modified Jones model by central bins of distributions. Each variable has bin means reported in the first column and bin medians in the second column of its box and is firstly evaluated with all observations included and then with zero observa- tions excluded ("wo 0" in the last variable row stands for "WITHOUT O"). Bolded font and asterisk denote that respective means (medians) are different from means (medians) in the following bin at the 5% significance level, i.e., a bolded* mean (median) in bin(0) is different from the mean (median) in bini at 5%. Tests used were t-test for means and Wilcoxson rank-sum test for medians. Modified Jones model is of the form: NDACC = afi/TAJ + a1(&REVt - &REC) + a3(PPE) . NDACC are non-discretionary accruals, TAt-1 are lagged total assets (WC02999), AREVt is the change in revenues (WC01001), scaled by lagged total assets, ARECt is the change in receivables (WC02051), scaled by lagged total assets and PPEt is gross property plant and equipment (WC02301), scaled by lagged total assets. To estimate a1, a and a3 total accruals are considered as the dependent variable and calculated as: TACC = (ACAt - ACLt -ACasht + ASTDt - Dept)TAt-1. ACAt is the change in current assets (WC02201), ACLt is the change in current liabilities (WC03101), ACasht is the change in cash and cash equivalents (WC02001), ASTDt is the change in short term debt (WC03051), Dept are depreciation and amortization charges (WC01151) and TAt-1 are lagged total assets. Finally, discretionary accruals are obtained as the difference between total accruals and non- discretionary accruals predicted by the model. DIV = dividends (WC04551) scaled by lagged total assets; NSCF = (dividends + repurchases (WC04751) - is- suances (WC04251)) = net shareholder cash flows scaled by lagged total assets; D_DIV = change in dividends from year (t-1) to (t) scaled by lagged total assets; D_NSCF = change in net shareholder cash flows from year (t-1) to (t) scaled by lagged total assets; D_DIV_DIV = change in dividends from year (t-1) to (t) scaled by lagged dividends; D_NSCF_NSCF = change in net shareholder cash flows from year (t-1) to (t) scaled by lagged net shareholder cash flows. For variables DIV, NSCF, D_DIV and D_NSCF bin width is 0.005 with lower bound inclusion, i.e., "zero bin" includes x if 0 < x < 0.005, "bin one" includes x if 0.005 < x < 0.01 etc., and for variables D_DIV_DIV and D_NSCF_NSCF bin width is 0.01 with lower bound inclusion, i.e., "zero bin" includes x if 0 < x < 0.01, "bin one" includes x if 0.01 < x < 0.02 etc. Bins in the range from -10 to 10 were tested but are not tabulated. Mean and median results of variables without zero observations are also not reported for bins -2, 1 and 2, as they are the same as in with zero observations included (the two versions differ only in the frequency of the zero bin). J. KOREN, A. VELENTINČIČ | SHAREHOLDERS' PAY-OUT-RELATED THRESHOLD 167 The two signals combined, that of accruals and breaks in pay-out distributions, indicate that the thresholds identified in this study can be associated with some firms' manage- ment activity. As firms aim to meet their planned, announced or established levels of pay-out on one side, and face anticipations of shareholders and potential investors on the other side, thresholds in form of positive pay-outs or pay-out changes gain in impor- tance. Not wanting to fail expectations firms may make use of accrual manipulation to arrive at desired financial results that enable a suitable pay-out policy. 5. ADDITIONAL TESTS To address the potential sensitivity of discontinuity tests to neighbouring bin values sug- gested by previous research (Bennet & Bradbury, 2007), we first recalculate GRPV test statistics using two adjacent bins on either side of bin(0) (i.e., bins -2, -1, 1 and 2) and report it in column 1 of TABLE 6. The only difference to the main test is that the break in NSCF without zero observations is now only significant at 5% compared to previous 1% significance. All the other variables' rvalues are very similar to previously reported ones. We also re-calculate the GRPV test using only next-to-adjacent bins (i.e., -2 and 2) and the results (not tabulated) remain quantitatively and qualitatively substantially unchanged. This confirms the robustness of earlier our results to the details of test speci- fications. Extending the analysis beyond the primary hypotheses, we then use the test statistics to study what happens with the breaks in the distributions in relation to specified cut- offs, identified as potentially important for pay-out time dynamics. In columns 2 and 3 of TABLE 6 we look at the pre- and post- 2008 financial crisis periods. The inferences are unchanged with an adjustment in significance to 5% for NSCF and D_DIV_DIV, both without zero observations. What we do observe comparing the two sub-periods is that for the years 2008 and following all test values are smaller, mainly in the order of one half, than in pre-2008 period (apart from DIV and D_NSCF_NSCF, both without zero observations, which are insignificant as in the main test specification). Smaller val- ues imply a less pronounced break in the distribution (although still highly significant) meaning less observations are concentrated in zero bins and more in the adjacent bins. This could be interpreted as some of the firms not pursuing or not being able to pur- sue pay-out thresholds in the crisis period, given the harsher economic conditions they found themselves in. 168 E/B/R ECONOMIC AND BUSINESS REVIEW | VOL. 15 | No. 2 | 2013 | 168-33 113 Table 6: Additional GRPV discontinuity of distribution tests (1) (2) (3) (4) (5) (6) (7) 4 bins crisis effect ifrs used finance act used pre-2008 2008&^ no yes pre-1997 1997&^ DIV 349.19 297.96 251.13 274.89 278.36 74.53 400.21 DIV (wo 0) 2.28 0.82 1.61 1.03 1.07 2.97 0.23 NSCF 124.50 90.59 75.17 86.61 78.64 33.14 112.96 NSCF (wo 0) 8.39 9.88 5.62 8.94 7.10 0.19 12.75 D_DIV 401.72 281.52 201.50 261.58 227.93 109.76 335.98 D_DIV (wo 0) 155.96 114.15 47.71 107.18 62.14 68.41 103.21 D_NSCF 158.15 108.84 61.19 105.74 65.54 51.50 115.40 D_NSCF (wo 0) 86.81 58.07 23.54 56.50 27.28 33.03 53.32 D_DIV_DIV 78.00 69.00 24.20 66.44 30.39 52.07 52.27 D_DIV_DIV (wo 0) 23.69 20.58 5.56 19.44 8.42 18.54 12.57 D_NSCF_NSCF 39.52 36.85 15.56 36.82 15.64 27.51 29.31 D_NSCF_NSCF (wo 0) 1.75 1.41 1.77 1.46 1.47 2.83 0.31 Notes: Reported are T values of GRPV discontinuity of distribution tests for zero bins of variables analysed with and without zero observations (the latter denoted by "wo 0" abbreviation). Column 1 reports statistics using 2 adjacent bins on either side of bin(0), columns 2 and 3 use 2008 as a cut-off year to analyse the effect of financial crisis, columns 4 and 5 analyse the effect of IFRS and column 6 and 7 use 1997 as a cut-off year to analyse the effect of change in legislation (Finance Act). With Hgg: the distribution function is continuous, the values of T at standard levels of significance are: at 10% |T| = 3.16, at 5% |T| = 4.47, and at 1% |T| = 10. As the number of observations in adjacent bins is required by the test, in the first two rows (case of DIV) bins on the left of zero (negative bins) are empty (there are no negative dividends) and are as such affecting test statistic computation. DIV = dividends (WC04551) scaled by lagged total assets (WC02999); NSCF = (dividends + repurchases (WC04751) - issuances (WC04251)) = net shareholder cash flows scaled by lagged total assets; D_DIV = change in dividends from year (t-1) to (t) scaled by lagged total assets; D_NSCF = change in net shareholder cash flows from year (t-1) to (t) scaled by lagged total assets; D_DIV_DIV = change in dividends from year (t-1) to (t) scaled by lagged dividends; D_NSCF_NSCF = change in net shareholder cash flows from year (t-1) to (t) scaled by lagged net shareholder cash flows. Our next cut-off is IFRS implementation. International Financial Reporting Standards and their predecessors, International Accounting Standards, are mainly regarded as be- ing of higher quality than existing local standards (e.g., Barth, Landsman, & Lang, 2008; Armstrong et al., 2010), although alternative views are also not uncommon (Soderstrom & Sun, 2007; Ahmed, Neel, & Wang, 2013), and they also directly affected accounting for dividends as noted under sample selection. IFRS are compulsory since 2005 and this ap- pears as a ready candidate for assessing the standards' effects. We deem it a second-best option as before 2005 firms could voluntarily adopt IFRS and even after 2005 data shows some financial statements in our sample as being prepared under UK GAAP. Our data- base allows us to identify the standards which the company used in preparing its reports and we thus classify 7,678 observations as prepared under IFRS. These mainly coincide with the period after 2005, but there is some overlapping with local standards, especially in years 2004-2007. The results (columns 4 and 5 in TABLE 6) in terms of subsample comparisons are analogous to that for the crisis effect. IFRS observations exhibit notably lower test values than non-IFRS observations for all but two insignificant variables lead- J. KOREN, A. VELENTINČIČ | SHAREHOLDERS' PAY-OUT-RELATED THRESHOLD 169 ing us to conjecture that IFRS usage is associated with "smoother" distributions. Poten- tial explanation for this is the negative effect of stricter standards on firms' willingness and/or ability to achieve pay-out thresholds, positioning less of them in central bin(0). We identify the last cut-off to be 1997 as pointed out by the dividend taxation literature. Namely, in order to end the discriminatory tax treatment in favour of dividend pay-outs compared to capital gains, the Finance Act of 1997 increased taxation of dividend in- come, primarily affecting pension funds that were the largest class of investors in UK eq- uities.12 Consequently, Bell & Jenkinson (2002) find a significant reduction in valuation of dividend income after the tax reform and initial evidence of reductions in dividend pay-out ratios, whereas Bond, Devereux & Kleem (2005) observe that it was the form of dividend payment that changed with the level marginally affected. Our two subsamples comparison in columns 6 and 7 of Table 6 reveals considerably smaller (yet again, still above critical values) values of discontinuity tests for most of the significant variables in the pre-1997 years compared to the later period. A potential explanation would be that after the 1997 tax reform dividends were not as large as before but still present (due to other investors' interests, signalling and other reasons), which resulted in their concen- tration in the smallest positive bin(s) of our distributions, producing a higher value of the test statistic. It has to be acknowledged however, that all these additional tests ana- lyse only a specific factor possibly affecting pay-out dynamics and that firms' distribu- tional decisions in real life are based on many elements, relative importance of which are changing in time. Moreover, even in our cases, there are overlapping effects especially towards the end of analysed time period. 6. CONCLUSION This paper investigates the existence of pay-out-related thresholds as an extension of documented earnings management thresholds. With dividends and distinct net share- holder cash flows defined variables, discontinuities in their distributions are statistically analysed, employing a robust test that does not assume that the distributions of under- lying variables are normal. The importance of pay-out policy for the firms' economic environment and for the firms' themselves (as a signalling mechanism, clientele and tax induced decisions etc.) leads us to consider threshold analysis to be of considerable im- portance for our study. We find evidence of breaks in distributions at suggested thresholds of zero or zero change of variables in question, supporting our reasoning that these are important for firms. Dividend thresholds are more pronounced than net shareholder cash flows thresholds suggesting the dominating role of cash dividends over share buybacks and over the net- ting role of new shares' issuances. Although repurchases are almost as common as divi- dend pay-outs, their effect is much smaller. Adding share issuances in the calculation to 12 More specifically, the 1997 Finance Act abolished repayment of dividend tax credits to tax-exempt inves- tors, UK pension funds being the largest beneficiaries of the previous regulation. 170 E/B/R ECONOMIC AND BUSINESS REVIEW | VOL. 15 | No. 2 | 2013 | 170-33 113 arrive at net shareholder cash flows disperses the pay-out distributions and reduces the breaks. Hence, repurchases and issuances are relatively much less important drivers of targeted pay-out level in the broader sense and net shareholder cash flows do not repre- sent a separate threshold independent of cash dividends. Discretionary accruals as a proxy for earnings management are analysed at identified thresholds. We find significant differences and/or magnitudes of discretionary accruals at or in the closest proximity of central bins of distributions. This is another sign of their importance for firms as accruals are considered as a convenient and potentially strong earnings management tool. Additional analyses employ the discontinuity test to exam- ine various sample partitions to arrive at more insightful results. We also find that a 10% dividend increase in the dividend paid is significant, suggesting the increase of dividends of 10% is common. Known caveats relate to distributional analysis being questioned as an earnings manage- ment measure and, although supportive of our hypotheses and considered general, the accrual model employed is merely one of several accruals modes and these have been found to produce results of different significance or even conclusions. In a related, but not directly comparable research, Dechow, Richardson & Tuna (2003) are not able to confirm that discretionary accruals are driving the breaks in earnings distributions and offer supplementary explanations. 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