Banks' Earnings Management Before Potential Violation of Dividend Regulation in Japan

This paper provides some evidence of dividend motivated earnings management by Japanese banks under the governmental guideline. The Guideline had limited dividend payment of banks under 40 percent of their current net income until August 1992. A bank potentially violating the Guideline would increasingly manage its earnings in the same fiscal year to stay within the upper bound. The paper examines several banks' earnings models such as Wahlen (1994) and Ahmed and Takeda (1995) and develops a new accruals model of banks. Empirical results significantly support the existence of such earnings management. However, unexplained selection bias may remain