The effect of non-realized income from fair value adjustments on dividend policy

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The effect of non-realized income from fair value adjustments on dividend

policy.

Thesis

Student: Thomas Hagedoorn Student number: 5796601 15th august 2014

Study: Msc in Accountancy & Control: Accountancy Amsterdam Business School

Faculty of Economics and Business, University of Amsterdam Supervisor: Dr. Georgios Georgakopoulos

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Abstract

This research will investigate is the effect of fair value adjustments on dividend pay-outs. I expect that fair value adjustments are non-realized income and will not be distribute to shareholders. According to Lintner’s framework only persistent income should be included into dividend pay-outs.

The sample consists of listed firms of fifteen countries in Europe for the sample period 2006-2010. The available data is selected from Compustat. The research is a replication of a study from Goncharov and Van Triest (2011).

The results of the regressions did not reject the claim that fair value adjustments have no impact on dividend pay-outs. And that for the majority of the countries the results showed that the fair value adjustments are not persistent. These results are not corresponding with the findings of Goncharov and Van Triest (2011).

Keywords: fair value accounting, investment property, dividend policy.

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1 Introduction

1.1 Background

Since 2005 the reporting standards for publicly listed companies in Europe switched from local GAAP to the International Financial Reporting Standards (IFRS), IFRS is now

mandatory reporting standards for publicly listed companies in the European Union (EU). The financial statements in more than 113 countries are prepared according to IFRS. And the International Accounting Standards Board (IASB) claims that the switch to IFRS leads to a higher quality of financial statements. Fair value accounting is an important component of IFRS. It helps in providing relevant information to users of financial statements however the use of fair value accounting increases the volatility. The changes in the fair value of assets are recorded in the income statement and these changes can lead to changes in the net income. The fair value adjustments can consist of realized and non-realized income. Non-realized income is not always persistent. The distribution of un-realized income to shareholders can be a problem if the un-realized income is not persistent. The leverage of a firm increases if dividend payouts are higher and higher leverage results in more risk because the probability of a default increases. This research will investigate the effect of fair value adjustments on dividend policy.

The study of Goncharov and Triest (2011) examined the effect of fair value accounting on dividend policies. They used the framework of Lintner (1956) on dividend and earning components. The two authors looked at the positive fair value adjustments of financial instruments and the dividend policies. The study examined firms that were listed on the Russian stock exchange for the years 2003-2006. The Russian economy was growing in this time period. The results showed that positive fair value adjustments are associated with a relatively lower payout of dividends in a time of economic growth.

The framework of Lintner (1956) formalizes the link between the reported earnings and the dividends. His partial adjustment model shows that companies try to pay out a fixed portion of the permanent core earnings. And if a company does not reach its targeted payout ratio it will slowly change to its targeted ratio. Dividend can be calculated based on this model by taking current earnings and previous paid out dividend.

Several studies have been undertaking on the subject of dividend and dividend policies. And these studies showed that dividend is related to permanent earnings. The study of

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Jaggannathan et al. (2000) confirms that dividend is related to persistent earnings. However the non-persistent component of earnings is not distributed among the shareholders.

The topic of fair value accounting is extensively researched by different authors. Investors are more able to make better and more informed decisions (Barth and Landsman 1995, Barth 2007) with fair value accounting. The studies of Penman (2007) and Plantin et al. (2008) show that fair value accounting can lead to more volatility of net income.

1.2 Research question

The proposed research proposal will investigate the effect of fair value adjustments on the dividend policy. The following research question is formulated: What is the effect of

investment property revaluations on dividend policy? This paper will replicate the study of

Goncharov and Van Triest (2011).

I have added the following possible sub question to examine this topic further. What is the

persistence of the unrealized income from investment property revaluations?

1.3 Motivation of this study

The research will largely replicate the study of Goncharov and Van Triest (2011) but it will extend it by selecting more countries and use a different measurement for fair value

adjustments. Another big difference is that the study of the two authors focused on a period of economic growth and the proposed research consist of five years of economic growth including a year of economic decline. The results of the study of Goncharov and Van Triest (2011) did not correspondent to the expectation of other literature. The contribution of the proposed research to the literature is that it will help understand the consequences of fair value accounting on dividend policies and by extending the research of Goncharov and Van Triest (2011). The contribution to society is that it can help investors understand the effects of standards on dividend policy. And help in understanding the link between earnings and its components and dividends. According to Sloan (1996) investors have difficulty in assessing the persistence of earnings. Other literature shows that managers are somewhat optimistic in assessing the persistence of earnings (Jensen 1993, DeAngelo et al. 1996).

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2 Literature review and hypotheses

This chapter will describe all the relevant prior literature on fair value adjustments and

dividend policies. The first section will give a general description of fair value accounting; the second section describes the literature on fair value accounting and investment property. The third section describes literature on earnings and dividends and the persistence of earnings. The fourth section covers the dividends policy of the different countries. The fifth section covers the hypotheses.

2.1 General literature on fair value accounting

Fair value accounting is since the adoption of IFRS in 2005 in the European Union becoming more important. The International Accounting Standards Board (IASB) is focusing on using the fair value method to appraise assets, especially for assets such as financial instruments. With fair value accounting firms report the fair values of the different components of the balance sheet. And the periodic changes of the fair values are reported in the income statement.

The use of fair value measurements should improve the relevance of the financial report for investors; the investors are more able to make better decisions (Barth and Landsman 1995, Barth 2007) in comparison to historic cost accounting. It is expected that fair value reporting increases the transparency and decision relevance of accounting information (Barth and Clinch 1998, Barth et al. 2001, Hitz 2007). Another characteristic of fair value accounting is that the fair value adjustments create transitory components in the income statement. This leads to volatility of income (Penman 2007, Plantin et al. 2008). And create difficulty for managers and investors to assess the performances of a firm (Petroni and Wahlen 1995, Cornett et al. 1996, Hung and Subramanyam 2007). This will also affect the dividend policy of a firm because that will be based on the performance of the firm and the income statement. Using fair value adjustments in the aggregated income will lead to noise in decision-making if the investors are not able to assess the information in the earnings components (Petroni and Wahlen 1995, Cronett et al. 1996, Hung and Subramanyam 2007). And regulators are afraid

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that unrealized income from fair value adjustments will lead to higher dividends and by increasing the leverage expose a company to more risk (Enria et al. 2004).

2.2 Fair value accounting and investment property (IFRS)

Under IFRS investment property falls under IAS 40 rules. The IAS 40 Investment property standard applies to investment property under IFRS. The IASB define investment property as: “Investment property is property (land or a building - or part of a building - or both) held (by

the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both…” (IFRS.org, 2012). IAS 40 investment property does not apply if property is used for

production or administrative tasks. After the recognition of the asset IAS 40 allows to choose between two models of measurement: a cost model or a fair value model. The cost model for investment property is according to IAS 16. The property will be accounted for by taking the costs less the accumulated depreciation and minus the accumulated impairment losses. With the fair value model the assets will be revalued at fair value. Gains and losses from fair value revaluations are recognized in the income statement.

The study of Christensen and Nikolaev (2009) showed that the same amount of firms in the United Kingdom and Germany use fair value or historic cost accounting for investment property. However firms with real estate as primary business activity use primarily fair value accounting for its investment property.

Quagli and Avvolone (2010) researched the choice for the fair value model for appraising investment property at real estate firms. The study was limited to countries of the European Union that did not allow fair value measurements before the adoption of IFRS in 2005. The selected real estate firms were listed in Finland, France, Germany, Greece, Italy, Spain and Sweden. The results show that the drivers for the choice of the fair value method were information asymmetry, contractual efficiency and managerial opportunism. However the results also show that how bigger the firm is that the firm is less likely to choose the fair value method for appraising investment property.

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2.3 Earnings and dividends

Litner (1956) developed a framework that links dividends and reported earnings. The author states that the dividend policy of a company should be based on the persistent earnings. Earnings consist of persistent and transitory earnings; companies should not pay out the transitory earnings to its investors. In the case of fair value adjustments (unrealized income) only the persistent positive adjustments should be pay out to the investors. The partial

adjustment model show that companies try to pay out a percentage of the permanent earnings. And that companies change their current dividend payout to match the target ratio. Other research supports the link between earnings and dividends (DeAngelo et al. 1992,

Jagannathan et al. 2000, Brav et al. 2005, Goergen al. 2005). However there is a problem if management and investors cannot identify correctly the persistence component of earnings. Previous studies have claimed that managers and investors have difficulty in assessing the different components of earnings (Petroni and Wahlen 1995, Cornett et al. 1996, Hung and Subramanyam 2007) and are therefore not able to determine the actual performance of a company.

The relation of dividends with permanent earnings is researched by different authors. The study of Kormendi and Zarowin (1996) investigated more than 300 firms over 40 years. The results showed that firms with more persistent earnings have higher dividend payouts.

However the authors also concluded that the dividend policy over a long period is also related to other factors then permanent earnings such as tax policy, clientele effects, transaction costs etcetera. Other studies of Edwards and Mayer (1985), Grullon et al. (2002), Jagannathan et al. (2000) support the link between the persistent component of earnings and dividends.

Goncharov and Van Triest (2011) investigated the effect of upward fair value adjustments of financial assets on dividend payouts. The study was done in a Russian setting from 2003-2006 during an economic growth of the economy. Russian listed firms were selected because the Russian GAAP required fair value accounting for financial instruments and require the disclosure of unrealized fair value adjustments in income in the footnotes. The results show that positive fair value adjustments were associated with lower dividend payouts. The two authors discuss two possible explanations for these results. A possible explanation is that management use the transitory income to opportunistically lower the dividend. By doing this management will shift wealth from the investors to the company. The authors think that this

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will only happen at companies with weak corporate governance. The second explanation for the result is that management thinks that the high growth in fair value adjustments is not-persistent and to lower the high growth expectation they will decrease the dividends.

2.4 Dividend policy of the different countries in the European Union

The different countries in the EU have legislation and guidelines for the dividend policy of firms. IFRS does not contain rules on the distribution of income. Some countries limit the distribution of income by guidelines or legislation (KPMG, 2008).

The following countries do not limit the distribution of income based on IFRS by local legislation or guidelines: Belgium, Finland, and Portugal. The following countries allow or make it possible to distribute income based on IFRS but require some modifications: Denmark, Greece, Ireland, Italy, The Netherlands and United Kingdom.

Denmark limits the distribution of unrealized fair value revaluations by legislation. There is an exemption for the fair value adjustments of financial assets. For example the modifications for Greece are that there are guidelines that limit the distribution of different types of income (KPMG, 2008, 320). The revaluations of investment property are non-distributable. This income is only distributable if the assets are sold and realized.

Ireland has legislation that defines what the distributable profit is and requires firms that prepare financial statements under Irish GAAP and IFRS to comply with this law.

Italy has legislation that requires some modification to fair value effects to a non-distributable reserve.

In The Netherlands it is required by legislation to have a legal reserve (KPMG, 2008). This reserve is not distributable to shareholders. There are no other limitations on the distribution of income.

The United Kingdom requires a balance-sheet test and if this is negative than the distribution of income prohibited. The balance-sheet test is based on local GAAP or IFRS.

In other countries it is not permitted to distribute dividend based on IFRS profits. The countries that do not allow the distribution of income based on IFRS are: Austria, Belgium, France, Germany, Luxembourg, Spain and Sweden.

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The different countries in Europe all have different legislation on the distribution of dividend / income. Some countries limit the distribution of dividend and other limit the legislation to IFRS. It will make it difficult to compare the different countries.

2.5 Hypotheses

Studies such as Lintner (1956) and Jagannathan et al. (2000) state that the non-persistent earnings components are not related to dividends. However the persistent component of fair value adjustment should affect the dividend policy. According to studies from DeAngelo et. al. (1996), Hirshleifer et al. (2004) Jensen (1993) and Sloan (1996) management and investors have difficulty to assess persistence of earnings and are inclined to be optimistic. However I suspect that management can assess the fair value adjustments correctly. Management will not distribute un-realized income to shareholders. However the results of Goncharov and Van Triest (2011) showed that positive fair value adjustments have a negative influence on the dividends payouts. These results may be influenced by the economic growth during the sample period or the specific setting of Russia. The authors propose two possible explanations for the negative relationship between fair value adjustments and dividend payout. The first is that managers prefer to keep the profits inside the firm instead of payout the profits and use the fair value gains opportunistically to justify the lower dividend payout. A possible second explanation is that management is afraid to sustain a high sales growth. Or that management needs to finance possible investments due to high growth. According to most of the literature the following hypotheses are stated;

Hypothesis 1: There is no effect of fair value adjustments on dividend payouts. Hypothesis 2: Fair value adjustments are not persistent.

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3 Research design

This research consists of a quantitative archival research. I will examine the effect of fair value adjustments on dividend policy in Europe. The fair value adjustments consist of the revaluations of investment property. Not all companies use fair value accounting for their investment property so the selected companies will mainly consist of companies with real estate. The sample consists of 15 countries in Europe that adopted IFRS. The list of countries consists of: The Netherlands, Belgium, United Kingdom, France, Germany, Spain, Portugal, Italy, Greece, Denmark, Finland, Sweden, Ireland, Luxembourg and Austria. The capital market data has been selected from Worldscope. The sample period is from 2006 till 2010. The proposed sample period contains a period of economic growth and a year (2009) with a declining economic growth.

The research is based on the study of Goncharov and Van Triest (2011) and uses the partial adjustment model of Lintner (1956). The model to assess the persistence of fair value adjustment is used by Goncharov and Van Triest (2011) and is similar to Sloan (1996).

NIit = γ0+ γ1NIBREVit-1+ γ2REVit-1 + ε (1)

NIit is net income in year t, NIBREVit-1 is net income before fair value adjustments in year t21, and REVit21 is the mark-to-market increment on (revaluation of) short-term and long- term investment property in year t-1. All variables are scaled by average total assets as in Sloan (1996).

The second model that Goncharov and Van Triest (2011) use investigates the impact between earnings components and the dividend policy. This model is based on Lintner’s partial

adjustment model (1956). However the chosen variables and how to scale them are based on research of Fama and Babiak (1968) and Fama and French (2002).

ΔDIV

it

=

List of variables

NIit = Net Income in year t

Niit-1 = Net Income in year t-1

REVit = Positive fair value adjustments investment property in year t

REV_Dit = Dummy variable; 1 for fair value adjustments and 0 for no

adjustments

DIVit = Dividend in year t, scaled by average total assets

DIVit-1 = Dividend in year t-1, scaled by average total assets

SIZEit = Natureal logarithm of total assets at the beginning of year t

LEVit = Ratio of total debt to total assets

GROWTHit = Percentage change in sales in year t

CASHit = Cash in year t, scaled by average total assets

NIBREVit = Net income before fair value adjustments in year t

NIBREVit-1 = Net income before fair value adjustments in year t-1

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4 Results

4.1 Sample selection and descriptive statistics

The sample consists of listed firms of fifteen countries in the E.U. over the period 2006-2010. 2005 is the first year when IFRS was mandatory for the financial statements of listed firms in the E.U. To calculate the different variables the first possible year for the sample period is 2006.

The proportion of firms paying dividend for The Netherlands is 74% and 11% of the sampled firm-years consist of a revaluation of the investment property. In table 1 a reports the

percentage of revaluations for each country. Table 1 a. Percentage of revaluations

Country Revaluations Austria 12% Belgium 13% Denmark 11% Finland 5% France 5% Germany 7% Greece 7% Ireland 5% Italy 3% Luxembourg 14% Portugal 6% Spain 4% Sweden 1% The Netherlands 11% United Kingdom 5%

The total final sample for the country The Netherlands consists of 503 firm-year observations and they represent 192 unique firms. The descriptive statistics for The Netherlands is reported in table 1. The descriptive statistics for the test variables and other tables of the fourteen other countries are in the appendix. 11% of the sampled firm-years contained a revaluation of long-term or short-long-term investment property. The median of REVit is 0 that suggest that most firms do not make revaluations of investment property. The variable GROWTHit shows a big difference between the mean (0.057) and median (0.013) this suggest that firms with high growth opportunities affect the mean figure upwards.

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Table 1 b. Descriptive statistics The Netherlands

Mean Std dev. Q1 Median Q3

NIit 0.018465 0.16537 -0.01062 0.033561 0.083537

Niit-1 0.02924 0.138537 0.00184 0.049937 0.093402

REVit 2.47E-09 2.04E-08 0 0 0

REV_Dit 0.115646 0.320164 0 0 0 ∆DIVit 0.001582 0.143475 -0.00203 0 0 DIVit-1 0.025532 0.104303 0 0.012488 0.028826 SIZEit 13.36847 2.263904 11.68742 13.38919 14.60929 LEVit 0.243939 0.18499 0.082633 0.233179 0.364696 GROWTHit 0.057156 2.776995 -0.12131 0.013808 0.139685 CASHit 0.083425 0.120712 0.018751 0.044152 0.104956

4.2 Univariate analysis

Following the study of Goncharov & Van Triest (2011) I have started with a series of univariate tests for the countries. I use the same models and tests as Goncharov and Van Triest (2011). Hypothesis 1 predicts that fair value adjustments for investment property have no distribution consequences. I analyze this impact by evaluating the changes in dividends of revaluing firms relative to non-revaluing firms. According to Goncharov and Van Triest (2011) and Francis and Lennox (2008) using a difference in dividends in the tests has an advantage over using the level of dividends. It will help control for unobservable

characteristics so long as they are fixed at a firm level. Just as Goncharov and Van Triest (2011) I am calculating dividend changes on three different ways. I correct for scale by regressing firm-level dividend changes on the natural logarithm of total assets and by scaling it by using average total assets. Dividend changes to earnings are calculated by dividing the dividend changes by net income. All the variables are scaled by average total assets except the indicator that is to control for size differences.

The results of the univariate tests for The Netherlands are summarized in table 2. Panel A of table 2 shows that almost 69% of firms reporting positive fair value adjustments increase their dividends and that 77% of firms that do not report positive fair value adjustments increase their dividends. The difference is not-significant based on a χ2–test. The other 14 countries show the same results (see appendices); the difference is not-significant. Panel B of table 2 shows the results of a comparison of the means of dividends. It shows that the scale-adjusted

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dividend changes dividends are not significantly lower for revaluing firms (p = 0.0687). The results also show no significant difference for the means of dividend changes to total assets (p=0.7159) and dividend changes to earnings (p=0.8130). The results of the other countries matches the results for The Netherlands, the results are tabulated in the appendix.

I do not reject hypothesis 1, so fair value adjustments do not have distribution consequences.

Table 2. Univariate test The Netherlands

Panel A. Descriptive evidence

Scale-adjusted dividend changes (n) <0 >0 Total Non-revaluers 163 560 723 Revaluers 28 62 90 Total 191 622 813 χ2_–test _0.002215

Panel B. Comparison of the means

N Scale-adjusted dividend changes Dividend changes to total assets Dividend changes to earnings Non-revaluers 723 151.199 - 0.008334 103019.7 Revaluers 90 1763.75 - 0.003894 -199714 Difference (t-test) 1.8231* 0.3641 0.2366 * significant at 0.1 level ** significant at 0.05 level *** significant at 0.01 level

Overall, the results show that there is no evidence that fair value adjustments have distribution consequences.

4.3 Multivariate analysis

To check the persistence of the fair value adjustments I will use the model from Goncharov and Van Triest (2011) to answer hypothesis 2. The model is defined as:

NIit= γ0+ γ1NIBREVit-1+ γ2REVit-1+ ε (1)

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NIit is net income in year t, NIBREVit-1 is net income before fair value adjustments in year t -1, and is the revaluation of short-term and long-term investment property in year t-1. These variables are all scaled by average total assets as in Sloan (1996).

Table 3 shows the results of the earnings persistence analysis. To correct for the cross-observation correlation in variables, I use the clustered standard errors similar to Goncharov and Van Triest (2011). The variables are clustered at firm-level. The sample for The

Netherlands consists of 503 firm-years and 192 clustered firms. If the coefficients of REV it-1 are zero then the fair value adjustments would be transitory, the results in table 3 show that coefficients are not zero so they are not transitory. The coefficient of REV it-1 (-116559.6) is negative and would indicate a declining profitability. The coefficient is not significant

(p=0.268) so there is no strong support for the claim that fair value adjustments are persistent. In column b of table 3 are the results were the variable REV it-1 is replaced by the indicator REV_D it-1. The coefficient of REV_D it-1 is positive (.0043945) and is not statistically significant (p=0.727). The other countries show the same results (see appendix) except for Italy, Finland and the United Kingdom. The coefficient for Italy on REV it-1 is .7288332 (p=0) and on REV_D it-1 .1062751 (p=0.028). The coefficients are positive and significant; these results suggest that fair value adjustments are persistent. These three countries allow the distribution of profit based on IFRS. Hypothesis 2 is only not rejected for the countries of Italy, Finland and United Kingdom.

Table 3. Earnings persistence analysis. The Netherlands

Variables (a) (b) Constant -.0022939 (-0.23) -.0032323 (0.43) NIBREVit-1 .5193635 (2.21)** .5179894 (2.20)** REV it-1 -116559.6 (-1.11) REV_D it-1 .0043945 (0.35) N 503 503 Adj. R2 0.19 0.19 * significant at 0.1 level ** significant at 0.05 level *** significant at 0.01 level 17

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Goncharov and Van Triest (2011, p.58) developed a model to evaluate the impact of the revaluation and historical cost component on dividends. The model is based on Lintner’s partial adjustment model (1956) on earnings components and the dividend policy.

ΔDIV

it

=

In model 3 net income is decomposed into net income before revaluation of investment property and fair value adjustments.

ΔDIV

it

=

The results of model 2 are shown in table 4 column a. Consistent with the Lintner framework and Goncharov and Van Triest (2011) the result for the coefficient for lagged dividends is negative. In contrast to the coefficient on

NI

it that is negative, the coefficient for net income year t-1 is positive. The coefficient on the variable NIit is negative and not statistically

significant. But the coefficient on NIit-1 is positive and statistically significant (p=0.030). The results for model 3 are published in column b till d in table 4. The effect of income before revaluations (column b) is negative for year t and statistically not significant and the coefficient is statistically significant for year t-1. However the coefficient for REV it is

negative and only statistically significant at the 10% level (p=0.054). The results are the same if the variable for revaluations if replaced by the indicator for revaluations. There is no strong evidence for the claim that fair value adjustments do not affect dividend policy. Model 3 is further extended by including control variables such as SIZE it, LEV it, GROWTH it and CASH it. The results are shown in column d and e. The coefficient on control variables are negative and not statistically significant except for GROWTH it (p=0.05).. It appears that GROWTH has an impact on the growth of dividends. The R2 of model 2 and 3 is 0.47. Table 4. Dividend policy analysis The Netherlands

Variables (a) (b) (c) (d) (e)

Constant 0.0196 (3.44)*** 0.0198 (3.42)*** .0170 (6.66)** * .0040 (0.74) 0.0949 (1.38) NIit -0.0212 _(-0.74) NIit-1 0.0777 _(2.19)** NIBREVit -.0211 (-0.74) -0.0214 (-0.74) -0.0120 (-0.32) -0.0125 (-0.33) 18

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NIBREV it-1 0.0780 (2.19)** 0.0787 (2.19)** 0.0863 (2.53) 0.0856 (2.54)** REV it -69910.86 (-1.94)* -36897.11 (-1.53) REV it-1 REV_Dit -0.0103 _(-1.59)* 0.0044 _(0.74) DIVit-1 -0.9008 _(-9.28)*** -0.9010 _(-9.28)*** -0.9016 _(-9.28)*** -0.8048 _(-8.97)*** -0.8034 _(-8.94)*** SIZEit -0.0048 _(-1.19) -0.0049 _(-1.18) LEVit -0.0471 _(-1.32) -0.0495 _(-1.31) GROWTHit -0.0074 _(-1.98)** -0.0074 _(-1.97)* CASHit -0.0153 _(-0.75) -0.0141 _(-0.69) N 503 503 503 503 503 Adj. R2 _0.47 _0.47 _0.47 _0.5 _0.5 * significant at 0.1 level ** significant at 0.05 level *** significant at 0.01 level

The majority of the other countries show the same results as The Netherlands with negative coefficients for revaluations and they are not statistically significant.

The results of Germany (appendix) differ from that of The Netherlands. Germany also shows negative coefficients on revaluations and the revaluation indicator however the coefficients are also statistically significant with a p-value smaller then 0.01. Model 2 and 3 has a R2 of 0.44, that is significantly higher than the majority of R2’s of the other countries.

The results of Ireland (appendix) are largely the same but the coefficient on revaluations (appendix: table 4 column b) is positive .0078394 (p=0.93) however it is statistically not significant.

The coefficients on revaluations are positive for Spain (.1054809). This coefficients is not statistically significant with a p-value of 0.53.

Sweden has also positive coefficients on REV it (appendix table 4 column b and d) of

.1987362 (appendix table 4 column b) and .3134144 (appendix table 4 column d). The p-value is respectively 0.101 and 0.011.

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The United Kingdom also shows positive coefficients on REV it however they are not statistically significant.

Overall, the results show that the coefficients for the investments property revaluations and the indicator for revaluations are negative. There is no strong evidence that support that fair value adjustments has an impact on the dividend policy. And that there is no strong evidence that fair value adjustments are persistent. Hypothesis 1 and 2 are not rejected.

4.4 Robustness test

This section will investigate the robustness of my results. I have conducted a robustness test for the sample The Netherlands by removing the scaling from the variables, the test conducted with clustering the standard errors by firm. The results for model 1 are in table 5 and the results for model 2 and 3 are reported in table 6. The sample increased from 503 firm-years to 731 firm-years due to missing data on the available total assets. The amount of firms

increased from 192 to 221.

The results are comparable for the scaled and unscaled variables. Table 5 column a shows that coefficient on REV it is also negative however this time it is statistically significant with p-value of 0.034. It appears that the results are stronger. And that the fair p-value adjustments are persistent. On basis of these results I reject hypothesis 1.

Table 5. Earnings persistence analysis The Netherlands.

Variables (a) (b) Constant 2617.065 6521.124 0.23 0.53 NIBREV it-1 0.8131562 .8128987 (16.67)*** (16.70)*** REV it-1 -946514 (-2.13)** REV_D it-1 -69150.92 (-1.53) N 731 731 Adj. R2 0.8 0.8 * significant at 0.1 level ** significant at 0.05 level *** significant at 0.01 level 20

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If I compare the results with results of table 4 they are quite similar. The most import

coefficient is on REV it (table 6 column b) to check if the hypothesis holds up. The coefficient is also negative but it is just a little bit more statistically significant with a p-value of 0.048. If we compare that to the previous results that show a p-value of 0.054, the difference is quite small. The other coefficients on REV it and REV_D are also negative (column c, d and e) and statistically significant. I can conclude based on this robustness test that I reject hypothesis 2. Fair value adjustments have an effect on dividend policy.

Table 6. Dividend policy analysis The Netherlands

Constant 9595.315 (3.56)*** 9919.023 (3.62)*** 10118.31 (3.54)*** 6571.266 (1.24) 6622.203 (1.25) NIit -0.0061484 (-0.18) NIit-1 .1502539 _(3.83)*** NIBREVit -0.0060315 -0.0061023 -0.0032536 -0.003321 (-0.18) (-0.18) (-0.10) (-0.10) NIBREV it-1 .1503013 (3.38)*** .1503255 (3.38)*** .1520157 (3.68)*** .1520676 (3.68)*** REV it -135349.1 -190069.8 (-1.98)** (-2.31)** REV it-1 REV_Dit -9023.698 -0.4581209 (-1.80)* (-2.11)** DIVit-1 -0.4499751 -0.4503863 -0.450379 -0.4579657 -0.4581209 (-5.34)*** (-5.34)*** (-5.34)*** (-4.79)*** ( -4.79)*** SIZEit -0.0002539 -0.0002537 (-2.78)*** (-2.78)** LEVit -20838.44 22054.04 (1.02) (-1.06) GROWTHit -28.84941 -28.75875 (-1.31) (-1.27) CASHit -0.0148607 -0.0148243 (-1.94)* (-1.93)* N 731 731 731 731 731 Adj. R2 _0.44 _0.44 _0.44 _0.45 _0.45 * significant at 0.1 level ** significant at 0.05 level *** significant at 0.01 level 21

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5 Conclusion

Since 2005 it was mandatory for public listed firms in the European Union to publish their financial statements according to IFRS. Fair value accounting plays a big role in IFRS. The changes in fair value assets are recorded in the income statement. However these fair value adjustments can contain realized and unrealized income. It can be a problem if the unrealized income is distributed to the shareholders and this income is not persistent. Higher dividends can increase the leverage and the risk of a firm.

The research objective of this paper is to study the impact of fair value adjustments on dividend policy. This study is a replication of the study of Goncharov and Van Triest (2011). It will contribute to existing literature because the research setting is different, the sample consists of fifteen countries of the European Union and the sample period is from 2006-2010. I examined the impact of fair value adjustments on dividend policy and the persistence of fair value adjustments by using the Lintner framework. I limited my research on fair value

adjustments to investment property revaluations. I did find that positive fair value adjustments have a negative relationship with dividend payouts but I did not find strong evidence to support this claim. I did not find evidence that fair value adjustments are persistent in all fifteen countries. There is only evidence that fair value adjustments are persistent in Italy, Finland and United Kingdom.

There are several limitations to this study. The fair value adjustments are limited to positive fair value adjustments. It is possible that the inclusion of negative fair value adjustments lead to different conclusions. And the sample-period (2006-2010) consists of a period of economic growth with exception for the year 2009. This is probably of influence on the dividend

payouts.

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Appendices

Austria

Table 1 Descriptive statistics

NIit _{0.006467 0.264199 0.001894 0.057232 0.125387} Niit-1 _{0.032323 0.294014 0.019438 0.069799} _0.13386 REVit _{0.001983 0.012909} ₀ ₀ ₀ REV_Dit _0.147766 _0.35548 ₀ ₀ ₀ ∆DIVit _{0.001431 0.036692} _-0.00259 _{0 0.002813} DIVit-1 _{0.029267 0.039535} _{0 0.016748 0.043448} SIZEit _{13.02453 1.988101 11.60217} _{12.7333 14.45145} LEVit _{0.250095 0.194123 0.088931 0.232204 0.365076} GROWTHit _{-95.4022 1625.302} _{-0.07671 0.051592 0.158733} CASHit _0.208011 _{0.24695 0.041684 0.115111 0.269145} Table 2 <0 >0 Total Non-revaluers 88 321 409 Revaluers 11 44 55 Total 99 365 464 Chi square test 0.0205

N Scale-adjusted dividend changes Dividend changes to total assets Dividend changes to earnings Non-revaluers 409 327.0183 0.003523 -0.01471 Revaluers 55 172.3174 0.001594 0.00792 Difference (t-test) 0.4458 0.4019 -0.1512 Table 3 Variables (a) (b) Constant .0051613 (0.28) .0053073 (0.26) NIBREV it-1 .0632316 (0.64) .0621734 (0.62) REV it-1 -.2129491 (-0.42) 25

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REV_D it-1 -.0056877 (-0.19) N 291 291 Adj. R2 0.01 0.01 Table 4

Constant .0100197 (3.70)*** .0104224 (3.69)*** .0111847 (3.65)*** .0175713 (1.09) .0166582 (0.99) NIit -.0015209 _(-0.10) NIit-1 .0218796 _(1.42) NIBREVit - .0012093 (-0.08) -.0012575 (-0.08) - .0056858 (-0.36) - .0057157 (-0.36) NIBREVit-1 .0221422 (1.43) .0218385 (1.43) .0225797 (1.49) .0223759 (1.49) REV it -.1066483 (-1.82)* -.0814777 (-1.12) -.025587 (-0.50) REV_Dit -.005271 _(-1.34) -0.0031501 _(-0.64) DIVit-1 -.317283 _(-3.18)*** -.3222355 _(-3.20)*** .3285781 _(3.65)*** -.3466337 (-_3.52)*** -.3496709 _(-3.51)*** SIZEit .0000773 _(0.07) .0001695 _(0.14) LEVit - .0299635 (-_2.48)** -.0296177 _(-2.43)

GROWTHit 4.19e-07 _(1.98)** 4.18e-07 _(1.97)*

CASHit .0002389 _(0.02) .0003547 _(0.03)

N 291 291 291 291 291

Adj. R2 _0.13 _0.13 _0.13 _0.16 _0.16

Belgium

NIit _{0.043782 0.286358 0.015251 0.072008 0.139287} Niit-1 _0.047397 _{0.2932 0.015875 0.078465 0.145619} REVit _0.002845 _0.01789 ₀ ₀ ₀ REV_Dit _{0.150718 0.358202} ₀ ₀ ₀ ∆DIVit _{0.001301 0.053311} _-0.00164 _{0 0.003744} 26

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DIVit-1 _{0.048345 0.095516} _{0 0.024588 0.050339} SIZEit _{13.07685 1.732313} _{11.7686 12.79185 14.33131} LEVit _{0.226948 0.220019 0.035571 0.184965 0.341255} GROWTHit _{0.184817 1.265963} _{-0.0677 0.047091 0.193509} CASHit _{0.116542 0.191829 0.015645 0.062547 0.145659} Table 2 <0 >0 Total Non-revaluers 108 489 597 Revaluers 19 69 88 Total 127 558 685 Chi square test 0.002501

N Scale-adjusted dividend changes Dividend changes to total assets Dividend changes to earnings Non-revaluers 597 -2.28908 0.00204 0.075339 Revaluers 88 96.70612 0.006142 -0.26596 Difference (t-test) -0.1308 -0.717 4 2.0546* * Table 3 Variables (a) (b) Constant .0409815 (6.44)*** .0640848 (3.30)*** NIBREV it-1 0.2794668 (2.55)** .2495141 (2.54)** REV it-1 0.1770689 (0.78) REV_D it-1 -.0198166 (-0.93) N 63 63 Adj. R2 0.08 0.08 Table 4

Constant .031113

2 .030989

.0315837

(3.47) .109965 .103397

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(3.45)** * 5 (3.34)** * 7 (1.47) 9 (1.47) NIit .012311_{5 (0.32)} NIit-1 .045642 4 (1.86)* NIBREV it .028811 8 (0.57) .0488058 (0.87) .048805 8 (0.87) .050067 6 (0.90) NIBREV it-1 .051126 1 (1.72)* .0456044 (1.52) .015301 8 (0.43) .008102 (0.22) REV it -.050969 3 (-1.03) -.054492 5 (-1.06) REV it-1 REV_Dit -.5932316 (-4.02)*** DIVit-1 -.591503 7 (-4.10)** * -.593126 2 (-3.98)** * -0.901604 4 (-9.28)*** -.628710 9 (-3.98)** * -.629789 4 (-4.06)** * SIZEit -.005453 8 (-1.15) -.005003 4 (-1.11) LEVit .002610 8 (0.08) .006156 2 (0.19) GROWTH it -.004085 (-0.84) -.004467 3 (-0.95) CASHit -.120332 1 (-1.38) -.115654 2 (-1.39) N 63 63 63 63 63 Adj. R2 _0.33 _0.34 _0.33 _0.38 _0.38

Denmark

Table 1. Descriptive Statistics

Variable Mean Std dev. Q1 Median Q3

NIit _{-0.10304 0.698697} _{-0.10149 0.033182 0.133568}

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Niit-1 _{-0.04632 0.553302} _{-0.06774 0.062217} _0.14343 REVit _{0.002248 0.015017} ₀ ₀ ₀ REV_Dit _{0.095477 0.294243} ₀ ₀ ₀ ∆DIVit _{-0.02293 0.268261} _-0.00301 _{0 0.000223} DIVit-1 _{0.055887 0.276042} _{0 0.011436 0.041376} SIZEit _{14.47271 1.891441 13.17311 14.33522 15.84274} LEVit _{0.29107 0.248281 0.077744 0.243417 0.453351} GROWTHit _{0.002129 9.619321} _{-0.09142 0.058227} _0.18691 CASHit 0.207726 0.334348 0.038366 0.09781 0.226328 Table 2. <0 >0 Total Non-revaluers 172 637 809 Revaluers 27 73 100 Total 199 710 909 Chi square test 0.002448

N Scale-adjusted dividend changes Dividend changes to total assets Dividend changes to earnings Non-revaluers 809 99.37434 -0.00239 0.069081 Revaluers 100 -3838.63 -0.00297 -0.06782 Difference (t-test) 0.3233 0.0219 0.4335 Table 3 Variables (a) (b) Constant -.0681525 (-3.06)*** -.0621001 (2.71)*** NIBREVit-1 .734138 _{(8.48)*** .7340678 (8.50)***} REV it-1 .4303721 _(0.87) REV_D it-1 -.0579383 (-0.60) N 398 398 Adj. R2 0.34 0.34 Table 4

Constant .0320385 (6.29)*** .0318488 (6.17)*** .032699 (2.04)** .055232 7 (1.71)* .0571917 (1.76)* 29

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NIit .0095714 _(2.02)** NIit-1 .0221959 _(1.62) NIBREVit .0096892 (2.02)** .0096275 (2.04) .01065 (1.67)* .0109043 (1.71)* NIBREVit-1 .0217144 (1.60) .0218901 (1.62) .026196 9 (1.59) .026336 (1.60) REV it .1152269 (0.45) .201877 6 (1.06) REV_Dit -.0060218 (-0.49) .0106763 (.97) DIVit-1 -.9474373 (-26.66)*** -.9473394 (-26.60)*** -.9475912 (-26.67)*** -.952911 1 (-29.09)* ** -.9529093 (-29.10)*** SIZEit -.000658 8 (-0.30) -.00078 (-0.35) LEVit -.056164 (-3.83)** * -.0586767 (-3.89)*** GROWTHit .000166 3 (1.11) .0001663 (1.11) CASHit .014133 (0.65) .0141073 (0.65) N 398 398 398 398 398 Adj. R2 _0.94 _0.94 _0.94 _0.95 _0.95

Finland

NIit _{-0.01797 1.006605} _{-0.02515 0.072226 0.171164} Niit-1 _{0.049821 0.315346} _{-0.00309 0.090416 0.184787} REVit _0.002845 _0.01789 ₀ ₀ ₀ REV_Dit _{0.047146 0.212215} ₀ ₀ ₀ ∆DIVit _{-0.00819 0.069498} _-0.0174 _{0 0.011228} DIVit-1 _{0.08393 0.102319 0.019514 0.055527 0.108844} 30

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SIZEit _{12.73369 1.870792 11.35144 12.41187 14.15219} LEVit _{0.297566 0.505118 0.118117 0.263755 0.390794} GROWTHit _{-0.1292 2.275975} _{-0.08517 0.038234 0.132756} CASHit _{0.160259 0.180368 0.040882 0.103359 0.219445} Table 2 Panel A & B <0 >0 Total Non-revaluers 192 428 620 Revaluers 20 12 32 Total 212 440 652 Chi square test 0.000193

N Scale-adjusted dividend changes Dividend changes to total assets Dividend changes to earnings Non-revaluers 620 61.24651 -0.00061 -0.6838 Revaluers 32 681.0098 -0.00243 -0.01254 Difference (t-test) -1.0635 0.1329 -0.2684 Table 3 Variables (a) (b) Constant -.1347001 (-2.41)** -.1404194 (-2.42)** NIBREVit-1 2.366012 _(3.36)*** 2.369824 _(3.37)*** REV it-1 1.602429 (2.11)** REV_D it-1 .1881312 (1.74)* N 403 403 Adj. R2 0.55 0.55 Table 4

Constant .0188651 (5.78)*** .0188862 (5.71)*** .0192961 (5.82)*** .0306404 (1.38) .0314077 (1.42) NIit -.016834 _(3.48)*** 31

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NIit-1 .1014968 _(3.06)*** NIBREVit - .0169783 (-3.46)*** - .01693 (-3.47)*** .0005585 (0.05) .0003947 (0.03) NIBREV it-1 .1020997 (3.05)*** .1020166 (3.06)*** .0996304 (3.60)*** .0998245 (3.60)*** REV it .1180566 (0.48) .2139174 (0.86) REV_Dit -.0042326 (-0.86) .0042494 (0.86) DIVit-1 -.3862325 (-6.81)*** -.3867794 (-6.80)*** -.3877146 (-6.82)*** -.4107557 (-6.86)*** -.4112861 (-6.86)*** SIZEit -.0010169 (-0.65) -.0010641 (-0.69) LEVit - .0164364 (-1.31) .0061562 (0.19) GROWTHit -.0095218 (-2.10)** -.0094932 (-2.10)** CASHit .0450409 _(2.09)** .0446331 _(2.05)** N 403 403 403 403 403 Adj. R2 _0.26 _0.26 _0.26 _0.28 _0.28

France

NIit _{2.244943 104.3449} _{-0.01582 0.053421 0.114427} Niit-1 _{0.022077 0.278014} _-0.00069 _{0.05924 0.121389} REVit _{0.002517 0.020473} ₀ ₀ ₀ REV_Dit _{0.061644 0.240563} ₀ ₀ ₀ ∆DIVit _{-0.00313 0.214427} _-0.00186 _{0 0.002493} DIVit-1 _{0.038654 0.203658} _{0 0.014201 0.035594} SIZEit _{12.68645 2.314099 11.07005} _{12.3757 14.10061} LEVit _{0.281031 1.412464 0.084534 0.210355 0.365638} GROWTHit _{-0.62473 12.56751} _{-0.05997 0.045879 0.135506} CASHit _{0.149216 0.189446 0.036896 0.092386 0.184871} 32

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Table 2 <0 >0 Total Non-revaluers 733 2739 3472 Revaluers 44 137 181 Total 777 2876 3653 Chi square test 0.00595

N Scale-adjusted dividend changes Dividend changes to total assets Dividend changes to earnings Non-revaluers 3472 365.9987 -0.00039 0.051313 Revaluers 181 345.927 0.001812 -0.02975 Difference (t-test) 0.0315 -0.094 0.225 Table 3 Variables (a) (b) Constant 3.439899 (1.02) 1.327741 (0.94) NIBREVit-1 -55.26561 (-1.01) -53.44923 (-1.02) REV it-1 -14.49634 _(-0.96) REV_D it-1 35.52098 _(1.05) N 2167 2167 Adj. R2 0.02 0.03 Table 4

Constant .026275 (8.18)*** .0265703 (8.11)*** .0268382 (7.88)*** .0545221 (1.46) .0546341 (1.47) NIit .0000126 _(3.70)*** NIit-1 .0466311 _(4.99)*** NIBREVit .0000126 (3.69)*** .0000139 (4.03)*** .0000115 (1.92) .0000113 (1.91)* NIBREV it-1 .0469877 (4.98)*** .0467686 (4.97)*** .054087 (4.87)*** .0541788 (4.89)*** 33

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REV it -.0640844 (-1.18) -.025587 (-0.50) REV_Dit -.0068074 (-1.48) DIVit-1 -.7878651 (-13.71)*** -.7879395 (-13.71)*** -.7880725 (-13.72)*** -.791281 (-15.00)*** -.7912936 (-15.01)*** SIZEit -.0018676 (-0.73) -.0018883 (-0.74) LEVit - .0158968 (-4.77)*** .0061562 (0.19) GROWTHit -.0029676 (-5.18)*** -.0029685 (-5.18)*** CASHit -.0110357 (0.56) -.0107588 (-0.55) N 2167 2167 2167 2167 2167 Adj. R2 _0.56 _0.56 _0.56 _0.58 _0.58

Germany

Table 1 Descriptive Statistics

NIit _{0.008751 0.383011} _{7.81E-05 0.059103} _0.13025 Niit-1 _0.015151 _{0.49309 0.001504 0.063604 0.138255} REVit _{0.000418 0.004015} ₀ ₀ ₀ REV_Dit _{0.083047 0.276021} ₀ ₀ ₀ ∆DIVit _{-0.00205 0.225303} _-0.00099 _{0 0.001381} DIVit-1 _{0.043269 0.177138} _{0 0.005992 0.036166} SIZEit _{12.73462 2.214935 11.21951 12.32374} _14.0207 LEVit _{0.226948 0.220019 0.035571 0.184965 0.341255} GROWTHit _-0.36466 _5.56635 _{-0.06643 0.045355 0.150377} CASHit _{0.229458 0.269756} _{0.05157 0.143502} _0.29985 Table 2 <0 >0 Total 34

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Non-revaluers 622 3058 3680 Revaluers 20 243 263 Total 642 3301 3943 Chi square test

7.96E-09 N Scale-adjusted dividend changes Dividend changes to total assets Non-revaluers 3680 84.99695 -0.02072 -1.09698 Revaluers 263 178.113 -0.01121 0.130676 Difference (t-test) -0.1572 -0.1379 -0.4309 Table 3 Variables (a) (b) Constant .0079747 (0.68) .0640848 (3.30)*** NIBREV it-1 .0000226 (0.83) .0000216 (0.80) REV it-1 -.3698172 _(-1.31) REV_D it-1 -.038678 (-1.25) N 1972 1972 Adj. R2 0.0001 0.0005 Table 4

Constant .0333225 (5.24) .0339242 (5.23)*** .0355001 (5.25)*** .0798733 (3.57)*** .0783449 (3.54)*** NIit .0018218 _(0.08) NIit-1 .0292862 _(1.97)** NIBREVit .0174173 (0.92) .0171796 (0.90) .0124702 (0.63) .0123788 (0.62) NIBREV it-1 -4.50e-07 (-0.01) -1.15e-06 (-0.03) -6.50e-07 (-0.02) -9.98e-07 (-0.03) REV it -.3810397 (-4.72)*** -.1510212 (-1.58) REV_Dit -.0233074 _(-3.82)*** -.0128806 _(-2.35)** DIVit-1 -.8425657 _(-10.12)*** -.8410073 _(-9.99)*** -.8408811 (-_9.95)*** -.8460475 (-10.24)*** -.8457421 (-10.21)*** 35

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SIZEit -.0024935 (-1.61) -.0023358 (-1.52) LEVit -.0575059 (-2.92)*** -.0554403 (-2.88)*** GROWTHit .000664 _(1.41) .0006607 _(1.39) CASHit -.0039378 (-0.31) -.0040962 (-0.32) N 1972 1972 1972 1972 1972 Adj. R2 _0.44 _0.44 _0.44 _0.44 _0.44

Greece

NIit _{-0.00622 0.281212} _{-0.06857 0.018094 0.093943} Niit-1 _{0.031212 0.303918} _{-0.0296 0.042506} _0.11414 REVit _{0.003645 0.030352} ₀ ₀ ₀ REV_Dit _{0.122066 0.327618} ₀ ₀ ₀ ∆DIVit _{-0.00791 0.064705} _-0.00843 _{0 0.001311} DIVit-1 _{0.042543 0.103784} _{0 0.013422 0.043196} SIZEit _{12.48351 1.438414 11.65876 12.43208 13.34611} LEVit _{0.337711 0.223402 0.184725 0.340712 0.471608} GROWTHit _{-0.97958 23.19076} _{-0.17658 0.020784 0.159316} CASHit _{0.081575 0.148354 0.001258 0.015571 0.090902} Table 2 <0 >0 Total Non-revaluers 508 825 1333 Revaluers 20 88 108 Total 528 913 1441 Chi square test

7.26E-07 N Scale-adjusted dividend Dividend changes to total Dividend changes to 36

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changes assets earnings Non-revaluers 1333 -17.6319 -0.00254 0.148637 Revaluers 108 -513.235 -0.00485 -0.01815 Difference (t-test) 1.9101* 0.3758 0.3068 Table 3 Variables (a) (b) Constant - .0195389 (-2.51)** -.0173122 (-2.14)** NIBREV it-1 .4780238 (7.25)*** .4763833 (7.22)*** REV it-1 .1152271 (0.80) REV_D it-1 -.0164448 (-0.82) N 639 639 Adj. R2 0.27 0.27 Table 4

Constant .008212 (2.68)* .0085257 (1.72)* .009082 (1.78)* .0255279 (1.81)* .0250843 (1.75)* NIit .0313505 _(1.81)* NIit-1 .0246934 _(1.29) NIBREVit .031883 (1.81) .0314526 (1.78) .0543026 (2.33)** .0541912 (2.31) NIBREV it-1 .0246241 (1.28) .0246754 (1.29) .0358887 (2.01) .0358605 (2.00) REV it -.0108949 (-0.61) -.0105758 (-0.54) REV_Dit -.0047184 _(-1.23) -.001029 _(-0.25) DIVit-1 -.3925827 _(-2.43)** -.3936008 _(-2.43)** -.3942049 _(-2.43)** -.4293906 _(-2.74)*** -.4294539 _(-2.73)*** SIZEit -.0009955 _(-0.91) -.0009575 _(-0.84) LEVit -.0142645 _(-1.13) -.0141122 (-_1.13) GROWTHit -.0005489 _(-2.67)*** -.0005482 (-_2.64) CASHit .0140417 _(0.87) .0141459 (0.88) N 639 639 639 639 639 37

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Adj. R2 _0.33 _0.34 _0.34 _0.37 _0.37

Ireland

NIit _{-0.22993 1.316116} _{-0.15352 0.045383 0.119663} Niit-1 _{-0.13395 0.635711} _-0.16095 _{0.04289 0.131465} REVit _{0.000418 0.004015} ₀ ₀ ₀ REV_Dit _0.066964 _0.25052 ₀ ₀ ₀ ∆DIVit _{-0.00144 0.046146} ₀ ₀ ₀ DIVit-1 _0.020151 _0.04755 ₀ _{0 0.025862} SIZEit _{12.4014 2.244505 11.03085 12.38956} _13.9325 LEVit _{0.259212 0.261255 0.014722 0.232552 0.369847} GROWTHit _{-5.18797 77.60823} _-0.12673 _0.04077 _0.23389 CASHit _{0.299793 0.315775} _{0.07397 0.173315 0.459327} Table 2 <0 >0 Total Non-revaluers 37 321 358 Revaluers 5 13 18 Total 42 334 376 Chi square test 0.01665

N Scale-adjusted dividend changes Dividend changes to total assets Dividend changes to earnings Non-revaluers 358 365.9987 -0.00039 -0.10968 Revaluers 18 345.927 0.001812 -0.16565 Difference (t-test) 0.0315 -0.094 0.1229 Table 3 Variables (a) (b) Constant - .0323933 -.0365969 38

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(-1.00) (-1.12) NIBREVit-1 1.462216 _(2.83)*** 1.461361 _(2.83)*** REV it-1 -.4593734 _(-0.33) REV_D it-1 .0590179 _(1.18) N 224 224 Adj. R2 0.5 0.5 Table 4 Variables (a) (b) (c) (d) (e) Constant .0103084 (2.18)** .0103238 (2.17)** .0106707 (2.15)** .0297201 (1.32) .0292297 (1.32) NIit -.005423 (-1.32) NIit-1 .0193729 (1.71)* NIBREVit - .0054323 (-1.32) -.0054231 (-1.32) -.0041641 (-1.21) -.0041724 (-1.21) NIBREVit-1 .0194047 (1.71) .0194742 (1.71)* .0174345 (1.58) .0173886 (1.58) REV it .0078394 (0.09) -.1445996 (-0.88) REV_Dit -.0045631 _(-1.10) -.0057716 _(-1.57) DIVit-1 -.5163084 (-_2.70)*** -.5164042 _(-2.69)*** -.5177257 _(-2.70)*** -.5260656 _(-2.77)*** -.5285007 _(-2.77)*** SIZEit -.0006831 _(-0.58) -.0006063 _(-0.53) LEVit -.0208076 _(-1.49) -.0205808 _(-1.49)

GROWTHit 8.25e-06 _(1.49) 8.42e-06 _(1.51)

CASHit - .017357 _(-1.83)* -.0178667 _(-1.85)*

N 224 224 224 224 224

Adj. R2 _0.3 _0.3 _0.3 _0.32 _0.32

Italy

NIit _{0.002255 0.215627} _-0.02592 _{0.03709 0.091103}

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Niit-1 _{0.002255 0.215627} _-0.02592 _{0.03709 0.091103} REVit _{0.000215 0.003061} ₀ ₀ ₀ REV_Dit _{0.027809 0.164516} ₀ ₀ ₀ ∆DIVit _{-0.00303 0.063034} _-0.00374 _{0 0.001739} DIVit-1 _{0.02803 0.068258} _{0 0.010516 0.033589} SIZEit _{13.40019 1.927742 12.11818 13.06253 14.55684} LEVit _0.283519 _{0.18829 0.137908 0.281643} _0.40613 GROWTHit _{-12.2184 325.5741} _{-0.09299 0.029268 0.145473} CASHit _{0.088039 0.161621 0.000343 0.011486 0.100431} Table 2 <0 >0 Total Non-revaluers 360 1034 1394 Revaluers 9 29 38 Total 369 1063 1432 Chi square test 0.348427

N Scale-adjusted dividend changes Dividend changes to total assets Dividend changes to earnings Non-revaluers 1394 -143.424 0.000348 0.13222 Revaluers 38 364.0481 -0.00186 0.54481 Difference (t-test) -0.2737 0.1944 -0.3262 Table 3 Variables (a) (b) Constant - .013477 (-2.04)** -.0158941 (-2.42)** NIBREV it-1 .7023497 (8.52)*** .7073951 (8.99)*** REV it-1 .7288332 _(6.86)*** REV_D it-1 .1062751 (2.21)** N 899 899 Adj. R2 0.32 0.33 Table 4

Constant .0170299 (3.92)*** .0170783 (3.92)*** .0172575 (3.94)*** .0302951 (2.38) .0301434 (2.32)** 40

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NIit .0161333 _(2.14) NIit-1 .0603848 _(3.37)*** NIBREVit .0161241 (2.14) .0164733 (2.17)** .0164048 (2.17)** .0164482 (2.18)** NIBREV it-1 .0604892 (3.37)*** .0599577 (3.34)*** .0665578 (3.92)*** .0664727 (3.89)*** REV it - .0678637 (-1.15) .0321948 (0.31) REV_Dit -.0064622 _(-1.96)** -.0007415 _(-0.17) DIVit-1 -.7135432 _(-4.10)*** -.7137132 _(-4.10)*** -.7140314 _(-4.10)*** -.718002 _(-4.24)*** -.7180589 _(-4.24)*** SIZEit -.0011367 _(-1.15) -.0011244 _(-1.11) LEVit -.0071791 _(-0.96) -.0071105 _(-0.95)

GROWTHit -2.74e-06 _(-2.09)** -2.75e-06 _(-2.10)**

CASHit .0466571 _(2.26)** .0466345 _(2.25)**

N 899 899 899 899 899

Adj. R2 0.58 0.58 0.58 0.6 0.6

Luxembourg

Table 1 Descriptive Statistics

NIit _{0.07831 0.378033 0.015639 0.120402 0.212053} Niit-1 _{0.035467 0.115616} _{0.01525 0.057523 0.089239} REVit _0.00704 _0.03265 ₀ ₀ ₀ REV_Dit _{0.175141 0.381166} ₀ ₀ ₀ ∆DIVit _{-0.00461 0.093331} _-0.00338 _{0 0.004272} DIVit-1 _0.053854 _0.09825 _{0 0.017423 0.053634} SIZEit _13.45637 _{1.8975 12.21964 13.55355} _14.6984 LEVit _{0.240234 0.237331 0.018814 0.187311} _0.41448 GROWTHit _-0.07988 _1.1163 _{-0.03237 0.073316 0.214683} CASHit _{0.192463 0.203931 0.041068} _{0.1289 0.284182} Table 2 <0 >0 Total Non- 48 192 240 41

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revaluers

Revaluers 9 30 39 Total 57 222 279 Chi square test 0.039393

N Scale-adjusted dividend changes Dividend changes to total assets Dividend changes to earnings Non-revaluers 240 581.4481 0.008187 0.112226 Revaluers 39 -149.303 -0.00235 -0.11424 Difference (t-test) 0.5049 0.8033 0.9975 Table 3 Variables (a) (b) Constant .0956852 (1.81)* .0263102 (2.20)** NIBREV it-1 .0470026 (0.17) .0308767 (0.11) REV it-1 -.6652969 _(-1.23) REV_D it-1 -.1598237 (-1.69) N 177 177 Adj. R2 0.01 0.03 Table 4

Constant .0227072 (2.30)** .0241727 (2.38)** .0243828 (2.26)** .0297257 (-0.65) .0278295 (0.51) NIit .0373224 _(1.86) NIit-1 .0223418 _(2.33)** NIBREVit .0378534 (1.87) .0372044 (1.79)* .035055 (1.68)* .0344998 (1.65)* NIBREV it-1 .0229985 (2.40)** .0225227 (2.28)** .0236921 (2.21)** .0232073 (2.15)** REV it - .1198545 (-1.87) -.1108467 (-1.60) REV_Dit -.0059509 _(-0.59) -.0041726 _(-0.45) DIVit-1 -.6046015 _(-2.76)*** -.6096464 _(-2.77)*** -.6081964 _(-2.76)*** -.6095902 (-2.64)*** -.6075569 (-2.64) 42

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SIZEit -.0001701 (-0.05) -.0000276 (-0.01) LEVit -.0105141 (-0.40) -.0112466 (-0.45) GROWTHit .0025454 _(0.35) .0025127 _(0.34) CASHit - .002116 (-0.09) -.001729 (-0.07) N 177 177 177 177 177 Adj. R2 0.39 0.39 0.39 0.39 0.39

Portugal

NIit _{0.035428 0.102696 0.012012 0.048848} _0.08263 Niit-1 _{0.035467 0.115616} _{0.01525 0.057523 0.089239} REVit _{0.000853 0.005108} ₀ ₀ ₀ REV_Dit _{0.098592 0.299168} ₀ ₀ ₀ ∆DIVit _{-0.00298 0.047866} _-0.00359 _{0 0.001071} DIVit-1 _{0.031847 0.058639} _{0 0.009351} _0.04203 SIZEit _{13.93149 1.483644 12.73688 13.83476 15.07751} LEVit _{0.446271 0.195216 0.292387 0.438367 0.555106} GROWTHit _{0.040741 0.200846} _{-0.03115 0.055999 0.146146} CASHit _{0.028528 0.099598 0.000189 0.001496 0.013004} Table 2 <0 >0 Total Non-revaluers 61 189 250 Revaluers 3 13 16 Total 64 202 266 Chi square test 0.295243

N Scale-adjusted dividend changes Dividend changes to total assets Dividend changes to earnings Non-revaluers 250 327.1531 0.001253 0.122164 Revaluers 16 860.5684 0.00621 0.043954 Difference (t-test) -0.3311 -0.3576 0.2821 43

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Table 3 Variables (a) (b) Constant .0248576 (2.08)** .0263102 (2.20)** NIBREV it-1 .2922722 (1.60) .2904582 (1.61) REV it-1 .5994028 _(0.51) REV_D it-1 -.0117213 (-0.42) N 142 142 Adj. R2 0.11 0.1 Table 4

Constant .0120461 (3.25)*** .0122978 (3.21)*** .0118338 (3.03)*** -.0223215 (-1.39) -.0197569 (-0.65) NIit .0323561 _(1.32) NIit-1 .0722456 _(2.55)** NIBREVit .0318104 (1.31) .0322076 (1.31) .0375193 (1.39) .0394592 (1.45) NIBREV it-1 .0722533 (2.56)*** .0719665 (2.53)** .0798091 (2.41)** .0801289 (2.44)** REV it - .14736 (-1.23) -.2818214 (-1.76)* REV_Dit .0029562 _(0.41) -.0000319 (-0.00) DIVit-1 -.5882206 (-4.90)*** -.589218 (-4.89)*** -.5878653 (-4.87)*** -.6228515 (-5.23)*** -.6210458 (-5.19) SIZEit .0020049 _(0.88) .0017989 _(0.81) LEVit .0131757 _(0.84) .0130221 _(0.84) GROWTHit - .0056174 (-0.35) - .005695 (-0.35) CASHit .0617932 (1.00) .0619133 (1.00) N 142 142 142 142 142 Adj. R2 _0.44 _0.44 _0.44 _0.46 _0.46 44

The effect of non-realized income from fair value adjustments on dividend policy