Managerial compensation and the corroboration effect of earnings and dividend announcements

Empirical studies have documented a joint announcement effect when earnings and dividends are announced within a short interval of ten days. We show that this phenomenon can occur in the presence of earnings and market value-based compensation schemes and when managers have a limited availability of discretionary accruals-conditions that are widely prevalent in practice. The reported earnings deviate from the actual earnings whenever the manager uses accruals to adjust his earnings-based compensation. In the presence of informational asymmetry, such earnings reports only partially reveal the firm's true value. The market value component in the compensation, however, induces the manager of a higher value firm to signal any residual private information. It is shown that dividends provide this residual, corroborative information.