An-Najah National University 

Faculty of Graduate Studies 
 

 

 

 
 

The Effect of Earnings Management on Dividend 

Payout and the Moderating Role of Financial 

Leverage: Evidence from Palestinian and 

Jordanian Banking Sector 
 

 

 

 
By 

Aseel Yousef Melhem 
 

 
 

 

 
Supervisor 

Prof. Dr. Abdul-Naser Nour 
 

Co- Supervisor 
Dr. Sameh Atout 

 

 
 
 

This Thesis is Submitted in Partial Fulfillment of the 

Requirements for the Degree of Master of Accounting, 

Faculty of Graduate Studies, An-Najah National University, 

Nablus, Palestine. 

2021 



ii 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
The Effect of Earnings Management on Dividend 

Payout and the Moderating Role of Financial 

Leverage: Evidence from Palestinian and 

Jordanian Banking Sector 
 

By 

This thesis was defended successfully on 02/0/2021 and approved by: 

Defense Committee Members  Signature 

1- Prof. Dr. Abdul Naser Nour / Supervisor ………..……... 

2- Dr. Sameh Atout / Co-Supervisor ………..…...… 

3- Dr. Abdel Fatah Sartawe / External Examiner       ……...…..…… 

4- Dr. Islam Abdel Jawad / Internal Examiner       ……...…..…… 

Aseel Yousef Shaker Melhem 

 



iii 

 اإلهداء

 بسم ميحرلا نمحرلا هللا

() 
 صدق هللا العظيم

 تطيب وال بعفهك الإ اآلخخة تطيب وال ... بطاعتك إاَلا شيارال يطيب وال بذكخك إالَا يلالم يطيب ال إليي

اجاللو لجَا هللا ...ابخؤيتك إالَا الجشة

 دمحم سيجنااالعالسين ونهر الخحسة نبي إلى ... األمة ونرح ... األمانة ى وأد الخسالة َبمغ من إلى
اوسمم عميو هللا صمى

ا..سشجي و قهتي مرجر زوجيااوشخيكاحياتيااالولاواالخيخا....ااإلى

ا.....ظمسة تشيخ متقجة شسعة إلى ... الحشانوا بالح يشبهع إلى ..حياتي ونهر سعادتي مرجر إلى

اوأخهتي عائمتي...

االعمم طخيق لشايجواام الحين إلى ..الكمسات أنطق كيف ستاوتعم ...الحخوف مشيم استقيت ا من إلى

االكخام أساتحتي

ا...الساجدتيخ رسالة إليكم أىجي

 .السهقخين السشاقذة لجشة أعزاء جانب من والقبهل بالشجاح لت كم أن- وتعالى سبحانو- السهلى داعية

  



iv 

 الذكر والتقدير

 بسم ميحرلا نمحرلا هللا

ا
 99 اآليةسورة النمل 

عمىاالخسهلاالسعممااالول،ااالحسجاوالذكخاهللاالحياتمابتهفيقواتتمااالعسالاوالرالةاوالدالم
االحياعمسشااقيسةاالذكخاوالتقجيخالسناىمااىلاالفزل.

 أما بعد،،

افإنشيواعتخافاابالفزلالحوياالفزل،ااىحهااالطخوحة،ابإنجازوبعجاانااتماهللاانعستواعميا
"عبجاالشاصخانهر"اواالستاذاالفاضلا أتقجمابجديلاشكخياوخالصاامتشانياالىاالبخوفيدهراالفاضل

عمىااباإلشخاف"سامحاالعطهط"اعمىاتهاضعيماوسساحتيماوصبخىماوسعةاصجرىم،اوالمحاناتفزالا
اومتابعتيما االقيسة اونرائحيم اتهجيياتيم الهال االرهرة ابيحه التخخج اكانت اما االتي ااالطخوحة ىحه

صهرتواالحاليةافكانااخيخامهجوالياالسدتسخةاليحااالعسلامشحااناكانامجخدافكخةاوحتىااكتسالوافيا
افيارحمةاالبحث،افجداكماهللااعشااكلاخيخ،افقجاكشتماالسهجواوالسعمم.

 أساتحتي بالحكخخصاوأ السحاسبة، ماجدتيخ بخنامج طاقم جسيعل الجديل بالذكخماأتقج كسا

 غدان جكتهرعميا،اال أبه معد الجكتهر،االجهاد عبج إسالم الكهني،اوالجكتهر سائج الجكتهرااألفاضل

ا.عقهلشا وإنارة تعميسشا سبيل في وجيج تعب من بحلهه دعاس،السا

اىحه إعجاد في وفقت قج أكهنا وأن الجداء، خيخ عشي الجسيع يجديا أن القجيخ ميالع هللا واسأل
ا.وإحدان بإتقاناالطخوحةا

  



v 

 اإلقرار

ا:عشهان تحت التي الخسالة جمةمق أدناه السهقعة أنا

 عمى تهزيعات األرباح والدور المعًدل لمرافعة المالية: تأثير ادارة األرباح

 دليل من القطاع المررفي الفمدطيني واالردني

 
The Effect of Earnings Management on Dividend Payout and 

the Moderating role of Financial Leverage: Evidence from 

Palestinian and Jordanian Banking Sector 
 

اتس تااإلشارةااأقخ ا ااشتسمتاعميواالخسالةاإن سااىهانتاجاجيجياالخاصاباستثشاءاما اما بأن 
ادرجةاعمسيةاأوا مامناقبلالشيلاأي  المايقج  اجدءامشيا اىحهاالخسالةاككلاأواأي  إليواحيثسااورداوأن 

امؤسدةاتعميسيةاأوابحثيَّةاأخخى.  

Declaration  

The work provided in this thesis, unless otherwise referenced, is the 

researcher‟s own work, and has not been submitted elsewhere for any other 

degree or qualification. 

 :Aseel Yousef Shaker Melhem Student‟s Name اسم الطالة:

 :Signature …………………………………… التوقيع: 

 

  

ا بحثاعمسيالجىاأي
 

Date:  20/02/2021  التاريخ: 



vi 

Table of Contents 
Page Subject No. 

ii Defense Committee Members  

iii اإلىجاء  
iv والتقجيخاالذكخ   
v Declaration  

vi Table of Contents  

viii List of Tables  

ix List of Appendixes  

x List of Abbreviations   

xi Abstract  

1 
Chapter One 

General Framework 
 

2 Introduction 1.1 

4 Research problem and questions 1.2 

6 Research Importance 1.3 

7 Research objectives  1.4 

8 Research structure  1.5 

10 
Chapter Two 

Background of Research and the development of hypotheses 

11 Introduction 2.1 

11 Earning Management  2.2 

15 Dividend payout 2.3 

16 Dividend cash and in stock 2.3.1 

17 Financial Leverage  2.4 

18 Theories related to Earning management  2.5 

19 The Agency theory  2.5.1 

20 The Free cash flow theory  2.5.2 

21 The signal theory  2.5.3 

22 The positive accounting theory  2.5.4 

23 The Effect of Earning management on Dividend payout  2.6 



vii 

Page Subject No. 

25 
The role of Leverage on the effect of earning management 

on Dividend payout 
2.7 

26 Palestine exchange –An overview 2.8 

27 Amman stocks  Exchange –An overview 2.9 

27 The Background of research  2.10 

31 Development of hypotheses  2.11 

34 Research Framework  2.12 

36 
Chapter Three 

Research Methodology 

36 Introduction 3.1 

36 Population and sample of the research 3.2 

36 Data and source  3.3 

37 Research variables and measurement  3.4 

45 Statistical processing  3.5 

46 Empirical Model  3.6 

48 
Chapter Four 

The Estimation results and discussion 

49 Introduction  4.1 

49 Descriptive statistics  4.2 

55 Correlation matrix  4.3 

55 Estimation results  4.4 

58 Testing hypotheses and Discussion results  4.5 

63 
Chapter Five 

Conclusions and Recommendations 

64 Introduction  5.1 

64 Conclusions  5.2 

66 Recommendations  5.3 

67 Limitations  5.4 

68 References  

79 Appendixes  

  السمخص ب

 



viii 

List of Tables 

Page Title No. 
45 Variable measurement  Table (1) 
50 Descriptive indicators for the variables considered in 

the analysis. Table (2) 

53 Correlation between all variables included in the 

analysis Table (3) 

54 
Estimation results for the DAC Yoon et al (2006) 

model with three type of dividend as a dependent 

variables with no moderator variable 
Table (4) 

57 

Estimation results for the DAC Yoon et al (2006) 

model with three type of dividend as dependent 

variables with moderator variable 

Table (5) 

58 Summary of relationships from the research findings  Table (6) 

  



ix 

List of Appendixes 

No. Title Page 

Appendix (1) 
The websites that have been used to select the 

historical data of the study 
80 

Appendix (2) Bank code 81 

Appendix (3) 
The Yoon et al (2006) model descriptive  analysis 

with moderator variable 
82 

Appendix (4) 
The Yoon et al (2006) model correlation matrix 

with moderator variable  
83 

Appendix (5) Summary of statistical analysis 84 

Appendix (6) 
The Yoon et al (2006) model estimation result 

with moderator variable 
89 

 

 

  



x 

List of abbreviations 

EM Earning Management 

DPO Dividend payout 

DAC Discretionary accruals 

LEV Leverage  

SIZE Firm Size 

ROA Return of Assets 

GLS Generalized Least Squares 

 

  



xi 

The Effect of Earnings Management on Dividend payout and the 

moderating role of financial leverage: Evidence from Palestinian and 

Jordanian Banking Sector 

By  

Aseel Yousef Melhem 

Supervisor 
Prof. Dr. Abdul-NaserNour 

Co-Supervisor  

Dr. SamehAtout 

Abstract 

This research aims to verify the effect of earning management on 

dividend payout with a moderating role of financial leverage on this 

relationship in the banking sector in Palestine Exchange and Amman Stock 

Exchange during the period 2009 to 2018 with a total 210 firm year 

observations. Yoon et al. (2006) model is used to measure earning 

management through discretionary accruals. The model is estimated using 

panel general least square. The results of the relationship between earning 

management and dividend payout in the Palestinian and Jordanian banking 

sector showed that there is a positive effect of practicing earning 

management on cash dividend payout, but this effect is not significant with 

total dividends and stock dividends. Leverage is positively and 

significantly affects the relationship between earnings management and 

cash dividend payout. The relationship is insignificant with other types of 

dividends. The implication of this study is that the relationship between the 

earning management and dividend policy is significant. That presence of 

significance relationship is not suitable for investors. Strongly recommend 

that there should not be any relationship between earning management and 



xii 

dividend policy. That significant relationship can be reduced by controlling 

on discretionary accruals. This research will help the management that by 

reducing the operational expenses companies will effectively manage their 

earnings. So the impact of earning management on dividend policy can be 

reduced. 

Keywords: Earning Management, Dividend payout, Leverage. 



9 

Chapter one 

General Framework 

1.1 Introduction  

1.2  Research Problem and Questions  

1.3  Research Importance 

1.4  Research Objectives 

1.5  Research Structure  

  



5 

Chapter one 

General Framework 

1.1 Introduction  

One of the most prevalent topics at the present time and in 

accounting with regard to earning management consequences and earning 

management practices in companies. There are many aspects that have 

been linked to earning management, including the dividend payout policy, 

which has been emphasized in modern business, (Haider & Sadiq, 2012). 

Corporate managers take many important administrative decisions, 

including the dividend payout policy which appear a symbol of good 

financial health for firm (Miller & Modigliani, 1961). When assuming that 

the market is fully efficient and effective, there can be no increase in the 

value of the company through the dividend policy. Many studies have been 

carried out to determine the effect of earning management and its practice 

in companies on the policy of dividend distribution, (Saleem & Alifiah, 

2017). There is a possible difference in the impact of earning management 

between developed countries and developing countries. Consequently, 

there is an impact of the dividend payout policy on both stock prices and 

the future and current growth of companies. The simple way to define 

earning management is manipulating of the accounting or income of the 

company. Dividends are paid to shareholders, and there are many ways to 

distribute dividend such as dividends Fixed, payout ratio and availability of 

cash and in the last summarize, every company should have a strategy that 

governs it in the dividend policy to rely on for many years i.e. consistency. 



3 

There are many earning management practices carried out by 

companies, for example, choosing specific accounting treatment methods 

for financial transactions or through economic decisions or economic 

events taken by the company that affect investor decisions or the company's 

services (and here depending on the nature of the company's business) or it 

is possible to influence cash flows. The company, in both cases, is rejecting 

to improve the profits shown in the financial reports. 

Opportunistic behavior may lead to earning management either to 

reduce its profits for tax evasion or to increase it to increase the 

remuneration of members of the board of directors, and this behavior is 

known as “managing profits or gains”, and some of the accounting 

procedures, that corporate administrations sometimes resort to in pursuit of 

improvement are called “ windows dressing”, are either in its profitability 

or in its financial position by exploiting the existing gaps in the accounting 

or by taking advantage of the multiplicity of alternatives and methods 

available in the accounting policies that allow international accounting 

standards for the company to follow in the areas of measurement and 

disclosure, which negatively affects the quality of the numbers that these 

lists show and then on the reliability of financial ratios and thus the lack of 

transparency and credibility if profit management has a decisive effect, 

especially by adopting international accounting standards and the need to 

unify their application (the accounting information), and globally 

Accordingly, this research examines the effect of Earning management on 



4 

dividend payout and the moderating role of financial leverage at Palestinian  

and Jordanian  Banking sector.             اا 

This research was conducted by applying on a sample of (21) banks 

listed on Palestine Exchange and Amman stock Exchange, and the method 

of extraction financial data that was used to extract the required data from 

the annual reports of the banks. One of measures for measuring earning 

management, is used namely the Yoon model (2006). It also used panel 

multiple regression General least square method to test the hypotheses of 

the research, and the research show that the earning management for the 

Yoon model (2006), have a positive insignificant effect on cash dividend 

payout and, and leverage has a positive significant effect on the 

relationship between cash dividend payout and leverage  

1.2 Research problem and questions 

Many previous studies about the effect of earning management on 

dividend payout, the results of these studies varied especially on a less-

developed exchange like Pakistan stock exchange and India stock exchange 

market (Saleem & Alifiah, 2017). 

For every company there is a specific strategy that is followed when 

distributing profits depends on its stability, despite that, there are many 

approaches to distributing earning such as the stability dividend therefore, 

extract the problem statement from the above issues. 



5 

The following are factors of possible earnings management and 

dividend payout management problems encountered: 

1- The management is in dilemma regarding the dividend payout 

policy:  

Here is the problem of this research in that the management is 

hesitant or faces difficulty in its decision about the dividend payout 

policy; does it pay a large or small percentage of the profits? Or zero 

profit, from its profits, or withholding its profits (retained earnings) 

as an investment in the future, and therefore some investors prefer to 

obtain earning, whether high or low, to obtain interest accumulated 

on capital gains 

2- A negative payout ratio means that companies pay dividends even 

though they report losses: 

Many companies maintain their investors or attract new investors to 

pay dividends despite the presence of losses or manipulations of their 

earnings (RAHIM, 2010). 

Based on the illustrated problem, this study considered the following 

questions to investigate the effect of earnings management on dividend 

payout with a focus on moderating the Role of leverage at Palestine and 

Amman stocks exchanges in the Banking sector. The question of this 

research: 



6 

 Is there any effect of earning management on dividend payout at 

Palestine exchange and Amman stock exchange in the banking 

sector?  

 What the leverage contributes to the effect of earning management 

on dividend payout at Palestine exchange and Amman stocks 

exchange in the banking sector?  

1.3 Research Importance  

One of the ways of forming a good image of the company is 

determining the earning that will be distributed as profits to the investors of 

the company. Determining the profits is of great importance in the market 

from the economic side and from the investors' point of view. It is an 

indicator of the performance and value of the company. Therefore, the 

practice of earning management and dividend payout policy are important 

topics and an important part of the company. Managers may practice 

managing earnings for the benefit of the personal interest in order to 

increase their management incentives or increase their profits or salaries. 

Dividends policies are a guideline and a combination of rules of how 

dividend payment is to be made to its shareholder (Ben-David, 2010). 

when dividend policy is clear and describes how the company should 

distribute their dividends to shareholders, they can make all prediction and 

allocate information that mean it is working. 



7 

The results of the research will help investors who take into account 

the earnings of a corporation before investing and help owners of 

companies to make their dividend policy. 

The importance of this research is from the importance of 

international accounting compatibility by adopting international accounting 

standards, which include accounting flexibility, multiple methods, and 

accounting alternatives, and by the generalization of their application 

internationally without taking into account the gaps in them that may lead 

to accounting manipulation by the way of managing earnings and linking 

them to dividend cash and shares, and how is it possible for these methods 

to affect dividends and focus on the role of leverage and the diversity of 

boards of directors to prevent or limit earning manipulation. 

1.4 Research Objectives 

When companies decide to pay dividends to shareholders, this 

affects well on future or potential investors, so there is a possibility to 

attract them to invest in the company and as a result, the value of the 

company will increase and the number of shareholders will increase, and 

thus the economy in general will be affected positively. Usually what 

company managers do is earning management since they desire (according 

to their personal interests) or according to the company's policy to affect 

investors. The company‟s policy for dividend distributions may be a 

regular policy, meaning that it makes regular payments on an annual basis. 



8 

The dividend payout policy is a policy that has rules and regulations 

that regulate the methods and forms of dividend distribution to 

shareholders, and therefore it must be clear and be described in a complete, 

written and accurate description by the company. It is the duty of the 

shareholders to fully acknowledge the dividend policy, and it is their right 

to obtain a written copy of this policy.  

The objective of this research is to identify the effect of earning 

management on dividend payout in the banking sector listed in Palestine 

Exchange and Amman Stock Exchange and the role of leverage in this 

relationship by achieving the following: 

 To find out if there is any effect of earning management on dividend 

payout at Palestine exchange and Amman stocks exchange in the 

banking sector.  

 Verifying  the role of leverage that contributes to the effect of 

earning management on dividend payout at Palestine exchange and 

Amman stocks  exchange in the banking sector  

1.5 Research Structure 

This research consists of five chapters. The research problem, its 

questions, its importance, and its objectives were identified in the first 

chapter, while the second chapter deals with both the theoretical framework 

and previous studies related to the research topic in addition to developing 

the research hypotheses. The third chapter focuses on the research 



9 

methodology where the population and the sample are described, in 

addition to research data sources, collection tools, research variables, 

methods of measurement, and the statistical methods used in the research. 

The fourth chapter deals with the results of the research and the test of its 

hypotheses. Chapter 5 includes the conclusions of the results that have been 

reached, and any further suggested areas of research. 

  



91 

Chapter Two 

The Background of the Research and  

the Development of the Hypotheses 

2.1  Introduction 

2.2  Earning management  

2.3  Dividend payout 

2.4  Leverage 

2.5 Theories related to Earning management  

2.6  The Background of the research  

2.7  The effect of earning management on dividend payout  

2.8  The role of leverage on the effect of earning management 

on dividend payout. 

2.9 Palestine exchange –An overview 

2.10  Amman Stock exchange –An overview 

2.11  Development of the hypotheses 

2.12  Research framework 

  



99 

Chapter Two 

The Background of the Research  

And the Development of the Hypotheses 

2.1 Introduction 

In this chapter, we present the theoretical and conceptual framework 

of the research and a review of previous studies related to the research 

topic, in addition to the development of the research hypotheses. 

 This chapter begins with clarifying the main concepts related to the 

subject of this study, which includes the concept of earning management 

and the concept of dividend payout, whether in cash or shares, in addition 

to clarifying the concept of financial leverage. After that, we reviewed 

related explanatory theories. This chapter reviews the interpretation of the 

effect of earning management on dividend payout in light of these theories, 

and then discusses previous studies related to the research topic. This 

chapter ends with the development of the research hypotheses. 

2.2 Earning management 

Opportunistic behavior may lead management to either reduce 

profits for tax evasion or to increase the remuneration of members of the 

board of directors; however, there are varied instinct pushing the 

management to adopt the behavior of practicing earning  management, and 

this behavior is considered profiteer behavior practiced by the management 



95 

either to reduce profits for tax purposes (tax evasion) or to increase the 

remuneration of members of the board of directors and according to 

(Healey & Wahlen, 1999), profit management is practiced when managers 

renounce estimates and methods do not accurately reflect the real economy 

or the true financial condition of their companies. While the EM defined by 

many definitions and forms for examples (Leuz, & Wysocki, 2003) defined 

EM as a change in the declared financial performance of the company by 

the managers of the company in order to mislead the stakeholders or to 

affect the contractual results. Also, Sun and Rath (2008) defined EM, in 

general, as it is to conceal the actual financial performance by the 

company‟s manager in order to influence the performance of shares or 

benefit from contractual practices between the company and managers or to 

influence the organizational decisions of the company. Although EM has 

been defined in many ways, the basic concept of EM underlies the change 

of financial reporting information by the management. Deng et al. (2017) 

explain that one of the important determinants of earning management is 

the dividend policy. Therefore, he suggests that managers use a lot of 

inside information about the positions or results of the company's business 

to make decisions about it, such as dividends (Baker et al., 2003) showed 

the accrual accounting allows managers to easily access the internal 

financial data and transfer it through the company's financial statements 

and generally influence each of the share management and also greatly 

affect the percentage of dividends distribution. They also showed how the 

earning management was not an agency problem and also noted that the 



93 

managers that are appointing them to their operating and investment 

experiences have sufficient capacity to influence dividend payout policy 

through their practice of earning management. Kasanen et al. (1996) was 

the first to popularizing the idea of earning management paid with profits 

according to the implicit contractual parties of non-financial companies in 

Finland and the idea is that large shareholders demand high returns on their 

holdings from stocks and thus expect a smooth flow of profits, and this 

encourages companies to do some kind of earning management techniques 

to show income high enough to distribute dividends, and therefore in 

Finland during the period (1970-1989) the declared earnings were based on 

targeted profits, which are based on dividends. Historically, there is a 

positive relationship between the growths of expected future profits and the 

payout ratio but (Arnott & Asness, 2003). Supposed that today‟s low 

payout ratios are a strong positive signal for future growth against historical 

evidence. This study presented a challenge in that low dividends are an 

indication that there are strong future profits coming. This study also 

examined the relationship of profit distribution policy and the performance 

of companies in developed countries using free cash flow theory. 

In addition to that, a study in Nigeria that clarifies the relationship 

between dividend payout policy and earning management shows that 

earning management was in a negative relationship with dividend payout 

policy (Ajide, & Aderemi, 2014). 



94 

He et al. (2017) study showed that the dividend payout policy could 

be a policy that could be used to solve a problem or conflict of agency 

according to the negative relationship between the earning management 

and the dividend policy, and this study showed that companies that pay 

dividends (dividend payers) are using or practicing management earning 

less than companies that do not pay dividends (non-divided payers) to their 

shareholders. Other researchers like (Bhabra et al., 2002) investigated the 

factors that affect the homogeneity of corporate profits and clarified the 

differences in the homogeneity of dividend smooth by estimating the 

sensitivity of the companies ‟profit distribution ratios to changes in profits. 

According to this study, the firm size has a role in earning management and 

dividend payout. Small-sized companies are the most to smooth dividends. 

Caskey and Hanlon (2005) discussed the earnings-dividend link where they 

linked the earning to dividends and found that the companies that practice 

earning management are the companies that have not paid adequate 

dividends and have actually less increase in earnings compared to other 

companies. Balachandran et al. (2017) clarified how the dividend payout 

policy in Australia is used for tax purposes, as it found that companies can 

pay high dividends in the imputation environment compared to the 

traditional tax system. Alternatively, Commer et al. (2016) has classified 

earning management into two types, the first type, which is “real EM”, 

which is earning management through strategic timing for investment, 

financing, and operating decisions. One of the practices of this type is 

revenue management, and the second type is “policies” and with reference 



95 

to Schipper (1989) definition EM is important here to understand 

accounting accruals and their influence in the measurements of the firm‟s 

performance. According to (Mulford & Comiskey, 2002), timing the 

revenue-generating activities and reporting is a strong tool for practicing 

real EM, therefore, revenue is an important and factor in determining the 

financial performance of a firm. Revenues reported in the financial 

statements provide a firm‟s success indication; it directly affects the 

earnings reported and the firm‟s earning power. Despite the large number 

of studies that have been research about earning management and dividend 

payout, dividend remains an unclear issue. And there is no global 

agreement theory explains the relevance of dividend policy and firm value 

and how the earning management affects these two sides.  

2.3 Dividend payout 

As we know that the shareholder gets profits that depend on his share 

in the company or his holdings of shares in a particular company (Deng et 

al., 2017) and (He et al., (2017) suggested that dividend-paying companies 

are less likely to use earning management practices or earning 

manipulation because there is a possibility of using dividends as a form of 

resolving the agency problem. La Porta et al., (2000) also suggested that 

there is a possibility to reduce the opportunistic behavior that managers use 

to pressure minority shareholders to pay cash dividends and to limit their 

personal interests through dividends, as well as to benefit from them in 

building a worthy reputation for improved access and growth in capital 



96 

markets. Hanaeda and Serita (2007) clarified that companies do not 

amend the dividend policy in line with the financial need for investment, 

and also indicated that there is a positive indicator and a positive trend in 

companies obtaining a consistent dividend policy (regular annually) and 

(Baker & Powell, 2001) researchers emphasize the impact of corporate 

investment decisions on managers, and in some cases these decisions may 

stress managers and motivate them to use internal information for their 

benefit and their attempts to manipulate earnings for the sake of 

management incentives and achieve the goal of the investment decision, 

and this study investigated the possible effects of past dividends on future 

earnings and dividends. It was found that there is a possibility for 

companies to pay dividends on a regular and annual basis, and previous 

literature shows that 50% from market returns come from dividends, and 

this means that these policies has great importance in the market, whether 

from the economic point of view or from the investors‟ point of view. 

Tahira (2012) suggested that the potential investors are attracted toward 

those companies when firms pay a dividend to its investors, which increase 

the value of that company automatically. 

2.3.1 Dividend in cash and in stock 

There are different types of dividends that a company can pay to its 

shareholders, which can be in the form of cash, shares, or both, and there is 

a mechanism for announcing these dividends and is done by announcing 

the dividend payout and corporate income. Dividends declaration decisions 



97 

are taken by the Board of Directors in the annual general meetings to 

ensure the existence of the company for life, and this decision is written 

and accurately described, as the value of the distributed dividend is 

determined on the basis of each share and must be paid equally to all 

shareholders of the same class. The Board of Directors must approve the 

paying off. When dividends are announced, they will then be paid on a 

specific date, known as the payment date. Below are a list and a brief 

description of the most common types that shareholders receive: 

*  Cash :the most common type of payment is the actual cash payment 

made by the company to its shareholders, The payment is usually 

wire transfer, but may also be paid by check or cash. 

*  Stock – stock dividends are paid out to shareholders by issuing new 

shares in the company. These are paid out pro-rata, based on the 

number of shares the investor already owns. 

2.4 Financial Leverage 

A Company‟s financial leverage is an important determinant of its 

equity risk since preferred stocks take precedence over common stocks in 

the financial residue. Financial leverage can be defined as the ratio of long-

term debt to total long-term capital. Firms that use less debt, achieve 

maximum returns compared to operating companies with high debt, 

because the higher the financial leverage, the greater the company‟s 

dependence on long-term creditors for its long-term capital. According to 

https://corporatefinanceinstitute.com/resources/knowledge/accounting/prorated/


98 

Irina (2009), there is a possibility that companies face the risk of 

bankruptcy if they are not able to pay the financed payments from external 

debts, and also if a company with high leverage wants to obtain a new loan, 

then there will be stress from the lenders on the loan procedures and 

examining many procedures to ensure that the company remains within 

reasonable limits and that there is an ability to pay its debts. Some previous 

studies said that leverage increases the potential for managers to EM to 

avoid debt covenant violations. 

Studies by Dichev & Skinner (2002) and Beatty & Weber (2003) 

found a positive relationship that managers manage earnings to avoid debt 

infringe treaty. Jelinek (2007) believed that companies with more influence 

had managers less interested in building a good reputation in the stock 

market, and therefore these companies had more interagency disputes that 

increased incentives to manipulate earning, but empirically, the negative 

sign is also empirically correct because debt contracts generally have 

covenants that can restrict earnings manipulation. 

2.5 Theories related to Earning management 

 Different theoretical frameworks have been employed by many 

researchers including (Chen & Tong, 2007; Jensen 1986, De Angelo 2013 

H et al., 2004, and He et al., 2017). 

There are several theories related to earning management among 

them are the following: the agency theory, the free cash flow theory, the 



99 

signal theory, and the positive accounting theory. We will review these 

theories in terms of the general content of each of them, as well as 

explaining the relationship between research variables in light of them. 

2.5.1 The Agency theory 

This theory was established by Ross (1973) and developed by 

(Jensen & Mackling 1976) which states that there is a difference of 

interests and an inconsistency in information between the officer and the 

director, and the agent acts in a selfish manner for personal goals and gains, 

which is to increase his wealth to the maximum possible at the expense of 

the manager, so there is a transfer of wealth from The company to the 

manager, according to the agency theory, the manager always strives to 

maximize their benefit at the expense of the interest of others, and to help 

reduce this behavior and stimulate interest in the goals of the company, 

managers are paid according to the results achieved and this generates an 

incentive for managers to manage profits and maximize their wealth and 

this point is supported by (Jensen & Mackling 1976). It has been argued 

about this idea that the greater the percentage of capital that the manager 

maintains, the greater the deviation from the main goal, which is to 

maximize the value of the company and thus it results in good 

performance, and yet managers can manage profits from In order to obtain 

strengths in their position and thus lead to neglecting the interests of 

internal and external investors, which leads to an increase in disputes 

between managers and shareholders instead of reducing them in reality, 



51 

compensation contracts are established based on the profit of the company. 

Imen and Anthony (2016) because of the divergence of interests between 

shareholders and managers and thus leads to an increase in their salaries 

and the benefit of these contracts, managers can also use the practice of 

managing profits to postpone some fees and expenses and to show the 

goodness of their management (good management). 

2.5.2 The Free cash flow theory 

The free cash flow theory was developed by Jensen‟s (1986) as this 

theory explains agency conflicts that are exacerbated when the cash flow 

required to finance all positive net present value projects exceeds, and there 

is an incentive for managers to increase spending on franchises or continue 

in projects of low value. Finding a solution to provide market discipline, 

announcing recurring dividends is a solution to the problem of under-

investment and the problem of free cash flow, because it creates a contract 

or quasi-contract with shareholders to return the excess money, and from 

the viewpoint of (Healy & Palepu 1988) in the complete and ideal market, 

the distribution policy profits do not affect the value of the company. Given 

the frictions of the information market and others, the relationship between 

profits and dividends is not clear. 

According to Miller and Modigliani (1961) the change in dividends 

is considered an indication of the management's expectation of future 

profits and future growth of the company later, as the authors examined the 

returns of stocks and profits for successive years and also examined the 



59 

profits when announcing the start of dividend distribution, companies that 

start dividend distributions have an increase in profits in years The previous 

one immediately, during and after the start and this indication that there is a 

transfer of new information to the market, and based on these results, this 

study may summarize that starting the profit distribution process is 

expected to increase in profits for two consecutive years 

2.5.3 The signal theory 

The signal theory states that the same information is not shared by all 

economic agents and according to (Myers & Majluf 1984) in the reality of 

market economics there are many incomplete information that is not shared 

with all market parties and is distributed among various stakeholders within 

the same company as well. Ross (1977) the signal theory, which examined 

the relationship between managers and investors in the context of 

asymmetric information, and given the nature of the managers ‟work, this 

gives them the advantage that they are the most knowledgeable of the 

company‟s prospects because they have some distinct information that 

allows them to send a signal to various investors and participants in the 

market, and here comes how to use signal theory for the concept of profit 

management, by obtaining information about the expectations and 

prospects of the company, managers can use earning management by 

increasing the reported profits and thus reporting the correct performance 

of the company. The market depends on each of the performance of 



55 

managers and the results presented in the financial reports published at the 

end of the year to be able to anticipate (Aerts & Tarca, 2013). 

According to the literature devoted to signal theory, there are two 

types of signals. The first type is the informational signal, and this type 

supports the idea that managers obtain distinct information. They choose to 

deliver this information to the market to adjust the securities' values and 

thus reflect the real value of the company, and this may reduce the 

asymmetry of information between the various actors in the capital market, 

according to Ahmed et al., (1999)ا companies may practice earning 

management in order to report investment opportunities, but these 

companies They have high growth expectations. The second type is the 

opportunistic signal, which is reporting signals by managers to camouflage 

profitable investments and the aim is to mislead investors and get managers 

to obtain personal gains such as job security or increase their wealth 

through salary bonuses based on the outcome. Chalayer et al. (2001) 

suggested that companies can send some references to compare itself with 

other companies or to the sector through earning management, or for 

companies to reduce or increase their profits to appear like other companies 

or to distinguish itself from other companies. 

2.5.4 The positive accounting theory 

It is also called the political contract theory, and it is one of the 

theories mentioned in the literature and it started with (Watts & 

Zimmerman, 1986) which talks about the use of different accounting 



53 

practices to influence the outcome of the company. There are two types of 

behavior followed by managers, the first type, which aims to apply 

accounting standards. Efficiently to maximize the value of the company, 

and the second type is opportunistic behavior, which is in favor of 

managers for their own interests and personal gains at the expense of the 

interests of others, (Jeanjean, 2002) indicated that it is expected that the 

interests and welfare of managers will improve at the expense of 

influencing the interest of others (Watts & Zimmerman, 1986) suggested 

that there are three explanatory factors that can explain profit management: 

size, compensation and debt. According to the compensation standard, 

executives choose to accelerate and increase profits to maximize their 

wealth, especially if there is a direct relationship between the compensation 

percentage and the results achieved. 

Jeanjean (1999) opposed the explanatory factor, which is the size, 

because from his point of view the size of the company may present other 

aspects that are not indicative of the presence or absence of political costs 

such as good management that can show the efficiency of the executive 

directors, and also criticize the tool used to measure the size of the 

company (Total assets) This tool is believed to depend on the accounting 

measurement method and financing strategies. 

2.6 The effect of earning management on dividend payout 

In this part, the effect of profit management on the distributions will 

be clarified and explained, based on several theories linking the two 



54 

concepts as explained in the previous part: agency theory, free cash flow 

theory, signal theory and positive accounting theory. According to agency 

theory on the difference of interests between managers and shareholders, 

on the one hand managers are trying to achieve their goals and personal 

interests (increase their wealth) and shareholders are trying to limit the 

opportunistic behavior that the director may follow and motivate him to 

take care of the correct management of the company by paying bonuses 

and profits (distributions) and that creates an incentive for managers to 

practice managing profits to maximize their wealth, and managers can also 

practice profit management to strengthen the job position or to maintain it 

(job security) by neglecting the interests of internal and external investors, 

and this leads to conflicts of interest, and also leads to the need for 

shareholders to establish compensation contracts, for example: dividends 

(bonus shares, cash dividends) or promotions in positions based on 

company income 

According to the signal theory and concept, managers are considered 

the most informed party about the prospects of the company because they 

have distinct information that allows them to send a signal to various 

investors in the market. Managers can use earning management by 

increasing reported profits and providing results that align market 

expectations with managers' expectations and here comes the effect of 

profit management on increasing opportunities to distribute profits based 

on the results presented. With reference to the signal theory, we find the 

second type of signals, which are opportunistic signals, and here also 



55 

comes the role and effect of profit management, as managers use this type 

of signals to camouflage unprofitable investments and mislead investors to 

obtain personal gains such as job security or to increase their wealth 

through rewarding salaries based on the result Therefore, companies may 

send signals to increase their dividends as well and explain to investors that 

the company is in good condition. According to the free cash flow theory 

Jensen‟s (1986), it was suggested that there could be a solution to the 

problem of over-investment and the problem of free cash flow, through 

dividend payments, and this would limit manipulation of profits by 

managers. Dividends can be a solution to provide market discipline for 

over investment and the free cash flow problem because the announcement 

of recurring dividends creates a quasi-contract with shareholders to return 

excess cash. 

Dividend changes provide a signal that acts as management's 

expectations of future profits. When dividends are announced, companies 

sometimes start to increase their profits in previous years directly or after 

the start of the announcement or distribution. Here, the role of managers is 

to improve the company's image and profits, so it manages earnings for its 

effect on dividends. 

2.7 The Moderating role of financial leverage on the effect of earning 

management on dividend payout 

Referring to agency theory Panda & Leepsa (2017) the theory 

assumes that monitoring the agent leads to lower costs of the agency, and 



56 

the logic here is that managing profits is the agency's cost because it is 

often opportunistic. To avoid the agent's opportunistic behavior, the 

monitoring mechanism is to monitor the debts performed by the lenders 

and is within reach. On the other hand, the theory which argues that 

managers need to achieve more permanent profits in order to pay the 

capital premiums (Panda & Leepsa, 2017). Therefore it is not logical to 

manage earning where there is debt and as such, debt should have a 

negative effect on financial leverage and thus reduce agency cost should 

increase earnings. 

2.8 Palestine exchange –An overview 

The Palestine Exchange was established in the year 1995, and it is 

the only stock exchange in Palestine that encouraged investment in 

Palestine. It was the first Arab stock exchange to allow the use of electronic 

and automated technology for trading securities. It includes five major 

economic sectors, namely: banking and financial services, insurance, 

investments, Industry and services for profitable companies. And trade in 

the stock exchange in the two currencies, the Jordanian dinar and the US 

dollar. Securities are traded for 48 companies listed on the stock exchange 

with a market capital of 3 billion dollars, and stocks are traded only on the 

Palestine Exchange now, in the year 2009 the Palestine Stock Exchange 

ranked. The thirty-third among the global security markets, and it comes 

regionally in second place in terms of investor protection (www.pex.ps). 

 

http://www.pex.ps/


57 

2.9 Amman stock exchange –An overview 

Amman Stock Exchange was established on March 11, 1999, as an 

independent, not-for-profit Corporation; it is managed by the private sector 

and authorized to operate as a regulated market for securities trading in the 

Kingdom. Amman Stock Exchange is managed by a seven-member board 

of directors and an executive director who manages and monitors the daily 

business of the exchange. The Amman Stock Exchange is keen on 

establishing cooperation relations with international stock exchanges, 

associations, and organizations, entering into agreements with them, 

participating in Arab and international conferences and seminars and is an 

active member of the Arab Stock Exchanges Union, the European Asian 

Stock Exchanges Federation, the International Federation of Exchanges 

(https://www.ase.com.jo/ar). 

2.10 The Background of research 

Many types of research have investigated the issue of the effect of 

earning management on dividends, and these research papers have 

concluded with mixed results among them. 

On one hand, many types of research has found the negative effect of 

earning management on dividends as researches by (Ajide & Aderemi, 

2014; Dilawer, 2012; Savov, 2006; Khanet al., 2013 and Gill & Mand 

2014). 

https://www.ase.com.jo/ar


58 

 Dilawer (2012) examined that the Textile industry in Pakistan and 

found a negative effect of EM on DPO, (Khan et al., 2013) and (Gill 

&Mand2014) studies also showed a negative and insignificant effect; this 

study selected 228 firms from 500 top companies listed on Bombay stock 

exchange (BSE). A study by (Ajide & Aderemi, 2014) concluded that 

earnings management has a negative relationship with the dividend policy 

of a firm and it is not significant in the determination of dividend payout of 

every firm. It was therefore concluded that this relationship could be as a 

result of effective corporate governance mechanisms put in place. If 

managers increase discretionary accruals of the company, the dividend 

percentage will not increase, even not significantly in the determination of 

dividend policy in Nigeria. He et al., (2017) found a robust negative 

relationship between the dividend-paying status and earnings management, 

even after conditioning on some variables that have been previously shown 

to affect earnings management. 

Chansarn and Chansarn (2016) research showed a positive influence 

with dividend yields and no effect of earnings management on dividend 

payout ratio, reveal that listed companies in MAI had high earnings 

management due to high average discretionary accruals in the absolute 

term which equaled 11.91 percent of total assets based on Kasznik Model 

and 12.55 percent of total assets based on Kothari Model. study provided 

the first investigation of the difference in earnings management between 

dividend-paying banks and non-payers and how it is impacted in different 

settings of information failures by using the sample of US BHC throughout 



59 

2001:Q1-2017:Q4. The dividend policy not only impacts the conditional 

average earnings management of banks but also exerts influence on their 

dispersion. The impact of dividend policy appears to be more profound for 

highly opaque banks. 

As for the research that have reached the absence of any effect from 

earning management on dividends (e.g. Khan & Shah 2019;ا He et al., 

2017; Shah & Zafar, 2010; Saleem & Alifiah, 2017; Ibrahim & Hanefah, 

2016; Joshi, 2014 and Srikanth & Prasad, 2015). 

 In the research of (Khan & Shah, 2019) the sample was taken from 

companies listed on the Karachi stock exchange (KSE) from the year 2005 

to 2009, and the relationship was identified between earning management 

and dividends, which is a negative impact but very weak, close to the lack 

of influence, and it was concluded that small companies pay more 

dividends than big companies. He et al., (2017) study there is no impact 

and set that companies that pay dividends manipulate earning less than 

companies that do not pay dividends. 

In the research of (Shah & Zafar, 2010) it's different because its case 

study was taken between Pakistan and China in studying the effect of 

earning management on dividend payout. It was concluded that the 

discretionary accruals (DAC) have no effect on the dividend in both 

countries, but the large companies in Pakistan announce and distribute 

dividends while in China the small businesses do that, Saleem and  Alifiah, 

(2017) found insignificant impact, and one of the main reasons for that, 



31 

according to the research, is the financial crisis in the world and the decline 

in the economy in that period, as a sample of companies in the gas and oil 

sector was taken from the year (2008 to 2015 ) in the period of this decline, 

companies tried to increase earning management and as result of that are 

starting to reduce the payment of dividends, but other factors effectively 

affect in a pattern of dividend payout. In another research by (Ibrahim & 

Hanefah, 2016) the effect of earning management was measured on 

dividend, but in non-financial companies in Nigeria, it was found that there 

is no significant effect on the dividends from the management of earning, 

but both the financial leverage and the size of the company show a 

significant impact on the dividends, and it was also found that the earning 

management does not facilitate in any way forming or restricting the 

payment of dividends. Rather, managers have other reasons for managing 

earnings, and it is also concluded in the study that the main determinant of 

cash dividends is the level and size of the company's financial leverage. 

Joshi (2014) research found a positive but insignificant effect on the 

dividends, which indicates that the increase in the discretionary accruals of 

the company will not lead to a significant increase in the percentage of 

profits, and therefore the earning management practices do not significantly 

affect the dividend payout policy of the company in India. Srikanth and 

Prasad (2015) provide evidence that there is a significant correlation 

between earning management and dividends, and previous studies that 

were used talked about changes in stock prices and future profits as a result 

of changes in dividend distributions. As a result of this study, it was 



39 

concluded that the discretionary accruals are a factor affecting the dividend 

payout. 

2.11 Development of hypotheses 

1-  The effect of earning management on dividend payout 

Most of the research that was researched indicated a negative effect 

of earning management on a dividend. The results of previous research 

concluded that EM has negative relationship with the dividend policy of a 

firm in the determination of dividend payout of every firm. It was therefore 

concluded that this relationship could be a result of effective corporate 

governance mechanisms put in place that show in( Ajide & Aderemi, 2014; 

Dilawer, 2012; Savov, 2006; Khan et al., 2013 and Gill & Mand, 2014).  

Ajide & Aderemi (2014) if managers increase discretionary accruals 

of the company, the dividend percentage will not increase; accordingly, the 

first hypothesis can be formulated as follows: 

H1: Earning management has negative significant effect on dividend 

payout at Palestine and Amman stock exchange in the banking sector. 

2-  The role of leverage on the effect of earning management on 

dividend payout 

According to the definition of financial leverage, capital structure 

options are among the difficult options because financial leverage is the 

degree to which the company uses the borrowed money and high leverage 



35 

can lead to the risk of bankruptcy, however, leverage can increase 

shareholders‟ return on investment and usually What have tax advantages, 

and according to what was mentioned in the study of Kothari et al., (2012) 

the financial leverage has a tremendous impact on the management of 

earnings when companies aim to reduce the violation of debt agreements 

and increase the value of commercial bargaining during debt negotiations, 

so companies can use multiple earning management strategies, whether 

management accrual-based or true earnings, with the knowledge that 

accrual-based earning management occurs when managers choose 

accounting policies from a set of generally accepted policies to achieve 

profit goals. Jensen (1986) indicates that increasing leverage due to debt 

pledge pressure reduces the manager‟s opportunistic behaviors and makes 

them more conservative. Zagers (2009) found that financial leverage leads 

to income control with the purpose of affecting operating cash flow if 

financial leverage in companies increasing. On the other hand, the study of 

(Tonya & Sokiri, 2020) supports agency theory; the result shows a negative 

relationship between the level of leverage and profit management. Beatty 

and Weber (2003) and (Dichev & Skinner, 2002) indicate that higher 

financial leverage is likely to lead to increased accounting options from 

AEM and other earnings this to avoid debt charter violations. 

Graham et al., (2005) indicates that managers tend to practice profit 

management through manipulation Real activities are more than accruals 

because fixed asset management is more straightforward due to scrutiny of 

auditors and regulators. 



33 

Leverage can increase the shareholders' return on their investment 

and make good use of the tax advantages associated with borrowing. That 

is why there is an urgent need for every firm to have a specific optimal 

debt-to-equity ratio determined by balancing the present value of expected 

marginal benefits of leverage against the present value of expected 

marginal costs of leverage proposed that increased debts can reduce the 

probability of a firms failure. Despite these (Odum & Odum, 2017) 

suggested that leverage can impact dividend policy significantly because 

firms that have relatively high leverages may be at financial risk of 

bankruptcy if they are unable to make payments on their debt. It may also 

result in the inability to find lenders in the future. So leverage increases 

with fixed assets, non - debt tax shields, growth opportunities, and firm size 

and decreases with volatility, expenditures, and profitability, though 

provide no support for an effect on debt ratios arising from non - debt tax 

shields, volatility, and future growth. According too many studies that 

indicated the existence of a moderate effect of the role of the leverage on 

the effect of earning management on dividends. 

Accordingly, the second hypothesis can be formulated as follows: 

H2: The effect between the earning management and Dividend payout is 

moderated by leverage at Palestine and Amman stock exchange in 

banking sector. 

 



34 

2.12 Research Framework 

Figure 1 show the theoretical framework used in this research with 

the final target at the dividend payout. 

 

 

 

 

 

Figure (1): A research framework 

  

Independent variable 

Earnings Management 

Dependent 

variable 

Dividend payout 

Moderate 

variable 

Leverage  

Control 

variables 

 



35 

Chapter Three 

Research Methodology 

3.1  Introduction 

3.2  Research Population and Sample 

3.3  Data and Source 

3.4 Research Variables and Measurement 

3.5  Statistical Processing 

3.6  Empirical Model 

 

  



36 

Chapter Three 

Research Methodology 

3.1 Introduction 

The research methodology is considered a pivotal part of the 

research, through which the applied aspect of the research is carried out to 

reach the results of the research and achieve its objectives, and this chapter 

aims to describe the research methodology in terms of the research 

community and sample, data sources and their collection tools, research 

variables, and the method of measuring each of them, the research model 

and methods, and the statistic used in data analysis and hypothesis testing. 

3.2 Population and sample of the research 

The research population consists of 21 banks listed on Palestine and 

Amman exchanges during the period 2009 to 2018. To conduct the 

research, all listed banks that have been selected meet the following 

conditions to form the study sample: 

1-  To be listed on Palestine and Amman Stock Exchange during the 

study period. 

2- Availability of annual reports in addition to the data and information 

necessary to measure research variables during the study period. 

3.2 Data and source 

The theoretical aspect of the research was developed by using the 

sources related to the research topic, such as journals, scientific letters, 



37 

books, in addition to websites on the internet as for the practical aspect, the 

annual reports and disclosures issued by the banks during the years 2009-

2018 and published on the official website of Palestine Exchange and 

Amman stock Exchange were relied upon to collect the required data to 

conduct this research. 

3.4 Research variables and measurement 

A generalized model was initially explored by using all the variables 

as per the literature; however, the final optimized model was achieved by 

studying the effect of earning management as independent variables on 

dividend payout as dependent variable. Financial leverage was taken as a 

moderating variable, and firm size, return on assets and board director 

diversity (experience, age, gender, nationality) as control variables. A 

dummy variable was used (Exchange variable) in the research to clarify the 

difference in the effect of EM on DPO in the Palestine exchange and 

Amman stock exchange of the banking sector. 

1- Independent variable 

Earning management 

Earning management represents the independent variable in this 

research, and regarding previous studies, it is noticed that discretionary 

accruals are widely used as an indicator for managing earnings, and there 

are many models used to detect earning management that is based on 

estimating discretionary accruals. There are many models for measuring 



38 

profit management (DAC), but most of them have been developed in 

developed countries such as the United States and European countries, 

there is no guarantee that these results are effective in various industries 

and economic environments, and these results may not be generalizable to 

developing countries. For example, Yoon et al., (2006) and Islam, et al. 

(2011) documented that the Modified Jones model is not effective in 

measuring discretionary accruals for Korean and Bangladeshi firms. 

Therefore, this research attempts to find out if the Yoon model is effective 

in detecting earnings management in an emerging economy as Palestine 

and Jordan and will use it as a research model in this study. During this 

research, after measuring the earning management using this model the 

results will be compared with other results and we will explore more 

appropriate model in developing countries to detect earning management. 

The model of Yoon et al. (2006) is represented by: 

 
   

    
=    

           

    
) +   (

             

    
  +   (

             

    
)+εit 

 TA (Total accruals) = accounting earnings – CFO 

 REV = net sales revenue 

 REC = receivables 
EXP = sum of the cost of goods sold and selling and general administrative expenses 

excluding non-cash expenses. 

 PAY = payables  

DEP = depreciation expenses 



39 

RET = retirement benefits expenses 

At-1= total asset in the year t-1 

 Δ = change operator. 

The model posits that total accruals will normally depend on changes 

in cash sales revenue, changes in cash expenses, and some non-cash 

expenses including depreciation expenses and retirement benefits expenses. 

2- Dependent variable 

Dividend payout 

Dividends payout represents the dependent variable in the research, 

and it has used dividend payout ratio following the example of many 

previous studies and is considered appropriate to measure dividend payout. 

Here in this research, cash dividends and share dividend were measured 

and calculated in the form of free shares to shareholders and the total of 

dividends and divided by the net income. The data was used financial 

extracted from the annual reports. 

The dividend payout ratio can be calculated as: 

DPO= 
        

   
 

Where: 

DPO is the dividend payout ratio 

Div paid is dividend paid (cash) 

N.I is net income at the end of the year. 



41 

The Dividend payout (stock) can calculate: 

Dividend stock that disclosure in annual report in the year t+1 to net 

income at the end of the year. 

The total Dividend payout can calculate: 

Dividend payout cash + Dividend payout stock 

3- Moderating variable 

 Financial leverage: 

Leverage represented as a moderator variable in the research. 

According to (Khan et al., 2013) leverage can be defined as the ratio of 

total debt to total assets.  

LEV= 
  

  
 

Where: 

LEV is Leverage 

TD is long term debt of the year 

TA is the total asset 

4- Control variables  

These variables have the purpose of control for firm characteristics 

that can affect earnings management and dividend payout. In this section, I 

will provide a descriptive analysis of firm-specific control variables. 

 



49 

a- Firm Size (SIZE) 

There are two different measures of company size, market value and 

total assets. He et al., (2017) found a strong relationship between total 

assets and market capital, so I will use the only record of total assets in the 

analysis, but strength tests found that results remain unchanged using 

market value. It was also found from previous studies that larger companies 

are less likely to manage profits (Siregar & Utama, 2008) and in the largest 

company that has audit quality avoids earnings management activities that 

distort financial data and usually have a greater reputation in the market so 

the potential costs of losing reputation due to earnings management are 

greater (Siregar & Utama, 2008). 

b-  Return on Assets (ROA) 

With the analyses of the impact of firm's profitability, for the 

coefficient of this variable, the previous studies have again contradictory 

results using different samples using sub-sample of U.S firm, the 

coefficient is negative and statistically not significant (He et al., 2017) and 

other studies using a sample of China‟s listed firms, the coefficient is 

positive and statistically significant. De Angelo et al., (2007) suggested that 

more profitable firms are less likely to manage earnings. 

c-  Board of director Diversity: 

     The world has embarked into the era of globalization; consequently, 

the management of cultural differences is on the agenda of most corporate 



45 

leaders due to the combination of workforce diversity in terms of gender, 

race, ethnicity, and nationality .This diversity not only yields gains like 

improve decisions, greater vision, the novelty of ideas, and product 

marketing to culturally diverse customers but also generates costs such as 

more turnover rate, social differences, and communication issues. 

Ararat and Tinsel (2015) ‏investigated the impact of Board Diversity 

using Board Diversity Indices (Gender, Age, Education, Nationality) on the 

Firm Performance who found a positive relationship between the 

Demographic Board Diversity and the Firm Performance. While reviewing 

the literature on the Diversity of Board of Directors, (Kagzi & Guha, 2018) 

stated Board Diversity as a remarkable and vital dimension for research.  

Diversity can be broadly categorized in two broad features i.e. 

apparent features such as gender, age, race or ethnic background, 

nationality, etc. And unobvious attributes such as education, technical 

abilities, experience, etc. Differentiating between the two types of 

diversities is important as the persons‟ apparent features tend to induce 

reactions owing directly to presumptions, prejudgment, for example, 

gender differences may be linked with the differences of underlying 

attributes such as social status, schooling, and beliefs. 

*  Nationality Diversity (Nati) 

Board nationality diversity defined as the existence of at least one 

holding member foreign-nationality within the board of director (Staples, 



43 

2007). Various governance instructions focus on the hiring of individuals 

from various nationalities in board of director for their stakeholders, 

employees and customers. This is due the hiring of foreign directors is seen 

to enhance the decision process and its quality for the board (Ibrahim & 

Hanefah, 2016). Ruigrok & Tacheva (2007) in addition, suggest that 

foreign directors bring with them diverse ideas and viewpoints, such as 

religion, language, culture life, experiences, norms and behavior of the 

company or state, which, in turn, improve the decision-making operation. 

The assumption may be made that foreign board membership is a primary 

element of a corporate governance framework that defines the value of 

companies and the distribution of resources amongst different stakeholders 

(Romli & Ismail, 2014; Okon & Monday, 2017 and Bollazzi & Risalvato, 

2018).  

*  Gender and Age diversity (GENDER and AGE) 

Members of the corporate board are supposed to be educated 

intellectuals, mature, knowledgeable, experienced, and hence aged above 

the forties. Diversity in age and gender can be referred to as the degree to 

which the age & gender of the members of a group or organization varied 

(Li, J. & Liao, 2011). Age diversity is considered to be the apparent 

attribute group diversity in terms of age is one of the salient topics among 

the researchers as the workforce is getting old throughout the world. The 

aging of personnel globally subsequently resulting in an increase in age 

diversity in the business firms (Li, J & Liao, 2011). 



44 

*   Experience Diversity (Exp) 

Experienced directors may explore the new prospects for the firm 

with a better grasp of the association between the corporate board of 

directors and its decisions. Altiner and Ayhan (2018) studied and found a 

positive correlation between experience diversity and team efficiency. The 

organizations can learn from diverse backgrounds and experiences of 

different individuals. The knowledge so gained can be used to yield 

favorable results (Jehn & Bezrukova, 2004) While switching the 

corporates, directors gain facts, information, and skills. This gained 

experience consequently outlines the range of decisions, which in turn 

becomes the framework for strategic considerations of the organization 

(Kroll & Wright, 2008) experience drives the future course of action of the 

executives (Beckman, 2006) corporations can accomplish expertise in 

certain activities performed internally by adding experience in the 

execution of such activities. Likewise, directors gain expertise via their 

external experience. It is assumed that directors with experience have a 

rather worthwhile comprehension of the enterprise; hence such directors 

have the propensity to contribute in bringing to light key components of the 

enterprise habitat and in aligning management focus on the critical aspects 

for guidelines. While highlighting the behavioral aspects of the theory of 

the firm, emphasized former experience cannot be parted away from the 

decision making, therefore while analyzing a given situation with a 

perspective of the individuals with varied experiences, an innovative 

solution can be triggered. 



45 

Table (1): Variable measurement 

Variables Measurement 

Earning management (EM) Yoon et al, model 2006 

Dividend payout /cash(DPO) Dpo/N. I  

Dividend stock Disclosure in annual report in  the year 

t+1 to net income at the end of the year  

total Dividend payout  Dividend payout cash + Dividend stock 

Leverage (LEV)  total debt/total asset  

Size firm (SIZE) ln of total assets 

Nationality Diversity(Nati) Equal to one if the non-resident director is 

on the board. otherwise zero 

Gender diversity(GENDER) Equal to one if man zero if a woman  

Age diversity(AGE) The average age of the board of the 

directors of the firm 

Experience Diversity(EXP) Ln (average experience of the directors of 

the firm ) 

Return on Asset (ROA) net income/ total asset 

Exchange variable Palestine exchange = 0 

Amman stock exchange =1  

3.5 Statistical processing 

Statistical analyses were carried out using E-views statistical 

computer program, the analysis examined in the research includes: 

1- Descriptive statistics 

Descriptive statistics forms the basis of nearly every quantitative 

analysis of data and is used to describe the basic features of data in 

research as they provide simple summaries about the sample and 

measures, and describe the maximum value, minimum value, mean, 

and standard deviation of variables. 

2- Multiple regressions: 

Another statistics processing used is multiple regressions. To 

complete this research which was used to test the relationship 



46 

between the dependent variable and independent variable which are 

earning management and dividend payout and the moderator variable 

which are the leverage and board diversity, regression analyses 

describe how one variable is related to another. The method of 

Generalized Least Squares (GLS) constructed with E-views is used 

to estimate the regression line. Some tests were also performed to 

verify the compatibility of the data with the basic assumptions of the 

multiple regression models, as (Durbin-Watson statistic) was used to 

verify the existence of the (autocorrelation) problem between the 

residuals and autocorrelation. Otherwise, the regression equation 

expresses the linear relationship between two or more variables, 

moreover, the regression analysis, the dependent variable (DV), the 

independent variable (IV) and moderator variable (MV) have to be 

identified and these are usually based on the theoretical basis.  

3.6 Empirical Model  

The research model is developed to examine the effects of earnings 

management on dividend payout with a focus on the moderating role of 

leverage at Palestine and Amman exchanges in the Banking sector during 

the period (2009 to 2018). 

DPO =β0+ β1DACi++ β3 FIRM SIZE+ β4 ROA +    

DPO = β0 + β1DACi + β2LEVi + β3 DAC*LEV+ β4 SIZE+β5ROA+ β6 

Nati+ β7 AGE+ β8 GENDER+ β9 EXP +   

DACi = earnings management of firm i. It is proxy by Discretionary accrual calculated 

using Yoon et al. (2006) model. 



47 

Div = Dividend payout of firm 𝑖. It measured as Di = 
   

   
 , Dividend cash, Dividend 

stock(disclosure in annual report to N.I)  and Dividend total (Dividend cash +Dividend 

stock). 

SIZEi = size of firm i. It is calculated using the natural logarithm of total assets of a 

company 

ROAi = Return on asset of firm i in year t. It is measured using the ratio of net income 

of the company to total asset 

LEVi = Financial leverage of firm i in year t. It is calculated using the ratio of total debt 

to total assets. 

DAC*LEV= Interaction term. 

Nati= Nationality diversity, Equal to one if the non-resident director is on the board. 

Otherwise zero 

GENDER= gender diversity, Equal to one if man zero if a woman 

AGE= age diversity, the average age of the board of the directors of the firm 

EXP= experience diversity. Equal Ln (average experience of the directors of the firm) 

  



48 

Chapter Four 

The Estimation results and discussion 

4.1  Introduction 

4.2  Descriptive statistics 

4.3 Pearson Correlation matrix  

4.4  Estimation results 

4.5  Testing Hypotheses and Discussion of results  

 

  



49 

Chapter Four 

The Estimation results and discussion 

4.1 Introduction 

This chapter aims to test the research‟s hypotheses to investigate 

whether earning management will affect the dividend payout in the banking 

sector at Palestine and Amman exchange and focus on the role of Leverage 

as moderator variable. Also, it presents the research results and discussion. 

4.2 Descriptive statistics 

This section demonstrates the effect of earning management on 

dividend payout with a focus on moderating effect of Leverage. EM was 

measured by discretionary accruals; firm size and ROA were controlling 

variables. In this part, the descriptive statistics obtain the appropriate output 

for variables; the descriptive shows every quantitative analysis of data 

and describes the Maximum Minimum values and standard deviation of 

search variable. Table (2) presents the descriptive pooled indicators of the 

variable. 

  



51 

Table (2): Descriptive indicators for the variables considered in the 

analysis 

  

M
ea

n
 

M
ed

ia
n

 

M
a
x
im

u
m

 

M
in

im
u

m
 

S
td

. 
D

ev
. 

O
b

se
rv

a
ti

o
n

s 

TOTAL_DIV 0.76 0.5 23.67 -7.23 2.10 210 

DIV_CASH 0.47 0.40 8.15 0.00 0.97 210 

DIV_STOCK 0.29 0.00 17.30 -7.23 1.60 210 

DAC_YOON 0.00 -0.30 20.18 -13.28 2.86 210 

LEVERAGE 0.80 0.84 8.82 0.08 0.80 210 

GENDER 0.51 1.00 1.00 0.00 0.50 210 

LN_AGE 4.06 4.06 4.234 3.80 0.10 210 

LN_EXP 3.44 3.46 3.71 2.99 0.16 210 

NATIONALITY 0.61 1.00 1.00 0.00 0.48 210 

ROA 0.01 0.01 0.13 -0.02 0.01 210 

FIRM_SIZE 20.93 20.79 24.65 17.87 1.24 210 

EXCHANGE 0.71 1.00 1.00 0.00 0.45 210 

LEVERAGE_CENTERED*D

AC_YOON_CENTERED 
-0.24 -0.02 8.56 -12.73 1.42 210 

Referring to the table (2) the mean of discretionary accruals (DAC 

Yoon) is about 0 this result approximately corresponds with previous 

research (Zeb & Rahman, 2019 and Saleem & Alifiah 2017). Looking at 

the minimum value, the maximum value, and the standard deviation of the 

estimated entitlements, we find it as follows: minimum (-13.3) maximum 

value (20.2) st.div (2.8)  As for the minimum value, the previous research 

found that consistent with the result (Saleem & Alifiah, 2017) in the gas 

and oil Pakistani companies  Also, inا (Zeb & Rahman, 2019) found the 

minimum value-0.391 according to the maximum value of accruals (DAC) 

for the  proxy used and this result approximately in the range of previous 

research of ( Dilawer, 2012) in textile industry 9.941399  on the other hand, 

(Ibrahim & Hanefah, 2016) found it 41.74, and it was found in (Khan & 



59 

Shah, 2019) 16.453. Referring to Table (2), the standard deviation of 

discretionary accruals is (2.8)  for the proxy used. And that fit with 

previous types of research (Shah & Zafar, 2010) they were found in china 

case the st.div of DAC 1.233157 on the other hand, it was found (Dilawer, 

2012) std of DAC 1.524665. 

Moving to the dependent variable the dividend payout Mean value of 

DPO (dividend payout) is (0.5) for div cash, (0.3) for div stock and (0.8) 

for total div which shows the average payment of dividend level, while the 

standard deviation of dividend payout is (0.97, 1.61 and 2.10) which shows 

the deviation of dividend from its mean value. The maximum value of 

dividend payout is (8.16, 17.3 and 23.7), and the minimum value of 

dividend payout is (0,-7.23 and -7.23). the results are similar to several 

previous studies, and it was found in a research (Saleem & Alifiah, 2017 

and  Khan & Shah, 2019) the mean value (.30) and (0.703486) 

Respectively, While in their (Shah & Zafar, 2010) research study of 

Pakistan and China cases, they found that the minimum value of dividends 

in Chinese companies is -5.08928 and the maximum value is consistent 

with Pakistan case 8.0936  was found in  (Khan& Shah, 2019) -13.81551, 

while the st.div of dividend payout was found higher than it in (Khan & 

Shah, 2019)  was 4.90505. As for the financial leverage and its moderate 

role the Table above shows that leverage has a mean value of -0.24 with an 

associated standard deviation of 1.43 and minimum value -12.7 and 

maximum value 8.5 In previous studies, the effect of financial leverage was 

found on earning management as well as on dividends, and it was found 



55 

that the results are close to the results of the research in the research 

(Vakilifard & Mortazavi, 2016 and Odum & Odum, 2017). 

4.3 Correlation matrix 

As we know the Correlation coefficients are indicators of the 

strength of the relationship between two variables. If correlation coefficient 

is greater than zero indicates a positive relationship between two variables, 

a value of zero indicates no relationship between the two variables that are 

being compared. 

Finally, a value that is less than zero signifies a negative relationship 

between two variables. Moving to correlation matrix for the variables in 

this study is presented in Table (3) as shown, all the proxies of 

discretionary accruals are highly correlated. This observation validates the 

measurement approaches of the dependent variable of the study. The 

correlations among independent variables are generally low. Asteriou and 

Hall (2007) claimed that correlations of less than 0.9 do not cause a serious 

Multicollinearity problem in the regression analysis. 
 



53 

Table (3): Correlations between all variables included in the analysis 

Correlation 
T

O
T

A
L

_
D

IV
 

D
IV

_
C

A
S

H
 

D
IV

_
S

T
O

C
K

 

D
A

C
_

Y
O

O
N

 

L
E

V
E

R
A

G
 

G
E

N
D

E
R

 

L
N

_
A

G
E

 

L
N

_
E

X
P

 

N
A

T
IO

N
A

L
IT

Y
 

R
O

A
 

F
IR

M
_

S
IZ

E
 

E
X

C
H

A
N

G
E

 

LEVERAGE_CE

NTERED*DAC_

YOON_CENTER

ED  

TOTAL_DIV 1.000 
           

  

DIV_CASH 0.681 1.000 
          

  

DIV_STOCK 0.896 0.285 1.000 
         

  

DAC_YOON -0.057 0.036 -0.097 1.000 
        

  

LEVERAGE 0.034 0.019 0.034 -0.106 1.000 
       

  

GENDER -0.022 0.099 -0.090 0.066 0.033 1.000 
      

  

LN_AGE -0.123 -0.021 -0.149 0.115 0.067 0.510 1.000 
     

  

LN_EXP 0.087 0.040 0.090 -0.095 0.100 0.225 0.296 1.000 
    

  

NATIONALITY 0.083 0.151 0.018 0.015 -0.022 -0.233 -0.094 0.189 1.000 
   

  

ROA -0.034 0.008 -0.050 -0.129 0.395 0.102 0.171 0.143 0.089 1.000 
  

  

FIRM_SIZE 0.033 0.089 -0.011 -0.130 -0.057 0.242 0.305 0.267 -0.062 0.033 1.000 
 

  

EXCHANGE 0.110 0.199 0.024 -0.038 -0.005 -0.214 -0.066 0.271 0.502 0.074 0.329 1.000   

LEVERAGE_C

ENTERED*DA

C_YOON_CEN

TERED 

0.162 0.044 0.186 -0.643 0.301 0.099 0.022 0.155 -0.126 0.120 0.226 -0.088 1.000 

Note: All correlations in the table are based on original data. Mean-centering of variables is used to reduce multicolinearity problem. 



54 

Table (3) above shows that the degree of association between 

discretionary accruals and dividend payout ratio is -0.05,-0.09 and 0.04, 

suggesting a negative association between the two. This result was also 

confirmed by (Haider & Sadiq, 2012; Srikanth & Prasad, 2015 and Saleem, 

& Alifiah, 2017). This result confirms that it is an important signal for 

potential future growth. The companies may also participate in the 

management's gain to reduce their profits to pay fewer dividends if there 

are cash restrictions with them in the event that the management's profits 

increase from the ability of the profits and may lead to an increase in the 

share price and this helps to attract investors to invest in the company. The 

table reveals that there is positive correlation between dividend payout 

(total div, cash div 0.07 and stock div 0.09), an increase in leverage would 

reduce dividend payout. With the focus of leverage and DAC of the proxy 

Yoon et al. model (-0.64), we see their negative correlation, depending on 

whether the leverage is high or low, the users of financial statements should 

be taking into account in assessing reported earnings by lowering / 

increasing their expectations regarding the reliability of earnings. Moving 

to control variables (Firm size, ROA, board diversity) the table below 

shows the correlation coefficient of firm size with earning management 

(DAC) for yoon model proxy, the value of firm size (-0.130) it indicates 

there negative and insignificant relationship with DAC it reveals that the 

banks that don‟t have a large number of assets and decrease using EM 

practices. 



55 

However, the size of the firm positively correlated with DPO of total 

and cash div (0.03 and 0.08) and negatively with the stock dividend 

(-0.011). As indicate of ROA is found to be negatively associated with 

dividend payout and DAC. Moving to board diversity (Gender, age, Exp, 

Nationality show negative correlation with two variables. This can be 

confirmed from the correlation coefficient. Furthermore, the correlation 

matrix only shows the degree of association among the variables of the 

study. But, to determine the real impact, should using regression. 

4.4 Estimation results 

The two hypotheses were proposed by this research and investigated 

using one proxy to measure DAC (Yoon model) independent variable and 

the relationship with the dependent variable (total dividend, cash dividend, 

and stock dividend) the moderating variable (Financial leverage) and 

control variables (Firm size, ROA) were estimated using panel GLS with 

cross-section weights and using exchange variable as dummy variable for 

Palestine and Jordan to explain if there any differences in two countries. 

Table (4) below shows the estimation results for the Yoon model with 

(total div, cash div and stock div) as a dependent variable with no 

moderator variable . The coefficient is equal (0, 0.007 and 0.003) to DAC-

Yoon with t-statistics of (-0.02,0.88 and 0.38) (p-value=0.98,0.38 and 

0.70). Thus, from the result, it can be stated that there is no significant and 

positive effect of earning management (DAC) and dividend payout for the 

three types .The adjusted R-square shows that the model explained 34% of 



56 

the total variations of the dependent variable it means that 34% of the 

changes dependent (dividend payout) are described by independent, and 

control variables. As a point of focus, the hypotheses of this research states 

that there is no  significant and positive effect of earning management 

(DAC) and dividend payout for the three types in all banks sector in 

Palestine and Amman's stock exchanges selected for the research. Hence 

the research supports the view that there negative and significant effect and 

the result show the opposite of it. Moving to control variables the results 

show that there is insignificant and positive between the firm size and DPO 

but negative with ROA, moving to board diversity variables  shows gender 

negative and insignificant with total div and stock div and positive and 

insignificant with cash div, the age diversity show positive and significant 

with total div, cash div and negative insignificant with cash div , while the 

estimation result show in experience diversity positive insignificant with 

total div, negative significant with cash and stock dividends ,in nationality 

diversity the result show as following negative insignificant with total and 

stock dividends and insignificant negative with cash dividends  and this 

result does not correspond with our expectation about the association 

between control V and cash DPO. When we used the exchange variable, it 

turned out that it is sufficient to compare the two markets to demonstrate 

the effect of earning management practice in Palestinian and Jordanian 

banks. There is no need to separate the two markets to know this 

comparison. 



54 

Table (4): Estimation results for the DAC Yoon et al (2006) model with three type of dividend as a dependent 

variables with no moderator variable 

 

Dependent Variable: 

TOTAL_DIV 
  Dependent Variable: DIV_CASH   Dependent Variable: DIV_STOCK 

Variable Coefficient t-Statistic Prob.     Coefficient t-Statistic Prob.     Coefficient t-Statistic Prob.   

DAC_YOON 0.000 -0.019 0.985   0.007 0.883 0.378   0.003 0.375 0.708 

LEVERAGE 0.040 1.493 0.137   0.012 0.498 0.619   0.018 1.080 0.281 

GENDER -0.054 -1.018 0.310   0.200 4.179 0.000   -0.151 -3.724 0.000 

LN_AGE 1.003 2.052 0.042   0.636 2.257 0.025   -0.389 -1.300 0.195 

LN_EXP 0.264 1.090 0.277   -0.292 -1.896 0.059   0.443 2.822 0.005 

NATIONALITY -0.106 -1.871 0.063   0.052 1.344 0.180   -0.015 -0.421 0.675 

ROA -2.936 -1.737 0.084   -0.025 -0.018 0.986   -0.905 -0.928 0.355 

FIRM_SIZE -0.006 -0.392 0.696   0.008 0.500 0.618   0.007 0.675 0.501 

EXCHANGE 0.383 5.906 0.000   0.377 7.428 0.000   -0.067 -1.438 0.152 

C -4.495 -3.043 0.003   -1.741 -1.757 0.080   0.151 0.167 0.868 

                        

R-squared 0.366       0.524       0.146     

Adjusted R-squared 0.338       0.503       0.108     

    Durbin-Watson stat     1.354   1.013       1.369     

F-statistic 12.835       24.512       3.806     

Prob(F-statistic) 0.000       0.000       0.000     

Method: Panel EGLS (Cross-section weights) 

Total panel (balanced) observations: 210 

- Note: the model is panel estimated GLS with cross-section weights. Independent variables are defined in Table (1). 

- The model includes a constant term and exchange variable. 



55 

Table (5) below  shows the estimation results for the DAC Yoon et al 

(2006) model with (total div, cash div and stock div) as a dependent 

variable with moderator variable (Leverage). The coefficient is equal 

(0.02,.023 and 0.014) to DAC-Yoon with t-statistics of (1.45,2.43 and 1.38) 

(p-value=0.14,.02 and 0.18).Thus, from the result, it can be stated that there 

is no significant and positive relationship between earning management 

(DAC) and dividend payout for the two types (Total dividend and stock 

dividend) and significant with cash dividend at a significant level of 

5%.The adj R-square shows that the model explained 25% of the total 

variations of the dependent variable it means that 25% of the changes in the 

dependent (dividend payout) are described by independent, moderator, and 

control variables. As a point of focus, the hypotheses of this research states 

that there is significant and positive relationship between EM and DPO in 

all banks sector in Palestine and Amman's stock exchanges selected for the 

research. Hence the research supports the view that there positive and not 

significant relationship and the result shows the opposite of it in total and 

cash dividend.  Moving to control variables the results show that there 

insignificant and negative between the firm size and DPO and negative 

with ROA and this result does not correspond with our expectation about 

the association between control V and cash DPO, board diversity show as 

following age and nationality diversity positive and significant that 

correspond with our expectation, while gender and experience show 

negative and insignificant. 



56 

Table (5) also shows how positively that affects DPO and how the 

moderating variable affects the relationship between EM and the DPO 

positively and the significant relationship. This result is consistent with our 

expectations about the effect of the moderating variable on the relationship 

between the EM and the DPO. 



57 

Table (5): Estimation results for the DAC Yoon et al (2006) model with three type of dividend as dependent variables 

with moderator variable 

  Dependent Variable: TOTAL_DIV   
Dependent Variable: 

DIV_CASH 
  Dependent Variable: DIV_STOCK 

Variable Coefficient t-Statistic Prob.     Coefficient t-Statistic Prob.     Coefficient t-Statistic Prob.   

DAC_YOON 0.023 1.459 0.146   0.023 2.431 0.016   0.014 1.386 0.167 

LEVERAGE 0.028 0.517 0.606   0.019 0.698 0.486   0.005 0.127 0.899 

GENDER -0.044 -0.768 0.444   0.166 3.761 0.000   -0.170 -4.096 0.000 

LN_AGE 0.871 1.699 0.091   0.499 1.797 0.074   -0.163 -0.518 0.605 

LN_EXP -0.167 -0.608 0.544   -0.314 -1.996 0.047   0.457 2.523 0.012 

NATIONALITY -0.026 -0.446 0.656   0.046 1.298 0.196   -0.010 -0.290 0.772 

ROA -1.140 -0.505 0.614   0.545 0.381 0.704   -0.741 -0.656 0.512 

FIRM_SIZE -0.019 -1.007 0.315   -0.002 -0.128 0.898   -0.007 -0.690 0.491 

EXCHANGE 0.440 5.521 0.000   0.415 7.991 0.000   -0.028 -0.530 0.597 

LEVERAGE_CENTERED*DAC_ 

YOON_CENTERED 
0.127 2.647 0.009   0.057 2.527 0.012   0.072 2.250 0.026 

C -2.336 -1.410 0.160   -0.922 -0.915 0.361   -0.519 -0.508 0.612 

                        

R-squared 0.285       0.477       0.140     

Adjusted R-squared 0.249       0.451       0.097     

    Durbin-Watson stat         1.201       1.492     

F-statistic 7.930       18.162       3.238     

Prob(F-statistic) 0.000       0.000       0.001     

Method: Panel EGLS (Cross-section weights) 

Total panel (balanced) observations: 210 

- Note: the model is  panel estimated GLS with cross-section weights. Independent variables are defined in Table (1). 

- The model includes a constant term and exchange variable. 



58 

4.5 Testing Hypotheses and Discussion results 

Testing Hypotheses 

This part of the research aims to test the effect of earning 

management on dividend payout and then the intended part, which is to test 

the effect of earning management on dividend payout in the presence of 

leverage. 

The two hypotheses intended to be investigated in this thesis were as 

follows: 

H1: Earning management has negative significant effects on dividend 

payout at Palestine and Amman stock exchange in the banking sector. 

H2: The effect between the earning management and Dividend payout is 

moderated by leverage at Palestine and Amman stock exchange in 

banking sector. 

To conclude about the relationships found from the analyses, Table 

(6) summarizes the results of previous model. 

Table (6): Summary of the relationships from the research findings 

Dependent variable: Total div Cash div Stock div Conclusion 

variables     

EM (DAC) - + - Mixed 

LEVERAGE + + + positive 

LEVERAGE*DAC_YOON + + + positive 

Firm size - - - negative 

ROA - - - negative 

Gender diversity - + + Mixed 

Age diversity + - + Mixed 

Nationality diversity - + + Mixed 

Experience diversity + + - Mixed  

Only significant results are presented in this table. All insignificant results are 

left empty. 



59 

H1: Earning management has negative significant effects on dividend 

payout at Palestine and Amman stock exchange in the banking sector. 

The first hypothesis examines the extent of the practice of 

Palestinian and Jordanian banks listed on the Palestine Exchange and the 

Amman Stock Exchange during the study period, and the hypothesis asks 

whether the management of profits practiced by the banks affects one of 

the most important financial decisions, which is the dividend policy. In 

order to test this hypothesis, the decision rule to accept the hypothesis if it 

is (F-test) is less than its scheduled value at the 95% confidence level, as 

well as its probability (p-value) less than 5%. 

From table (4), it is noticed that correlation factor (R) between EM 

and the ratio of DPO (cash and total) is high, but the stock dividends is low, 

and the size and direction of the impact of EM on DPO positive while in 

our hypothesis however that indicates that banks manage their earnings by 

increasing them, which is reflected in the increase in dividends, but this 

result cannot be Generalize it because the effect is not significant. This 

result came close to a research result Joshi, R, (2014)  In this study it was 

found that companies that practiced profit management in order to increase 

their profits made larger cash dividends, but this result cannot be 

generalized. 

  



61 

H2: The effect between the earning management and Dividend payout is 

moderated by leverage at Palestine and Amman stock exchange in 

banking sector. 

 The question that expresses this hypothesis is whether there is an 

effect of earning management on dividend in moderate of leverage in 

Palestinian and Jordanian banks listed on the Palestine Exchange and 

Amman stock exchange? To test this hypothesis the base of the decision 

rule to accept the hypothesis if it (F-test) is less than its scheduled value at 

the 95% confidence level, as well as its probability (p-value) less than 

5%.That means the banks that managed their earning with the moderate of 

leverage were able to influence the DPO? To measure this hypothesis, a 

multiple regression model was used .Through Table (5), we find that there 

is an effect of profit management on profit distributions in the presence of 

financial leverage and that the three variables (EM, DPO, Leverage) have 

statistical significance. Financial leverage and that is consistent with the 

hypothesis that was developed and also corresponds to several studies, such 

as (Ibrahim & Hanefah, 2016) for non-financial companies in Nigeria, 

(Chansarn & Chansarn, 2016; Khan & Shah, 2019; He  et al., 2017 ; Shah, 

et al., 2010 and Saleem & Alifiah, 2017) that show a positive and 

significant impact were found. 

Discussion of results 

The research aims to discover how the  banks listed in  Palestine  and 

Amman Stock Exchange practice managing earning and how misleading in 



69 

financial disclosure, through their intervention in accounting measurement 

processes by exploiting the flexibility available to them in accounting 

standards to influence the declared net profit to achieve the objectives of 

the administration. Earning management in the banking sector on the policy 

of dividend distribution as one of the most important financial policies in 

banks with the moderate of financial leverage. In order to achieve the 

objectives of the research, two hypotheses were put forward and through 

testing those hypotheses, the following results have been reached, which 

can be summarized as follows: 

1- The results of the first hypothesis test showed that there is no 

significant and positive statistical impact of earning management on 

dividend payout in the banking sector listed in the Palestine 

exchange and Amman Stock Exchange. Exposure to financial crises 

due to the distribution of fictitious profits. Whereas the banks that 

practice profit management and show low profits, they may resort to 

the voluntary reserve account, profits and retained losses, to maintain 

the stability of the distributed profit ratio. Therefore, the bank‟s 

management was able to harmonize between exploiting the 

phenomenon of profit management to achieve its goals and the most 

important financial decisions, which is the policy of distributing 

profits without affecting on their financial condition. 

2- The results of the second hypothesis test showed that there is a 

significant and positive statistical effect of profit management on 



65 

profit distribution by mediating the financial leverage in the banks 

sector listed on the Palestine Stock Exchange and the Amman Stock 

Exchange. This hypothesis was based on the idea of a link between 

profit management and the relationship between dividends and 

financial leverage, meaning that the banks that managed their profits 

and financial leverage were able to influence the distribution of 

profits, and therefore the management of banks that committed to 

manipulating their profits was able to balance one of the most 

important financial decisions (the policy of dividend distribution) 

without damaging its financial position, using leverage and 

influencing the decisions of shareholders, investors and financial 

analysts with interests in the policy The bank distributes profits and 

that makes it a fairly stable policy. 

 

  



63 

 

Chapter Five 

Conclusions and Recommendations 

5.1  Introduction  

5.2  Conclusions 

5.3  Recommendations 

5.4  Limitations 
  



64 

Chapter Five 

Conclusions and Recommendations 

1.5 Introduction 

After running the data with variety of tests the result and evidence to 

approve the hypotheses whether significant or not are already being 

answered. Chapter five of this research aims to summarize the most 

important conclusions reached by the research in addition to present a set 

of recommendations based on them. 

2.5 Conclusions 

From the results we determined it has been clear that earnings 

management is positively effect on dividend payout with moderating role 

of financial leverage in Palestinian and Jordanian banking sector. 

From the econometric analysis conclude that: 

1- Discretionary accruals have impact on dividend policy in both 

Palestine and Jordan. 

2- A control variable also shows insignificant impact on our dependent 

variable. 

In this research we have found that there is earning management in 

both countries but that is not for the purpose of dividend announcement. 

Earning management is made by owners and managers to get maximum 



65 

benefits from their profits. And the result shows there is positive 

relationship between earning management and dividend payout. It may be 

due to financial crisis in world. This research offers a wide range to look at 

what are the other factors that may involve in effecting the pattern of 

dividend payment. And this  result shows the positive effect of EM on DPO 

in Yoon model (total, cash and stock DPO), while the relationships with 

these two variables were not significant and they indicated in overall failure 

in effect, because its nearly to be no impact and weak, with regard 

moderating role to leverage the result show that there are significant and 

positive effects , on the one hand, this research will focus on the situation 

related to earning management and its practi