1. Chuan-San Wang 1

2. Research Question Does payout policy affect investment decision ? Do discretionary accruals differ from other earnings components in cash payout decisions? Does managers’ accounting discretion mitigate the tension between payouts and investment? 2

3. Motivation payout policy can be relevant Corporate decisions can reveal earnings quality Accrual accounting can mitigate competition for capital resources 3

4. Importance Dividends can be value-relevant, DeAngelo and DeAngelo (2006) Several crucial studies are based on the irrelevance theorem, e.g., Ohlon’s (1995) valuation model 4

5. Contributions It shows the causality from dividends to investment It quantifies the competition for capital resources It focuses on the impact of earnings quality on both dividends and investments It provides new evidence based on actual corporate actions 5

6. Literature #1 Miller and Modigliani (1961) theoretically propose that dividend policy is value-irrelevant because it is made after the investment decision The survey evidence from Brav et al. (2005) indicates the opposite: dividend choices are made simultaneously with (or perhaps a bit sooner than) investment decisions H1: The magnitude of cash dividends is simultaneously determined with that of capital expenditures. 6

7. Literature #2 Earnings can explain the propensity to pay dividends (Fama and French, 2001) The three earnings components are similar in explaining dummy for dividend increase (Subramanyam, 1996) Accrual accounting provides additional information H2: discretionary accruals increase dividend payouts by mitigating financial constraints. H3: the marginal propensity to pay dividends for discretionary accruals differs from that of other earnings components 7

8. Research design #1 Cash payout equation 2-stage regressions Simultaneity between Y and X variables diagnostic statistics 8

9. Research design #2 Interaction term for DACC 9

10. The 2 IVs Sargan test for the over-identifying restrictions To show IVs are exogenous to the error term of payout equation One-year lagged depreciation expense, and capital expenditures Jackson et al. (2009) perceived utility, earnings consequences Investment projects need subsequent maintenance and evaluation at multiple stages (Seybert, 2010) 10

11. Discretionary Accruals cross-sectional version of the Jones model used in Daniel et al. (2008) 11

12. Control Variable for Dividends life-cycle theory Fama and French (2001), DeAngelo et al. (2006), Chay and Suh (2009) senior firms pay more dividends firm size, MVE firm age, Tage investment opportunities, MtB retained earnings, RE/TE cash flow uncertainty, SRVOL 12

13. More Control Variables dividends persistency and financial slack Lintner (1956), Brav et al. (2005) Past dividends financial leverage 13

14. Other Control Variable firm performance. Fama and French (2001) value-weighted, market-adjusted buy- and-hold annual stock return, BHAR t operating cash flows, OCF t return on assets, ROA t 14

15. Sample 2010 version of Compustat CRSP 1989–2008 63,955 firm–years with necessary data available 15

16. 16

17. 17

18. Baseline results IVs for capital expenditures are valid and strong investment magnitude is determined simultaneously with cash dividends investments have a significantly negative effect on dividends but the economic size is rather small 18

19. 19

20. (0.4539-0.0624)/(1-0.0624)=0.4176 20

21. over-identifying test OLS regression of the second-stage residuals on all exogenous variables (including the two IVs) the R 2 is 0.0000 The two IVs are exogenous 21

22. 22

23. 23

24. 24

25. 25

26. 26

27. 27

28. 28

29. Robustness Other measures of discretionary accruals Teoh et al. (1998), Dechow and Dichev (2002), and Ball and Shivakumar (2005) How to measure accruals is independent for the dampening effect of investment on dividends the endogeneity tests 29

30. Conclusions Dividend policy is at least simultaneously determined with investment decisions (Brav et al 2005) The irrelevance theorem of Miller and Modigliani (1961) may be questionable (DeAngelo and DeAngelo 2006) The competition between dividends and investment is small in size can be mitigated by managers’ use discretionary accruals It is inconclusive for the propensity to pay dividends for discretionary accruals 30