Unrealized earnings, dividends and reporting aggressiveness: An examination of firms' behavior in the era of fair value accounting

This study explores changes in the dividend policy of companies following the adoption of fair value accounting rules. Using a sample of Israeli firms that adopted International Financial Reporting Standards (IFRS), we document a dramatic increase in the payout ratios of firms that distributed dividends based on revaluation gains from 32 percent of realized earnings in the pre-IFRS period to 115 percent in the post-IFRS period. Furthermore, we reveal that firms paying dividends from unrealized earnings are more aggressive both in their book and tax reporting behaviors. We demonstrate that this increased aggressiveness is associated with the payment of cash dividends from paper profits.