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The authors examine the performance of stock dividend issuing firms in New Zealand and find that stock dividends provide management with incentives to manipulate earnings. During the sample period of 1989 to 2003, stock dividend issuing firms increase accruals substantially in the same year followed by poor earnings and stock price performances in the subsequent year. Consistent with the earnings management hypothesis, the authors find that discretionary accruals of stock dividend issuing firms in New Zealand are negatively and significantly correlated with the declines in both future earnings and abnormal stock returns.
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