The effect of accounting conservatism and financial constraints on dividend policy

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Abstract

This study examines the relationship between accounting conservatism (AC) and financial constraints (FC) and their impact on dividend policy (DP). It was noted that the sample companies lack a clear explanation for their dividend policy despite achieving high profits. The study concluded that companies tend to use accounting conservatism as a result of financial constraints on their internal investments, which prevents them from benefiting from less costly external investments. This drives them to adopt policies that reduce dividend distribution to shareholders. Accounting conservatism and higher financial constraints lead to lower dividend distributions. Accounting conservatism measures show a greater negative impact on dividend policy compared to financial constraints measures. This means that a higher degree of conservatism leads to lower dividend distributions. However, financial constraints play a significant role in explaining the dependent variable when combined with accounting conservatism. This interpretation is consistent with Kim et al. (2023) and Abdel Tawab (2022). These results are important for regulators and standard setters regarding the importance of accounting conservatism and financial constraints within accounting standards, as accounting conservatism is widely used in practice by recording the benefits of accounting conservatism in reducing financial constraints, which better explains the companies’ dividend policy.

Keywords: Accounting Conservatism, Financial Constraints, Dividend Policy, Accounting Conservatism Measures, Financial Constraints Measures

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: M41

Received: 17.04.2025
Revised: 18.07.2025; 28.08.2025
Accepted: 11.09.2025
Published online: 15.09.2025

How to cite this paper: Zainy, H. Z. A. (2025). The effect of accounting conservatism and financial constraints on dividend policy [Special issue]. Risk Governance & Control: Financial Markets & Institutions, 15(3), 226–235. https://doi.org/10.22495/rgcv15i3sip5