Dividend smoothing and financial transparency

Abstract

The study explores the effect of financial transparency on dividend smoothing behavior. We analytically show that dividend smoothing should increase when shareholders cannot observe cash flow realizations. Using exogenous variation in financial transparency created by the SOX, we find that less transparent firms as measured by higher dispersion of analyst forecasts and lower excess audit fees reduced dividend smoothing more after the legislative change, as compared to other dividend-paying firms in the sample. Our study complements recent studies considering the firm's dividend smoothing as an alternative corporate governance mechanism.