The effect of dividend smoothing on bond spreads: Evidence from Japan

Abstract

This study investigates the impact of dividend smoothing on bond spreads, using data on Japanese bond-issuing firms. The regression results show that, although dividend smoothing is not systematically associated with bond spreads, it moderates the relationship between target payout ratios and bond spreads for firms facing serious conflicts of interest between shareholders and bondholders over dividends. Specifically, when the level of dividend smoothing is low, the relationship between target payout ratios and bond spreads is positive. However, when the level of dividend smoothing is high, target payout ratios are unrelated to bond spreads.