Which Companies Deliver on the Dividend Promise? New Evidence on Dividend Smoothing and Dynamic Dividend Behavior

Abstract

This paper uses differences in corporate governance and ownership structure to explain the time series properties of dividends (in particular, dividend smoothing). I show that the implicit dividend promise is sustainable in the presence of weak monitoring. The reason is that weakly governed managers face increased pressure from shareholders and the market to comply with the observable dividend policy. I find that weakly governed managers make fewer dividend cuts, engage in more dividend smoothing, and adopt small regular dividend increases. The effect of governance on dividend changes is concentrated in firms with significant cash flow increases. The paper’s empirical strategy accounts for potential endogeneity of corporate governance and financial decisions. The dividend findings are robust to the use of overall payout. Persistent dividends exhibit a partial substitution with debt. JEL classification: G30, G34, G35