Why Firms Smooth Dividends: Empirical Evidence

Abstract

While dividend smoothing is taken as an article of faith, little is known about the cross-sectional properties of smoothing policies. Why do some firms smooth more than others? We examine firms' dividend smoothing behavior across a wide spectrum of publicly traded firms in the U.S. We find that larger firms, firms with more tangible assets, and firms with lower price volatility and earnings volatility smooth more. The findings also indicate that firms with slower growth prospects and firms that are cash cows smooth more. Firms with a more significant presence of institutional investors and firms with higher payout ratios also smooth more. Taken together, the results suggest that agency considerations play an important role in firms' decision to smooth dividends. Asymmetric information based theories are largely unsupported by the data.