Smooth Dividends Research Articles

Dividend Policy and Firms’ Value Nexus: Do Walter and Gordon Relevance Theories Hold Water?

This study is an attempt to join on the argument on whether dividend policy is either relevant or irrelevant on the firms’ market value in Nigeria. To achieve this, the data were obtained from selected 20 quoted firms from ten sectors of the Nigeria economy spanning from 2015 to 2021, taking care of the variables; dividend per share, earnings per share, and market value proxied by market price per share obtained from Nigeria Exchange Group and the firms’ annual and accounting reports for the periods. In testing the specified models, all the variants of the Panel data Analysis techniques; Pooled Regression, Fixed Effects and Random Effects were employed. In addition, the prepositions of the Pooled Regression versus Fixed Effects and Random Effects versus Fixed Effects were compared using Likelihood and Hausman test respectively. The results of Pooled Regression, Fixed Effects and Random Effects found dividend per share and earnings per share significantly impacted on market value. Again, both the Likelihood and Hausman tests favour the fixed effect that the unobserved factors in firm are significant or that the correlation between observed and unobserved factors are significant. In the light of the findings, the researchers recommended among others that investors should be consistent with their dividend payment (smooth dividend payment) to attract investors. Again, this study has added to the stream of knowledge that firms should consistently pay dividends to their shareholders as a form of shareholders wealth maximization. This is a form of financial signaling or dividend announcement that will attract investors.

Heterogeneity of dividend smoothing: A strategic response to peer competition in China

Individual firms respond to their peers' influence by adopting an imitation or competition policy. Prior research has documented that firms imitate peers' financial decisions, yet empirical evidence on heterogeneous competing behavior is limited. Since corporate dividend smoothing serves as a competitive tool and relates to financial flexibility, we examine whether individual firms' dividend smoothing behavior is affected by peer firms' behavior. Using peers' idiosyncratic equity risk as the instrumental variable in a 2SLS estimation to mitigate the endogeneity, we find robust evidence supporting that firms tend to behave oppositely to their peers, i.e., individual firms choose to smooth dividends more when peers smooth less, and they smooth less when peers smooth more. In addition, the heterogeneous peer effects of dividend smoothing are more pronounced if firms are in industries with more intense product market competition and more serious information asymmetry problems. Our evidence suggests that firms adopt heterogeneous strategies as responses to peer competition, which casts light on firms' dividend smoothing policy in Chinese context.

Influence of Real Earning Management on Subsequent Dividend Payout Decisions and Corporate Returns: A Case of Developing Economy

Real earning management (REM) enhances the control of managers on the financial reporting of firms. However, its influence on financial decisions in the coming years is not well documented, especially in developing countries. This study investigates the influence of three REM activities on subsequent years’ dividend payout decisions (DPDs) and annual corporate returns of firms listed on the Pakistan Stock Exchange (PSX). The study employed panel data from 2011 to 2020 of 120 large manufacturing firms to 1) measure the extent of REM activities and 2) investigate the impact on future financial decisions of dividends and reported returns. This study used multiple proxies of return for robustness. Consistent with empirical studies, the REM negatively impacts the following years’ returns. However, its effect on dividend payout policy is insignificant. This indicates that Pakistani firms are more concerned with a smooth dividend payout to investors than reporting coherent returns. The study provides significant evidence from a developing economy and has implications for investors, analysts, and policymakers.

Share price informativeness and dividend smoothing behavior in GCC markets

PurposeThis paper examines the dividend smoothing (DS) behaviour in the Gulf Cooperation Council (GCC) countries in emerging markets where the response to news and the economic environment are different from those of developed countries.Design/methodology/approachThe authors examine the effect of share price informativeness on DS in the GCC markets using unbalanced panel data for a sample of 628 GCC-listed firms during 1994–2016. For the regression analysis, the hypotheses are tested using panel regressions and generalised method of moments (GMM) estimation.FindingsFirst, the Lintner model shows that the DS degree in GCC firms is comparable to that of a developed market. Second, and importantly, the results reveal that the DS in GCC firms is sensitive to private information of share prices. Finally, the findings indicate that information asymmetry (IA) and agency-based models affect the tendency to smooth dividends in the GCC markets.Originality/valueThis study is the first study to measure the degree of DS using data for all GCC countries. The authors also identify other determinants of DS behaviour and test the agency and IA explanations for DS in GCC-listed firms. The findings are highly recommended to financial managers and analysts dealing with the GCC markets. This study helps financial analysts to use the share price informativeness as an indicator for the presence of the IA. The study results are beneficial to researchers in understanding the relationship between DS and share price informativeness.

Leverage target and payout policy

AbstractDepending on whether the existing debt is below or above target debt level, some firms are more willing to raise debt (if needed) than others. In this article, I show that firms are more likely to both increase and smooth dividends when they have below‐target debt after controlling for access to debt. Additionally, I show that when firms have below‐target debt, they use a greater fraction of proceeds from net debt issues to finance dividends. I obtain similar results when repeating the tests with total payouts (dividends plus repurchases) instead of dividends only.

When no news is good news: failing to increase dividends

PurposeThe study's purpose is to examine market returns around dividend announcements that contrast with a pattern of prior dividend announcements.Design/methodology/approachThe paper identifies firms that have a smooth dividend pattern of once-a-year dividend increases but at some point break that pattern and announce an unchanged dividend. The sample design allows the opportunity to investigate the market reaction to unchanged dividend announcements when an increase was likely to have been expected.FindingsThe results indicate that failing to increase the dividend is associated with significantly positive abnormal returns that are greater in magnitude for more entrenched dividend-increase records, supporting a contrast-effect hypothesis.Originality/valueThe results indicate that dividends are interpreted not only relative to the immediate dividend amount but also how the decision contrasts with dividends over a prolonged period. This finding suggests that the information content of the announcement of an unchanged dividend can vary according to the prior dividend pattern.

Dividend Policy and Smoothening Behavior of the Southeast Asian Countries Including Japan

This study examines the dividend policy and smoothening behavior of major Southeast Asian countries including Japan. The study uses firm specific variables including corporate governance measures as independent variables. The results indicated financial leverage, return on equity, asset tangibility, Tobin Q, market concentration (HHI), and life cycle are the main determinants of dividend policy for the Southeast Asian region. In addition to this, the corporate governance measures (board composition, audit quality, and ownership structure) are also found as significant determinants of dividend policy of the selected economies. However, the results for cash flow and business risk are found to be contradictory due to their insignificant impacts on dividend policy in some economies. Thus, the study concludes that most determinants of dividend policy are similar within the regions. The study also used probit model in order to find probable factors that may influence the dividend policy and the results show similarity between determinants of dividend policy and probability factors that influence dividend policy. The probable factors are the same as the determinants of dividend policy. In addition to this, the study also tested the application of Lintner model, and the results clearly depicted that last year dividend as well as the current year earnings are the main factors that impact dividend policy of the firms within the region. More so, focusing on the speed of adjustment and target payout ratio of the firms, the study unties that firms have moderate speed of adjustment, and management is reluctant to cut dividends. Lastly, the target payout ratios of the firms also suggest that firms do have moderate target payout ratio except for Singapore with target payout ratio almost equal to 1. Conclusively, the study reveals that the determinants of dividend policy for the Southeast Asian countries are quite similar, firms do follow smooth dividend policy, and management is reluctant to cut dividends in the long run.

Corporate Governance, Ownership Structure and Dividend Smoothing: The Mediating Role of Family Ownership and Board Diversity in Emerging Markets

Purpose: The study attempts to explore the determinants of dividend smoothing behavior of firms by using firm’s specific characteristics, corporate governance and ownership structure variables as determinants of dividend smoothing in emerging markets due to their unique features from Western markets. The current study is undertaken to fill this gap in the literature. Design/methodology/approach: In order to achieve the research objectives penal data (2009-2018) of more than 1000 Asian firms were analyzed by using Statistical techniques such as pool, fixed and random models. Findings: Based on gender critical mass theory, the study finds that the presence of gender critical mass is positive and significantly associated with firm dividend smoothing behavior; whereas, presence of fewer women depicts negative or insignificant association with dividend smoothing behavior. Importantly, the study also finds moderating role of gender diversity between family ownership and firm’s dividend smoothing behavior. Furthermore, contrary to the agency theory based on explanations of dividend smoothing, firms with family ownership smooth dividend more in emerging markets. Practical implications: This paper helps out to the current as well as future potential investors to make better decision in such a changing economy as well as to help investors in selecting better investment opportunity to make their investment more profitable. Originality/value: The current study is the first of its kind to investigate dividend-smoothing behavior for more than 1000 firms of emerging Asian countries based on cross country analysis.

Rethinking Capital Regulation: The Case for a Dividend Prudential Target

The paper investigates the effectiveness of dividend-based macroprudential rules in complementing capital requirements to promote bank soundness and sustained lending over the cycle. First, some evidence on bank dividends and earnings in the euro area is presented. When shocks hit their profits, banks adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then, a DSGE model with key financial frictions and a banking sector is developed to as- sess the virtues of what shall be called dividend prudential targets. Welfare-maxi- mizing dividend-based macroprudential rules are shown to have important proper- ties: (i) they are effective in smoothing the financial cycle by means of less volatile bank retained earnings, (ii) they induce welfare gains associated to a Basel III-type of capital regulation, (iii) they mainly operate through their cyclical component, en- suring that long-run dividend payouts remain unaffected, (iv) they are flexible enough so as to allow bank managers to optimally deviate from the target, and (v) they act as an insurance scheme for the real economy.

Corporate Governance and Dividend Smoothing: Evidence from Pakistani Listed Banks

Manuscript type: Research paper Research aims: This paper empirically examines the effects of ownership and board structure on dividend smoothing in Pakistani listed banks between 2006 and 2014. Design/Methodology/Approach: This study employs random Tobit regression to analyse the effects of ownership and board structure on dividend smoothing. It also applies principal component analysis (PCA) to develop a corporate governance index. Research findings: The findings indicate that Pakistani banks with concentrated and foreign ownership, small size audit committee and less independent boards, exhibit higher levels of dividend smoothing. Interestingly, the study finds Pakistani banks having a joint position of CEO and chairperson, demonstrate lesser dividend smoothing. The study concludes that increasing dividends is an alternative monitoring mechanism for shareholders who are enclosed within a weak corporate governance environment such as Pakistan. Theoretical contribution/Originality: This study contributes to previous literature on corporate governance and dividend smoothing by investigating the role of the boards and the ownership structure. It also fills the research gap by investigating the impact of corporate governance on dividend smoothing by using the CG-Index. Practitioner/Policy implications: The findings of this study offer practical implications for payout and corporate governance policies. Higher information asymmetry and regulatory requirements, low shareholders’ rights and weak corporate governance environment make dividend smoothing another tool for safeguarding the interest of minority shareholders in Pakistani listed banks. Currently, regulators in Pakistan are only focusing on corporate governance mechanism as a means of protecting shareholders. This study recommends that smooth dividends can serve as an additional instrument to help safeguard the minority shareholders’ interest from expropriation. Research limitation: The findings of this study may not be generalised due to the small sample size. Keywords: Dividend Smoothing, Corporate Governance, Tobit Regression, Principal Component Analysis, PakistanJEL Classification: G350, G300, C24, C19

Payout policy in industrial and financial firms

Using a sample of Swedish publicly listed firms between 1970 and 2013, we examine whether payout policy differs between industrial and financial firms. Specifically, we investigate whether payouts and their composition (primarily dividends and stock repurchases) differ between firms. We find that dividends are the major vehicle in distributing earnings to shareholders and also that payouts are more frequent for financial than industrial firms. Stock repurchases have not replaced dividends in Sweden. The total payout ratio, including dividends, stock repurchases, and other forms of cash distributions to shareholders relative to earnings are roughly the same for industrial and financial firms. Financial firms are more reluctant to cut or omit dividends than industrial firms. Our examination of dividend smoothing shows that although both industrial and financial firms smooth dividends, they tend to smooth less during the last two decades as indicated by an increase in the speed of adjustment.

Why do firms smooth dividends? Empirical evidence from an emerging economy India

The present study examines the determinants of dividend smoothing behaviour of 240 sample companies listed on National Stock Exchange (NSE) in India, which have continuous data during the period 1994-1995 to 2012-2013. The empirical results show that Indian firms have target payout ratios, adjust to their targets relatively slowly but not as slowly as the firms in the developed markets such as the USA, Germany and France and thus, tend to smooth and stable their dividends and rely on long-term target payout ratios while making the dividend payment decisions. The firms having high investment opportunities, low leveraged, riskier and smaller firms tend to smooth their dividend more. As for the macroeconomic factors, the high dividend distribution taxes imposed by the government tend the firms to smooth their dividends more. Overall, the results support the information asymmetry and agency-based explanations of dividend smoothing.

Why do firms smooth dividends? Empirical evidence from an emerging economy India

The present study examines the determinants of dividend smoothing behaviour of 240 sample companies listed on National Stock Exchange (NSE) in India, which have continuous data during the period 1994-1995 to 2012-2013. The empirical results show that Indian firms have target payout ratios, adjust to their targets relatively slowly but not as slowly as the firms in the developed markets such as the USA, Germany and France and thus, tend to smooth and stable their dividends and rely on long-term target payout ratios while making the dividend payment decisions. The firms having high investment opportunities, low leveraged, riskier and smaller firms tend to smooth their dividend more. As for the macroeconomic factors, the high dividend distribution taxes imposed by the government tend the firms to smooth their dividends more. Overall, the results support the information asymmetry and agency-based explanations of dividend smoothing.

Liquidity default, liquidity management and smooth dividends policy

ABSTRACTOur article models liquidity financing constraints with the real options framework. By conducting a comprehensive investigation of the effects of shocks to liquidity constraints on the firm’s optimal investment, financing and dividend policies, our model highlights the importance of liquidity management and extends the liquidity management approach to hedge liquidity default risk. We find that being concerned about liquidity default risk will significantly change a firm’s behaviours, including those related to investment and the optimal capital structure. A firm that is concerned about its liquidity default risk will become more cautious: it will choose to delay investment and have higher leverage when internal liquidity is very low, but choose earlier investment and lower leverage when liquidity is high enough. The dividends policy can alleviate risks from both the external market and internal project volatility and provides an alternative explanation for the ‘smooth dividends policy puzzle’ commonly reported in empirical research.

Dynamics of Dividend Payout in Emerging Stock Markets: Evidence from Public Firms at Nairobi Securities Exchange, Kenya

Dividend decisions are central to corporate finance because of its relationship with firm value, finance and investment. Emerging stock markets like the Nairobi Securities Exchange have been hypothesized to exhibit unpredictable dividend behavior by some finance scholars. The thesis is guided by the hypothesis that emerging market firms following dividend pattern different from that of developed stock markets and that determinants of payout exhibit different behavior in different stock exchanges. A mixed design involving panel data from 40 firms over the period 2000 to 2010 and cross section data from finance officers of 40 firms provide evidence of dividend dynamics for quoted companies at the exchange. Panel data estimation techniques along with logistic regression are applied in analysis and testing of hypotheses at 0.05 level based on firm and industry characteristics. Conclusions include; dividends payout by listed firms at the NSE are influenced and predicted mainly by prior dividends (73%) followed by changes in current after tax earnings (3.5%) and lastly business risk to a lesser extent. Secondly, three companies consistently paid significantly higher dividends than their peers in the study period. Thirdly, majority of corporate managers do not smooth dividends when distributing earnings. Forth, Fama and Babiak (1968) dividend model best explains dividend behaviour of NSE firms compared to Lintner (1956) model. Fifth dividend payout in this market is explained by agency cost, signaling and information asymmetry theories. Lastly industry and time effects have no link to dividend decisions of firms in the market. Recommendations include; Shareholders and new investors at NSE should consider prior dividends and earnings changes when making choices about which stock(s) to buy. Dividend payout need to be stabilized by corporate managers to enhance value especially by firms in sectors facing high risk and growth prospects. More so dividend paying firms are preferred by investors to non-paying firms and that changes in dividends elicit excitement among investors compared to keeping dividend unchanged. Finally management of three firms namely Bamburi Cement, Kapchorua Tea and BOC Ltd possess superior talent compared to other firms in their respective industries.

Do Investors Value Dividend Smoothing Stocks Differently?

It is widely documented that managers strive to maintain smooth dividends. Yet, it is not clear if this behavior reflects investors’ preferences. In this paper, we study whether investors indeed value dividend smoothing stocks differently by exploring the implications of dividend smoothing for firms’ investor clientele, stock prices and cost of capital. We find that retail investors are less likely to hold dividend smoothing stocks, while institutional investors, and especially mutual funds, are more likely. However, this preference does not result in any detectable relation between the smoothness of a firm’s dividends and the expected return, or market value, of its stock. Together, the evidence suggests that firms adjust the supply of smoothed dividends to match investors’ demand. Dividend smoothing affects the composition of a firm’s shareholders but has little impact on its stock price.

IMPACT OF FAMILY OWNERSHIP ON FINANCING DECISIONS: A COMPARATIVE ANALYSIS OF COMPANIES LISTED AT THE KSE

The current study attempts to investigate debt and dividend policies under the umbrella of capital structure’s theories in both organizational types i.e. family owned business (FOB) and non-family owned business (NFOB). Two threshold points of ownership structure (25% & 50%) were used to distinguishing FOB from NFOB. A sample of 280 listed firms at the KSE was collected for the period 2002- 13.Generalized Method of Moments (GMM) was applied on panel data to estimate the coefficients of variables. The empirical results indicated the weak application of pecking order theory and higher payout ratio in family firms comparatively. The study provided explanation regarding speedier rebalancing the target capital structure of family firms due to easier access to debt and long term presence of the family in the firm. However, FOBs smooth dividends to lesser extent than their counterpart NFOBs indicate lower agency and information asymmetry problems in them. SECP as well as stock exchanges are advised to bring required changes in corporate laws to ensure lucid and verifiable disclosure regarding dividend policy in their reports, prospectus and websites etc

Dividend payout policies: Evidence from Latin America

This paper examines dividend payout policies for firms in six Latin American countries from 1995 to 2013. As predicted by the pecking order and trade-off models, the dividend payout is positively linked to profitability and negatively related to past indebtedness and investment opportunities. We also find that the target dividend payout ratio is positively related to governance indicators at the country level. In addition, the speed to which firms adjust their dividends to changes in earnings is lower in high governance countries in the region. Thus, firms smooth dividends more in countries with higher governance scores. We do not find evidence supporting the lifecycle theory nor illiquidity effects on dividends levels.

Robust Contracts in Continuous Time

We study a continuous-time contracting problem under hidden action, where the principal has ambiguous beliefs about the project cash flows. The principal designs a robust contract that maximizes his utility under the worst-case scenario subject to the agent’s incentive and participation constraints. Robustness generates endogenous belief heterogeneity and induces a tradeoff between incentives and ambiguity sharing so that the incentive constraint does not always bind. We implement the optimal contract by cash reserves, debt, and equity. In addition to receiving ordinary dividends when cash reserves reach a threshold, outside equity holders also receive special dividends or inject cash in the cash reserves to hedge against model uncertainty and smooth dividends. Ambiguity aversion raises both the equity premium and the credit yield spread. The equity premium and the credit yield spread are state dependent and high for distressed firms with low cash reserves.

Dividend Smoothing: An Agency Explanation and New Evidence

In spite of considerable research into firm dividend behavior, dividend smoothing has eluded a definitive explanation. This paper provides an agency interpretation of dividend smoothing and offers evidence that variation in corporate governance and managerial incentive conflicts explains differences in intertemporal properties of dividends. We argue that smooth dividends are an alternative to traditional corporate governance mechanisms. Empirically, we document a greater degree of dividend smoothing, fewer dividend cuts, and a trend towards regular incremental dividend increases at firms with weak traditional monitoring mechanisms. The effect of governance on dividend changes is largest for firms with high free cash flow. We document consistent patterns for total shareholder payout and overall commitment to external claimholders. However, dividends and repurchases are not perfect substitutes and adjustments to repurchases are secondary to the weakly governed managers’ need to sustain dividends.