Do Investors Value Dividend Smoothing Stocks Differently?
Penn State University
Mark T. Leary
Washington University in St. Louis - Olin Business School
Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC)
March 15, 2012
Johnson School Research Paper Series No. 51-2011
It is almost an article of faith that managers have a preference for smooth dividends. Yet, it is not clear why. Is dividend smoothing associated with a lower cost of capital? Do managers’ preferences reflect investors’ preferences? In this paper, we study whether investors indeed value dividend smoothing stocks differently by exploring the implications of dividend smoothing for firms’ cost of capital and their investor clientele. We first document that dividend smoothing is associated with lower average cost of capital both in a univariate setting and after controlling for firm characteristics and commonly used risk factors. We also find that some of this return differential can be attributed to lower risk, captured by return comovement among high (low) smoothing firms. Second, we find that retail investors are less likely to hold dividend smoothing stocks, while institutional investors, and especially mutual funds, are more likely to hold dividend smoothing stocks. Last, we document that firms that smooth their dividends issue equity more frequently.
Number of Pages in PDF File: 46
JEL Classification: G35, G12, G32working papers series
Date posted: October 14, 2011 ; Last revised: March 17, 2012
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