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)
May 17, 2013
Johnson School Research Paper Series No. 17-2012
It is almost an article of faith that managers have a preference for smooth dividends. Yet, it is not clear if this 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’ stock prices and cost of capital. Using over 80 years of data, we find no robust relationship between the smoothness of a firm’s dividends and the expected return on its stock. First, we find that the asymmetric reaction to dividends increases and decreases is attributed to the first time the firm cuts its dividends. Second, we find little evidence that the asymmetric market reaction to dividend cuts and increases depresses stock prices for firms that fail to smooth their dividends. Finally, we find that retail investors are less likely to hold dividend smoothing stocks, while institutional investors, and especially mutual funds, are more likely. This evidence for a smoothing clientele offers a potential reconciliation of our findings with the prevalent use of dividend smoothing.
Number of Pages in PDF File: 46working papers series
Date posted: March 17, 2012 ; Last revised: May 21, 2013
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