Why Firms Smooth Dividends: Empirical Evidence

58 Pages Posted: 29 Sep 2008

See all articles by Mark T. Leary

Mark T. Leary

Washington University in St. Louis - Olin Business School; National Bureau of Economic Research (NBER)

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Date Written: September 3, 2008

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.

Suggested Citation

Leary, Mark T. and Michaely, Roni, Why Firms Smooth Dividends: Empirical Evidence (September 3, 2008). Johnson School Research Paper Series No. 11-08, Available at SSRN: https://ssrn.com/abstract=1274291 or http://dx.doi.org/10.2139/ssrn.1274291

Mark T. Leary (Contact Author)

Washington University in St. Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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