Do Investors Value Dividend Smoothing Stocks Differently?

Forthcoming, Management Science

Johnson School Research Paper Series No. 17-2012

42 Pages Posted: 17 Mar 2012 Last revised: 1 May 2016

See all articles by Yelena Larkin

Yelena Larkin

York University - Schulich School of Business

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: April 20, 2016

Abstract

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.

Keywords: dividend, payout, dividend smoothing, institutions

Suggested Citation

Larkin, Yelena and Leary, Mark T. and Michaely, Roni, Do Investors Value Dividend Smoothing Stocks Differently? (April 20, 2016). Forthcoming, Management Science, Johnson School Research Paper Series No. 17-2012, Available at SSRN: https://ssrn.com/abstract=2023975 or http://dx.doi.org/10.2139/ssrn.2023975

Yelena Larkin

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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 )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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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