An international analysis of dividend smoothing

Abstract

This study examines the extent to which agency-based models and asymmetric information
theories explain dividend smoothing around the world. Tests on a cross-section of more
than two thousand firms from twenty-four countries show that managers of firms with low
market-to-book ratios and less cash engage in greater dividend smoothing. Further, firms with
highly-concentrated ownership structure and strong corporate governance smooth dividends
less. In addition, managers of firms in industries facing high levels of competition smooth
dividends more. We also determine that the extent of legal protections provided to shareholders
and the culture of the country in which the firm is incorporated, as well as tax regime, have
additional explanatory power for dividend smoothing. Our results are most consistent with the
simultaneous presence of agency and information asymmetry effects in the decision to smooth
dividends.

Keywords: dividend smoothing, information asymmetry, agency costs

JEL Classification: D22, G34, G35