Dividend Smoothing: An Agency Explanation and New Evidence

55 Pages Posted: 3 Oct 2014

See all articles by Anzhela Knyazeva

Anzhela Knyazeva

Independent; New York University (NYU) - Leonard N. Stern School of Business

Diana Knyazeva

Independent; Securities and Exchange Commission

Date Written: July 1, 2014


In spite of considerable research into firm dividend behavior, dividend smoothing has eluded a definitive explanation. This paper provides an agency interpretation of dividend smoothing and offers evidence that variation in corporate governance and managerial incentive conflicts explains differences in intertemporal properties of dividends. We argue that smooth dividends are an alternative to traditional corporate governance mechanisms. Empirically, we document a greater degree of dividend smoothing, fewer dividend cuts, and a trend towards regular incremental dividend increases at firms with weak traditional monitoring mechanisms. The effect of governance on dividend changes is largest for firms with high free cash flow. We document consistent patterns for total shareholder payout and overall commitment to external claimholders. However, dividends and repurchases are not perfect substitutes and adjustments to repurchases are secondary to the weakly governed managers’ need to sustain dividends.

Keywords: dividend smoothing, intertemporal dividend decisions, corporate governance, conflicts of interest

JEL Classification: G30, G34, G35

Suggested Citation

Knyazeva, Anzhela and Knyazeva, Diana, Dividend Smoothing: An Agency Explanation and New Evidence (July 1, 2014). Available at SSRN: https://ssrn.com/abstract=2504715 or http://dx.doi.org/10.2139/ssrn.2504715

Anzhela Knyazeva (Contact Author)

Independent ( email )

No Address Available

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Diana Knyazeva

Independent ( email )

No Address Available

Securities and Exchange Commission

100 F Street, NE
Washington, DC 20549
United States

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