The Determinants of Dividend Smoothing Behaviour

Abstract

This paper empirically investigates the cross-sectional properties of the dividend smoothing policies of 890 firms over a twenty-year time period in order to determine the extent to which important firm characteristics systematically alter the degree of dividend smoothing carried out by corporations. Dividend smoothing is measured by an isoelastic functional relationship between dividends and earnings. Firm characteristics which are likely to affect corporate dividend smoothing policies are identified using dividend signalling theory, and cross-sectional regression analysis is used to test these implications. The paper finds that riskier and smaller firms smooth dividends to a greater extent, as dividend signalling theory predicts. The presence of financial slack lowers a corporation's tendency to smooth dividends and the influence of firm growth rates is insignificant. These latter results are inconsistent with dividend signalling implications.

JEL Classification: G35