Hostname: page-component-586b7cd67f-vdxz6 Total loading time: 0 Render date: 2024-11-29T08:17:03.808Z Has data issue: false hasContentIssue false
  • English
  • Français

Dividend Smoothing and Firm Valuation

Published online by Cambridge University Press:  02 November 2021

Paul Brockman ,
Jan Hanousek ,
Jiri Tresl  and
Emre Unlu
Paul Brockman*
Affiliation:
Lehigh University Department of Finance
Jan Hanousek
Affiliation:
CERGE-EI and [email protected]
Jiri Tresl
Affiliation:
University of Mannheim Department of Finance and CERGE-EI [email protected]
Emre Unlu
Affiliation:
University of Nebraska Department of Finance [email protected]
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine the relationship between dividend smoothing and firm valuation across 21 countries using several empirical methods and smoothing measures. Our main results show that dividends are capitalized at significantly larger values for high-smoothing firms than for low-smoothing firms. We also find that dividend-smoothing premiums are higher in countries with weak shareholder protection – suggesting that smoothing serves as a substitute mechanism to reduce agency costs. Overall, our findings support the view that managers use dividend smoothing predominantly as a bonding mechanism to reduce agency costs (Leary and Michaely (2011)), and not as a rent extraction mechanism (Lambrecht and Myers (2012)).

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 4 , June 2022 , pp. 1621 - 1647
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Abu Amin, Demian Berchtold, Jeff Bredthauer, Richard DeFusco, Donna Dudney, Kathleen Farrell, Stephen Ferris, Geoffrey Friesen, John Geppert, Jarrad Harford (the editor), Gordon Karels, Mark Leary, Bochen Li, Ernst Maug, Roni Michaely (the referee), Brian Payne, Manferd Peterson, Anastasiya Shamshur, David Smith, Erik Theissen, Wei Wang, Nancy White, Haigang Zhou, and Tom Zorn; and seminar participants at the University of Mannheim, University of Missouri, CERGE-EI, Central Michigan University, Cleveland State University, University of Scranton, Czech Economic Society, 2014 European FMA Maastricht, 2014 FMA Nashville Meetings, and University of Nebraska. The research was supported by GAČR grant (No. 16-20451S). The usual disclaimer applies.

References

Aivazian, V.; Booth, L.; and Cleary, S.. “Dividend Smoothing and Debt Ratings.” Journal of Financial and Quantitative Analysis, 41 (2006), 439–453.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Dividends as Reference Points: A Behavioral Signaling Approach.” Review of Financial Studies, 29 (2015), 697–738.Google Scholar
Beny, L. N. “Do Insider Trading Laws Matter? Some Preliminary Comparative Evidence.” American Law and Economics Review, 7 (2005), 144–183.CrossRefGoogle Scholar
Beny, L. N. “Do Investors in Controlled Firms Value Insider Trading Laws? International Evidence.” Journal of Law and Economic Policy, 4 (2008), 267–310.Google Scholar
Berk, J., and DeMarzo, P.. Corporate Finance, Boston, MA: Pearson-Addison Wesley (2007).Google Scholar
Bhattacharya, U., and Daouk, H.. “The World Price of Insider Trading.” Journal of Finance, 57 (2002), 75–108.CrossRefGoogle Scholar
Brav, A.; Graham, J.; Harvey, C.; and Michaely, R.. “Payout Policy in the 21st Century.” Journal of Financial Economics, 77 (2005), 483–527.CrossRefGoogle Scholar
Brockman, P.; Tresl, J.; and Unlu, E.. “The Impact of Insider Trading Laws on Dividend Payout Policy.” Journal of Corporate Finance, 29 (2014), 263–286.CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chen, L.; Da, Z.; and Priestley, R.. “Dividend Smoothing and Predictability.” Management Science, 58 (2012), 1834–1853.CrossRefGoogle Scholar
DeAngelo, H., and DeAngelo, L.. “Capital Structure, Payout Policy, and Financial Flexibility.” Working Paper, University of Southern California (2007).CrossRefGoogle Scholar
Dewenter, K., and Warther, V.. “Dividends, Asymmetric Information, and Agency Conflicts: Evidence from a Comparison of the Dividend Policies of Japanese and U.S. Firms.” Journal of Finance, 53 (1998), 879–904.CrossRefGoogle Scholar
Dittmar, A., and Mahrt-Smith, J.. “Corporate Governance and the Value of Cash Holdings.” Journal of Financial Economics, 83 (2007), 599–634.CrossRefGoogle Scholar
Djankov, S.; La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “The Law and Economics of Self-dealing.” Journal of Financial Economics, 88 (2008), 430–465.CrossRefGoogle Scholar
Easterbrook, F. H. “Two Agency-Cost Explanations of Dividends.” American Economic Review, 74 (1984), 650–659.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Taxes, Financing Decisions, and Firm Value.” Journal of Finance, 53 (1998), 819–843.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Size, Value, and Momentum in International Stock Returns.” Journal of Financial Economics, 105 (2012), 457–472.CrossRefGoogle Scholar
Fudenberg, D., and Tirole, J.. “A Theory of Income and Dividend Smoothing Based on Incumbency Rents.” Journal of Political Economy, 103 (1995), 75–93.CrossRefGoogle Scholar
Hail, L.; Tahoun, A.; and Wang, C.. “Dividend Payouts and Information Shocks.” Journal of Accounting Research, 52 (2014), 403–456.CrossRefGoogle Scholar
Javakhadze, D.; Ferris, S. P.; and Sen, N.. “An International Analysis of Dividend Smoothing.” Journal of Corporate Finance, 29 (2014), 200–220.CrossRefGoogle Scholar
Knyazeva, A., and Knyazeva, D.. “Dividend Smoothing: An Agency Explanation and New Evidence.” Working Paper, Securities and Exchange Commission (2014).CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Law and Finance.” Journal of Political Economy, 106 (1998), 1113–1155.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Agency Problems and Dividend Policies Around the World.” Journal of Finance, 55 (2000), 1–33.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-, F. Shleifer, Silanes; A.; and Vishny, R. W.. “Investor Protection and Corporate Valuation.” Journal of Finance, 57 (2002), 1147–1170.CrossRefGoogle Scholar
Lambrecht, B. M., and Myers, S. C.. “A Lintner Model of Dividends and Managerial Rents.” Journal of Finance, 67 (2012), 1761–1810.CrossRefGoogle Scholar
Larkin, Y.; Leary, M. T.; and Michaely, R.. “Do Investors Value Dividend Smoothing Stock Differently?” Management Science, 63 (2017), 4114–4136.CrossRefGoogle Scholar
Leary, M. T., and Michaely, R.. “Determinants of Dividend Smoothing: Empirical Evidence. Review of Financial Studies, 24 (2011), 3197–3249.CrossRefGoogle Scholar
Lintner, J. “The Distribution of Incomes of Corporations Among Dividends, Retained Earnings, and Taxes.” American Economic Review, 46 (1956), 97–113.Google Scholar
Michaely, R., and Roberts, M. R.. Corporate Dividend Policies: Lessons from Private Firms.” Review of Financial Studies, 25 (2012), 711–746.CrossRefGoogle Scholar
Miller, M., and Modigliani, F.. “Dividend Policy, Growth, and the Valuation of Shares.” Journal of Business, 34 (1961), 411–433.CrossRefGoogle Scholar
Modigliani, F., and Miller, M.. “The Costs of Capital, Corporation Finance, and the Theory of Investment.” American Economic Review, 48 (1958), 261–297.Google Scholar
Pinkowitz, L.; Stulz, R.; and Williamson, R.. “Does the Contribution of Corporate Cash Holdings and Dividends to Firm Value Depend on Governance? A Cross-Country Analysis.” Journal of Finance, 61 (2006), 2725–2751.CrossRefGoogle Scholar
Rangvid, J.; Schmeling, M.; and Schrimpf, A.. “Dividend Predictability Around the World.” Journal of Financial and Quantitative Analysis, 49 (2014) 1255–1277.CrossRefGoogle Scholar
Supplementary material: PDF

Brockman et al. supplementary material

Internet Appendix

Download Brockman et al. supplementary material(PDF)
PDF 953.7 KB