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Dividend Smoothing and Debt Ratings

Published online by Cambridge University Press:  06 April 2009

Varouj A. Aivazian ,
Laurence Booth  and
Sean Cleary
Varouj A. Aivazian
Affiliation:
[email protected], Joseph L. Rotman School of Management, University of Toronto, 105 St. George St., Toronto, Ontario M5S 3E6, Canada
Laurence Booth
Affiliation:
[email protected], Joseph L. Rotman School of Management, University of Toronto, 105 St. George St., Toronto, Ontario M5S 3E6, Canada
Sean Cleary
Affiliation:
[email protected], Sobey School of Business, Saint Mary's University, Faculty of Commerce, 923 Robie St., Halifax, Nova Scotia B3H 3C3, Canada.
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Abstract

We find that firms that regularly access public debt (bond) markets are more likely to pay a dividend and subsequently follow a dividend smoothing policy than firms that rely exclusively on private (bank) debt. In particular, firms with bond ratings follow a traditional Lintner (1956) style dividend smoothing policy, where the influence of the prior dividend payment is very strong and the current dividend is relatively insensitive to current earnings. In contrast, firms without bond ratings flow through more of their earnings as dividends and display very little dividend smoothing behavior. In effect, they seem to follow a residual dividend policy.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 2 , June 2006 , pp. 439 - 453
Copyright
Copyright © School of Business Administration, University of Washington 2006

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