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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 CEPRjan.hanousek@cerge-ei.cz
Jiri Tresl
Affiliation:
University of Mannheim Department of Finance and CERGE-EI jtresl@gmail.com
Emre Unlu
Affiliation:
University of Nebraska Department of Finance emre@unl.edu
*
pab309@lehigh.edu (corresponding author)
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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

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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.

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