The Stability of Dividends Assignment
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Added on 2020-05-16
The Stability of Dividends Assignment
Added on 2020-05-16
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The most documented well known phenomenon in corporate financial policy is called dividend Smoothing. It was observed in many studies that the concern of firms is primarily about the stability of dividends (Linther, 1956). The firms need to change the dividend policyas they need to set the policy to pay the dividends quarterly. They need to decide when the change is necessary and how do they implement that change and whether the change needs toa big change or small. The firms with stable dividend policy will get premiums from the market theses are manager’s contentions. The Linther’s study was done 50 years ago and the sample selected for the study was almost 28 firms, his study was based on a wide range of firms and with the most recent ones. For example: Fama and Babiak, 1968; Bray et al. 2005. Latest evidence says that this change is proved to be costly for firms. The study findings says that the managers are willing to forgo the investments with positive NPV and willing to raise capital with external sources in order to evade cutting dividends (Brave et al., 2005).In spite of the importance and prevalence of dividend smoothing, there is a little propensity as if why firms need to do dividend Smoothing. The research has shown an improved interest in elucidating dividend smoothing; the evaluation of alternative explanations has some limited empirical evidence. The article is to address this gap and give an understanding as to why firms need to smooth out their dividends by reviewing the cross- sectional changes in their dividend Smoothing behaviour (say total pay-out). We also assess the smoothing of dividend that has evolved over time by using unique dataset.Dividend Smoothing is done with our realistic analysis according to the market frictions by classifying the existing hypothetical markets. The smoothness of dividend is affected by many market frictions which are associated to the extent of dividend levels that is by agency conflicts, taxes and facts asymmetry. The evidences are provided which are empirical and a broad list of proxies are used to prove which type of the firms are more likelyor less likely to dividend smoothing. The given firms prove a significant shift near to repurchases, the cross sectional properties of dividend smoothing are also analysed. For exploring the time trends in dividend smoothing behaviour we need to use an exceptional dataset, starting from 1920s and over a longer time duration than has been previously documented. The theories of dividend smoothing which are in existence as well as the directions for future work both are severed in our findings.The evidences which are existing and empirical on the smoothing behaviour suggest that the smoothing of dividend is widespread (For example, empirical evidence by Fama and Babiak, 1968; Lintner, 1956 and Choe, 1990). However there were limited studies which examine cross sectional variances. In United Kingdome, smoothing of dividend is more clearly visible in public firms as compared to private firms, as we did analyse from the data (Michaely and Roberts, 2011). The members of Keiretsu group which are Japanese firms are smooth less and likely to face rarer conflict of interest and lower information asymmetry. (Dewenter and Warther, 1998). The firms with only private debts are less smooth then the firms with the public bond rating as they are smoother (Aivazian, Booth and Cleary, 2006). The studies which were conducted earlier suggest that there is logical difference in the smoothing behaviour, this article made several contributions for that. First of all there are some cross sectional evidences for a large number of firms which are selected for sample in
United States. Most importantly, while Keiretsu/ non-keiretsu; public/ private and rated/ unrated divisions are associated with the numerous frictions of market, these measurements are only not sufficient to distinguish in between the competing theories. The empirical evidence which is in existence not only provides importance of dividend smoothing but also provides guidance to growing literature which is limited.This research provides new results in bulk for the firm’s smoothing policies. The primary findings of the firms are highlighted here. The first thing is that the traditional procedures of smoothing of dividend are biased and are not ideal for analysing the cross- sectional changes in the policy. Our concern is regarding the connection among the speed of adjustment and the small- sample from the Lintner’s model in estimating the autoregressive models (Hurwicz, 1950). The another concern is regarding the dividend targets of different firms as the targets of dividend today are somewhat changed from the Lintner’s model (Brav et. al., 2005). To overcome these concerns we did performed two alternative measures regarding smoothing and used a simulation exercise for that.The variation in cross- sectional dividend smoothing is then documented and even better cross- sectional dissimilarity in total dividend smoothing. The same policy of dividend smoothing is not followed by all the firms. The pay-out policy is linked to market frictions and the smoothing behaviour varies in accordance with the previously linked pay-out policy. The proxies for information asymmetry are found to be correlated negatively with smoothing.Low dividend yield funds, younger firms, firms with very high return and earning volatility, smaller firms and the firms with accurate analyst forecast and more isolated and with less analysts are all forecasted to be smooth less. By that time the results indicate that the firms that smooth the most are usually substance to agency conflict. The firms are considered to be cash cows, with weaker governance, with low growth prospects and which are observed by institutional investors are considered to be smoother. Results that we figured out are robust across various measures of empirical and smoothing methods. Over the past few centuries we documented a stable and more substantial rise in the amount of dividend smoothing. As we encountered that most of the hike in smoothing have ensued before the use of repurchasing system this shows that the contribution of repurchases is less in this process (Grullon & Michaely, 2002). We came to know that dividend smoothing is not attributable to the nature of the firms as we did the analysis using both panelregression and subsample from constant firm. Our practical findings make available evidences of between which firms and when dividend smoothing is extreme prevalent. The underlying theories can be related with dividend smoothing to elaborate the motive of this study. Theories which present the dividend smoothing of the firms are primarily based on agency consideration or on asymmetric information (Kumar, 1988; Brennan and Thakor, 1990; Fudenberg and Tirole, 1995; DeMarzo and Sannikov, 2008; Guttman, Kadan and Kandel, 2010). Soothing can be related to tax planning and external finance cost as we do analyse other studies (Miller and Scholes, 1978)
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