The Stability of Dividends Assignment

Added on - 16 May 2020

  • 5

    Pages

  • 2510

    Words

  • 129

    Views

  • 0

    Downloads

Trusted by +2 million users,
1000+ happy students everyday
Showing pages 1 to 2 of 5 pages
The most documented well known phenomenon in corporate financial policy is calleddividend Smoothing. It was observed in many studies that the concern of firms is primarilyabout 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 thechange 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 themarket theses are manager’s contentions. The Linther’s study was done 50 years ago and thesample selected for the study was almost 28 firms, his study was based on a wide range offirms 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 saysthat the managers are willing to forgo the investments with positive NPV and willing to raisecapital 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 littlepropensity as if why firms need to do dividend Smoothing. The research has shown animproved interest in elucidating dividend smoothing; the evaluation of alternativeexplanations has some limited empirical evidence. The article is to address this gap and givean 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 assessthe smoothing of dividend that has evolved over time by using unique dataset.Dividend Smoothing is done with our realistic analysis according to the marketfrictions by classifying the existing hypothetical markets. The smoothness of dividend isaffected by many market frictions which are associated to the extent of dividend levels that isby agency conflicts, taxes and facts asymmetry. The evidences are provided which areempirical 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 torepurchases, the cross sectional properties of dividend smoothing are also analysed. Forexploring the time trends in dividend smoothing behaviour we need to use an exceptionaldataset, starting from 1920s and over a longer time duration than has been previouslydocumented. The theories of dividend smoothing which are in existence as well as thedirections for future work both are severed in our findings.The evidences which are existing and empirical on the smoothing behaviour suggestthat the smoothing of dividend is widespread (For example, empirical evidence by Fama andBabiak, 1968; Lintner, 1956 and Choe, 1990). However there were limited studies whichexamine cross sectional variances. In United Kingdome, smoothing of dividend is moreclearly 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 aresmooth 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 thefirms 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 thesmoothing behaviour, this article made several contributions for that. First of all there aresome 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 measurementsare only not sufficient to distinguish in between the competing theories. The empiricalevidence which is in existence not only provides importance of dividend smoothing but alsoprovides guidance to growing literature which is limited.This research provides new results in bulk for the firm’s smoothing policies. Theprimary findings of the firms are highlighted here. The first thing is that the traditionalprocedures 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 ofadjustment and the small- sample from the Lintner’s model in estimating the autoregressivemodels (Hurwicz, 1950). The another concern is regarding the dividend targets of differentfirms as the targets of dividend today are somewhat changed from the Lintner’s model (Bravet. al., 2005). To overcome these concerns we did performed two alternative measuresregarding smoothing and used a simulation exercise for that.The variation in cross- sectional dividend smoothing is then documented and evenbetter cross- sectional dissimilarity in total dividend smoothing. The same policy of dividendsmoothing is not followed by all the firms. The pay-out policy is linked to market frictionsand 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 lessanalysts are all forecasted to be smooth less. By that time the results indicate that the firmsthat smooth the most are usually substance to agency conflict. The firms are considered to becash cows, with weaker governance, with low growth prospects and which are observed byinstitutional investors are considered to be smoother. Results that we figured out are robustacross various measures of empirical and smoothing methods.Over the past few centuries we documented a stable and more substantial rise in theamount of dividend smoothing. As we encountered that most of the hike in smoothing haveensued before the use of repurchasing system this shows that the contribution of repurchasesis less in this process (Grullon & Michaely, 2002). We came to know that dividendsmoothing 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 whendividend smoothing is extreme prevalent. The underlying theories can be related withdividend smoothing to elaborate the motive of this study. Theories which present thedividend smoothing of the firms are primarily based on agency consideration or onasymmetric information (Kumar, 1988; Brennan and Thakor, 1990; Fudenberg and Tirole,1995; DeMarzo and Sannikov, 2008; Guttman, Kadan and Kandel, 2010). Soothing can berelated to tax planning and external finance cost as we do analyse other studies (Miller andScholes, 1978)
desklib-logo
You’re reading a preview
Preview Documents

To View Complete Document

Click the button to download
Subscribe to our plans

Download This Document