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Review of Quantitative Finance and Accounting
Published in:

15-09-2023 | Original Research

Generalized dividend behavior model and dividend smoothing: theory and empirical evidence

Authors: Cheng-few Lee, James Juichia Lin

Published in: Review of Quantitative Finance and Accounting | Issue 4/2023

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Abstract

The main purpose of this study is to use generalized dividend behavior model proposed by Fama and Babiak (1968) and Lee et al. (1987) to re-examine previous dividend smoothing researches. This study proposes a dividend smoothing model that integrates two prevailing dividend hypotheses to evaluate the degree of dividend smoothing behaviors and investigates cross-sectional variation in determining a firm’s propensity to smooth dividend. By using a sample of 1193 U.S. firms, we support the notion that dividend smoothing behaviors are driven by different channels. Our findings show that firms with a stronger monitoring mechanism or are subject to more agency conflicts will smooth dividend more through partial adjustment channel. In our additional analysis, we show that firms with greater accounting conservatism or poor financial reporting quality are prone to smooth dividend more driven by signaling motives.
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Appendix
Available only for authorised users
Footnotes
1
For further discussion, please refer to Fama and Babiak (1968) and Ang (1975).
 
2
We also use Gauss–Newton nonlinear regressions to estimate the model parameters. The untabulated estimations show that Marquardt and Gauss–Newton convergence routines yield very similar results.
 
3
Our data screens and restrictions exclude many of the smaller firms in the Compustat database. In particular, the proliferation of growth stocks in the U.S. economy during our data period means that dividend smoothing is likely relevant to a smaller fraction of US exchange-listed firms. On average, our sample accounts for only 10.05% of the firms in Compustat. However, those firms are likely blue chip stocks in terms of market capitalization.
 
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Metadata
Title
Generalized dividend behavior model and dividend smoothing: theory and empirical evidence
Authors
Cheng-few Lee
James Juichia Lin
Publication date
15-09-2023
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 4/2023
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-023-01197-6

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