Ownership Structure, Tax Regime, and Dividend Smoothing

Abstract

Since the novel study of Lintner (Am Econ Rev 46:97–113, 1956), it has become a widespread idea that US firms only gradually adjust dividend levels toward long-term targets (Fama and Babiak, J Am Stat Assoc 63:1132–1161, 1968; Mueller, Q J Econ 81:58–87, 1967; Brav et al., J Financ Econ 77:483–527, 2005; Leary and Michaely, Rev Financ Stud 24:3198–3249, 2011). Dividend smoothing helps firms mitigate problems that arise from information asymmetry (e.g., signaling and reduction of agency costs). Gugler (J Bank Finance 27:1297–1321, 2003) and Michaely and Roberts (Rev Financ Stud 25:712–746, 2012) show evidence supporting this idea by using data from the UK and Austria, respectively. However, single country analyses do not provide conclusive answers to the question of why firms smooth dividends. There are significant variations in agency relationships across countries which generate substantial differences in dividend smoothing behaviors. Shleifer and Vishny (J Finance 52:737–783, 1997) point out that in continental Europe and East Asian countries, corporate ownership structures are highly concentrated and there are less severe conflicts between controlling shareholders and management. This fact naturally leads to the idea that international data provides us with an appropriate research setting in which to address the question.