Advertisement

Ownership Structure, Tax Regime, and Dividend Smoothing

  • Shinya Shinozaki
  • Konari UchidaEmail author
Chapter
Part of the New Frontiers in Regional Science: Asian Perspectives book series (NFRSASIPER, volume 18)

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.

Notes

Acknowledgements

An earlier version of this paper was presented to the Asian Finance Association’s annual meeting, Midwest Finance Association annual meeting, and Japan Finance Association annual meeting. We thank Jeffrey Coles, Wolfgang Drobetz, Toshinori Sasaki, and Jin Yu for their helpful comments and suggestions. This research is financially supported by JSPS KAKENHI Grant Number 15H03367.

References

  1. Alzahrani, M., and M. Lasfer. 2012. Investor protection, taxation, and dividends. Journal of Corporate Finance 18:745–762.CrossRefGoogle Scholar
  2. Andres, C., A. Betzer, M. Goergen, and L. Renneboog. 2009. Dividend policy of German firms: A panel data analysis of partial adjustment models. Journal of Empirical Finance 16:175–187.CrossRefGoogle Scholar
  3. Bhattacharya, S. 1979. “The bird in the hand” fallacy. Bell Journal of Economics 10:259–270.CrossRefGoogle Scholar
  4. Bohren, O., Josefsen, M.G., and P.E. Steen. 2012. Stakeholder conflicts and dividend policy. Journal of Banking and Finance 36:2852–2864.CrossRefGoogle Scholar
  5. Brav, A., J.R. Graham, C.R. Harvey, and R. Michaely. 2005. Payout policy in the 21st century. Journal of Financial Economics 77:483–527.CrossRefGoogle Scholar
  6. Breuer, W., M.O. Rieger, and K.C. Soypak. 2014. The behavioral foundations of corporate dividend policy a cross-country analysis. Journal of Banking and Finance 42:247–265.CrossRefGoogle Scholar
  7. Brockman, P., and E. Unlu. 2009. Dividend policy, creditor rights, and the agency costs of debt. Journal of Financial Economics 92:276–299.CrossRefGoogle Scholar
  8. Brown, J.R., N. Liang, and S. Weisbenner. 2007. Executive financial incentives and payout policy: Firms responses to the 2003 dividend tax cut. Journal of Finance 62:1935–1965.CrossRefGoogle Scholar
  9. Chay, J.B., and J. Suh. 2009. Payout policy and cash-flow uncertainty. Journal of Financial Economics 93:88–107.CrossRefGoogle Scholar
  10. Chemmanur, T.J., J. He, G. Hu, and H. Liu. 2010. Is dividend universal? New insights from a comparative study of dividend policies in Hong Kong and the US. Journal of Corporate Finance 16:413–430.CrossRefGoogle Scholar
  11. Chetty, R., and E. Saez. 2005. Dividend taxes and corporate behavior: Evidence from the 2003 dividend tax cut. Quarterly Journal of Economics 120:791–833.Google Scholar
  12. Cuny, C.J., G.S. Martin, and J.J. Puthenpurackal. 2009. Stock options and total payout. Journal of Financial and Quantitative Analysis 44:391–410.CrossRefGoogle Scholar
  13. DeAngelo, H., L. DeAngelo, and R. Stulz. 2006. Dividend policy and the earned/contributed capital mix: A test of the life-cycle theory. Journal of Financial Economics 81:227–254.CrossRefGoogle Scholar
  14. Denis, D.J., and I. Osobov. 2008. Why do firms pay dividends? International evidence on the determinants of dividend policy. Journal of Financial Economics 89:62–82.CrossRefGoogle Scholar
  15. Dewenter, K.L., and V.A. Warther. 1998. Dividends, asymmetric information, and agency conflicts: Evidence from a comparison of the dividend policies of Japanese and U.S. firms. Journal of Finance 53:879–904.CrossRefGoogle Scholar
  16. Djankov, S., R. La Porta, F. Lopez-de-Silanes, and A. Shleifer. 2008. The law and economics of self-dealing. Journal of Financial Economics 88:430–465.CrossRefGoogle Scholar
  17. Easterbrook, F.H. 1984. Two agency-cost explanations of dividends. American Economic Review 74:650–659.Google Scholar
  18. Endres, D., C. Fuest, and C. Spengel. 2010. Company taxation in the Asia-Pacific region, India, and Russia. Berlin/Heidelberg: Springer.CrossRefGoogle Scholar
  19. Fama, E.F., and H. Babiak. 1968. Dividend policy: An empirical analysis. Journal of the American Statistical Association 63:1132–1161.CrossRefGoogle Scholar
  20. Fatemi, A., and R. Bildik. 2012. Yes, dividends are disappearing: Worldwide evidence. Journal of Banking and Finance 36:662–677.CrossRefGoogle Scholar
  21. Fenn, G.W., and N. Liang. 2001. Corporate payout policy and managerial stock incentives. Journal of Financial Economics 60:45–72.CrossRefGoogle Scholar
  22. Ferris, S.P., N. Jayaraman, and S. Sabherwal. 2009. Catering effects in corporate dividend policy: The international evidence. Journal of Banking and Finance 33:1730–1738.CrossRefGoogle Scholar
  23. Grullon, G., and R. Michaely. 2002. Dividends, share repurchases, and the substitution hypothesis. Journal of Finance 57:1649–1684.CrossRefGoogle Scholar
  24. Gugler, T. 2003. Corporate governance, dividend payout policy, and the interrelation between dividends, R&D, and capital investment. Journal of Banking and Finance 27:1297–1321.Google Scholar
  25. Guttman, I., O. Kadan, and E. Kandel. 2010. Dividend stickiness and strategic pooling. Review of Financial Studies 23:4455–4495.CrossRefGoogle Scholar
  26. Henry, D. 2011. Ownership structure and tax-friendly dividends. Journal of Banking and Finance 35:2747–2760.CrossRefGoogle Scholar
  27. Jagannathan, M., C.P. Stephens, and M.S. Weisbach. 2000. Financial flexibility and the choice between dividends and stock repurchases. Journal of Financial Economics 57:355–384.CrossRefGoogle Scholar
  28. Jensen, M.C. 1986. Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review 76:323–329.Google Scholar
  29. John, K., and J. Williams. 1985. Dividends, dilution, and taxes: A signaling Equilibrium. Journal of Finance 40:1053–1070.CrossRefGoogle Scholar
  30. Khan, T. 2006. Company dividends and ownership structure: Evidence from UK panel data. Economic Journal 116: C172–C189.CrossRefGoogle Scholar
  31. Kumar, P. 1988. Shareholder-manager conflict and the information content of dividends. Review of Financial Studies 1:111–136.CrossRefGoogle Scholar
  32. Kumar, P., and B. Lee. 2001. Discrete dividend policy with permanent earnings. Financial Management 30:55–76.CrossRefGoogle Scholar
  33. Kuo, J.-M., D. Philip, and Q. Zhang. 2013. What drives disappearing dividend phenomenon? Journal of Banking and Finance 37:3499–3514.CrossRefGoogle Scholar
  34. La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R.W. Vishny. 1998. Law and finance. Journal of Political Economy 106:1113–1155.CrossRefGoogle Scholar
  35. La Porta, R., F. Lopez-de-Silanes, and A. Shleifer. 1999. Corporate ownership around the world. Journal of Finance 54:471–518.CrossRefGoogle Scholar
  36. La Porta, R., F. Lopez-De-Silanes, A. Shleifer, and R.W. Vishny. 2000. Agency problems and dividend policies around the World. Journal of Finance 55:1–33.CrossRefGoogle Scholar
  37. Lasfer, M.A. 1996. Taxes and dividends: The UK evidence. Journal of Banking and Finance 20:455–472.CrossRefGoogle Scholar
  38. Leary, M.T., and R. Michaely. 2011. Determinants of dividend smoothing: Empirical evidence. Review of Financial Studies 24:3198–3249.CrossRefGoogle Scholar
  39. Lee, Y.T., Y.J. Liu, R. Roll, and A. Subrahmanyam. 2006. Taxes and dividend clientele: Evidence from trading and ownership structure. Journal of Banking and Finance 30:229–246.CrossRefGoogle Scholar
  40. Lintner, J. 1956. Distribution of incomes of corporations among dividends, retained earnings, and taxes. American Economic Review 46:97–113.Google Scholar
  41. Low, S.-W., L. Glorfeld, D. Hearth, and J.N. Rimbey. 2001. The link between bank monitoring and corporate dividend policy: The case of dividend omissions. Journal of Banking and Finance 25:2069–2087.CrossRefGoogle Scholar
  42. Michaely, R., and M.R. Roberts. 2012. Corporate dividend policies: Lessons from private firms. Review of Financial Studies 25:712–746.CrossRefGoogle Scholar
  43. Miller, M.H., and K. Rock. 1985. Dividend policy under asymmetric information. Journal of Finance 40:1031–1051.CrossRefGoogle Scholar
  44. Mueller, D.C. 1967. The firm decision process: An econometric investigation. Quarterly Journal of Economics 81:58–87.CrossRefGoogle Scholar
  45. Pattenden, K., and G. Twite. 2008. Taxes and dividend policy under alternative tax regimes. Journal of Corporate Finance 14:1–16.CrossRefGoogle Scholar
  46. Shleifer, A., and R.W. Vishny. 1997. A survey of corporate governance. Journal of Finance 52:737–783.CrossRefGoogle Scholar
  47. von Eije, H., and W.L. Megginson. 2008. Dividends and share repurchases in the European union. Journal of Financial Economics 89:347–374.CrossRefGoogle Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2017

Authors and Affiliations

  1. 1.Saga UniversitySagaJapan
  2. 2.Kyushu UniversityFukuokaJapan

Personalised recommendations