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This chapter introduces dividend smoothing, presents theories to explain dividend smoothing behavior, and analyzes how different levels of business environment affect dividend smoothing. First, dividend smoothing describes a mechanism in which a firm is reluctant to reduce dividends and only increases dividends when its earnings increase permanently. In practice, dividend smoothing behavior is found in both developed and developing countries. Firms in developed countries are more likely to smooth dividends than those in developing countries. Second, although Miller and Modigliani (1961) posit that investors are indifferent between stable and unstable dividend payments in a perfect environment, market frictions in the real world make stable and unstable dividends have different effects on firm value. Three common frictions are information asymmetry, agency problem, and investors' demand for income smoothing. Due to information asymmetry between insiders and outsiders, firms tend to smooth their dividends to signal outside investors about their quality. In addition, dividend smoothing may be the substitute for weak corporate governance and/or the outcome of free cash absorption behavior. Besides, dividends are more convenient for investors' consumption; therefore, firms are more likely to smooth dividends in order to satisfy investors' demand for smooth income. Finally, as a special dividend decision, dividend smoothing is also affected by an internal micro (industry) and macro-environment. Dividend smoothing theories are the behind mechanisms to explain these effects.

Lintner’s (1956) survey revealed that managers are concerned about dividend signalling over time, and adopt a smoothing policy. In addition to signalling, dividend policy may affect a firm’s re‐investment opportunities, particularly if it is capital constrained. In this paper, we examine the interaction between dividend smoothing/signalling and optimal re‐investment. We develop a dividend policy model that considers both an optimal level of dividends (and re‐investment) at each point in time, and optimal smoothing over time. Our model provides both theoretical insights, and provides a practical management tool for dividend policy.

The purpose of this paper is to contribute to the debate and find out the impact of cash flow on changes in dividend payout decisions among non-financial firms quoted at Bursa Malaysia as compared to earnings. There has been renewed debate in recent finance and accounting literature concerning the key determinants of changes in dividends payout policy decisions in some jurisdictions. The conclusion in some is that firms base their dividend decisions on cash flows rather than published earnings.

The research made use of panel data from 1999 to 2012 at Bursa Malaysia, using generalized method of moments as the main method of analysis.

The research finds that Malaysia non-financial firms consider current earnings more important than current cash flow while making dividends payout decisions, and prior year cash flows are considered more important in dividends decisions than prior year earnings. We also found support for Jensen (1986) in Malaysia on agency theory, that managers of firms pay dividends from free cash flow to reduce agency conflicts.

The research concludes that Malaysian non-financial firms use current earnings and less of current cash flow in making changes in dividends policy. The policy implication is that current earnings are dividends smoothing agents, and the more they are considered in dividends payout decisions, the less of dividends smoothing.

If dividends smoothing is encouraged, it could lead to dividends-based earnings management.

The research is our novel contribution of assisting investors and government in making informed decisions regarding dividends policy in Malaysia.

We test for the validity of the smoothing and signalling hypotheses of dividend determination.

Using a VAR framework we examine the dynamic behaviour of share prices, dividends and earnings for 137 UK manufacturing and service companies, observed over the period 1970‐2003.

There is strong evidence of a contemporaneous relationship between prices, dividends and earnings, and little evidence of independence between these variables. Some evidence in favour of both the smoothing and the signalling hypothesis is obtained from causality tests, with perhaps more support for the latter hypothesis. However, there is considerable diversity in the causal relationships between prices, dividends and earnings.

No single hypothesis regarding the determination of dividends, and the predictive power of dividends for earnings and prices appears to dominate.

The results presented here are of interest to markets agents in that while they suggest there is no single transition mechanism linking prices, dividends and earnings, nevertheless these three variables are strongly correlated and exhibit varying degrees of causality.

The purpose of this paper is to investigate the impact of regulations, reforms and legal environment on dividend policy in a different institutional setting. Particularly, it examines the firm-level cash dividend behaviour of publicly listed firms in Turkey in the post-2003 period, since there were major economic and structural reforms as well as significant regulatory changes of dividend payout rules imposed by the supervisory bodies.

The paper focuses on a recent large panel data set of 264 Istanbul Stock Exchange (ISE)-listed firms over a ten-year period 2003-2012. First, it employs a modified specification of Lintner’s (1956) partial adjustment model for analysis regarding target payout ratio and dividend smoothing. Second, it performs a logit model for analysis in identifying the link between financial characteristics and the likelihood of paying dividends.

The results show that ISE firms now follow the same determinants as suggested by Lintner. They, indeed, have long-term payout ratios and adjust their cash dividends by a moderate level of smoothing, and therefore adopt stable dividend policies (although less stable policies compared to their counterparts in the developed US market) as a signalling mechanism over the period 2003-2012. Moreover, the results also report that ownership structure concentration affects the target payout ratio and dividend smoothing in the Turkish market. In addition, the results further show that more profitable, more mature and larger sized ISE firms are more likely to pay cash dividends, whereas ISE firms with higher investment opportunities and more debt are less likely to distribute cash dividends in the post-2003 period.

To the best of authors’ knowledge, this paper is the first major research that examines the implications of reforms and regulations on cash dividend payments and dividend smoothing over time in Turkey during its market integration process in the post-2003 period.

This paper examines the dividend smoothing (DS) behaviour in the Gulf Cooperation Council (GCC) countries in emerging markets where the response to news and the economic environment are different from those of developed countries.

The authors examine the effect of share price informativeness on DS in the GCC markets using unbalanced panel data for a sample of 628 GCC-listed firms during 1994–2016. For the regression analysis, the hypotheses are tested using panel regressions and generalised method of moments (GMM) estimation.

First, the Lintner model shows that the DS degree in GCC firms is comparable to that of a developed market. Second, and importantly, the results reveal that the DS in GCC firms is sensitive to private information of share prices. Finally, the findings indicate that information asymmetry (IA) and agency-based models affect the tendency to smooth dividends in the GCC markets.

This study is the first study to measure the degree of DS using data for all GCC countries. The authors also identify other determinants of DS behaviour and test the agency and IA explanations for DS in GCC-listed firms. The findings are highly recommended to financial managers and analysts dealing with the GCC markets. This study helps financial analysts to use the share price informativeness as an indicator for the presence of the IA. The study results are beneficial to researchers in understanding the relationship between DS and share price informativeness.

This study aims to examine cash dividend practices of travel and leisure (T&L) companies listed on the London Stock Exchange (LSE).

The study uses a panel data set of 524 firm-year observations of 55 unique publicly listed UK T&L companies between 2007 and 2019. First, it uses a modified version of Lintner’s (1956) partial adjustment model for analysis regarding the target payout ratio and dividend smoothing. Second, it performs logit and Tobit models in ascertaining the association between financial characteristics and divided decisions of T&L firms. Finally, it applies the modified specification of the partial adjustment model on different sub-samples that are partitioned based on various financial factors to determine how the financial characteristics of T&L companies affect their dividend behavior.

The results show that UK T&L companies have long-term payout ratios and adjust their cash dividends by moving gradually to their target at a serious degree of smoothing. The findings also detect that financial characteristics of T&L firms (i.e. profitability, debt and size) have significant effects on their dividend payments decisions. In particular, more profitable and larger T&L corporations are more likely to pay cash dividends, whereas T&L companies with more debt are less likely to pay cash dividends in the UK. The results further reveal that although such financial characteristics also have important impacts on the target payout ratios and dividend smoothing levels, UK T&L companies generally adopt stable dividend policies over the period 2007-2019.

This is thought to be the first study to provide insights on dividend policy practices of UK travel and leisure corporation listed on the LSE.

This paper develops and empirically tests a dynamic model of dividend smoothing and signaling. Intertemporal dividend smoothing results from a “signal jamming” problem whereby the manager uses dividends not only to convey information about future cash flows but also to influence perceptions of his abilities. Any excess cash left after the dividend is paid must be carried into the future at a dissipative cost, and any cash shortfall arising from promising too high a dividend must be borrowed at a cost. Since these costs are higher for low-ability managers, high-ability managers promise a lower dividend when future cash flows are high and a higher dividend when future cash flows are low. Thus, high-ability managers not only credibly signal their type and the firm's future cash flows, but also smooth dividends more than low-ability managers. Consistent with the model, I find that firms that smooth more have higher future values, larger price appreciations to unexpected dividend increases, and smaller price declines to unexpected dividend decreases. Further, I find that high-ability managers smooth dividends more than low-ability managers.

This paper aims to examine the stability of dividend policy using a unique data set.

The paper is based on the Lintner model that is used to test the dividend smoothing behavior. The specific econometric method used for panel data is Tobit regression.

The evidence shows that Omani firms adopt a policy of smoothing dividends. This stability of dividends does not support the predictions suggested by the high bank leverage, absence of taxes, and the variability of dividend payments in Oman.

This study highlights the need for further research in order to examine whether these results have any effect on dividend initiations and omissions in Oman.

The findings of this study show that there are differences in dividend policies between the Omani companies and those in developed markets. Potential investors in the Omani market should be aware about these differences in making their investment decisions.

This paper examines stability of dividend policy in a unique environment where firms distribute almost 100 percent of their profits in dividends, firms are highly levered mainly through bank loans, there are no taxes on dividends and capital gains, and there is variability in cash dividend payments. These factors suggest a diminished role of dividend stability in Oman. It is an empirical issue to examine whether this is indeed true. The authors are not aware of any other study on dividend stability using data with these unique factors.

This study examines the underlying factors which influence and cross-sectionally explain differences in the degree of dividend smoothing of firms. Differences in corporate dividend smoothing are documented by estimating the sensitivity of corporations' dividend payout ratios to changes in earnings. Theoretical determinants of dividend smoothing are investigated by cross-sectionally regressing the degree of dividend smoothing of firms against firm characteristics. The results show that riskier firms and smaller firms are more likely to smooth dividends. The empirical relationship between dividend smoothing and firm characteristics is much more significant for high growth firms, and varies considerably amongst sub-groups of the data that differ with respect to firm risk.