eThesis - School of Business electronic theses

PURPOSE OF THE STUDY:

Regardless of the extensive body of literature examining firms' payout policies, the theoretical and empirical evidence on why companies pay dividends and what determines the amounts paid out has proved contradictory. One aspect of the dividend puzzle is managers' tendency to keep the dividend flow stable; a phenomenon also known as dividend smoothing. The objective of this study is to examine the cross-sectional differences in the dividend smoothing behavior of European companies. Although the phenomenon of dividend smoothing is unanimously agreed and the empirical evidence is rather consistent, there is little agreement on what are the characteristics of these firms that determine the propensity to smooth and what are the reasons behind the smoothing behavior. By examining the differences in firm characteristics and smoothing behavior I intend to shed light on possible reasons for this behavior. The objective is to examine whether the firm characteristics driving smoothing behavior can be linked to the prevailing theories of information asymmetries, agency considerations, dividend clienteles and external financing constraints.

DATA AND METHODOLOGY:

The sample consists of 1,221 publicly listed European companies that have continuously paid dividends for at least 8 consecutive years during the sample period of 1985-2011. The sample firms are also required to have at least 5 years of data for each of the firm characteristic variables examined in this study. The sample includes companies from 20 European countries. The data is retrieved from Thomson One Banker. Dividend smoothing is measured by speed of adjustment and univariate t-tests of equal means as well as basic multivariate cross-sectional regressions are used to examine the link between firm characteristics and speed of adjustment measure.

RESULTS:

According to my results, a clear conclusion on the underlying driving force behind dividend smoothing behaviour cannot be made. I find that larger firms with less growth opportunities, shorter investor investment horizon, that pay less dividends and do have bond ratings have smoother dividends. Moreover, 'cash cow firms' and firms with weaker shareholder rights smooth less. These results partly support both information asymmetry and agency conflict explanations. Investor clientele and external financing constraints explanations, instead, are more clearly rejected. Differences between European countries may effect this inconclusivity of the results or several market factors may drive the behaviour simultaneously.