Abstract:
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Dividend smoothing is a well-known empirical phenomenon which is
extensively described and analyzed in the financial literature. However, the
motivation behind this widespread firm's policy is not totally understood. The
signaling approach is one model employed to explain dividend smoothing:
managers reduce information asymmetry between firm insiders and other
stakeholders by maintaining dividends stable, thus signaling their confidence in
the firm's future performance. Nevertheless, results from empirical studies are
incomplete and contradictory, and the full extent and implications of dividend
smoothing as a signaling approach requires further research.
In this regard, firms' performance as a factor that influences dividend
smoothing is not commonly studied. The goal of this dissertation is to fulfill this
gap, determining the existence of a relationship between firm's performance and
dividend smoothing. Additionally, this dissertation also takes business cycle
effects into consideration when investigating the association between performance
and smoothing. The existing research dealing with business cycle and dividend
policy shows that recessions can have an important impact on firms' dividend
payout, including dividend smoothing. However, firms' performance as a factor
that influences dividend smoothing during recession and recovery is not directly
found in the literature.
In order to achieve the goals above described, the firms were divided in
three performance groups: high, intermediate, and low performance. Employing a
database of U.S. firms during the period 1980 to 2014, five distinct sub-periods of recession and recovery were analyzed using the Lintner's smoothing regression,
including recent developments in the model. The regression analysis was carried
out with a panel data model with fixed-effects.
The results contribute to the literature by establishing that firm's
performance has indeed an impact on dividend smoothing: intermediate
performance firms practice a higher level of dividend smoothing, contrasted to an
erratic dividend policy adopted by low and high performance firms. Furthermore,
firm's performance has also an impact on dividend smoothing during different
phases of the business cycle: compared to low and high performance firms, fewer
intermediate performance firms cut dividends during recession. This leads to a
higher level of dividend smoothing practiced by intermediate firms, contrasted to
a higher variation in dividend policy adopted by low and high performance firms.
With these findings, this dissertation sheds light on the relationship
between firm's type and dividend policy, particularly in circumstances where
external macroeconomic shocks, not under the control of the firm, may affect the
firm's value. In practical terms, the ability to determine the firm's true
performance by observing its dividend policy, either in recessions or recoveries,
improves potential investors' capability to direct investments to their target firms.
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