Why do firms smooth dividends? Empirical evidence from an emerging economy India. (2018) - Labhane, Nishant B.
The present study examines the determinants of dividend smoothing behaviour of 240 sample companies listed on National Stock Exchange (NSE) in India, which have continuous data during the period 1994-1995 to 2012-2013. The empirical results show that Indian firms have target payout ratios, adjust to their targets relatively slowly but not as slowly as the firms in the developed markets such as the USA, Germany and France and thus, tend to smooth and stable their dividends and rely on long-term target payout ratios while making the dividend payment decisions. The firms having high investment opportunities, low leveraged, riskier and smaller firms tend to smooth their dividend more. As for the macroeconomic factors, the high dividend distribution taxes imposed by the government tend the firms to smooth their dividends more. Overall, the results support the information asymmetry and agency-based explanations of dividend smoothing.