Speed of Adjustment in Dividend Payout Decisions: A Comparative Analysis of Developed and Developing Countries

Abstract

This study examines the phenomenon of dividend smoothing, which is a policy of setting higher or lower dividend values than aligns with the levels of a company’s earnings. Herein we specifically examine the speed of adjustment as a measure for the presence of dividend smoothing, and investigate how this manifests as a corollary to the phenomenon. Our research also includes an investigation of firms’ internal characteristics and other relevant parameters which determine the speed of adjustment. We perform an analysis on an international sample comprising more than 4000 non-financial companies from 40 countries. The data for analysis were obtained from the Capital IQ database. We identified relevant and pertinent variables based on a thorough analysis of the existing academic literature, and applied a series of analytical models based on Lintner’s model for evaluating corporate dividend policy. We applied a number of modifications to Lintner’s basic model which were tailored to suit our individual approach.Our results illustrate the ubiquitous presence of dividend smoothing across our international sample, and indicates a general speed of adjustment equal to 64.8%. Further, our results indicate that the speed of adjustment to a higher dividend level is significantly lower in comparison to the speed of adjustment to a lower dividend level. These differences in the speed of adjustment allows us to assert that the speed of adjustment in a group of companies which indicate a dividend fall of lower than 25%, significantly differs from the case presented in the rest of the sample. In fact, the speed of adjustment in a group with a dividend fall lower than 25% is approximately equal to 100%, while the remaining sample shows a speed of adjustment equal to 37%.Our results allow for us to present a single novel theory of dividend smoothing. We conclude that the speed of adjustment can be best explained from the perspective of the theory of information asymmetry. This conforms with the majority opinion from existing studies in the field. This paper uses the most recent data available and provides insights not previously established, which is especially interesting considering the international context of our sample. Our analysis provides ground for further investigation into the most salient results confirmed by our analysis, and most specifically, the question as to why is there a difference in the speed of adjustment between lower and higher levels of dividends.

Keywords

• speed of adjustment
• dividend payout
• developing countries