The Role of Market Fluctuation and Imperfection on Dividends Smoothing
Abstract
This study aimed to investigate the effect of market fluctuation (earnings fluctuation) and imperfection on dividend smoothing. In this study, environmental uncertainty is used as a market fluctuation index calculated by the standard deviation of profitability changes over three years. In order to investigate the issue, data on companies listed in Tehran Stock Exchange for 9 years, that is, 2011-2019, were extracted, and a panel regression model was used to test the research hypotheses. The results showed that the information asymmetry in inefficient markets motivates managers to manipulate and smooth profits to achieve their goals. Dividend smoothing is a function of market imperfection and fluctuates and changes in various levels of environmental uncertainty. It, environmental uncertainty leads to the difference in smoothing the dividends between companies operating in conditions of high environmental uncertainty and companies operating in conditions of low environmental uncertainty. Environmental uncertainty increases overall ambiguity about the company by creating incomplete information. It causes benefits for certain investors from obtaining private information about the company.
Keywords: dividend smoothing, market fluctuation, market imperfection.
Full Text:
PDFReferences
DZIDIC A., & ORSAG S. Dividend smoothing and investor protection. Zagreb international review of economic & business, 2019, 22(2): 55-70. https://doi.org/10.2478/zireb-2019-0020
GODDARD J. D., MCMILLAN G. J., and WILSON O. S. Dividend smoothing vs dividend signaling: evidence from UK firms. Managerial Finance, 2006, 32(6): 493-504. https://doi.org/10.1108/03074350610666229
KARUNARATHNE M. B. D. N., SEWWANDI A. K. Y., SUBHASHINI I. B. N., and WICKRAMA ARACHCHIGE T. O. The Signaling Effect of Dividends on The Market & Financial Performance of Listed Companies in Sri Lanka. International Journal of Academic Research in Business and Social Sciences, 2021, 11(1): 233-249. http://dx.doi.org/10.6007/IJARBSS/v11-i1/8471
LINTNER J. Distribution of incomes of corporations among dividends, retained earnings, and taxes. The American Economic Review, 1956, 46(2): 97-113. https://www.jstor.org/stable/1910664
TOSKI O., JANANI M., and HEMATFAR M. Measuring and explaining the probability of informed trading and its relation between with the cost of capital with an emphasis on family ownership. International Journal of Nonlinear Analysis and Applications, 2020, 11(5): 63-79. https://dx.doi.org/10.22075/ijnaa.2020.4525
AKINS B., NG J., and VERDI R. Investor competition over information and the pricing of information asymmetry. The Accounting Review, 2012, 87(1): 35–58. https://dx.doi.org/10.2139/ssrn.1769905
GUTTMAN I., KADAN O., and KANDEL E. Dividend stickiness and strategic pooling. The Review of Financial Studies, 2010, 23(12): 4455-4495. https://doi.org/10.1093/rfs/hhq096
BRAV A., GRAHAM J., HARVEY C., and MICHAELY R. Payout Policy in the 21st Century. Journal of Financial Economics, 2005, 77: 483–527. https://doi.org/10.1016/j.jfineco.2004.07.004
PANAGIOTIS A., STYLIANOS A., and AICHEN Z. Dividend smoothing and credit rating changes. The European Journal of Finance, 2021, 27(1-2): 62-85. https://doi.org/10.1080/1351847X.2020.1739101
CHARLES G. H., ZACHARY R. K., and MARK T. L. Do dividends convey information about future earnings? Journal of Financial Economics, 2020, 136 (2): 547-570. https://doi.org/10.1016/j.jfineco.2019.10.006
LAMBRECHT. M., & MYERS, S. C. A Linter model of payout and managerial rents. The Journal of Finance, 2012, 67(5): 1761-1810. https://doi.org/10.1111/j.1540-6261.2012.01772.x
AIVAZIAN V. A., BOOTH L., and CLEARY S. Dividend smoothing and debt ratings. Journal of Financial and Quantitative Analysis, 2006, 41(2): 439-453. http://dx.doi.org/10.1017/S0022109000002131
WIJEKOON W., and SENAVIRATHNE, L. Impact of Dividend Policy on Firm Performance Evidence from Listed Companies in Colombo Stock Exchange. Global Scientific Journals, 2019, 7(10): 225-239. https://www.globalscientificjournal.com/researchpaper/IMPACT-OF-DIVIDEND-POLICY-ON-FIRM-PERFORMANCE-EVIDENCE-FROM-LISTED-COMPANIES-IN-COLOMBO-STOCK-EXCHANGE.pdf
AHMETI F., & PRENAJ B. A critical review of Modigliani and Miller’s theorem of capital structure. International journal of economics, commerce and management, 2015, 3(6): 914-924. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2623543
LAURI A. Asymmetric Information: Theory and Applications. Helsinki University of Technology, Helsinki, 2003. https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.198.9252&rep=rep1&type=pdf
MUTFI M. Y., PUDJIARTI E. S., and DARMANO S. Analysis of second order person-environment fit on innovative work behavior and individual performance. Journal of Business Management and Accounting, 2019, 3(2): 100-113. https://arthatamajournal.co.id/index.php/home/article/view/30
HSU C., NOVOSEOV K., and WANG R. Does Accounting Conservatism Mitigate the Shortcomings of CEO Overconfidence? The Accounting Review, 2017, 92(6): 77-101. https://doi.org/10.2308/accr-51718
LOUIS H., & URAN O. Agency conflicts, dividend payout, and the direct benefits of conservative financial reporting to equity-holders. Contemporary Accounting Research, 2014, 32(2): 455-484. https://doi.org/10.1111/1911-3846.12085
EBRAHIMI S., BAHRAMINASAB A., and HAMEDI M. Effect of Auditor’s Opinion on Stability of Dividend and Free Cash Flow. Applied Research in Financial Reporting, 2018, 7(1): 223-247. http://www.arfr.ir/article_68853.html?lang=en
SOHAIL M., Impact of financial reporting quality on the firm’s financial performance. Global Scientific Journals, 2019, 7(7): 468–481. http://dx.doi.org/10.6007/IJARAFMS/v11-i1/7510
OZILI P. K. Accounting and financial reporting during a pandemic. Social Science Research Network Electronic Journal, 2020: 1–8. https://doi.org/10.2139/ssrn.3613459
MERTON R. A Simple Model of Capital Market Equilibrium with Incomplete Information. Journal of Finance, 1987, 43: 483-510. https://doi.org/10.1111/j.1540-6261.1987.tb04565.x
VERRECCHIA R. Essays on disclosure. Journal of Accounting and Economics, 2001, 32: 97-180. http://dx.doi.org/10.1016/S0165-4101(01)00025-8
DIAMOND D., & VERRECCHIA R. Disclosure, liquidity and the cost of capital. Journal of Finance, 1991, 46(4): 1325-1359. https://doi.org/10.1111/j.1540-6261.1991.tb04620.x
BROWN S., & HILLEGIEST S. A. How Disclosure Quality Affects the Level of Information Asymmetry. Review of Accounting Studies, 2007, 12: 443–477. https://doi.org/10.1007/s11142-007-9032-5
LEARY M. T., & MICHAELY R. Determinants of dividend smoothing: Empirical evidence. The Review of Financial Studies, 2011, 24(10): 3197-3249. https://doi.org/10.1093/rfs/hhr072
FAMA E. F., & FRENCH K. R. Testing trade-off and pecking order predictions about dividends and debt. The Review of Financial Studies, 2002, 15(1): 1-33. https://doi.org/10.1093/rfs/15.1.1
FLIERS P. T. What is the relation between flexibility and dividend smoothing? Journal of international money and finance, 2019, 92: 98-111. https://doi.org/10.1016/j.jimonfin.2018.12.009
LAMBERT R., LEUZ C., and VERRECCHIA R. Information asymmetry, information precision, and the cost of capital. Review of Finance, 2012, 16(1): 1-29. https://doi.org/10.1093/rof/rfr014
KUSTONO A. S., ROZIQ A., and NANGALLA A. Y. A. Earnings Quality and Income Smoothing Motives: Evidence from Indonesia. The Journal of Asian Finance, Economics and Business, 2021, 8(2): 821–832. https://doi.org/10.13106/jafeb.2021.vol8.no2.0821
HUCHZERMEIER A., & LOCH C. H. Project management under risk: Using the real options approach to evaluate flexibility in R&D. Management Science, 2001, 47(1): 85–101. https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.614.8299&rep=rep1&type=pdf
MICHAEL J. I., SCOTT E. S., and DAVID B. S. Comparability and Cost of Equity Capital. Accounting Horizons, 2017, 31(2): 125-138. https://doi.org/10.2308/acch-51710
DICHEV I. D., & TANG V. W. Earnings volatility and earnings predictability. Journal of Accounting and Economics, 2009, 47(1): 160-181. https://doi.org/10.1016/j.jacceco.2008.09.005
XIAODONG X., XIA W., and NINA H. Accounting Conservatism, Ultimate Ownership and Investment Efficiency. China Finance Review International, Emerald Group Publishing, 2013, 2(1): 53-77. https://doi.org/10.1108/20441391211197456
BHUIYAN M. B. U., and HOOKS J. Cash holding and over-investment behavior in firms with problem directors. International Review of Economics & Finance, 2019, 61(C): 35-51. https://ideas.repec.org/a/eee/reveco/v61y2019icp35-51.html
WU Y. What’s behind Smooth Dividends? Evidence from Structural Estimation. The Review of Financial Studies, 2018, 31(10): 3979–4016. https://doi.org/10.1093/rfs/hhx119
BAKER H. K., & POWELL G. E. Determinants of corporate Dividend Policy a Survey of NYSE Firms. Financial Practice and Education, 2000, 10: 29-40. https://dra.american.edu/islandora/object/auislandora%3A73242/datastream/PDF/view
Refbacks
- There are currently no refbacks.