Integrating Reputational Considerations in the Empirical Analysis of Dividend Smoothing Policy of Emerging Market Firms - A Quantile Regression Approach
Integrating Reputational Considerations in the Empirical Analysis of Dividend Smoothing Policy of Emerging Market Firms - A Quantile Regression Approach

Summary/Abstract: Firm’s prior tendency towards paying dividends and the reputational considerations arising from it have long been known as the primary drivers of dividend policies around the world. Taking these factors into account, we study the cross-sectional properties of dividend smoothing among emerging market firms from Pakistan under light of asymmetric information and agency cost theories. Distinguishing between the high- and low-smoothing firms based on their prior tendencies towards smoothing, our quantile regression estimates confirm significant heterogeneity in the cross-sectional determinants of smoothing among the two groups. The findings show that while dividend smoothing rises significantly with size, age, asset tangibility, and risk among the low-smoothing firms, and declines with higher growth, payout level, and free cashflow; it remains largely insensitive to these factors for the high-smoothing firms. The results thus confirm that the high-smoothing firms continue to smooth high regardless of their exposure to informational asymmetries and agency costs. We, thus, observe this anomaly in smoothing policies of high-smoothing firms which emphasizes the dominance of the reputational effects in the smoothing policy of these firms. Inconsistent with the theoretical predictions, these findings provide some explanation for the dividend smoothing puzzle that why firms with lesser or no need for dividend smoothing still smooth high.Moreover, these findings also offer empirical evidence for setting future theoretical directions.

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