Dividend smoothing and retail shareholders: Australian evidence of dividend clientele effects

Thorne, Sarah (2010). Dividend smoothing and retail shareholders: Australian evidence of dividend clientele effects Honours Thesis, UQ Business School, The University of Queensland.

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Author Thorne, Sarah
Thesis Title Dividend smoothing and retail shareholders: Australian evidence of dividend clientele effects
School, Centre or Institute UQ Business School
Institution The University of Queensland
Publication date 2010-10-28
Thesis type Honours Thesis
Supervisor Jason Hall
Total pages 89
Language eng
Subjects 1502 Banking, Finance and Investment
Abstract/Summary Despite the lack of financial theory in support for dividend smoothing as a risk reduction technique, progressive dividend policies are widely used among Australian corporations. Recent survey evidence indicates that managers believe that smoothing dividends is so important that they would prefer to make potentially value destroying decisions than to cut their dividend level. A revealing example of this behaviour was observed during the economic downturn of 2007 to 2009 in which managers undertook share placements at substantial discounts as an alternative to dividend cuts to strengthen balance sheets. This thesis examines whether managers pursue a smooth dividend profile in order to cater to their retail shareholders who are the equity market participants most likely to view smooth dividends as indicative of low risk in spite of volatile earnings. This conjecture is founded on the notion that retail shareholders are relatively unsophisticated and irrational. By linking dividend policy to capital structure this thesis estimates the value of the tax benefits of debt that managers are forgoing to smooth dividends. On average, this perpetual cash flow represents 7.0 per cent of a firm‟s equity value. Through the use of a new empirical technique that is widely employed in investment banking that estimates the percentage of stock held by retail shareholders, this thesis finds that the proportion of a firm‟s retail shareholding is significantly related to this forgone perpetual cash flow. This provides compelling evidence that firms are catering to their retail shareholders by smoothing dividends. This result holds after controlling for size, profitability, growth opportunities, business risk, agency costs, buybacks and franking credits. Furthermore, the result is robust to different measures of smoothing and the retail shareholding.

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Created: Tue, 17 Jul 2012, 11:19:47 EST by Karen Morgan on behalf of UQ Business School