Excess Dividend Smoothing

Abstract

I find that dividends are a strong predictor of forced executive turnover, which suggests that managerial career concerns can be an important force behind observed dividend smoothness. I study the effect of this channel by developing a dynamic agency model in which dividends signal the firm's persistent earnings.In equilibrium, dividends and earnings are informational substitutes. Stock prices react to both earnings announcements and dividend changes, and this price reaction has a first-order effect on executive turnover. Managers, therefore, smooth dividends relative to earnings to withhold negative news and lower their turnover risk. Empirical estimates of the model parameters imply that 38% of observed dividend smoothness is turnover-induced. Having a turnover risk leads managers to smooth dividends excessively, compared to the level that maximizes the shareholders' wealth. This excess dividend smoothing destroys firm value by 2.84%. v Contributors and Funding SourcesThe work in this dissertation has been conducted independently without outside funding support, under the supervision of Professors