Dividend Smoothing and Financial Transparency

The study explores the effect of financial transparency on dividend smoothing behavior. We first analytically show that dividend smoothing should increase when shareholders cannot observe cash flow realizations. We then utilize difference-in-differences estimation to contrast firms’ propensity to smooth dividends before and after the passage of SOX. Our data include a sample of dividend-paying U.S. public companies in 1980–2017. Using exogenous variation in financial transparency created by the SOX, we find that firms with a greater increase in audit fees and firms that decreased dispersion of analyst forecasts in the post-SOX period reduced dividend smoothing after the legislative change, as compared to other dividend-paying firms in the sample. Our study complements recent studies considering the firm’s dividend smoothing as an alternative corporate governance mechanism and provides both theoretical and empirical evidence on importance of financial transparency