Dividend smoothing and ownership concentration: Evidence from Latin America

• Published date: 01 October 2023
• Author: Tamara Tigero,Rodrigo Saens,Augusto Castillo
• Date: 01 October 2023
• DOI: http://doi.org/10.1002/jcaf.22639

Received:  January  Revised:  April  Accepted:  April 

DOI: ./jcaf.

RESEARCH ARTICLE

Dividend smoothing and ownership concentration:

Evidence from Latin America

Tamara Tigero1Rodrigo Saens1Augusto Castillo2

Universidad de Talca, Chile

Universidad Adolfo Ibáñez, Chile

Correspondence

Rodrigo Saens, Universidad de Talca,

Chile.

Email: rsaens@utalca.cl

Abstract

We evaluate the impact of ownership concentration on dividend smoothing for

six Latin American economies characterized by both a low level of investor pro-

tection and high ownership concentration. Using a panel data set, we find that

firms with higher ownership concentration tend to engage more in dividend

smoothing, which is more evident for firms with high growth opportunities

and greater financial constraints. Our results also show that companies with

a mandatory minimum dividend rule (Brazil and Chile) do not engage in div-

idend smoothing as much as companies without this regulation (Argentina,

Colombia, Mexico, and Peru). These results are consistent with the idea that

in countries where the legal system does not protect minority shareholders,

firms would smooth dividends to build a reputation for moderation in expro-

priating shareholders. According to our results, this need for reputation would

be more important for firms with high ownership concentration, more growth

opportunities, and greater financial constraints.

KEYWORDS

agency costs, dividend smoothing, information asymmetry, ownership structure

JEL CLASSIFICATION

G, G, G

1 INTRODUCTION

This paper investigates the relationship between corpo-

rate ownership structure and dividend smoothing. Given

that information asymmetries and agency costs—between

shareholders and managers—differ according to the cor-

porate ownership structure, the relationship between

ownership concentration and dividend smoothing has

generated considerable research interest (Allen et al.,

;Brockmanetal.,; Fudenberg & Tirole, ;

Javakhadze et al., ; Koussis & Makrominas, ;

Rahman, ; among others).

Since Lintner (), we know that if firms adjust

dividends towards a long-term target, they do so only

gradually; that is, they smooth dividends (Brav et al., ;

Fama & Ba biak , ; Leary & Michaely, ). Based

on the information asymmetries that exist between the

internal members of the corporation and the external

shareholders, there are two main alternative theories that

explain dividend smoothing: signaling theory and agency

cost theory (Francis et al., ). Easterbrook ()and

Jensen () suggest, for example, that managers pay high

and stable dividends to signal to outside investors that

they will not invest in projects with negative present value,

as well as to mitigate agency conflicts between corporate

insiders and outside shareholders.

The signaling theory states that dividends serve as a sig-

nal of a firm’s future cash flows (Bhattacharya, ; John

108 ©  Wiley Periodicals LLC. J Corp Account Finance. ;:–.wileyonlinelibrary.com/journal/jcaf