Dividend smoothing and implication of Lintner Model: An empirical analysis of Indian auto sector

Abstract

Dividend smoothing is the strategy used by the managers to avoid adverse reaction of market participant or shareholders while setting dividend level. John Lintner (1956), in his study on dividend policy found that managers target a long-term dividend payout ratio and concluded that dividends are sticky, connected to long-term sustainable earnings, paid by mature firms, and are smoothed from year to year. This study is an effort to find the applicability of dividend smoothing in BSE sectoral firms. This paper utilizes event study methodolgy to examine dividend announcement of 42 A&B listed companies in BSE Auto sector. The smoothing prevails in Indian Auto-Sector. The study reveals dividend policies of the firms depend strongly on lagged dividend and profit after tax with robust statistical significance of coefficients. The high target payout ratio coupled with high speed of adjustments (SOA), shows presence of dividend smoothing and hence, empirical analysis conducted strongly supports and further confirms Lintener's findings.