Dividend smoothing and implications of Lintner's model: An empirical analysis of Indian metal 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 Metal Sector firms. This paper utilizes time series cross sectional panel data analysis to examine dividend payout policies of 51 A& B listed companies in BSE Metal Sector. The empirical analysis of 782firm year observations for the period of fifteen years reveals that dividend 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 (1956) findings.