Abstract:
Dividend smoothing is the strategy used by the managers to target net earnings in the payout ratio as shareholders prefer stable dividend over volatile payments (Lintner 1956). In this paper, we investigate whether implications dividend smoothing model of Lintner holds good for Indian Consumer Goods sector. Using 15 years of panel data with 465 and 815 observations of Consumer durable goods sector and FMCG sector respectively, we find robust relationship between the smoothness of a firm's dividends with independent variable PAT and lagged dividend. Fixed effect firm model, time effect model and pooled data model has been used for the study. Results reveals high target payout ratio coupled with adequate speed of adjustment factor indicating the high presence of dividend smoothing and dividend signaling. Thus, Findings of the study support relevance of the Lintner model and finds that earnings (PAT) and lagged dividend are considered by managers while framing the dividend policy.
