Determinants of dividend smoothing in emerging market: The case of Korea

Dividend smoothing is a well-established empirical fact in developed countries. This paper investigates the dividend smoothing behavior in Korea where the tax regime and institutional settings of the financial market are different from those of developed countries. The empirical evidence shows that the dividend smoothing decision is influenced not only by a firm's characteristics, but also by macroeconomic factors such as tax and interest rates. Detailed results are as follows. First, application of the Lintner model shows that the extent of dividend smoothing in Korean firms is found to be less than that in the U.S. firms. Second, size, risk, growth and large shareholder ownership are found to be important determinants of dividend smoothing. Larger firms and lower growth firms smooth dividends more. Riskier firms tend to smooth more during the sample period while safer firms smooth dividends more for the post-liberalization period. These results are not consistent with the predictions of information asymmetry models. In addition, contrary to the agency theory based explanations of dividend smoothing, firms with concentrated ownership smooth dividend more. Finally, as for the effect of macroeconomic factors on dividend smoothing, both tax and interest rates are found to have significantly positive relationships with the degree of dividend smoothing. These findings suggest that institutional factors of financial market can play a critical role in understanding the dividend behavior in emerging markets.