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Dividend smoothing and credit rating changes

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  • Panagiotis Asimakopoulos
  • Stylianos Asimakopoulos
  • Aichen Zhang

Abstract

This paper examines the impact of credit rating changes on firms' dividend smoothing behavior, considering for the first time the ‘big three’ credit rating agencies (Standard and Poor's, Fitch and Moody's). Using a hand-collected sample of credit rating changes for firms listed at the S&P500 that are involved in dividend payments, we implement the traditional Lintner's [1956. “Distribution of Incomes of Corporations Among dividends, Retained Earnings and Taxes.” American Economic Review 46: 97–113] model and we initially verify the fact that firms smooth their dividend payments. Then we consider the effect of credit rating changes on smoothing behavior and we show the presence of an asymmetric impact on credit rating changes to dividend smoothing behavior. In particular, on average, a credit rating downgrade among any of the three credit rating agencies forces firms to engage in less smoothing, whereas a credit rating upgrade has only a marginal positive effect on dividend smoothing. Finally, our key results remain valid for firms with high level of financial pressure and under various robustness checks.

Suggested Citation

  • Panagiotis Asimakopoulos & Stylianos Asimakopoulos & Aichen Zhang, 2021. "Dividend smoothing and credit rating changes," The European Journal of Finance, Taylor & Francis Journals, vol. 27(1-2), pages 62-85, January.
    • Handle: RePEc:taf:eurjfi:v:27:y:2021:i:1-2:p:62-85
    DOI: 10.1080/1351847X.2020.1739101
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    Cited by:

    1. Stylianos Asimakopoulos & James Malley & Apostolis Philippopoulos & Jim Malley, 2024. "The Firm-Level and Aggregate Effects of Corporate Payout Policy," CESifo Working Paper Series 11460, CESifo.
    2. Jaime A. Teixeira da Silva & Daniel J. Dunleavy & Mina Moradzadeh & Joshua Eykens, 2021. "A credit-like rating system to determine the legitimacy of scientific journals and publishers," Scientometrics, Springer;Akadémiai Kiadó, vol. 126(10), pages 8589-8616, October.
    3. Aoki, Yasuharu, 2023. "The effect of dividend smoothing on bond spreads: Evidence from Japan," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 621-637.

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