Dividend smoothing and credit rating changes

Panagiotis Asimakopoulos, Stylianos Asimakopoulos, Aichen Zhang

Research output: Contribution to journalArticle

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.
Original languageEnglish
JournalThe European Journal of Finance
Early online date13 Mar 2020
DOIs
Publication statusE-pub ahead of print - 13 Mar 2020

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