Dividend smoothing when firms distribute most of their earnings as dividends

Abstract

Due to its distinctive institutional background, Oman offers a valuable opportunity to investigate the stability of the dividend policy. In Oman, (1) there are no taxes on dividends, (2) firms are highly levered mainly through bank loans, (3) there is a high concentration of stock ownership and (4) there is variability in cash dividend payments. These factors suggest a diminished role of dividend smoothing in Oman. Our results show that Omani financial firms have erratic dividend policies. These results are inconsistent with the predictions suggested by the relatively weak corporate governance, government ownership and dividend signalling.

Keywords:

• dividend smoothing
• taxes
• bank debt
• government ownership

JEL Classification:

• G35

Acknowledgements

The authors are grateful to participants at the 16th Annual Australasian Banking and Finance Conference for valuable comments and suggestions. The authors also thank the participants at the European Economics and Finance Society Conference in Prague for their comments and insights.

Notes

¹ Al-Yahyaee et al. (2010) examined the stability of dividend policy using a large sample of Omani nonfinancial firms. They find that Omani nonfinancial firms adopt a policy of smoothing dividends.

² See Aivazian et al. (2003a) for a discussion on the role of bank debt in reducing the agency cost. Fleming et al. (2005) also provide a discussion of the benefits of debt financing in alleviating the agency problem.

³ Gulf Cooperation Council (GCC) countries include United Arab Emirates, Kuwait, Oman, Saudi Arabia, Qatar and Bahrain.

⁴ The Capital Market Authority (CMA) in June 2002, published its Corporate Governance Code (Circular No. 11/2002), which was later amended and replaced by Circular No. 1/2003 of April 2003. The Code requires all listed companies to publish a section on corporate governance in their annual financial statements. This Code is not as elaborate as corporate governance regimes in western countries (Mohamed et al., 2009).

⁵ See Mohamed et al. (2009) for a detailed description of Corporate Governance in Oman.

⁶ See Al-Yahyaee (2006) for details on this issue.

⁷ For further information on this issue, see Anderson (1986) and Kim and Maddala (1992).

⁸ As a robustness check, we also use a random effects Tobit regression. The Tobit and random effects Tobit results are very similar to those reported using Tobit regressions.

⁹ The negative constant reported in this article is consistent with the results documented by Kim and Maddala (1992) and Huang (2001a, b) who utilize Tobit regression to estimate the Lintner model.

¹⁰ We calculate the target payout ratio as (the coefficient on earnings per share (EPS) divided by the speed of adjustment).