Dividend Smoothing And The Long-Run Stability Between Dividends And Earnings In Korea

Abstract

There have been no empirical attempts to estimate and verify the dividend-earnings relation reflecting both the signaling and dividend smoothing hypotheses. This study proposed a cointegration model to test both hypotheses in an integrated framework in order to provide better insight into the dividend and earning relation. We are particularly interested in the issue of whether the model can detect a presence of inter-temporal relations between dividends and earnings. The implications of the signaling model and smoothing model of dividends were empirically tested using the recent 26 annual series data of dividends and earnings up to year 2006 for 226 firms listed on the Korea Stock Exchange. The results of t-test and logistic regression show that the presence of cointegration is positively related to the degree of information asymmetry, a result consistent with the dividend signaling hypothesis. In addition, dividend smoothing is identified as an underlying force to make dividends and earnings cointegrated.