An Investigation Of Dynamic Dividend Behavior In Korea

Abstract

The principal objective of this study was to assess the dynamic dividend behavior of firms in Korea. Specifically, this study tests the presence of dividend smoothing and identifies the firm-level factors influencing the degree of dividend smoothing. For this purpose, 299 firms listed on the Korea Stock Exchange over a 26-year period, from 1981 to 2006, were investigated.

The empirical results of this study demonstrate that Korean firms made dividend payments which were quite closely related to the average interest rate over the sample period. A change in dividend payments is less likely to reflect a change in the fundamentals of Korean companies. Instead, it appears to be related significantly to movements in the interest rate. This study also finds that the majority of Korean firms pay smoothed dividends. However, the degree of dividend smoothing in Korean firms was determined to be lower than that observed in US firms. In addition, the results demonstrate that the long–term target payout ratio is significantly lower than the observed payout ratio. The results indicate that Lintner’s dividend smoothing model does not explain the dynamic dividend behavior in Korea.

The theoretical determinants of dividend smoothing were assessed by regressing the degree of dividend smoothing of firms against the firm characteristics. The results show that riskier firms tend to pay more smoothed dividends, thus supporting the prediction previously made by Kumar (1988). However, contrary to the theoretical predictions, our results find that larger and older firms are more likely to smooth dividends in Korea. Controlling shareholder’s ownership, growth, and financial slack all appear to exert insignificant effects on the degree of dividend smoothing. The results suggest that the information and agency theories of dividend smoothing do not explain the dynamic dividend policy of Korean firms.