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Dividend Smoothing and Business Groups: Evidence from Indian Companies

This article examines the determinants of dividend smoothing behaviour of business group-affiliated firms relative to unaffiliated firms in India during the period from 1994–1995 to 2012–2013. The study is based on 240 sample firms listed on the National Stock Exchange (NSE) that has continuous dividend data for the entire period. The business group-affiliated firms tend to smooth their dividend payments more than that of standalone firms and the actual payout ratio as well as the target payout ratio of business group-affiliated firms is higher than that of standalone firms. For the determinants of dividend smoothing, the investment opportunities and the financial leverage are the significant factors influencing the dividend smoothing behaviour of business group-affiliated firms and standalone firms, respectively. For the entire sample, the firms with high investment opportunities, low leverage, high business risk and that are smaller in size tend to smooth their dividend payments more. As for the macroeconomic factors, the high dividend distribution tax (DDT) imposed by government tends the firms to smooth their dividend payments more. Overall, the results support the information asymmetry and agency-based explanation of dividend smoothing behaviour.