Dividend Smoothing and Investor Protection

This paper examines the agency model of dividends where the importance of dividends depends on the level of investor protection. The importance of dividends is presented by the dividend smoothing concept, while the level of investor protection is determined by the legal origin. Within this, the sensitivity of dividends to earnings changes was analyzed to examine the universality of the dividend smoothing phenomenon. Subsequently, the difference in proportions of dividend smoothing firms within the common law and civil law countries was tested to determine which of these two systems attributes more importance to dividends. Finally, the application of Lintner’s model was examined in transition countries as well as in United States. Research results show that dividend smoothing is a globally widespread phenomenon, but the likelihood to reduce or cut dividends is greater in civil law countries. Also, the largest percentage of dividend smoothing firms was recorded in common law countries