Managerial Ability and Dividends Smoothing: A Dynamic Approach

Irregular and un-persistent dividends payments can provide a risky image of a firm and increase the costs of financing from the capital markets. This paper is aimed to examine the relationship between managerial ability and dividends smoothing. Using data from 148 firms listed in Tehran Stock Exchange during 2007-2017 and applying dynamic panel data approach, this research compares the dividends smoothing in firms with high and low managerial ability. The research results show that compared with other firms, firms with a higher level of managerial ability have a lower degree of dividends smoothing. The complementary results using differenced generalized method of moments are consistent with the research main findings. Our findings confirm that the more capable managers have the lower tendency to smooth firms’ dividend. These findings are not consistent with the concepts presented in the signaling theory.Contribution: For the first time, this research compares the dividends smoothing in firms with high and low managerial ability, and from this perspective tests the signaling theory. The research findings can help to develop the dividends literature and related theories.