Dividends: Relevance, Rigidity, and Signaling

Sigitas Karpavicius

    Research output: Contribution to journalArticlepeer-review

    28 Citations (Scopus)


    This paper uses a dynamic partial equilibrium model to explain a puzzle of dividend smoothing. In contrast to the Modigliani-Miller theory, I show that firm value depends on payout policy. The analysis implies that firms with more stable dividend stream are more valuable. This explains why dividends are rigid over time. A volatile component of dividends is introduced to reduce the likelihood of dividend omission in bad times while keeping the same historical average dividends. I show that the empirically observed positive relation between dividends and future firm performance is a statistical artifact driven by dividend smoothing. Thus, the empirical tests of dividend signaling theory might be misspecified.

    Original languageEnglish
    Pages (from-to)289-312
    Number of pages24
    JournalJournal of Corporate Finance
    Early online date2014
    Publication statusPublished - Apr 2014


    • Dividend smoothing
    • Partial equilibrium model
    • Payout policy
    • Signaling theory


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