Dividend smoothing and ownership concentration: Evidence from Latin America

We evaluate the impact of ownership concentration on dividend smoothing for six Latin American economies characterized by both a low level of investor protection and high ownership concentration. Using a panel data set, we find that firms with higher ownership concentration tend to engage more in dividend smoothing, which is more evident for firms with high growth opportunities and greater financial constraints. Our results also show that companies with a mandatory minimum dividend rule (Brazil and Chile) do not engage in dividend smoothing as much as companies without this regulation (Argentina, Colombia, Mexico, and Peru). These results are consistent with the idea that in countries where the legal system does not protect minority shareholders, firms would smooth dividends to build a reputation for moderation in expropriating shareholders. According to our results, this need for reputation would be more important for firms with high ownership concentration, more growth opportunities, and greater financial constraints.