The impacts of dividend-smoothing risk, institutional investors and investor behaviour on equity pricing

Chen, Yuxi (2022) The impacts of dividend-smoothing risk, institutional investors and investor behaviour on equity pricing. Doctoral thesis (PhD), University of Sussex.

[img] PDF - Published Version
Download (4MB)


Asset pricing theory analyses the value of financial claims to uncertain future payments. In the case of a stock the financial claims are its future dividends. Prices move in response to changes in discount rates, information on future dividends reflecting profitability or changes in behavioural bias.

1. Is dividend smoothing a priced risk factor? (discount rates)
2. Do firms use smooth dividends to signal? (profitability)
3. What behaviour leads to mispricing? (behavioural bias)

I attempt to answer the first question by examining whether dividend smoothing can explain returns. More specifically, can it replace the small and value risk factors? I add a dividend smoothing factor to the CAPM and find that the smoothing factor had some explanatory power for the US stocks but not for Chinese stocks. However, this explanatory power is limited to non-large firms and does not perform well as the Fama-French three-factor model.

I attempt to answer the second question by examining the circumstances in which a smoothed dividend can convey information. Whether a smooth dividend acts as a signalling mechanism depends on its relationship with institutional investors: the type of institution, the direction of the relationship and the severity of the principal-agent problem. In the US, institutional monitors control the principal-agent problem and require dividend smoothing in exchange. In China, where the principal-agent problem is less pronounced, institutional monitors replace dividend smoothing to mitigate the minority-controlling shareholder problem. Dividend smoothing is not used as a signalling device in either case. In addition, managers in both countries pay smoothed dividends for their benefit when the colluders’ institutional holdings are high.

I attempt to answer the third question by identifying the sources of momentum. I wonder whether both overreaction and underreaction to information could cause a momentum effect. I establish different momentum strategies in China only, where short selling is not allowed. I find that Chinese investors underreact to bad news and overreact to good news. Among them, institutional investors intensify their overreaction to good news in bad times.

Item Type: Thesis (Doctoral)
Schools and Departments: University of Sussex Business School > Accounting and Finance
Subjects: H Social Sciences > HG Finance
Depositing User: Library Cataloguing
Date Deposited: 16 Feb 2022 13:07
Last Modified: 16 Feb 2022 13:07

View download statistics for this item

📧 Request an update