Sentiment and dividend smoothing: Do firms alter dividends during periods of high market activity?
DOI:
https://doi.org/10.18559/ebr.2025.4.2485Keywords:
Investor sentiment, Dividend policy, Dividend smoothing, Behavioral finance, Emerging marketsAbstract
This study investigates whether investor sentiment shapes dividend policy among publicly listed firms in Bangladesh by testing the hypothesis that firms alter their dividend smoothing practices in response to market optimism. We utilise a balanced panel of 116 firms from 2010 to 2021, applying robust panel regression techniques, including random effects, panel-corrected standard errors, and instrumental variable estimation to address model imperfections and potential endogeneity. Our findings show that, on average, firms increase dividends during periods of heightened investor optimism. However, this effect is moderated by prior dividend levels, indicating a tendency toward dividend smoothing. Firms appear to balance market sentiment with the need to maintain consistent payout signals. The findings contribute to the behavioural finance literature by highlighting sentiment as a key determinant of dividend behaviour within the Bangladesh context, where market volatility and retail participation are pronounced.
JEL Classification
International Financial Markets (G15)
Payout Policy (G35)
Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets (G41)
Financial Markets • Saving and Capital Investment • Corporate Finance and Governance (O16)
Downloads
References
Abor, J., & Bokpin, G. A. (2010). Investment opportunities, corporate finance, and dividend payout policy: Evidence from emerging markets. Studies in Economics and Finance, 27(3), 180–194. https://doi.org/10.1108/10867371011060018
View in Google Scholar
Aivazian, V. A., Booth, L., & Cleary, S. (2003). Do emerging market firms follow different dividend policies from US firms? Journal of Financial Research, 26(3), 371–387. https://doi.org/10.1111/1475-6803.00064
View in Google Scholar
Ali, A., Jan, F. A., & Atta, M. (2015). The impact of dividend policy on firm performance under high or low leverage: Evidence from Pakistan. Journal of Management Info, 2(4), 16–25. https://doi.org/10.31580/jmi.v8i1.48
View in Google Scholar
Baker, M., & Wurgler, J. (2004). A catering theory of dividends. Journal of Finance, 59(3), 1125–1165. https://doi.org/10.1111/j.1540-6261.2004.00658.x
View in Google Scholar
Baker, M., & Wurgler, J. (2006). Investor Sentiment and the Cross-Section of Stock Returns. The Journal of Finance, 61(4), 1645–1680. https://doi.org/10.1111/j.1540-6261.2006.00885.x
View in Google Scholar
Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. Journal of Economic Perspectives, 21(2), 129–152. https://doi.org/10.1257/jep.21.2.129
View in Google Scholar
Baltagi, B. H. (2005). Econometric analysis of panel data (3rd ed.). John Wiley & Sons.
View in Google Scholar
Beck, N., & Katz, J. N. (1995). What to do (and not to do) with time-series cross-section data. American Political Science Review, 89(3), 634–647. https://doi.org/10.2307/2082979
View in Google Scholar
Bekaert, G., & Harvey, C. R. (2003). Emerging markets finance. Journal of Empirical Finance, 10(1–2), 3–55. https://doi.org/10.1016/S0927-5398(02)00054-3
View in Google Scholar
Belhoula, M. M., Mensi, W., & Naoui, K. (2024). The impact of investor sentiment, un-certainty indices, and macroeconomic factors on efficiency of G7 stock markets. Quality & Quantity, 58, 2855–2886. https://doi.org/10.1007/s11135-023-01780-y
View in Google Scholar
Berger, D. (2022). Investor sentiment: A retail trader activity approach. Review of Accounting and Finance, 21(2), 61–82. https://doi.org/10.1108/raf-06-2021-0152
View in Google Scholar
Bissoondoyal-Bheenick, E., Do, H., Hu, X., & Zhong, A. (2022). Sentiment and stock market connectedness: Evidence from the U.S. – China trade war. International Review of Financial Analysis, 80, 102031. https://doi.org/10.1016/j.irfa.2022.102031
View in Google Scholar
Bon, S. F., & Hartoko, S. (2022). The effect of dividend policy, investment decision, lev-erage, profitability, and firm size on firm value. European Journal of Business and Management Research, 7(3), 7–13. https://doi.org/10.24018/ejbmr.2022.7.3.1405
View in Google Scholar
Brambor, T., Clark, W. R., & Golder, M. (2006). Understanding interaction mod¬els: Improving empirical analyses. Political Analysis, 14(1), 63–82. https://doi.org/10.1093/pan/mpi014
View in Google Scholar
Brav, A., Graham, J. R., Harvey, C. R., & Michaely, R. (2005). Payout policy in the 21st century. Journal of Financial Economics, 77(3), 483–527. https://doi.org/10.1016/j.jfineco.2004.07.004
View in Google Scholar
Byun, J., Kim, K., Liao, R. C., & Pan, C. (2021). The impact of investor sentiment on catering incentives around the world. Journal of International Financial Markets, Institutions and Money, 71, 101285. https://doi.org/10.1016/j.intfin.2021.101285
View in Google Scholar
Dong, M., Robinson, C., & Veld, C. (2005). Why individual investors want dividends. Journal of Corporate Finance, 12(1), 121–158. https://doi.org/10.1016/j.jcorp-fin.2004.04.006
View in Google Scholar
Duc, D. T., Hoai, N. T., Nguyen, V. P., Nguyen, D. P., Anh, N. H., & Hai, H. H. (2024). Google Search intensity and stock returns in frontier markets: Evidence from the Vietnamese market. Economics and Business Review, 10(1), 30–56. https://doi.org/10.18559/ebr.2024.1.778
View in Google Scholar
Ferris, S. P., Jayaraman, N., & Sabherwal, S. (2009). Catering effects in corporate div¬idend policy: The international evidence. Journal of Banking & Finance, 33(9), 1730–1738. https://doi.org/10.1016/j.jbankfin.2009.04.005
View in Google Scholar
Gaies, B., Nakhli, M. S., Ayadi, R., & Sahut, J. M. (2022). Exploring the causal links between investor sentiment and financial instability: A dynamic macro-financial analysis. Journal of Economic Behavior & Organization, 204, 290–303. https://doi.org/10.1016/j.jebo.2022.10.013
View in Google Scholar
Gao, Y., Zhao, C., Sun, B., & Zhao, W. (2022). Effects of investor sentiment on stock volatility: New evidences from multi-source data in China’s green stock markets. Financial Innovation, 8(1), 77. https://doi.org/10.1186/s40854-022-00381-2
View in Google Scholar
Goel, G., & Dash, S. R. (2022). Investor sentiment and government policy interven¬tions: Evidence from COVID-19. Journal of Financial Economic Policy, 14(2), 242– 267. https://doi.org/10.1108/JFEP-02-2021-0038
View in Google Scholar
Haritha, P. H., & Rishad, A. (2020). An empirical examination of investor sentiment and stock market volatility: Evidence from India. Financial Innovation, 6, 34. https://doi.org/10.1186/s40854-020-00198-x
View in Google Scholar
Hasan, F., Kayani, U. N., Abdel-Razzaq, A. I., & Choudhury, T. (2022). Effect of interest rate changes and dividend announcements on stock returns: Evidence from a fron¬tier economy. Pakistan Journal of Commerce and Social Sciences, 16(4), 639–659.
View in Google Scholar
Hoberg, G., & Prabhala, N. R. (2008). Disappearing dividends, catering, and risk. Review of Financial Studies, 22(1), 79–116. https://doi.org/10.1093/rfs/hhn073
View in Google Scholar
Huynh, T. L. D., Foglia, M., Nasir, M. A., & Angelini, E. (2021). Feverish sentiment and global equity markets during the COVID-19 pandemic. Journal of Economic Behavior & Organization, 188, 1088–1108. https://doi.org/10.1016/j.jebo.2021.06.016
View in Google Scholar
Kamath, A. N., Shenoy, S. S., Abhilash, Subrahmanya Kumar, N., & Deekshitha. (2024). Overview of the nexus between investor sentiment-return relation: A global perspective. Vision: The Journal of Business Perspective. https://doi.org/10.1177/09722629231211399
View in Google Scholar
Kamath, A. N., Shenoy, S. S., & Kumar, N. S. (2022). An overview of investor senti¬ment: Identifying themes, trends, and future direction through bibliometric anal¬ysis. Investment Management and Financial Innovations, 19(3), 229–242. https://doi.org/10.21511/imfi.19(3).2022.19
View in Google Scholar
Kluzek, M., & Schmidt-Jessa, K. (2022). Special state aid measures during COVID-19 and corporate dividend policy: Early evidence from Polish public companies. Economics and Business Review, 8(1), 72–89. https://doi.org/10.18559/ebr.2022.1.5
View in Google Scholar
Kumar, P., & Sinha, P. (2024). Changing dividend payout behavior and predicting divi¬dend policy in emerging markets: Evidence from India. Investment Management and Financial Innovations, 21(1), 259–274. https://doi.org/10.21511/imfi.21(1).2024.20
View in Google Scholar
La Porta, R., Lopez‐de‐Silanes, F., Shleifer, A., & Vishny, R. W. (2000). Agency problems and dividend policies around the world. Journal of Finance, 55(1), 1–33. https://doi.org/10.1111/0022-1082.00199
View in Google Scholar
Leary, M. T., & Michaely, R. (2011). Determinants of dividend smoothing: Empirical ev-idence. Review of Financial Studies, 24(10), 3197–3249. https://doi.org/10.1093/rfs/hhr072
View in Google Scholar
Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings, and taxes. American Economic Review, 46(2), 97–113. https://www.jstor.org/stable/1910664
View in Google Scholar
Lubis, E., Khaddafi, M., & Satriawan, B. (2024). Dividend policy as a tool to increase firm value. Business and Investment Review, 2(3), 20–27. https://doi.org/10.61292/birev.109
View in Google Scholar
Mahirun, M., Jannati, A., Kushermanto, A., & Prasetiani, T. R. (2023). Impact of dividend policy on stock prices. Acta Logistica, 10(2), 199–208. https://doi.org/10.22306/al.v10i2.375
View in Google Scholar
Mampouya, J. O. (2024). It’s okay to be sentimental: A study of investor sentiment in emerging markets. Working Paper. SSRN. https://doi.org/10.2139/ssrn.5138146
View in Google Scholar
Maurya, P. K., Bansal, R., & Mishra, A. K. (2025). Investor sentiment and its implication on global financial markets: A systematic review of literature. Qualitative Research in Financial Markets. https://doi.org/10.1108/qrfm-04-2024-0087
View in Google Scholar
Michaely, R., & Roberts, M. R. (2012). Corporate dividend policies: Lessons from pri¬vate firms. Review of Financial Studies, 25(3), 711–746. https://doi.org/10.1093/rfs/hhr108
View in Google Scholar
Musina, B. O., & Tenai, J. (2018). Effect of age diversity on dividend policy in Kenya. International Journal of Advances in Management, Economics and Entrepreneurship, 10(25), 57–61.
View in Google Scholar
Novy-Marx, R. (2012). Is momentum really momentum? Journal of Financial Economics, 103(3), 429–453. https://doi.org/10.1016/j.jfineco.2011.05.003
View in Google Scholar
Nyakurukwa, K., & Patnaik, I. (2023). The evolution of studies on social media sen¬timent in stock markets: A bibliometric analysis. Scientific African, 20, e01596. https://doi.org/10.1016/j.sciaf.2023.e01596
View in Google Scholar
Osman, A., Pyeman, J., Jaafar, M. S., Sundram, V. P. K., & Zakaria, S. (2024). Impact of inflation on dividend determinants and dividend payout. 9th International Conference on Marketing and Retailing. European Proceedings of Social and Behavioural Sciences (EpSBS).
View in Google Scholar
Pieloch-Babiarz, A. (2021). The monitoring role of multiple large shareholders and the catering effect of dividends: Evidence from Poland. Economics and Business Review, 7(4), 72–93. https://doi.org/10.18559/ebr.2021.4.5
View in Google Scholar
Prasad, S., Mohapatra, S., Rahman, M. R., & Puniyani, A. (2023). Investor sentiment index: A systematic review. International Journal of Financial Studies, 11(1), 6. https://doi.org/10.3390/ijfs11010006
View in Google Scholar
Qureshi, A. A. (2025). What makes stocks sensitive to investor sentiment: An analysis based on Google Trends. Economics and Business Review, 11(2), 39–65. https://doi.org/10.18559/ebr.2025.2.1790
View in Google Scholar
Romus, M., Anita, R., Abdillah, M. R., & Zakaria, N. B. (2020). Selected firms environ¬mental variables: Macroeconomic variables, performance and dividend policy analysis. IOP Conference Series: Earth and Environmental Science, 469, 012047. https://doi.org/10.1088/1755-1315/469/1/012047
View in Google Scholar
Santi, C., & Zwinkels, R. C. J. (2023). Investor climate sentiment and financial markets. International Review of Financial Analysis, 86, 102490. https://doi.org/10.1016/j.irfa.2023.102490
View in Google Scholar
Schmeling, M. (2009). Investor sentiment and stock returns: Some international ev¬idence. Journal of Empirical Finance, 16(3), 394–408. https://doi.org/10.1016/j.jempfin.2009.01.002
View in Google Scholar
Wahyuni, S. F., & Peride, F. R. (2021). Influence of investment opportunity set, op¬erating profit margin, cash flow from operating activities and cash flow to equity on dividend policy on a metal company listed on the Indonesia Stock Exchange. Multidisciplinary Output Research For Actual and International Issue, 1(2). https://doi.org/10.54443/morfai.v1i2.102
View in Google Scholar
Wang, W., Su, C., & Duxbury, D. (2022). The conditional impact of investor sentiment in global stock markets: A two-channel examination. Journal of Banking & Finance, 138, 106458. https://doi.org/10.1016/j.jbankfin.2022.106458
View in Google Scholar
Wang, Z. (2023). Investor sentiment and the stock market. Highlights in Business, Economics and Management, 21, 346–351. https://doi.org/10.54097/hbem.v21i.14424
View in Google Scholar
Willett, T. D. (2024). Some implications of behavioral finance for international monetary analysis. Economics and Business Review, 10(1), 7–29. https://doi.aorg/10.18559/ebr.2024.1.1193
View in Google Scholar
Downloads
Published
Issue
Section
License
Copyright (c) 2026 M. Jahir Uddin Palas, M. Adnan Ahmed
This work is licensed under a Creative Commons Attribution 4.0 International License.
