Share price informativeness and dividend smoothing behavior in GCC markets

Abstract

PurposeThis paper examines the dividend smoothing (DS) behaviour in the Gulf Cooperation Council (GCC) countries in emerging markets where the response to news and the economic environment are different from those of developed countries.Design/methodology/approachThe authors examine the effect of share price informativeness on DS in the GCC markets using unbalanced panel data for a sample of 628 GCC-listed firms during 1994–2016. For the regression analysis, the hypotheses are tested using panel regressions and generalised method of moments (GMM) estimation.FindingsFirst, the Lintner model shows that the DS degree in GCC firms is comparable to that of a developed market. Second, and importantly, the results reveal that the DS in GCC firms is sensitive to private information of share prices. Finally, the findings indicate that information asymmetry (IA) and agency-based models affect the tendency to smooth dividends in the GCC markets.Originality/valueThis study is the first study to measure the degree of DS using data for all GCC countries. The authors also identify other determinants of DS behaviour and test the agency and IA explanations for DS in GCC-listed firms. The findings are highly recommended to financial managers and analysts dealing with the GCC markets. This study helps financial analysts to use the share price informativeness as an indicator for the presence of the IA. The study results are beneficial to researchers in understanding the relationship between DS and share price informativeness.

How do stock markets react to dividend announcements during the COVID-19 pandemic? Evidence from the GCC markets

“…We also show that the pandemic does exert an observable influence on how the market reacts to different dividend changes, in the sense that amid hard times of crises, because of prevailing uncertainty and bearish sentiment, investors might underreactor even unreactto the good news of dividend increases. In conjunction with prior studies such as Al-Ajmi and Kim (2012) and Felimban et al (2018Felimban et al ( , 2022, our results also provide more evidence that contradicts market efficiency in the GCC markets. Such that we contribute to the existing literature in several ways.…”

“…This study enriches the literature on COVID-19, the behavior of stock markets and corporates and the literature on financial crises and pandemics. In addition, via examining a sample of firms from GCC countries, this research, via conducting out-of-sample tests in a different context beyond the USA and developed markets, shed more light on the stock price behavior in the GCC markets primarily, the GCC markets, being characterized with weak market efficiency Dividend announcements and higher levels of uncertainty (Al-Ajmi and Kim, 2012;Felimban et al, 2022), represent an interesting case to explore how the stock markets have responded to changes in corporate dividend policies during the pandemic.…”

“…Unlike other regions, GCC stock markets are substantially dominated by domestic investors primarily using profit-sharing contract-based products with limited derivative options. Moreover, being characterized by weak market efficiency and higher levels of uncertainty (Al-Ajmi and Kim, 2012; Felimban et al , 2022), GCC markets represent a case of particular interest. Likewise, these markets substantially depend on oil and gas as their primary export and main source of revenue.…”