Dividend smoothing and optimal re‐investment

Lintner’s (1956) survey revealed that managers are concerned about dividend signalling over time, and adopt a smoothing policy. In addition to signalling, dividend policy may affect a firm’s re‐investment opportunities, particularly if it is capital constrained. In this paper, we examine the interaction between dividend smoothing/signalling and optimal re‐investment. We develop a dividend policy model that considers both an optimal level of dividends (and re‐investment) at each point in time, and optimal smoothing over time. Our model provides both theoretical insights, and provides a practical management tool for dividend policy.