Smoothed or not smoothed: the impact of the 2008 global financial crisis on dividend stability in the UK

This study examines the cash dividend behaviour of a panel dataset of 1,178 firms traded in the London Stock Exchange (LSE) for the period 2008-2017. Using a modified version of Lintner's (1956) partial adjustment model, it attempts to ascertain whether they follow a stable dividend policy and how the 2008 global financial crisis affects the dividend stability in the UK. The results in general show that LSE firms have long-term payout ratios and slowly adjust their cash dividends to their target as suggested by Lintner. The study findings also detect a negative impact of the financial crisis on dividend payments and a tendency to adjust dividends immediately in response to earnings changes in the first five-year period 2008-2012. More specifically, despite the credit crunch and volatile earnings, UK firms set high payout rates but adopt stable dividend policies with a serious degree of dividend smoothing in early years. When UK-listed firms have a better chance to recover from the initial impact of the crisis, they however set even higher payout rates but distribute much more smoothed cash dividends (exhibiting more stability) over the second five-year period 2013-2017.