Abstract
We analyze a sample of US firms that consistently paid dividends from 1995 to 2016 to examine the impact of corporate credit rating changes on dividend smoothing behavior. Focusing on the type of news a credit rating change might convey to stockholders, we classify bond downgrades into bad, good, and systemic, and document an asymmetric effect of bond downgrades on dividend smoothing. Bad downgrades are negatively associated with dividend smoothing, whereas good downgrades are positively associated with dividend smoothing. In addition, systemic downgrades associated with exogenous events have a negative impact on dividend smoothing. Likewise, we find that bond upgrades related to outstanding financial performance have a negative impact on dividend smoothing, whereas bond upgrades attributed to successful acquisitions, leverage decreases, or exogenous events have no impact on dividend smoothing. We conclude that the reason behind a bond rating change is crucial when a firm determines its dividend smoothing policy.