Dividend Smoothing under Political and Economic Uncertainty: Evidence from Pakistan Using Dynamic Panel GMM

Abstract

This study investigates dividend smoothing behavior among non-financial firms listed on the Pakistan Stock Exchange from 2010 to 2024, a period marked by major structural disruptions. Extending Lintner’s dividend model, we employ fixed and random effects panel regressions alongside a dynamic Generalized Method of Moments (GMM) estimator to examine the persistence of dividend policies under earnings volatility, political risk, and macroeconomic instability. Two key exogenous shocks are modeled: the COVID-19 pandemic (2020–2021) and the 2022 regime change operation in Pakistan, both represented through dummy variables and interaction terms. Our findings confirm significant dividend smoothing behavior, with lagged dividends and earnings emerging as robust predictors. The Arellano-Bond GMM model affirms short-term persistence, with no evidence of long-memory effects. Sectoral and size-based heterogeneity reveals stronger smoothing among large and capital-intensive firms. Though the direct effects of structural shocks were statistically insignificant, their interactions with earnings indicate behavioral conservatism during uncertain periods. This paper contributes to corporate finance literature by contextualizing dividend policy within a politically and economically unstable environment, offering insights for investors, policymakers, and scholars interested in emerging market dynamics.