Dividend stickiness and strategic pooling

We argue that dividend stickiness, the tendency of managers to keep dividends unchanged, implies that managers use a partially pooling dividend policy. We offer a model that demonstrates how such a policy can evolve endogenously in equilibrium. An informed manager who cares about the firm's intrinsic value as well as short-term stock price allocates earnings between investments and dividends. We show that there is a continuum of equilibria in which the dividend is constant for a range of realized earnings. Compared with the standard separating equilibrium, this partial pooling behavior induces higher firm value and lower underinvestment. We offer new empirical implications relating the pooling nature of dividend stickiness to the information environment of the firm, dividend prediction models, managerial incentives, and investment.