In this paper, we study empirically the effects of dividend smoothing on stock returns forfirms listed on Korea Securities Market of Korea Exchange. Leary and Michaely's (2011)dividend adjustment model indicates that firms have long run target dividend per share, andthat firms adjust partially the gap between actual and target dividend per share each year. Themain results of this study can be summarized as follows. The main finding is that firms that smooth more dividends earn lower abnormal returns thanfirms that smooth less. This finding suggests that investors place a lower risk on stocks thatdistribute smooth dividends, and are willing to sacrifice a portion of the expected returns forholding those stocks. From firm’s perspective, this finding suggests that firms that smoothmore dividends face lower cost of capital. The other result shows that differences in riskaccount for at least part of the return premium associated with low dividend smoothing stocks. We construct a dividend smoothing factor, similar to the way in which Fama and French(1993)construct mimicking portfolios using Size and Book-to-Market factors, and show that sensitivityto the dividend smoothing factor helps explain the cross-section of stock returns. Low smoothingfirms exhibit greater sensitivity to this factor, indicating that they are systematically riskierand command higher returns. Therefore, dividend smoothing captures additional common riskfactors, which are not incorporated in the Fama and French(1993) three factor model. Newsmoothing risk factor, constructed as the difference between low and high smoothing firms, issignificant in pricing the time-series of stock portfolio. The results show that firms that do notsmooth dividends bear additional risk, which is priced in the returns of their stocks. Moreover, this study shows that institutional investors, and especially bank and financial investmentcompany, are more likely to hold dividend smoothing stocks. That is, institutional investorsfavor dividend smoothing firms. Allen, Bernardo, andWelch(2000) suggest that dividend smoothingis a mean of attracting and maintaining institutional investors, who minimize financing coststhrough their monitoring and information gathering roles. In conclusion, investors place a lower risk on stocks that distribute smooth dividends, and arewilling to sacrifice a portion of the expected returns for holding those stocks. From firm’sperspective, firms that smooth more dividends face lower cost of capital. Moreover, dividendsmoothing captures additional common risk factors, which are not incorporated in the Famaand French(1993) three factor model.