A Catering Theory of Dividends

The Journal of Finance (Impact Factor: 4.22). 06/2004; 59(3):1125-1165. DOI: 10.2139/ssrn.342640
Source: RePEc

ABSTRACT We propose that the decision to pay dividends is driven by prevailing investor demand for dividend payers. Managers cater to investors by paying dividends when investors put a stock price premium on payers, and by not paying when investors prefer nonpayers. To test this prediction, we construct four stock price-based measures of investor demand for dividend payers. By each measure, nonpayers tend to initiate dividends when demand is high. By some measures, payers tend to omit dividends when demand is low. Further analysis confirms that these results are better explained by catering than other theories of dividends. Copyright 2004 by The American Finance Association.

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    ABSTRACT: This article explores the corporate dividend payment behavior of the Japanese chemicals industry firms. According to our empirical examinations, the Japanese chemicals industry firms do not cater to investors' dividend demands when they decide both their dividend initiations and continuations. Instead of catering factor, in this industry, our empirical examinations reveal that the determinants of corporate dividend policies are value-weighted size, value-weighted dividend yields, and value-weighted nonpayers' or payers' market-to-book ratio. In addition, although our cross-sectional tests generally imply the relations between corporate dividend payments and firm earnings, on an aggregate time-series basis, dividend initiations tend to decline corporate earnings in the following year in this Japanese industry. This evidence can be interpreted as the denial of the traditional signaling hypothesis of dividend policy in the Japanese chemicals industry firms.
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    ABSTRACT: Whereas the predictability of market returns and the deviation of market returns from funda-mentals have been investigated individually in a large number of studies, few if any have explicitly modelled both jointly. The present work aims to …ll the gap between the aforementioned two research streams by explic-itly introducing investor sentiment as a predictor of market returns. In so doing, we explore (i) the potential for adding to the market return predictability literature, as well as (ii) the possibility for extending the literature on the inuence of investor sentiment from mainly individual and portfolio returns to the aggregate-level returns. By using major investor sentiment indicators from the literature as predictors of market returns, we implement comparison among di¤erent indicators. Our results show that the indicators are not all equally informative. Some indicators better predict returns than the others. Evidence is also in line with the statement in the literature that some indicators a¤ect returns in a lagged way. We also consider more complex dynamics between investor sentiment indicators and market re-turns by conducting Granger causality tests. We …nd Granger causality at neither, either, or both directions for di¤erent indicators. In general, the dynamics between indicators and market returns are not uniform.

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