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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    • "Black and Scholes (1974) and Allen et al. (2000) propose clientele theories underlying firms " dividend policies. Baker and Wurgler (2004) argued that there are several reasons for the existence of several clientele effects. First, market imperfections, such as transaction costs, taxes, and institutional investment constraints cause traditional dividend " clienteles " . "
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    ABSTRACT: This study examines the dividend payout practices of the listed property firms in Malaysia from 1995 to 2005. The results show that dividend payments are less sticky and firms have to cut dividend payments as the operating risk increases, measured by cash flow volatility. Family ownership has a significant positive effect on the dividend policy of property firms which seems to suggest that these firms use dividend policy to reduce agency conflicts. Related diversification of the property firms has a significant influence on the dividend payout of the firms. These results contribute to the corporate governance and ownership literature in the emerging markets.
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    • "Management therefore 'cater' for investors by paying dividends to shareholders who require it and not paying when the investors do not require dividends. Baker and Wurgler (2004) argue that investors have uninformed and time varying demand for dividend paying shares. This demand is not influenced by any arbitrage as the prices of the payers and non-payers remain unperturbed. "
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    ABSTRACT: Dividends, particularly of acquired banks are influenced by several structural adjustments especially after mergers. The paper evaluates the various factors affecting dividend of both acquired and non-acquired banks. Using data from 120 large mergers and acquisitions in Europe, the study finds that while the levels of liquidity, risk, composition of the financial structure are pertinent factors in the dividend policy of banks, the price earning (PE) ratio is specifically fundamental to non-acquired banks. The significance of the variable in the non-acquired banks indicates that growth in bank investments and future projects exert more aggressive impact on banks that are not acquired or less likely to merge. This finding is novel as previous studies on dividend policy do not make this distinction.
    SSRN Electronic Journal 04/2013; 10(Spring):86-95. DOI:10.2139/ssrn.1779510
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    • "For some other explanations of dividend policy, see Shefrin and Statman (1984), who in the one of the …rst papers that utilized behavioral …nance in the dividend area, develop a framework that explains why investors exhibit a preference for dividends, based on the theory of self-control advanced by Thaler and Shefrin (1981) and prospect theory developed by Kahneman and Tversky (1979). More recently, Baker and Wurgler (2004) develop a " catering theory " for dividends, wherein investor sentiment drives dividend decisions and, in Baker and Wurgler (2012) a model is developed with behavioral underpinnings for the dividend decision on the basis of stockholders evaluating current dividends against a reference point derived from past dividends. "
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    ABSTRACT: We analyze the direct impacts of managerial overconfidence upon the dividend decision and demonstrate that the dividend levels and speeds of adjustment to target levels can increase when managers exhibit overconfidence. However, we demonstrate that the directional impact upon dividend levels will depend upon the nature of the managerial overconfidence. Differing degrees of investor bias can lead to reversals of this situation with the result that the empirical results will be influenced by the relative impacts of manager and investor related cognitive biases.
    SSRN Electronic Journal 03/2013; DOI:10.2139/ssrn.2228612
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