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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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    • "Shifts in investors' appetite for dividends in general may cause a separate pricing effect with a variable premium for dividend paying stock (Baker and Wurgler 2004; 2011). Some sets of investors, such as personal (retail) investors or pension funds may also have separate preferences for dividends, smoothed dividends or high pay-outs. "
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    ABSTRACT: This paper discusses the different interpretations that can be placed on the small set of variables generally used to explain dividend behaviour. Following a discussion of appropriate estimators it presents panel data estimates for declared dividend levels in the UK from 1997 to 2012, showing that fixed effect estimation is to be preferred. A number of different specifications for the aggregate sample are presented followed by disaggregated results for four groups differentiated by age and size. Interactive break dummies are used to identify changes in dividend policy during the period of the financial crisis. The paper finds considerable heterogeneity in dividend behaviour both across groups and over time.
    Stellenbosch University, Stellenbosch, South Africa; 02/2015
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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.
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