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.
    Pacific Rim Property Research Journal 03/2015; 13(4). DOI:10.1080/14445921.2007.11104241
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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
    • "They find the greatest decline in the propensity to pay among smaller and less profitable firms with more investment opportunities vs larger, more profitable, low-growth companies, but conclude that all firms are less likely to pay, even after controlling for firms' characteristics. Baker and Wurgler (2004a, b) suggest that these appearing and disappearing dividends are an outcome of firms " catering " to transient fads for dividend-paying stocks. Hoberg and Prabhala (2009) empirically examine disappearing dividends and the catering explanation while also controlling for risk. "
    Managerial Finance 02/2015; 41(2):126-144. DOI:10.1108/MF-03-2014-0077
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