A Catering Theory of Dividends

Harvard University, Cambridge, Massachusetts, United States
The Journal of Finance (Impact Factor: 4.22). 06/2004; 59(3):1125-1165. DOI: 10.2139/ssrn.342640
Source: RePEc


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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    • "Shifts in investors' appetite for dividends in general may cause a 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: The literature on dividend pay-out is both crowded and relatively homogenous, generally aimed at bridging the gap between an abstract world of dividend irrelevance and the observed practice of firms that pay stable dividends. Research on dividends needs to be empirically focused because the opportunity cost of paying dividends is hard to define, let alone measure. Our methodological approach in this paper is to employ appropriate estimation techniques for dividend equations, something that is often neglected. We pay attention to issues such as choice of estimator, the inclusion of a lagged dependent variable, the stability of the coefficients over time, the robustness to different datasets, and the issue of sample selection. We identify from the literature five theoretical perspectives, namely substitution between sources and uses of funds, signaling and dividend smoothing, agency, catering to investors, and idiosyncrasies. We argue that the theoretical literature is not sufficiently discriminating to support tightly defined hypotheses but is nevertheless a useful starting point for empirical work, a view that is consistent with the ambiguous findings in previous empirical studies. Our results are consistent with the Lintner model and they support the role of investment opportunity as captured by the market to book ratio. The importance to dividends of asset growth and leverage depends on which of two datasets we use, on estimation method, and on the time period; the paper uses these contrasts to suggest interpretations and future avenues for research.
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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.
    Full-text · Article · Mar 2015 · Pacific Rim Property Research Journal
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    • "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. "

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