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A Catering Theory of Dividends

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Author Info
Malcolm Baker (Harvard Business School and NBER)
Jeffrey Wurgler (NYU Stern School of Business)

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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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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 59 (2004)
Issue (Month): 3 (06)
Pages: 1125-1165
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Handle: RePEc:bla:jfinan:v:59:y:2004:i:3:p:1125-1165

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Del Guercio, Diane, 1996. "The distorting effect of the prudent-man laws on institutional equity investments," Journal of Financial Economics, Elsevier, vol. 40(1), pages 31-62, January. [Downloadable!] (restricted)
  2. Malcolm Baker & Jeremy C. Stein, 2002. "Market Liquidity as a Sentiment Indicator," Harvard Institute of Economic Research Working Papers 1977, Harvard - Institute of Economic Research. [Downloadable!]
  3. Shlomo Benartzi & Roni Michaely & Richard Thaler, 1997. "Do Changes in Dividends Signal the Future or the Past?," CRSP working papers 455, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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  4. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2002. "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms," NBER Working Papers 8750, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September. [Downloadable!] (restricted)
  6. Fama, Eugene F. & French, Kenneth R., 2001. "Disappearing dividends: changing firm characteristics or lower propensity to pay?," Journal of Financial Economics, Elsevier, vol. 60(1), pages 3-43, April. [Downloadable!] (restricted)
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  7. Baker, Malcolm & Savasoglu, Serkan, 2002. "Limited arbitrage in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 64(1), pages 91-115, April. [Downloadable!] (restricted)
  8. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  9. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, 02. [Downloadable!] (restricted)
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  10. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, 02. [Downloadable!] (restricted)
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  11. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Eades, Kenneth M & Hess, Patrick J & Kim, E Han, 1994. " Time-Series Variation in Dividend Pricing," Journal of Finance, American Finance Association, vol. 49(5), pages 1617-38, December. [Downloadable!] (restricted)
  13. Franklin Allen & Antonio Bernardo & Ivo Welch, . "A Theory of Dividends Based on Tax Clienteles," Rodney L. White Center for Financial Research Working Papers 15-98, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
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  14. Nicholas Barberis & Andrei Shleifer & Robert W. Vishny, 1997. "A Model of Investor Sentiment," NBER Working Papers 5926, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Barberis, Nicholas & Shleifer, Andrei, 2003. "Style investing," Journal of Financial Economics, Elsevier, vol. 68(2), pages 161-199, May. [Downloadable!] (restricted)
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  16. Michael J. Cooper, 2001. "A Rose.com by Any Other Name," Journal of Finance, American Finance Association, vol. 56(6), pages 2371-2388, December. [Downloadable!] (restricted)
  17. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December. [Downloadable!] (restricted)
  18. Malcolm Baker & Jeffrey Wurgler, 2000. "The Equity Share in New Issues and Aggregate Stock Returns," Journal of Finance, American Finance Association, vol. 55(5), pages 2219-2257, October. [Downloadable!] (restricted)
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  19. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339. [Downloadable!] (restricted)
  20. Asquith, Paul & Mullins, David W, Jr, 1983. "The Impact of Initiating Dividend Payments on Shareholders' Wealth," Journal of Business, University of Chicago Press, vol. 56(1), pages 77-96, January. [Downloadable!] (restricted)
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  24. Baker, Malcolm & Greenwood, Robin & Wurgler, Jeffrey, 2003. "The maturity of debt issues and predictable variation in bond returns," Journal of Financial Economics, Elsevier, vol. 70(2), pages 261-291, November. [Downloadable!] (restricted)
  25. D'Avolio, Gene, 2002. "The market for borrowing stock," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 271-306. [Downloadable!] (restricted)
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  27. Olivier Blanchard & Changyong Rhee & Lawrence Summers, 1990. "The Stock Market, Profit and Investment," NBER Working Papers 3370, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  28. Franklin Allen & Roni Michaely, 2002. "Payout Policy," Center for Financial Institutions Working Papers 01-21, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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    • Allen, Franklin & Michaely, Roni, 2003. "Payout policy," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 7, pages 337-429 Elsevier. [Downloadable!] (restricted)
  29. Rodney D. Boehme & Sorin M. Sorescu, 2002. "The Long-run Performance Following Dividend Initiations and Resumptions: Underreaction or Product of Chance?," Journal of Finance, American Finance Association, vol. 57(2), pages 871-900, 04. [Downloadable!] (restricted)
  30. Malcolm Baker & Jeremy C. Stein, 2002. "Market Liquidity as a Sentiment Indicator," NBER Working Papers 8816, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Renneboog, L.D.R. & Trojanowski, Grzegorz, 2005. "Control structures and payout policy," Discussion Paper 61, Tilburg University, Center for Economic Research. [Downloadable!]
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  2. Lai, Richard, 2004. "A Catering Theory of Analyst Bias," MPRA Paper 4761, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  3. Renneboog, L.D.R. & Szilagyi, Peter G., 2006. "How relevant is dividend policy under low shareholder protection?," Discussion Paper 73, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  4. Richard Kum-yew Lai, 2005. "Does Competition Kill Ties?," Others 0509001, EconWPA. [Downloadable!]
    Other versions:
  5. Malcolm P. Baker & Ryan Taliaferro & Jeffrey Wurgler, 2004. "Pseudo Market Timing and Predictive Regressions," NBER Working Papers 10823, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," NBER Working Papers 13189, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Neves, Elisabete & Pindado, Julio & Torre, Chabela de la, 2006. "Dividends: New evidence on the catering theory," Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". Working Papers "New Trends on Business Administration". 2006-14, Interuniversitary Doctorate Program "New Trends on Business Administration", Universities of Valladolid, Burgos and Salamanca (Spain). Programa de Doctorado Interuniversitario "Nuevas Tendencias en Di. [Downloadable!]
  8. Roger Gordon & Martin Dietz, 2006. "Dividends and Taxes," NBER Working Papers 12292, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Malcolm Baker & Jeffrey Wurgler, 2003. "Appearing and Disappearing Dividends: The Link to Catering Incentives," NBER Working Papers 9995, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Philippe Aghion & Jeremy C. Stein, 2004. "Growth vs. Margins: Destabilizing Consequences of Giving the Stock Market What it Wants," NBER Working Papers 10999, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Clemens Sialm, 2006. "Investment Taxes and Equity Returns," NBER Working Papers 12146, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Ameer, Rashid/R, 2007. "Product Market Competition, Regulation and Dividend Payout Policy of Malaysian Banks," MPRA Paper 8579, University Library of Munich, Germany. [Downloadable!]
  13. Raj Chetty & Emmanuel Saez, 2004. "Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut," NBER Working Papers 10841, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Malcolm Baker & Robin Greenwood & Jeffrey Wurgler, 2008. "Catering Through Nominal Share Prices," NBER Working Papers 13762, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Carlos Martins, 2007. "Consistency of Dividend Signalling and Future Maturity Level:Evidence from UK Data," Working Papers de Economia (Economics Working Papers) 40, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro. [Downloadable!]
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