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Catering driven substitution in corporate payouts

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  • Kulchania, Manoj

Abstract

This paper investigates catering as a motivation for substitution between share repurchases and dividend payments. I hypothesize that firms cater to investor demand by repurchasing shares when investors place a premium on the stock price of firms that repurchase shares, and by paying dividends when investors place a higher value on dividend-paying firms. I propose a proxy to measure the relative preference for repurchases over dividends—the difference premium. Results show that the decision to repurchase shares or to pay dividends depends on this premium. Firms channel higher fractions of the additional payout dollars toward share repurchases when this premium is high. The market reaction to dividend changes is more favorable when firms act in accordance with the catering hypothesis. Overall, I find that catering plays a role in the substitution between repurchases and dividends.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 21 (2013)
Issue (Month): C ()
Pages: 180-195

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Handle: RePEc:eee:corfin:v:21:y:2013:i:c:p:180-195

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Repurchases; Payout policy; Catering; Dividends;

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References

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Cited by:
  1. Krieger, Kevin & Lee, Bong-Soo & Mauck, Nathan, 2012. "Do Senior Citizens Prefer Dividends? Local Clienteles vs. Firm Characteristics," MPRA Paper 41784, University Library of Munich, Germany.

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