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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.

Suggested Citation

  • Kulchania, Manoj, 2013. "Catering driven substitution in corporate payouts," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 180-195.
    • Handle: RePEc:eee:corfin:v:21:y:2013:i:c:p:180-195
    DOI: 10.1016/j.jcorpfin.2013.02.003
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    5. Karpavičius, Sigitas & Yu, Fan, 2018. "Dividend premium: Are dividend-paying stocks worth more?," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 112-126.
    6. Krieger, Kevin & Lee, Bong-Soo & Mauck, Nathan, 2013. "Do senior citizens prefer dividends? Local clienteles vs. firm characteristics," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 150-165.
    7. Chao, Ching-Hsiang & Huang, Chih-Jen & Ho, Ruey-Jenn & Huang, Hsin-Yi, 2022. "Catering to investors through capital expenditures: Testing assets substitution problem around financing," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    8. Bradley Benson & Travis Davidson & Hui James & Hongxia Wang, 2022. "Board busyness and corporate payout: are all busy directors the same?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3711-3759, September.
    9. Banyi, Monica L. & Kahle, Kathleen M., 2014. "Declining propensity to pay? A re-examination of the lifecycle theory," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 345-366.
    10. Hayley Baker & Millicent Chang & Choy Yeing (Chloe) Ho, 2021. "Value of dividend signaling in uncertain times," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1419-1440, December.
    11. Kumar, Alok & Lei, Zicheng & Zhang, Chendi, 2022. "Dividend sentiment, catering incentives, and return predictability," Journal of Corporate Finance, Elsevier, vol. 72(C).
    12. Gyimah, Daniel & Gyapong, Ernest, 2021. "Managerial entrenchment and payout policy: A catering effect," International Review of Financial Analysis, Elsevier, vol. 73(C).
    13. Joanna Golden, 2018. "The Effect of Shareholder Rights and Information Asymmetry on Stock-Option-Related Repurchase Activity," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-41, June.

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    More about this item

    Keywords

    Repurchases; Payout policy; Catering; Dividends;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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