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Appearing and Disappearing Dividends: The Link to Catering Incentives

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  • Malcolm Baker
  • Jeffrey Wurgler

Abstract

We document a close link between fluctuations in the propensity to pay dividends and catering incentives. First, we use the methodology of Fama and French (2001) to identify a total of four distinct trends in the propensity to pay dividends between 1963 and 2000. Second, we show that each of these trends lines up with a corresponding fluctuation in catering incentives: The propensity to pay increases when a proxy for the stock market dividend premium is positive and decreases when it is negative. The lone disconnect is attributable to Nixon-era controls.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9995.

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Date of creation: Sep 2003
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Publication status: published as Baker, Malcolm and Jeffrey Wurgler. "Appearing And Disappearing Dividends: The Link To Catering Incentives," Journal of Financial Economics, 2004, v73(2,Aug), 271-288.
Handle: RePEc:nbr:nberwo:9995

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  1. Malcolm Baker & Jeffrey Wurgler, 2003. "A Catering Theory of Dividends," NBER Working Papers 9542, National Bureau of Economic Research, Inc.
  2. Dann, Larry Y., 1981. "Common stock repurchases : An analysis of returns to bondholders and stockholders," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(2), pages 113-138, June.
  3. Bagwell, Laurie Simon & Shoven, John B, 1989. "Cash Distributions to Shareholders," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(3), pages 129-40, Summer.
  4. Eugene F. Fama & Kenneth R. French, . "Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?."," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 509, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Gustavo Grullon & Roni Michaely, 2002. "Dividends, Share Repurchases, and the Substitution Hypothesis," Journal of Finance, American Finance Association, American Finance Association, vol. 57(4), pages 1649-1684, 08.
  6. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 34, pages 411.
  7. John R. Graham, 2003. "Taxes and Corporate Finance: A Review," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 16(4), pages 1075-1129.
  8. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, Elsevier, vol. 54(3), pages 375-421, December.
  9. Fenn, George W. & Liang, Nellie, 2001. "Corporate payout policy and managerial stock incentives," Journal of Financial Economics, Elsevier, Elsevier, vol. 60(1), pages 45-72, April.
  10. Black, Fischer & Scholes, Myron, 1974. "The effects of dividend yield and dividend policy on common stock prices and returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 1(1), pages 1-22, May.
  11. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
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