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Dividends: New evidence on the catering theory

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Author Info
Neves, Elisabete (Instituto Politécnico de Coimbra)
Pindado, Julio () (Departamento de Administración y Economía de la Empresa, Facultad de Economía y Empresa, Universidad de Salamanca)
Torre, Chabela de la () (Departamento de Administración y Economía de la Empresa, Facultad de Economía y Empresa, Universidad de Salamanca)

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Abstract

This paper is built upon the predictions of the catering theory of dividends, and examines whether investors’ sentiments exert significant influence on corporate dividend policy. To achieve this aim, we propose a dividend model that incorporates a variable at a firm-level proxing for the catering effect. The estimation of the model by using the Generalized Method of Moments provides interesting results. Consistent with the predictions of the catering theory, we find that companies in eurozone countries cater to their investors’ sentiments. Additionally, other relevant findings show an interaction effect between catering and firm characteristics; particularly, liquid assets, investment opportunities and free cash flow. First, we find a catering effect only in firms with high liquid assets. Second, the positive effect of catering is only found in firms with valuable investment opportunities. Third, companies with higher levels of free cash flow cater more strongly to their investors’ sentiments.

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Paper provided by Interuniversitary Doctorate Program "New Trends on Business Administration", Universities of Valladolid, Burgos and Salamanca (Spain). Programa de Doctorado Interuniversitario "Nuevas Tendencias en Dirección de Empresas", Universidades de Valladolid, Burgos y Salamanca (España). in its series Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". Working Papers "New Trends on Business Administration". with number 2006-14.

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Length: 31 pages
Date of creation: Dec 2006
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Handle: RePEc:ntd:wpaper:2006-14

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Related research
Keywords: Catering investors’ sentiment payout policy.

Find related papers by JEL classification:
G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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