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Demographics, dividend clienteles and the dividend premium

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  • Lee, King Fuei

Abstract

The catering theory of dividends proposed that corporate dividend policy is driven by prevailing investor demand for dividend payers, and that managers cater to investors by paying dividends when the dividend premium is high. While earlier research found that the dividend premium is not driven by traditional clienteles derived from market imperfections such as taxes, transaction costs, or institutional investment constraints, we find empirical evidence that demographic clienteles are an important source of the time-varying demand for dividend payers. In particular, we find that, as consistent with the behavioural life-cycle theory and the marginal opinion theory of stock price, the dividend premium is positively driven by demographic clientele variation represented by changes in the proportion of the older population. Our results are robust when controlled for the factors of investor sentiment, signalling, agency costs and time trend.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34546.

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Date of creation: Dec 2010
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Publication status: Forthcoming in Quarterly Review of Economics and Finance 51.4(2011): pp. 368-375
Handle: RePEc:pra:mprapa:34546

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Keywords: Dividend policy; demographics; dividend premium; dividend clienteles;

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  1. 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.
  2. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198292272, October.
  3. Bae, Kee-Hong & Yamada, Takeshi & Ito, Keiichi, 2008. "Interaction of investor trades and market volatility: Evidence from the Tokyo Stock Exchange," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 16(4), pages 370-388, September.
  4. Olivier Vigneron, & Xavier Gabaix & Arvind Krishnamurthy, 2004. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," Econometric Society 2004 North American Summer Meetings, Econometric Society 430, Econometric Society.
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  6. Espen Eckbo, B. & Verma, Savita, 1994. "Managerial shareownership, voting power, and cash dividend policy," Journal of Corporate Finance, Elsevier, Elsevier, vol. 1(1), pages 33-62, March.
  7. Fama, Eugene F. & French, Kenneth R., 2001. "Disappearing dividends: changing firm characteristics or lower propensity to pay?," Journal of Financial Economics, Elsevier, Elsevier, vol. 60(1), pages 3-43, April.
  8. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 979, Cowles Foundation for Research in Economics, Yale University.
  9. Zweig, Martin E, 1973. "An Investor Expectations Stock Price Predictive Model Using Closed-End Fund Premiums," Journal of Finance, American Finance Association, American Finance Association, vol. 28(1), pages 67-78, March.
  10. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, Elsevier, vol. 77(3), pages 483-527, September.
  11. Zhiguo He & Arvind Krishnamurthy, 2008. "Intermediary Asset Pricing," NBER Working Papers 14517, National Bureau of Economic Research, Inc.
  12. Malcolm Baker & Jeffrey Wurgler, 2003. "A Catering Theory of Dividends," NBER Working Papers 9542, National Bureau of Economic Research, Inc.
  13. Malcolm Baker & Jeffrey Wurgler, 2003. "Appearing and Disappearing Dividends: The Link to Catering Incentives," NBER Working Papers 9995, National Bureau of Economic Research, Inc.
  14. Zhiguo He & Arvind Krishnamurthy, 2008. "A Model of Capital and Crises," NBER Working Papers 14366, National Bureau of Economic Research, Inc.
  15. John R. Graham & Alok Kumar, 2006. "Do Dividend Clienteles Exist? Evidence on Dividend Preferences of Retail Investors," Journal of Finance, American Finance Association, American Finance Association, vol. 61(3), pages 1305-1336, 06.
  16. Shefrin, Hersh M & Thaler, Richard H, 1988. "The Behavioral Life-Cycle Hypothesis," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 26(4), pages 609-43, October.
  17. Li, Wei & Lie, Erik, 2006. "Dividend changes and catering incentives," Journal of Financial Economics, Elsevier, Elsevier, vol. 80(2), pages 293-308, May.
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Cited by:
  1. Lee, King Fuei, 2013. "Demographics and the long-horizon returns of dividend-yield strategies," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 53(2), pages 202-218.
  2. Lee, King Fuei, 2011. "Demographics and the Long-Horizon Returns of Dividend-Yield Strategies in the US," MPRA Paper 46350, University Library of Munich, Germany.

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