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A Catering Theory of Dividends

Author

Listed:
  • Malcolm Baker

    (Harvard Business School and NBER)

  • Jeffrey Wurgler

    (NYU Stern School of Business)

Abstract

We propose that the decision to pay dividends is driven by prevailing investor demand for dividend payers. Managers cater to investors by paying dividends when investors put a stock price premium on payers, and by not paying when investors prefer nonpayers. To test this prediction, we construct four stock price-based measures of investor demand for dividend payers. By each measure, nonpayers tend to initiate dividends when demand is high. By some measures, payers tend to omit dividends when demand is low. Further analysis confirms that these results are better explained by catering than other theories of dividends. Copyright 2004 by The American Finance Association.

Suggested Citation

  • Malcolm Baker & Jeffrey Wurgler, 2004. "A Catering Theory of Dividends," Journal of Finance, American Finance Association, vol. 59(3), pages 1125-1165, June.
    • Handle: RePEc:bla:jfinan:v:59:y:2004:i:3:p:1125-1165
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