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A Catering Theory of Dividends

  • Malcolm Baker

    (Harvard Business School and NBER)

  • Jeffrey Wurgler

    (NYU Stern School of Business)

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.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 59 (2004)
Issue (Month): 3 (06)
Pages: 1125-1165

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Handle: RePEc:bla:jfinan:v:59:y:2004:i:3:p:1125-1165
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  18. Franklin Allen & Roni Michaely, 2002. "Payout Policy," Center for Financial Institutions Working Papers 01-21, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Allen, Franklin & Michaely, Roni, 2003. "Payout policy," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 7, pages 337-429 Elsevier.
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