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Catering driven substitution in corporate payouts

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  • Kulchania, Manoj

Abstract

This paper investigates catering as a motivation for substitution between share repurchases and dividend payments. I hypothesize that firms cater to investor demand by repurchasing shares when investors place a premium on the stock price of firms that repurchase shares, and by paying dividends when investors place a higher value on dividend-paying firms. I propose a proxy to measure the relative preference for repurchases over dividends—the difference premium. Results show that the decision to repurchase shares or to pay dividends depends on this premium. Firms channel higher fractions of the additional payout dollars toward share repurchases when this premium is high. The market reaction to dividend changes is more favorable when firms act in accordance with the catering hypothesis. Overall, I find that catering plays a role in the substitution between repurchases and dividends.

Suggested Citation

  • Kulchania, Manoj, 2013. "Catering driven substitution in corporate payouts," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 180-195.
  • Handle: RePEc:eee:corfin:v:21:y:2013:i:c:p:180-195 DOI: 10.1016/j.jcorpfin.2013.02.003
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    Cited by:

    1. Krieger, Kevin & Lee, Bong-Soo & Mauck, Nathan, 2013. "Do senior citizens prefer dividends? Local clienteles vs. firm characteristics," Journal of Corporate Finance, Elsevier, pages 150-165.
    2. Banyi, Monica L. & Kahle, Kathleen M., 2014. "Declining propensity to pay? A re-examination of the lifecycle theory," Journal of Corporate Finance, Elsevier, pages 345-366.
    3. Jiang, Zhan & Kim, Kenneth A. & Lie, Erik & Yang, Sean, 2013. "Share repurchases, catering, and dividend substitution," Journal of Corporate Finance, Elsevier, pages 36-50.

    More about this item

    Keywords

    Repurchases; Payout policy; Catering; Dividends;

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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