Institutional Factors and Investors Sentiments for Dividends

This paper is built upon the predictions of the catering theory of dividends and examines how the different institutional environments impact catering effect. The focus of our analysis is the argument that when companies belong to different institutional environments and the nature of existing agency problems also differs, there will also be differences in the relationship between dividend policy and the catering effect. To achieve this aim, we propose a dividend model that incorporates a variable at a firm-level proxying for the catering effect. The results from the estimation of the model by using the GMM provide interesting results. Consistent with the predictions of the catering theory, we find that companies in Eurozone countries and the US, UK, Canada and Japan cater to their investors’ sentiments. More interesting, our findings show an interaction effect between catering and institutional factors, particularly the legal protection of investors, development of capital markets and the orientation of the financial systems, the effectiveness of the market for corporate control, the level of ownership concentration and the effectiveness of boards of directors. We find a substitute effect of external corporate governance mechanisms on catering dividends. Specifically, dividend payers with weak governance are significantly more likely to pay dividends than dividend payers with strong governance.