Do Managers Cater to Investors' Demand for Income?

This paper investigates whether corporate managers cater to income-seeking investors by paying dividends when interest rates are low to boost their firms' share prices. Using a dataset of U.S. firms from 1962 to 2023, I analyze the propensity of firms to pay dividends under varying interest rate environments. Although firms appear more likely to pay dividends when rates are low, this effect disappears once risk and other established determinants of dividend policy are controlled for. Cross-sectional analyses by maturity, growth, size, volatility, and industry show a consistent pattern: interest rates matter only when risk is omitted. Long-run return tests also reveal no evidence that dividend initiations during low-rate periods exploit mispricing. Overall, the results challenge the catering theory's reaching-for-income channel, highlighting risk as the binding constraint on dividend policy. The findings also demonstrate the boundaries of monetary policy transmission through financial markets.