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A Catering Theory of Dividends

  • Malcolm Baker
  • Jeffrey Wurgler

We develop a theory in which the decision to pay dividends is driven by investor demand. Managers cater to investors by paying dividends when investors put a stock price premium on payers and not paying when investors prefer nonpayers. To test this prediction, we construct four time series measures of the investor demand for dividend payers. By each measure, nonpayers initiate dividends when demand for payers is high. By some measures, payers omit dividends when demand is low. Further analysis confirms that the results are better explained by the catering theory than other theories of dividends.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9542.

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Date of creation: Mar 2003
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Publication status: published as Baker, Malcolm and Jeffrey Wurgler. "A Catering Theory Of Dividends," Journal of Finance, 2004, v59(3,Jun), 1125-1165.
Handle: RePEc:nbr:nberwo:9542
Note: CF
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