Appearing and disappearing dividends: The link to catering incentives

Abstract

We document a close link between fluctuations in the propensity to pay dividends and catering incentives. First, we use the methodology of Fama and French (2001) to identify a total of four distinct ends in the propensity to pay dividends between 1963 and 2000. Second, we show that each of these ends lines up with a corresponding fluctuation in catering incentives: The propensity to pay increases when a proxy for the stock market dividend premium is positive and decreases when it is negative. The lone disconnect is attributable to Nixon-era controls.