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A Catering Theory of Dividends

Authors: Baker, Malcolm
Wurgler, Jeffrey
Issue Date: 7-Nov-2002
Series/Report no.: FIN-02-012
Abstract: 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 non payers. To test this prediction, we construct four time series measures of the investor demand for dividend payers. By each measure, non payers 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.
Appears in Collections:Finance Working Papers

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