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A Catering Theory of Dividends
Author(s) -
Baker Malcolm,
Wurgler Jeffrey
Publication year - 2004
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2004.00658.x
Subject(s) - dividend , stock (firearms) , dividend policy , financial economics , stock price , economics , business , monetary economics , finance , mechanical engineering , paleontology , series (stratigraphy) , engineering , biology
ABSTRACT We propose that the decision to pay dividends is driven by prevailing investor demand for dividend payers. Managers cater to investors by paying dividends when investors put a stock price premium on payers, and by not paying when investors prefer nonpayers. To test this prediction, we construct four stock price‐based measures of investor demand for dividend payers. By each measure, nonpayers tend to initiate dividends when demand is high. By some measures, payers tend to omit dividends when demand is low. Further analysis confirms that these results are better explained by catering than other theories of dividends.