Working Paper: NBER ID: w9542
Authors: Malcolm Baker; Jeffrey Wurgler
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 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.
Keywords: No keywords provided
JEL Codes: G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor demand for dividend-paying stocks (G35) | Managers' decisions to initiate or omit dividends (G35) |
| High demand for payers (I11) | Nonpayers are more likely to initiate dividends (G35) |
| Low demand for payers (J29) | Payers are more likely to omit dividends (G35) |
| Lagged dividend premium (G35) | Initiation rate (O30) |
| Increase in initiation rate by one standard deviation (O49) | Future returns on payers are lower than those on nonpayers (J32) |
| Low dividend premium (G19) | Omission rate increases (H22) |