Catering for Dividends by Stripping Mutual-Fund Portfolios
43 Pages Posted: 29 Sep 2005
Date Written: August 2005
Abstract
The catering theory (Baker and Wurgler, 2004a, 2004b) argues that there is a time-varying demand for dividends, to which companies respond by initiating or omitting such payments. This paper supports that theory with evidence from split-capital closed-end funds in the UK, which flourished in the late 1990s. These funds offered high yields by stripping portfolios into separately-listed capital and dividend shares and then levering-up with 50 percent debt. Over 1998-2001 the split-capital funds were worth 9 percent more than conventional funds. Cross-section regressions for 1994-2004 confirm that this was due to a temporary shift in the derived demand for dividends, as small investors sought dividend yields which were not available directly in a rising stockmarket. The paper confirms that dividend yield has an important role in the decisions of some investors.
Keywords: Dividends, catering, mutual fund, corporate finance, behavioral finance
JEL Classification: G20, G35
Suggested Citation: Suggested Citation
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