A Catering Theory of Dividends

Posted: 15 Jul 2003 Last revised: 13 Aug 2008

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

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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.

Suggested Citation

Baker, Malcolm P. and Wurgler, Jeffrey A., A Catering Theory of Dividends. Journal of Finance, Vol. 59, No. 3, pp. 1125-1165, June 2004, Available at SSRN: https://ssrn.com/abstract=412121

Malcolm P. Baker (Contact Author)

Harvard Business School ( email )

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HOME PAGE: http://www.people.hbs.edu/mbaker

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Jeffrey A. Wurgler

NYU Stern School of Business ( email )

Stern School of Business
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HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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