Corporate Payout Policy and Changes in Housing Prices

Abstract:     
We study how corporate payout policy responds to changing investor tastes for non-dividend over dividend paying stocks following an increase in housing prices. Exploiting the crossregional dispersion in housing prices within the U.S. market, we find a significant negative effect of growth in housing prices on local firm’s propensity to pay and to initiate dividends, and on its dividend yield, payout ratio as well as total payout. Such housing effect is particularly strong for small firms, young firms, volatile firms, and low profitability firms. Our findings are insensitive to the choice of model specification and estimation method. They are also robust to controlling for several firm-specific variables, macro-economic variables, market sentiment, and dividend premium (proxy for dividend catering). In contrast to recent criticisms against catering theory, we find that dividend premium loads positively at state level. Moreover, we report weaker market reactions to dividend changes when local housing prices increase. This study is the first to establish a relationship between growth in housing prices and corporate policy decisions. It also introduces geography as a determinant of payout policy.

Number of Pages in PDF File: 58

Keywords: Corporate Payout Policy, Housing Prices, Housing Wealth, Local Bias, Dividend Clientele, Geography and dividends

JEL Classification: G10, G14, G34, G39

working papers series