Catering Driven Substitution in Corporate Payouts
Marquette University - Finance Group
January 1, 2012
Journal of Corporate Finance, Forthcoming
This paper investigates catering as a motivation for substitution between share repurchases and dividend payments. I hypothesize that firms cater to investor demand by repurchasing shares when investors place a premium on the stock price of firms that repurchase shares, and by paying dividends when investors place a higher value on dividend-paying firms. I propose a proxy to measure the relative preference for repurchases over dividends - the difference premium. Results show that the decision to repurchase shares or to pay dividends depends on this premium. Firms channel higher fractions of the additional payout dollars toward share repurchases when this premium is high. The market reaction to dividend changes is more favorable when firms act in accordance with the catering hypothesis. Overall, I find that catering plays a role in the substitution between repurchases and dividends.
Number of Pages in PDF File: 48
Keywords: Repurchases, Payout Policy, Catering, Dividends
JEL Classification: G35Accepted Paper Series
Date posted: May 22, 2012 ; Last revised: March 15, 2013
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo1 in 0.375 seconds