Catering Driven Substitution in Corporate Payouts

Journal of Corporate Finance, Forthcoming

48 Pages Posted: 22 May 2012 Last revised: 15 Mar 2013

See all articles by Manoj Kulchania

Manoj Kulchania

Wayne State University - Finance Group

Date Written: January 1, 2012


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.

Keywords: Repurchases, Payout Policy, Catering, Dividends

JEL Classification: G35

Suggested Citation

Kulchania, Manoj, Catering Driven Substitution in Corporate Payouts (January 1, 2012). Journal of Corporate Finance, Forthcoming, Available at SSRN: or

Manoj Kulchania (Contact Author)

Wayne State University - Finance Group ( email )

2771 Woodward Ave
Detroit, MI 48201
United States
313-577-7837 (Phone)


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