A Direct Test of the Dividend Catering Hypothesis
48 Pages Posted: 26 Nov 2016 Last revised: 25 Jul 2017
Date Written: April 8, 2017
This paper uses a direct measure of investors’ time-varying preference for dividends to test the dividend catering hypothesis proposed in Baker and Wurgler (2004a, 2004b). Specifically, we use Internet search volume for dividend-related keywords as a direct measure of investor preference for dividends (i.e., dividend sentiment). We validate this measure by showing that mutual funds that pay high dividends receive more inflows when the dividend sentiment is stronger. Further, we find that firms initiate or increase dividends when the dividend sentiment is stronger. These effects are concentrated among firms located in states with high dividend sentiment. Differences in risk or other firm characteristics do not explain our findings. Collectively, these results provide support for the catering theory and show that managers cater to investors’ time-varying demand for dividends.
Keywords: Dividend Catering; Investor Attention; Internet Search Volume; Dividend Sentiment; Fund Flows
JEL Classification: G32; G35
Suggested Citation: Suggested Citation