A Direct Test of the Dividend Catering Hypothesis

48 Pages Posted: 26 Nov 2016 Last revised: 12 Apr 2017

Alok Kumar

University of Miami - School of Business Administration

Zicheng Lei

University of Surrey - Finance and Accounting Group

Chendi Zhang

University of Warwick - Finance Group

Date Written: April 8, 2017

Abstract

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

Kumar, Alok and Lei, Zicheng and Zhang, Chendi, A Direct Test of the Dividend Catering Hypothesis (April 8, 2017). Available at SSRN: https://ssrn.com/abstract=2875114

Alok Kumar (Contact Author)

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Zicheng Lei

University of Surrey - Finance and Accounting Group ( email )

63MS02, Rik Medlik Building
Surrey Business School
Guildford, Surrey GU2 7XH
United Kingdom
01483686372 (Phone)

Chendi Zhang

University of Warwick - Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

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