Institutional Holdings, Investment Opportunities and Dividend Policy
The Quarterly Review of Economics and Finance (2017) Vol 64, 151-161 DOI:10.1016/j.qref.2016.06.008
32 Pages Posted: 26 Feb 2020
Date Written: 2017
This paper examines the relationship between institutional holdings and dividend policy by jointly considering investment style and firms’ growth opportunities. It helps to resolve the apparent low-dividend-preference puzzle in which institutional investors have higher holdings in dividend-paying firms, but among dividend payers, prefer firms that pay low dividends. We find that, controlling for style, institutional investors’ preferences for dividends are based on whether payout levels are consistent with firms’ needs to fund growth opportunities. High payout is preferred for firms with low growth opportunities, and low or no payout is preferred for firms with high growth opportunities. The results enhance our understanding of payout preferences of institutions by demonstrating the interactions of investment opportunities and investing style with respect to institutional investors’ payout preferences.
Keywords: dividend policy, payout policy, investment opportunities, institutional investors, institutional investor style
JEL Classification: G20, G32, G35
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