63 Pages Posted: 13 Mar 2003
Date Written: March 2003
We develop a theory in which the decision to pay dividends is driven by investor demand. Managers cater to investors by paying dividends when investors put a stock price premium on payers and not paying when investors prefer nonpayers. To test this prediction, we construct four time series measures of the investor demand for dividend payers. By each measure, nonpayers initiate dividends when demand for payers is high. By some measures, payers omit dividends when demand is low. Further analysis confirms that the results are better explained by the catering theory than other theories of dividends.
Suggested Citation: Suggested Citation
Baker, Malcolm P. and Wurgler, Jeffrey, A Catering Theory of Dividends (March 2003). NBER Working Paper No. w9542. Available at SSRN: https://ssrn.com/abstract=386171