ABSTRACT 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.
Malcolm Baker
Institution: Harvard Business School
Email: mbaker@hbs.edu
Jeffrey Wurgler
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0367
Fax: (212) 995-4233
Email: jwurgler@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~jwurgler/
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