NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Catering Theory of Dividends

Malcolm Baker, Jeffrey Wurgler

NBER Working Paper No. 9542
Issued in March 2003
NBER Program(s):   CF

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.

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Document Object Identifier (DOI): 10.3386/w9542

Published: Baker, Malcolm and Jeffrey Wurgler. "A Catering Theory Of Dividends," Journal of Finance, 2004, v59(3,Jun), 1125-1165.

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