A Catering Theory of Dividends

Baker, Malcolm; Wurgler, Jeffrey

doi:10.1111/j.1540-6261.2004.00658.x

Cited by 1,015 publications

(442 citation statements)

References 101 publications

(115 reference statements)

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“…If the same pattern holds in Germany, managers may tend to increase the amount disbursed to the shareholders since this will result in a more favorable market valuation. Closely related to that line of argumentation is the catering theory of Baker and Wurgler (2004). One can reconcile the catering view with our …ndings by assuming that the market values dividend increasers at a premium in times when the overall stock market return is low.…”

supporting

confidence: 53%

“…3 The foundation of the modern behavioral-…nance-based dividend theory is laid out by Baker and Wurgler (2004) who outline and test some of the predictions of the catering theory. Using data between 1963 and 2000, they …nd a strong relation between measures of the relative price of payers and nonpayers and measures of the aggregate dynamics of dividend initiations in the US.…”

Section: Related Literaturementioning

confidence: 99%

“…The catering theory, put forward by Baker and Wurgler (2004) also allows for a relation between the dividend policy and the stock price performance. According to this theory, arbitrage may be limited and (irrational) investor demand may create a gap between the stock prices of payers and non-payers.…”

Section: Introductionmentioning

confidence: 99%

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Fundamentals or Market Movements: What Drives the Dividend Decision?

Savov

Weber

2006

SSRN Journal

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This paper investigates the determinants of the dividend decision. We examine the impact of fundamental variables like earnings, size, or leverage, as well as the e¤ect of stock price movements. Using a sample of German companies, we …nd a negative relation between the probability for dividend increases and the performance of the …rm's shares. Dividend increasing companies performed worse than the overall stock market or corporations that keep dividends constant. In addition, we demonstrate that the documented pattern cannot be explained by models of asymmetric information or catering considerations. Thus, our results suggest that in Germany, where share repurchases were highly restricted, dividends are increased as a compensation for the poor returns of the current shareholders.JEL classi…cation: G35

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supporting

confidence: 53%

Section: Related Literaturementioning

confidence: 99%

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Fundamentals or Market Movements: What Drives the Dividend Decision?

Savov

Weber

2006

SSRN Journal

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“…This paper can also be viewed as a contribution to the already large body of literature on behavorial corporate finance, in which a theme is that firm behavior can be explained by their responses to clients and the market. This theme has been used to explain capital structure (Baker and Wurgler (2002)), dividend payouts (Baker and Wurgler (2003)), and acquisitions (Shleifer and Vishny (2003)). …”

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confidence: 99%

A Catering Theory of Analyst Bias

Lai

2004

SSRN Journal

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We posit a theory that runs counter to how conventional wisdom thinks about analyst bias, that it is the result of distorted incentives by "the system" -especially upstream factors like the analysts' employers. We suggest that analysts are also heavily influenced by what investors believe, the purported victims of analyst bias. We adapt Mullainathan-Shleifer's theory of media bias to build a theory of how analysts cater to what investors believe. The theory also predicts that competition among analysts does not reduce their bias. We provide empirical support for this theory, using an enormous dataset built from over 6.5 million analyst estimates and 42.8 million observations on investor holdings, which we argue is a proxy for what they believe. We use a simultaneousequations model for estimation, with instruments to rule out alternative interpretations of the direction of causality. For additional robustness, we investigate the time series of analyst bias and heterogeneity in investor beliefs from 1987 through 2003. Dickey-Fuller tests show that both have unit roots, but we establish that cointegration hold. Further, we employ a vectorautoregressive model to show Granger-causality between the two.The bias of analyst forecasts has received extensive empirical study, from as early as Mastrapasqua and Bolten (1973) and Brown and Rozeff (1978). A recent survey is in OʹBrien (2003). A large class of studies deals with how analysts' biases might affect stock prices and other aspects of the market. This paper joins an emerging class of studies that seeks to understand the source of the bias. For example, Hong and Kubik (2003) show that analysts who are positively biased get better jobs in the industry. Cowen, Groysberg and Healy (2003) provide evidence that analysts whose employers are more commissionbased, such as pure brokerages, are more bias. Underlying many of these explanations is an upstream source of analyst bias: that of distorted incentives by their employers and the companies covered.In this paper, we ask the seemingly obvious question: might not analysts' biases be a result of their catering to downstream influence -that is, their direct clients, the readers? This paper can also be viewed as a contribution to the already large body of literature on behavorial corporate finance, in which a theme is that firm behavior can be explained by their responses to clients and the market. This theme has been used to explain capital 2 structure (Baker and Wurgler (2002)), dividend payouts (Baker and Wurgler (2003)), and acquisitions (Shleifer and Vishny (2003)).Our "catering" theory, if true, has important practical implications. For example, it means that policy makers have to go beyond reforming incentives and organizational structures inside analysts' institutions, if we were to have any hope of reducing analyst bias. Finally, this research question opens up a range of others. The most important is how readers of analyst reports are in turn influenced by what analysts write.We start with Section I, in which...

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“…They emphasize that agency conflicts are determined not only by an objective assessment of the severity of agency conflicts which is provided by legal rules, but also by a subjective assessment among individuals of the perceived extent of [3] agency conflicts, which is captured by culture. Furthermore, measures of creditor rights (culture) do not fully account for differences in culture (creditor rights) across countries, resulting in instances in which the objective assessment of the extent of agency conflicts provided by legal variables may be very different to the culturally determined perception of these same agency conflicts.…”

Section: Introductionmentioning

confidence: 99%

Creditor rights, culture and dividend payout policy

Byrne

O’Connor

2017

Journal of Multinational Financial Management

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We study how creditor rights and culture interact with one another to influence corporate dividend payout policy. Where creditor rights are strong, creditors accept the status quo, which are large dividends in individualist and small dividends in collectivist traditions, respectively. Culture influences dividend payout where creditor rights are weak. In collectivist countries where group cohesion among corporate stakeholders results in perceived lower agency costs of debt and equity, creditors place few if any restrictions on dividend payout given weak creditor rights. In contrast, in individualist traditions, creditors continue to restrict dividend payouts under weak creditor rights. Our findings emphasize the importance of accounting for the interactions between creditor rights and culture in determining dividend policy.

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A Catering Theory of Dividends

Cited by 1,015 publications

References 101 publications

Fundamentals or Market Movements: What Drives the Dividend Decision?

Fundamentals or Market Movements: What Drives the Dividend Decision?

A Catering Theory of Analyst Bias

Creditor rights, culture and dividend payout policy

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