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Corporate payout-form: investors’ preference and catering theory

Abdelaziz Chazi, Alexandra Theodossiou and Zaher Zantout

Managerial Finance, 2018, vol. 44, issue 12, 1418-1433

Abstract: Purpose - The purpose of this paper is to develop and validate new robust measures of investors’ preference for the form of regular corporate payout. Then, the paper adds to the empirical evidence on catering theory by examining managers’ catering to such preference. Design/methodology/approach - The authors use the matching method to control for firm characteristics. The authors apply two robustness tests to validate the measures. The authors use the rigorous multivariate analysis. Findings - US investors’ preference for regular dividends vs regular stock repurchases, being different forms of corporate payout, varies over time. Managers cater to investors’ preference for payout form. The findings are consistent with the catering theory of Baker and Wurgler (2004a). The number of firms that pay cash dividends regularly continue to outnumber the ones that purchase their shares regularly. Research limitations/implications - The study only uses US data. It does not cover other countries. Practical implications - The measures can be used in several future research endeavors, such as examining investors’ payout-form preferences in other countries (see Booth and Zhou, 2017) and exploring their determinants, the corporate governance characteristics of firms that cater to investors’ preference vs firms that do not, etc. Social implications - The study contributes to understanding investors’ preferences and corporate payout behavior which is prerequisite to efficient policy formulation. Originality/value - The proxies for investors’ payout-form preference control for firm characteristics and are unrelated to investors’ time-varying risk preferences. Also, they are robust to measurement issues. Moreover, the study covers a period of 40 years.

Keywords: Catering theory; Form of corporate payout; Investors’ preference; G35; G11 (search for similar items in EconPapers)
Date: 2018
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