Dividends: New evidence on the catering theory

Elisabete Neves, Julio Pindado and Chabela de la Torre (chabela@usal.es)
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Elisabete Neves: Instituto Polit‚cnico de Coimbra
Chabela de la Torre: Departamento de Administraci¢n y Econom¡a de la Empresa, Facultad de Econom¡a y Empresa, Universidad de Salamanca

No 2006-14, Working Papers "New Trends on Business Administration". Documentos de Trabajo "Nuevas Tendencias en Dirección de Empresas". from Interuniversity Research Master and Doctorate Program (with a quality mention of ANECA) on "Business Economics", Universities of Valladolid, Burgos, Salamanca and León (Spain). Until 2008, Interuniversity Doctorate Program (with a quality mention of ANECA) “New trends in Business Administration”, Universities of Valladolid, Burgos, and Salamanca (Spain). Master en Investigación y Programa de Doctorado Interuniversitarios (con mención de calidad de la ANECA) en "Economía de la Empresa", Universidades de Valladolid, Burgos, Salamanca y León (España). Hasta 2008, Programa de Doctorado Interuniversitario (con mención de calidad de la ANECA) “Nuevas Tendencias en Dirección de Empresas”, Universidades de Valladolid, Burgos y Salamanca (España).

Abstract: This paper is built upon the predictions of the catering theory of dividends, and examines whether investors? sentiments exert significant influence on corporate dividend policy. To achieve this aim, we propose a dividend model that incorporates a variable at a firm-level proxing for the catering effect. The estimation of the model by using the Generalized Method of Moments provides interesting results. Consistent with the predictions of the catering theory, we find that companies in eurozone countries cater to their investors? sentiments. Additionally, other relevant findings show an interaction effect between catering and firm characteristics; particularly, liquid assets, investment opportunities and free cash flow. First, we find a catering effect only in firms with high liquid assets. Second, the positive effect of catering is only found in firms with valuable investment opportunities. Third, companies with higher levels of free cash flow cater more strongly to their investors? sentiments.

Keywords: Catering; investors? sentiment; payout policy. (search for similar items in EconPapers)
JEL-codes: G35 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2006-12
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