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A Catering Theory of Dividends


  • Malcolm Baker,

  • Jeffrey Wurgler

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    • Baker is from Harvard Business School and NBER; and Wurgler is from the NYU Stern School of Business. For helpful comments, we thank the editor, an anonymous referee, Viral Acharya, Raj Aggarwal, Katharine Baker, Alon Brav, Randy Cohen, Gene D'Avolio, Steve Figlewski, Xavier Gabaix, Paul Gompers, Florian Heider, Laurie Hodrick, Dirk Jenter, Kose John, Steve Kaplan, John Long, Asis Martinez-Jerez, Colin Mayer, Randall Morck, Holger Müeller, Sendhil Mullainathan, Eli Ofek, Lubos Pastor, Lasse Pedersen, Gordon Phillips, Raghu Rau, Jay Ritter, Rick Ruback, David Scharfstein, Hersh Shefrin, Andrei Shleifer, Erik Stafford, Jeremy Stein, Ryan Taliaferro, Jerold Warner, Ivo Welch, Luigi Zingales, and seminar participants at the AFA and EFA annual meetings, Harvard Business School, London Business School, LSE, MIT, the NBER, NYU, Oxford, University of Chicago, University of Michigan, University of Rochester, and Washington University. We also thank Yi Liu, John Long, and Simon Wheatley for data and Ryan Taliaferro for superb research assistance. Baker gratefully acknowledges financial support from the Division of Research of the Harvard Business School.


We propose that the decision to pay dividends is driven by prevailing investor demand for dividend payers. Managers cater to investors by paying dividends when investors put a stock price premium on payers, and by not paying when investors prefer nonpayers. To test this prediction, we construct four stock price-based measures of investor demand for dividend payers. By each measure, nonpayers tend to initiate dividends when demand is high. By some measures, payers tend to omit dividends when demand is low. Further analysis confirms that these results are better explained by catering than other theories of dividends.