Article | Journal of Finance | June 2004

A Catering Theory of Dividends

by Malcolm Baker and Jeffrey Wurgler


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.

Keywords: Financial Instruments; Investment Return; Business and Shareholder Relations;


Baker, Malcolm, and Jeffrey Wurgler. "A Catering Theory of Dividends." Journal of Finance 59, no. 3 (June 2004): 1125–1165.