Do US Managers Cater to Investor Demand for Dividends?

Abstract

We investigate whether managers cater to investor preferences when demand for dividend-paying stocks is high, implementing a simple model developed by Baker and Wurgler (2004a). Expanding upon their work, we extend the sample period from 1980 to 2021 and implement two alternative approaches. Our findings present evidence in favour of the catering theory through both the dividend premium and the rate of initiation. However, no significant relationship was observed with announcement effects or future returns. Despite some evidence indicating catering, we conclude that the model fails to encapsulate all relevant aspects of this complex issue.