Demographics, dividend clienteles and the dividend premium

Lee, King Fuei (2010): Demographics, dividend clienteles and the dividend premium. Forthcoming in: Quarterly Review of Economics and Finance , Vol. 4, No. 51 (November 2011): pp. 368-375.

Abstract

The catering theory of dividends proposed that corporate dividend policy is driven by prevailing investor demand for dividend payers, and that managers cater to investors by paying dividends when the dividend premium is high. While earlier research found that the dividend premium is not driven by traditional clienteles derived from market imperfections such as taxes, transaction costs, or institutional investment constraints, we find empirical evidence that demographic clienteles are an important source of the time-varying demand for dividend payers. In particular, we find that, as consistent with the behavioural life-cycle theory and the marginal opinion theory of stock price, the dividend premium is positively driven by demographic clientele variation represented by changes in the proportion of the older population. Our results are robust when controlled for the factors of investor sentiment, signalling, agency costs and time trend.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dividend policy; demographics; dividend premium; dividend clienteles
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G35 - Payout Policy; G - Financial Economics > G0 - General > G00 - General

References

Baker, M. and Wurgler, J., 2004a. A Catering Theory of Dividends. Journal of Finance 59, 1125-1165.

Baker, M. and Wurgler, J., 2004b. Appearing and Disappearing Dividends: The Link to Catering Incentives. Journal of Financial Economics 73, 271–288.

Eskesen, L., Lueth, E. and Syed, M., 2008. The Graying of Asia: Demographics, Capital Flows, and Financial Markets. IMF Regional Economic Outlook: Asia and Pacific, November 2008, 41-57.

Fama, E. and French, K., 2001. Disappearing Dividends: Changing Firm Characteristics or Lower Propensity To Pay?. Journal of Financial Economics 60, 3-44.

Ferris, S., Sen, N. and Yui, H., 2006. God Save the Queen and Her Dividends: Corporate Payouts in the U.K. Journal of Business 79, 1149–1173.

Graham, J. and Kumar, A., 2006. Do Dividend Clienteles Exist? Evidence on Dividend Preferences of Retail Investors. Journal of Finance 61, 1305-1336.

Kwiatkowski, D., Phillips, P.C.B., Schmidt, P. and Shin, Y., 1992. Testing the Null of Stationarity Against the Alternative of a Unit Root. Journal of Econometrics 54, 159-178.

Krüger, D., 2004. The Effects of Demographic Changes on Aggregate Savings: Some Implications from the Life Cycle Model. In Capital Markets in the Long Term: Demography, economic Development and Funded Pension Systems, Center for Financial Studies and Allianz, Frankfurt am Main, 2004.

Lee, C.M., Shleifer, A. and Thaler, R., 1991. Investor Sentiment and the Closed-end Fund Puzzle. Journal of Finance 46, 75–110.

Li, W. and Lie E., 2006. Dividend Changes and Catering Incentives. Journal of Financial Economics 80, 293-308.

Liu, L. and Shan, L., 2007. What is Dividend Premium?. Financial Management Association 15 Annual Meeting 2007. Online conference proceedings.

Modigliani, F. and Miller, M., 1961. Dividend Policy, Growth, and the Valuation of Shares. Journal of Business XXXIV, 235-64.

Smith, R.G.E., 1967. The ‘Marginal Opinion’ Theory of Stock Price. Financial Analysts Journal 23, 127-132.

Thaler, R.H. and Shefrin, H.H., 1988. The Behavioral Life-cycle Hypothesis. Economic Inquiry 26, 609-643.

Williams, J., 1938. The Theory of Investment Value, Cambridge, Mass. Harvard University Press.

Zweig, M.E., 1973. An Investor Expectations Stock Price Predictive Model Using Closedend Fund Premiums. Journal of Finance 28, 67–87.