Abstract
According to the catering theory of dividends, a company decides to distribute its dividends according to investor demand related by a dividend premium that results in this request. This study focuses on the impact of the catering theory of dividends of the 600 MENA companies in the financial industry listed in different stock exchanges of Tunisia, Morocco, Egypt, UAE, Saudi Arabia, and Kuwait during the period 2004-2010. The study employs an event study methodology in examining the effect of investor demand for dividends on the managers’ decision to distribute and change the amount of dividends. Research result indicates that companies pay dividends when demand is strong, i.e. when investors value companies that pay in a “depressed” or “bearish” market environment. Furthermore, catering persists even after controlling for the effect of some variables like tax and risk. The results confirm that the decision to change the amount of the payments depends on investor demand and the market premium resulting from the payment of dividends. Even though the result is not strong, it can be the evidence supporting the catering theory of dividend, not only in well-developed markets but also in emerging markets characterized with civil law characterized by low governance index and investor protection such as our MENA zone countries.
Highlights
Corporate dividend policy has long been an issue of interest in the financial literature, and despite the large body of research on the subject, it remains a subject open to debate
This study focuses on the impact of the catering theory of dividends of the 600 MENA companies in the financial industry listed in different stock exchanges of Tunisia, Morocco, Egypt, UAE, Saudi Arabia, and Kuwait during the period 2004-2010
This paper provides a test of the predictions of the catering theory of dividends
Summary
Corporate dividend policy has long been an issue of interest in the financial literature, and despite the large body of research on the subject, it remains a subject open to debate. Fama and French (2001) found that a decline in the proportion of dividends payout by US companies cannot be explained satisfactorily by changes in their characteristics. Different authors conducted cross-country comparisons and found that dividend policy can be appreciated by the catering theory of dividends. They show that common law countries enjoy high investor protection and corporate governance indices. In these countries, investor preference for dividends is generally lower and more flexible than in civil law countries. Despite the global importance of the MENA countries, few studies examined the catering theory and dividend payout in that particular region. Many studies examined this relationship in different regions
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