Dividend Catering, Investor Protection, and Sentiment: A Cross-Country Analysis

Abstract

This study investigates the international presence of dividend catering in different legal regimes in twenty-one countries from 1996 to 2010. Using modified dividend premiums, we find evidence of dividend catering among firms in common law countries, but not among those in civil law countries. Catering in common law countries persists even after controlling for the effect of fundamental variables like profitability, size, and growth opportunities. In civil law countries, cash dividends are less responsive to the value premium of dividend paying firms. However, we find that if taxation penalties on dividends are controlled, firms in common law countries cater to investors only when investor sentiment is negative. Our results suggest that when investors are well protected and negative sentiment is present, they force dividends from managers by placing a high value on dividend paying firms.