Does catering behavior persist? Evidence on dividend sentiment in emerging financial markets

Abstract

This study tests the catering theory and explores the main determinants of dividend payments across a sample of eleven emerging countries. There is evidence of catering to investor sentiment for dividends in Middle Eastern and North African countries. Dividend payers are mature, profitable, large firms with lower growth opportunities, and high dividend premiums, which supports the catering, lifecycle, and agency theories. Catering behavior persists even after controlling for the effect of Arab Spring. Difference-in-difference analysis shows that countries highly affected by the political transition period are less likely to pay dividends in the post-Arab Spring period than less affected countries. Catering decreases significantly in the post-Arab Spring period as compared with during- and pre-Arab Spring periods, suggesting that investors prefer that managers retain earnings to reinvest and grow during unstable economic conditions. Furthermore, catering persists in countries with high corruption levels and poor legal quality to reduce agency cost, and substitute for weak legal systems with poor enforcement of laws.