Dividend policy and catering theory: Evidence from the Taiwan Stock Exchange

Abstract

[[abstract]]This paper examines the dividend policy for firms listed on the Taiwan Stock Exchange. The sample involves 8935 sample observations during the period 1992-2011. Dividend policies for different types of dividend payers (stock dividends, cash dividends, mixed dividends involving both cash dividends and stock dividends, and no dividends) are investigated. The results are consistent with the prediction of the catering theory in that managers choose a dividend policy to cater to the demand of investors. Dividend payers experience higher market-to-book ratios than those for non-payers. Moreover, among dividend payers, firms distribute more stock dividends than other types of dividends when the dividend premium for stock dividends is positive. In contrast, firms shift from stock dividends to other types of dividends such as mixed dividends and cash dividends when the dividend premium for stock dividends is negative