Catering and dividend policy: evidence from the Netherlands over the twentieth century

Abstract

This article investigates the determinants of Dutch firms’ dividend policies in the twentieth century. We identify three distinct episodes and document shifts in dividend policies in the 1930s and 1980s, because firm managers cater to the changing preferences of shareholders. The first episode, prior to World War II, was characterised by dividends that were fixed contracts between shareholder and management and the payouts were mechanically determined by earnings. The second epoch of Dutch dividend policy, until the 1980s, was characterised by dividend smoothing. Dividends were still strongly related to earnings, but because of shareholder's preferences for stable dividend income, earnings changes are incorporated in dividends with a lag. Finally, dividend policy in the most recent episode is inspired by shareholder wealth maximisation, based on agency and signalling motives. In this period, dividends have become largely decoupled from earnings.