Impact of Catering Incentives on Dividend Payment Decisions: Evidence from Indian Firms

Abstract

Manuscript type: Research paper Research aims: The present study examines whether the catering incentives of dividends can influence firms’ dividend payment decision for 781 sample firms listed on the National Stock Exchange (NSE) of India during the period of 1995-2015. Design/Methodology/Approach: This study uses dividend premiums to measure the catering incentives of the dividends. The firms’ dividend payment decision is measured by the propensity to pay dividends, and the decision to change dividend payments. Research findings: The empirical results indicate that the catering incentives of dividends have a significant positive impact on the changes in the propensity to pay dividends. The findings suggest that the higher dividend premiums indicating the investors’ higher demand for dividends can induce managers to increase the amount of dividends paid. Firm managers are less likely to cut or omit dividends when the investors’ demand for dividends is high as reflected by the higher dividend premiums. Theoretical contribution/Originality: The catering theory of dividend which is based on investor sentiment is new, and the empirical evidence supporting this theory is limited. This study aims to contribute to existing literature by examining whether the catering incentives of dividends can influence firms’ dividend payment decision, in the context of India, during the period of liberalisation. Practitioner/Policy implication: This study has an implication for the management team. The investors in the Indian capital market show a preference for dividend payment. Firm managers could use these catering incentives for deciding dividend payments to investors. Research limitation/Implications: As the study has not used the primary survey approach to collect data, it could not examine the corporate managers’ and the investors’ views about the determinants of the dividend policy. New insights could thus be provided by analysing the behaviour of other forms of dividends like bonus shares, stock splits and the share buybacks. Keywords: Catering Incentives, Dividends, Dividend Policy, Dividend Premium, Propensity to Pay JEL Classification: G30, G35