Dividends: New evidence on the catering theory

This paper is built upon the predictions of the catering theory of dividends, and examines whether investors? sentiments exert significant influence on corporate dividend policy. To achieve this aim, we propose a dividend model that incorporates a variable at a firm-level proxing for the catering effect. The estimation of the model by using the Generalized Method of Moments provides interesting results. Consistent with the predictions of the catering theory, we find that companies in eurozone countries cater to their investors? sentiments. Additionally, other relevant findings show an interaction effect between catering and firm characteristics; particularly, liquid assets, investment opportunities and free cash flow. First, we find a catering effect only in firms with high liquid assets. Second, the positive effect of catering is only found in firms with valuable investment opportunities. Third, companies with higher levels of free cash flow cater more strongly to their investors? sentiments.