Catering theory and dividend policy: A study of MENA region

Abstract

According to the catering theory of dividends, a company decides to distribute its dividends according to investor demand related by a dividend premium that results in this request. This study focuses on the impact of the catering theory of dividends of the 600 MENA companies in the financial industry listed in different stock exchanges of Tunisia, Morocco, Egypt, UAE, Saudi Arabia, and Kuwait during the period 2004-2010. The study employs an event study methodology in examining the effect of investor demand for dividends on the managers’ decision to distribute and change the amount of dividends. Research result indicates that companies pay dividends when demand is strong, i.e. when investors value companies that pay in a “depressed” or “bearish” market environment. Furthermore, catering persists even after controlling for the effect of some variables like tax and risk. The results confirm that the decision to change the amount of the payments depends on investor demand and the market premium resulting from the payment of dividends. Even though the result is not strong, it can be the evidence supporting the catering theory of dividend, not only in well-developed markets but also in emerging markets characterized with civil law characterized by low governance index and investor protection such as our MENA zone countries.