Appearing and disappearing dividends: The link to catering incentives

We document a close link between fluctuations in the propensity to pay dividends and catering incentives. First, we use the methodology of Fama and French (J. Finan. Econ. (2001)) to identify a total of four distinct trends in the propensity to pay dividends between 1963 and 2000. Second, we show that each of these trends lines up with a corresponding fluctuation in catering incentives: The propensity to pay increases when a proxy for the stock market dividend premium is positive and decreases when it is negative. The lone disconnect is attributable to Nixon-era controls. (C) 2004 Elsevier B.V. All rights reserved.