A behavioral perspective on corporate dividend policy: evidence from France

• DOI: https://doi.org/10.1108/CG-02-2018-0077
• Pages: 102-119
• Date: 13 September 2018
• Published date: 13 September 2018
• Author: Dhoha Trabelsi,Saqib Aziz,Jean-Jacques Lilti
• Subject Matter: Corporate governance,Strategy

A behavioral perspective on corporate

dividend policy: evidence from France

Dhoha Trabelsi, Saqib Aziz and Jean-Jacques Lilti

Abstract

Purpose –This paper empirically examines the catering theory of Baker and Wurgler (2004)inthe

particular context of France. Considering the characteristics of French market –known for its high

concentrationof capital –it attempts to highlight therole family control plays in the managerialtendencies

to satisfynon-informative dividend demands.

Design/methodology/approach –The paper focuseson a large data set of Frenchfirms included in the

SBF-250 index over a period of 1992-2010. It uses a variety of dividend policy measures, including

dividend premium, percentageof dividend-paying firms and probability of paying dividends. It adopts

appropriate empirical specifications (time-series and probit models) to substantiate the research

hypotheses.

Findings –The empirical findingsshow that the percentage of payers riseswith the dividend premium,

and that the dividendpremium and the confidence index of French householdsare negatively correlated.

This reflects the sensitivity of dividend demand to investor sentiment. Moreover, results of multivariate

panel regression show a positiveand statistically significant effect of the dividend premium on the firm’s

tendency to pay,after controlling for firm characteristics.Finally, it finds that the dividend premium effect

disappears in the case of family-controlled firms. This result is in line with the long-term orientation of

familyfirms.

Research limitations/implications –The study focuses on the dividend payment behavior of French

firms. Althoughdividends are deeply engrained in France, authorsbelieve that it will be interesting to look

at the wholepayout policy and particularly therole played by share repurchases.

Practical implications –Addressingshort-term catering and managerialopportunism, the results of this

study maybe of interest for shareholders, potentialinvestors and regulators.

Originality/value –To the best of the authors’ knowledge, this is the first study that providesempirical

evidence on Baker and Wurgler(2004) catering theory by considering the particularityof French market

where, unlikethe US, percentage of dividend-payingfirms is high and the corporate ownershipstructures

are different.

Keywords Catering theory, Dividend policy, Investor sentiment

Paper type Research paper

1. Introduction

The dynamic and recurrent nature of dividend decisions and their significance for both the

financing and the investment decisions have been at the center stage of research since

long. The extant research that examines how market imperfections affect dividend

irrelevance in the firm value (Modigliani and Miller, 1961) has mainly advanced in two

streams. The first stream considers that the dividend payments not only reflect fiscal and

information considerations(signaling theory) but also allow the firms to control mangers and

limit their private benefits (agency theory). The second stream focuses on the role of

cognitive and psychological factors in driving the dividend decisions. While small variations

in taxation or investor wealth over the short to medium run may not adequately explain

investor dividend demand, Baker and Wurgler(2004) argue that the investor sentiment may

provide better insight regarding the time-varying preferences for dividends and hence the

Dhoha Trabelsi is Assistant

Professor at ESCE

International Business

School, Paris, France.

Saqib Aziz is Assistant

Professor at Rennes School

of Business, Rennes,

France. Jean-Jacques Lilti

is Full Professor at Rennes

1 University, CREM UMR

CNRS 6211 (IGR-IAE),

Rennes, France.

Received 10 February 2018

Revised 28 May 2018

Accepted 18 July 2018

PAGE 102 jCORPORATE GOVERNANCE jVOL. 19 NO. 1 2019, pp. 102-119, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-02-2018-0077

firms’ dividend offer. Departing from the extensively investigated agency and signaling

arguments, this study focuses on the catering incentives suggested by Baker and Wurgler

(2004).

Sentiments represent individuals’ irrational beliefs and anticipations regarding the

fundamentals. A greater role of sentiment in the judgments underlying investment decisions

tends to influence prices and hence widens the gap between prices and fundamentals.

Catering theory introduces a new theoretical framework of the dividend policy by relaxing

the assumptions of investor rationality and market efficiency. It uncovers the opportunistic

use of judgment errors of investor by managers to achieve short-term objectives of firms.

Since Shefrin and Statman (1984), behavioral dividend theories were not significantly

developed until the introduction of catering theory of Baker and Wurgler (2004). Baker and

Wurgler (2004) argue that the firm dividend policy reflects market variations and more

specifically the movements in the investor sentiments. Particularly, in bearish markets,

investors prefer immediate income and thus highlight a preference for dividend-paying

shares. However, in bullish markets, a general increase in investors’ appetite for growth

stocks tend to detriment the dividend payments. The theory predicts that changing

preferences affect dividend demand and lead to a price difference between paying and

non-paying stocks in the form of a dividend premium or discount[1]. To obtain this premium

(or avoid the discount), managers have an incentive to form their dividend policy as per

investors’ expectations bypaying out dividends when the demand is high and avoid paying

in the case of low demand. The empirical evidence regarding the catering incentives in the

dividend decisions is inconclusive. While Baker and Wurgler (2004)andLi and Lie (2006)

empirically substantiate the theory in the case of US, Ferris et al. (2006) provide supporting

evidence from UK. In the same vein, Hoberg and Prabhala (2009) provide mixed results as

they observe that the impact of the dividend premium tends to disappear after controlling

for the risk. Similarly, Denis and Osobov (2008) and Von Eije and Megginson (2008) find

inconsistencies across sample countries and contend the relevance of the catering

hypothesis only in common law countries. We attempt to better identify the determinants of

dividend policy in French firmsby testing catering theory. Considering the characteristicsof

French market, which is known for its high concentration of capital, we also highlight the role

family control plays in the managerial tendencies to satisfy non-informative dividend

demands.

Our sample covers French firms included in the SBF-250 index from 1992 to 2010. First, we

provide time-series analysis at aggregate level of market and show that the percentage of

payers rises with the dividend premium. Moreover, the dividend premium and the

confidence index of Frenchhouseholds exhibit a negative correlation that is indicative of the

sensitivity of dividend demand to the investor sentiment. Then, in a multivariate regression

analysis over the panel of sample firms, we find positive and statistically significant effects

of the dividend premium on the firm’s tendency to pay, after controlling for the firm

characteristics that are considered relevant in the dividend decision. Finally, we also find

that the dividend premium effects disappear in the case of family-controlled firms. This

result is in line with the long-term orientation argument aboutthe family firms.

Our contribution to the existing literature focusing on dividend policy is twofold. First,

rational theories that have beeninvestigated over the past several decades provided limited

explanation as to why firms pay dividends. We attempt to contribute in this regard by

specifically focusing on behavioral theories and how considering market inefficiencies and

investor biases can improve the explanatory power of dividend models. Second, unlike US,

the case of France is interesting as the proportion of French dividend-paying companies is

relatively high while the corporate ownership structures are different in France. We cover

this facet by addressing the role of family control in moderating the impact of catering

incentives on dividend-paying.

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