Payout and firm's catering

Purpose - The purpose of this paper is to investigate whether investor sentiments exert significant influence on corporate dividend policy. Additionally it provides further evidence on the moderating role of certain firm's characteristics on the relation between dividends and investor sentiment. Design/methodology/approach - A sample of 635 firms from 12 Eurozone countries for the period of 1986-2003 has been used. A dividend model has been suggested which incorporates a variable at the firm level that proxies for the catering effect, as a measure of investor sentiments. The estimation model of dividends is based on the Generalized Method of Moments (Arellano and Bond, 1991). Findings - It can be concluded that psychological factors influence the decision to pay. Furthermore, other relevant findings show an interaction effect between catering and firm's characteristics, particularly high liquid assets, valuable investment opportunities, and higher levels of free cash flow. Research limitations/implications - Given the subjectivity inherent in creating a variable that captures the sentiment of investors, the author admits that there are other variables to consider. Also, corporate governance factors could have been introduced as well as other countries with different institutional environments. Originality/value - To the best of the author's knowledge, this is a novel approach that incorporates a variable capturing investor's sentiment at the firm level. With the approach suggested it has been shown that investors' sentiments impact dividends payout, highlighting its usefulness for managers who are expected to pay dividends according to investors' expectations. Moreover, this work also demonstrated that firm's characteristics could affect the investor sentiments for dividends also conveying a valuable contribution for investors.