Implication of Catering Theory of Dividend: Evidence from Financial Firms Listed on the Nigerian Stock Exchange

Abstract

The increasing number of non-payers of dividend on the Nigerian Stock Exchange stimulates the interest to re-examine the determinants of payouts decisions in the market. This necessitates seeking alternative explanation for the dividend behavior of firms beyond the traditional determinants that have been established overtime. This paper examines the implication of the catering theory of dividend on the Nigerian Stock Exchange. Based on a sample of 386 firm-year observations drawn from 49 financial firms listed on the exchange, the study investigates the role of dividend premium (proxy for catering theory) and other firm level characteristics on dividend payout of the sampled firms. Panel data analysis was conducted using both fixed effect and random effect estimates. Based on the random effect estimates which is preferred by the Hausman test conducted, findings of the study shows that dividend premium have significant positive effect on dividend payout. Thus, indicating support for the catering theory of dividend. However, result indicates further that the theory is not supported during crisis. Findings also revealed that firm level characteristics which include size, profitability, cash flow, and past dividend are significant in explaining dividend payout of the sampled firms.

Keywords: Dividend, Catering, Dividend premium, Payout