Dividend Discount Model and Catering Theory Revisited

We examine the determinants of dividend payout policy, measured using three measures - the dividend-to-net-income ratio, shares repurchased-to-net-income ratio, and the dividend plus repurchases-to-net-income ratio. Two groups of explanatory variables are considered. The first group consists of firm characteristics (including lagged ones), and the second group comprises macroeconomic indicators reflecting economic conditions. OLS regressions (with firm fixed effects and firm-clustered standard errors) as well as Random Forest, Ridge, and Lasso regressions and univariate tests, show that the price-to-earnings (P/E) ratio exhibits consistently positive and statistically significant contemporaneous association with payout intensity. These findings provide strong and robust support for the dividend discount model. In contrast, lagged valuation measures and sentiment indicators do not exhibit consistent or robust association with payout intensity. Thus, we find little evidence supporting the catering theory.