A Test of Catering Theory of Dividend in Tehran Stock Exchange (TSE)

Catering theory of dividend is based on the idea that managers adjust dividend policy with investors’ time varying demand. In this paper، catering theory of dividend is tested in Tehran Stock Exchange (TSE) with market-level and firm-level variables for dividend premium. We run binary logistic regression for 420 firm– year observations (7 years × 60 firms) between 1386-1392 (2007-2013). We find that investors’ demand for paying or not paying dividends and for increasing or decreasing dividends has positive and significant impact on dividend decisions. These findings are in line with a stream of behavioral corporate finance and regards managers as rationally responding to irrational investors’ behavior.