Reaching for Income, Catering, and Risk

Investors have a higher demand for and place a higher valuation on income-generating assets such as high-dividend stocks when interest rates are low (Daniel et al., 2021). We examine whether managers cater to such investor demand for income by paying dividends when interest rates are low, and by not paying when interest rates are high to boost their  rms' share prices. There is evidence of this when the controls for the known determinants of dividend policy are omitted. However, once the controls (most notably, for risk) are incorporated, the relationship disappears.