INSTITUTIONAL HOLDINGS AND DIVIDEND POLICY
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This dissertation consists of two assets that study the institutional holdings and dividend policy. Chapter one studies whether institutional investors' preferences for firms vary by investing style and depend on whether their dividend policy is consistent with needs for funding growth. Chapter two examines the relationship between the industry structure of dividends and the likelihood and level of dividend initiations. Chapter one of this dissertation motivated by a result in Grinstein and Michaely (2005) that institutions prefer dividend-paying firms to non-dividend paying firms, but among dividend-paying firms prefer firms that pay lower dividends. We investigate this apparent puzzle, hypothesizing that it is not the unconditional level of dividends that matters to institutional investors, but the interaction between investment opportunities and dividend levels. We provide new insight into institutional investors' preference for payout policy by showing that this "low dividend preference puzzle" obtains because growth style institutions generally prefer firms with high investment opportunities and such firms tend to pay lower dividends. Similar results obtain when we consider total payout, which includes regular dividends, special dividends and repurchases. Chapter two find firms are more likely to initiate dividends when greater numbers of peers also pay dividends. However, firms are less likely to initiate dividends if the average dividend level in the industry is high or has an upward trend. There is also evidence that new payers try to match their industry peers in terms of dividend initiation levels. Finally, we find that announcement returns to dividend initiating firms are lower when there are more dividend payers in the industry and when industry dividends are increasing. Overall, our evidence suggests that firms are influenced by industry peers in making the dividend initiation decision.