A Servant to Many Masters : Competing Shareholder Preferences and Limits to Catering

We study what determines catering through payout policy, and how the ability to cater affects firm policies. We create a catering index, measuring the extent to which the firm caters to its investors' payout preferences. Catering is constrained by market segmentation and dispersion in investor payout preferences. The ability to cater grants the firm better equity financing conditions: catering firms experience a smaller stock price drop when issuing equity, and a positive market reaction to dividend announcements. Investors react to an increase in catering by raising their investment in the firm. Firms that cater have lower leverage, and invest more through capital expenditures and acquisitions