Firm Size and Dividend Payouts

This paper presents a model of large institutional and small individual investors choosing stocks. Dividend policy of firms is determined by the preferences of the resulting stockholders. Large investors choose to invest in large corporations because it lowers their transaction costs. Since these institutions prefer dividends, the large corporations choose to pay dividends, while the small corporations, owned by individuals, do not. The results show that firm size and liquidity explain the decision of whether to pay dividends well, whereas existing informational explanations (such as monitoring and signaling) explain the level of dividends well