Institutional holdings, investment opportunities and dividend policy

Accepted Manuscript Title: Institutional Holdings, Investment Opportunities and Dividend Policy Author: Wei Huang Donna L. Paul PII: DOI: Reference:

S1062-9769(16)30036-9 http://dx.doi.org/doi:10.1016/j.qref.2016.06.008 QUAECO 945

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Please cite this article as: Huang, W., and Paul, D. L.,Institutional Holdings, Investment Opportunities and Dividend Policy, Quarterly Review of Economics and Finance (2016), http://dx.doi.org/10.1016/j.qref.2016.06.008 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

Institutional Holdings, Investment Opportunities and Payout Policy Highlights

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 Interaction of payout policy and investment opportunities  Institutional investors condition preferences for dividends on need to fund growth  Investing style is an important mediator in preferences for combinations of payout levels and growth opportunities

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Wei Huang

Donna L. Paul

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College of Saint Benedict & Saint John's University Collegeville, MN 56321 320.363.3483 [email protected]

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Institutional Holdings, Investment Opportunities and Dividend Policy

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Washington State University Richland, WA 99354-1671 509.372.7233 [email protected]

We are grateful for helpful comments and suggestions from seminar participants at Washington State University and especially from George Jiang, John Nofsinger, and David Whidbee.

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Institutional Holdings, Investment Opportunities and Dividend Policy

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Abstract

This paper examines the relationship between institutional holdings and dividend policy by

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jointly considering investment style and firms’ growth opportunities. It helps to resolve the

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apparent low-dividend-preference puzzle in which institutional investors have higher holdings in dividend-paying firms, but among dividend payers, prefer firms that pay low dividends. We find

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that, controlling for style, institutional investors’ preferences for dividends are based on whether payout levels are consistent with firms’ needs to fund growth opportunities. High payout is preferred for firms with low growth opportunities, and low or no payout is preferred for firms with high growth opportunities. The results enhance our understanding of payout preferences of institutions by demonstrating the interactions of investment opportunities and investing style with respect to institutional investors’ payout preferences.

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1.

Introduction Several studies show that institutional investors exhibit preferences for firms with

specific attributes, such as high versus low growth opportunities (Bushee (2001), Sharma, Hur

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and Lee (2008)), levels of dividend payout (Hankins, Flannery and Nimalendran (2008), Yan and

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Zhang (2009)), and firm size (Bennett, Sias, and Starks (2003)). Bushee and Goodman (2007) also argue that institutional investors have better ability to acquire and process information for

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the specific type of firm in which their holdings are specialized (e.g., value or growth). This is

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supported by evidence in other studies that institutional investors have an information advantage over other investors (Nofsinger and Sias (1999), Wermers (1999, 2000), Ke and Petroni (2004),

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Amihud and Li (2006)). This information advantage underlies the premise of this paper that, in selecting firms, institutional investors not only consider their own investing style, but also

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evaluate firms’ payout policies in the context of their investment opportunities.

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Firms must consider their need to fund growth when setting dividend policy. For example,

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Brav, Graham, Harvey and Michaely (2005) find that firms meet investment and liquidity needs first, and then consider whether or not to increase the dividend. The combination of institutional investors’ preferences and information advantage, together with the need for firms to align payout policy with investment policy, lead to our hypothesis that institutional investors exhibit distinct preferences for combinations of dividend levels and investment opportunities due to their different investment styles. In this paper, we investigate the relationship between institutional holdings and dividend policy, conditioned on firms’ investment opportunities. We hypothesize that institutions will first choose firms based on their investment style (value or growth), then choose those with dividend policies consistent with the need to fund investment opportunities.

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We conduct our analysis using a sample of all firms with institutional holdings data from 1981 to 2011, merged with Compustat to obtain dividends, total payout, and firm characteristics. We classify institutional investors by growth and value styles based on Abarbanell, Bushee, and

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Raedy (2003) and Bushee and Goodman (2007), and firms are sorted based on dividend levels and investment opportunities. Proxies for investment opportunities include market-to-book value

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of assets, research and development expense, and total assets growth. In regression analysis, we

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examine the relationship between institutional holdings and the interaction of investment

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opportunities and dividend payout for growth and value investment styles.

There is a well-documented trend of disappearing dividends, where share repurchases are

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replacing dividends (Fama and French (2001), Fenn and Liang (2001), Grullon and Michaely (2002), Laurie Simon and Shoven (1989)). As an alternative payout method, repurchases provide

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firms with more flexibility in returning cash to shareholders, which is arguably one reason why

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repurchases appear to be replacing dividends (Jagannathan, Stephens, and Weisbach (2000)). In

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order to provide a complete picture of institutional investors’ preference for firms’ payout policy, our analysis is conducted for dividends, total payout (sum of repurchases and dividends), and net payout (total payout minus equity issuances). We find that growth and value style institutions differ notably in their preference for combinations of investment opportunities and payout. Growth style institutions have relatively higher holdings in firms with higher growth opportunities and no or low payout. In contrast, value style institutional investors have higher holdings in firms with higher payout and lower investment opportunities. By explicitly considering the interactions of payout policy, growth opportunities, and institutional investor style, we are able provide new insight into the payout preferences of institutional investors. In particular, we demonstrate that understanding of the 2 Page 5 of 33

dividend and payout preferences of institutions is incomplete without considering both investment opportunities and institutional investor style. Our results also provide insight on the apparently puzzling result in Grinstein and Michaely (2005) that institutional investors generally

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prefer dividend-paying firms, but have higher holdings in firms with lower dividends; we show

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that this preference obtains primarily for growth style institutional investors.

The rest of the paper is organized as follows. We develop hypotheses and describe the

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sample in the next two sections; Section 4 presents and discusses results of empirical analysis for

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institutional investor holdings, investment opportunities and payout policy by investment style.

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Section 5 reports results of additional tests, and Section 6 contains a concluding discussion.

Hypothesis Development

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In general, managers should set dividend policies consistent with their firms’ investment

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opportunities. Firms with low (high) investment opportunities should have relatively high (low)

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dividend payout (e.g., Brav, Graham, Harvey, and Michaely (2005), Jensen (1986), Lang and Litzenberger (1989), Ferris, Jayaraman and Sabherwal (2009), Renneboog and Trojanowski (2011), Gugler (2003), Fatemi and Bildik (2012)). Fatemi and Bildik (2012) examine worldwide payout policies and find that firms with low investment opportunities are more likely to pay dividends. Gugler (2003) finds that Austrian firms with low investment opportunities tend to have larger target payout ratios, and Renneboog and Trojanowski (2011) find similar results for a sample of U.K. firms. Ferris, Jayaraman and Sabherwal (2009) find that dividend payers have less growth opportunities than non-dividend payers. In addition, Lang and Litzenberger (1989) find positive announcement returns for dividend increases by firms with low investment opportunities. 3 Page 6 of 33

As discussed above in the introduction, institutional investor holdings in firms will be driven by their style (growth or value). Thus, we hypothesize that institutional investors jointly consider investment opportunities, dividend payout levels, and investment style in establishing

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their preferences for firms. High-growth firms are likely to have no or low dividend levels in order to maintain flexibility to fund growth. On the other hand, low-growth firms are likely to

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have relatively higher dividends because they do not need to retain cash to fund growth. Bushee

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and Goodman (2007) argue that institutional investors that specialize in certain types of firm should have more expertise in picking the good firms within that type. In this context, we expect

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growth and value style institutional investors to have different preferences for combinations of dividend levels and investment opportunities due to their different investment styles. Specifically,

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we expect that growth style institutional investors will have higher holdings in firms with high

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investment opportunities and no or low payout, and that value style institutional investors will

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have higher holdings in firms with low investment opportunities and high payout.

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We consider three types of firms with high growth opportunities: firms that do not pay dividends, firms that pay relatively low dividends, and firms that pay relatively high dividends. We note that firms in the last group arguably have a dividend policy that can lead to underinvestment if they do not retain sufficient cash to fund investment opportunities and external financing is costly (Myers (1984)). Our testable hypothesis is that growth style institutional investors will have higher holdings in high growth firms that pay low or no dividends. H1: Growth style institutional investors have higher holdings in firms with low dividend payout and high investment opportunities.

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Next, we consider three types of firms with low growth opportunities: firms that pay relatively high dividends, firms that pay relatively low dividends, and firms that pay no dividends. We note that firms with low investment opportunities that pay relatively low or no

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dividends have a payout policy that is inconsistent with arguments in Jensen (1986), that lowgrowth firms should have high payout to mitigate overinvestment. Firms with low investment

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opportunities that pay relatively high dividends have a payout policy consistent with Jensen’s

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prescriptions that when firms do not have good investment opportunities, they should have high payout. We hypothesize that value style investors have higher holdings in low-growth firms

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with high payout.

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H2: Value style institutional investors have higher holdings in firms with high dividend payout

Sample Formation and Descriptive Statistics

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and low investment opportunities.

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The sample comprises publicly traded firms with available 13F quarterly institutional holding data and required Compustat data from 1981 to 2011 (financial companies and utilities are excluded). Consistent with the literature (Grinstein and Michaely (2005)), we use the last quarter ending institutional holdings as the annual institutional holdings for each firm. We define institutional holdings as the number of shares held by institutional investors divided by total number of shares outstanding. We form investment style subsamples by dividing institutional investors into growth style and value style groups. Identification of value and growth styles is based on Bushee and Goodman (2007), who classify value style institutional investors as those in the top tercile of the VALUE factor and growth style institutional investors as those in the bottom tercile of the VALUE factor. The VALUE factor is developed in Abarbanell, Bushee, 5 Page 8 of 33

and Raeday (2003), who compute four factors from 15 variables that represent the investment preferences of institutions. We hypothesize that these different investment styles of institutional investors lead to different preferences for firms with distinct combinations growth opportunities

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and dividend payout.

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We measure dividends as common dividend scaled by total assets, consistent with

Grinstein and Michaely (2005). Table 1 contains mean and median institutional holdings in

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dividend-paying firms and non-dividend-paying firms for the full sample and separately for

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growth and value investment style subsamples. For the full sample (Panel A), institutional holdings are higher in dividend paying firms than non-dividend paying firms (median 38.32% for

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payers versus 17.68% for non-payers). When we examine the sample by different investment styles, we see that value style institutional investors (Panel C) have notably higher holdings in

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firms that pay dividends (median 33.68% of payers versus 14.35% of non-payers). In contrast,

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for growth style investors (Panel B), the difference in holdings between payers and non-payers,

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while statistically significant, is of much smaller magnitude (median 21.16% of payers versus 16.74% of non-payers). In additional untabulated analysis, we find that growth style institutional investors actually do have significantly higher holdings in non-dividend paying firms than dividend paying firms for the top four market cap quartiles. However, they have higher holdings in dividend paying firms in the smallest size quintile, and the latter result tempers the difference when all firms are aggregated. As a result, we control for size in later regression analysis. We now focus on the contribution of our paper, which is to evaluate payout policy in the context of firms’ investment opportunities, providing additional insights into institutional investors’ preferences for firms conditioned on investing style and firms’ growth prospects. Our testable hypothesis is that institutional investors consider the interaction of dividend levels and 6 Page 9 of 33

investment opportunities in choosing firms. In developing proxy variables for investment opportunities, we follow the literature (Fama and French (2001), Ferris, Jayaraman and Sabherwal (2009)) and use the ratio of market value to book value of assets, research and

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development expenditures scaled by total assets, and one-year growth in total assets. We

examine each of these three variables separately and also combine them into an index. The index

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is computed by dividing the sample into deciles based on the three variables, ranking them from

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0 to 9, then adding the ranks for each firm to obtain its index value. The lowest value for this index is 0 and the highest is 27. We define payout in three ways: dividends, total payout and net

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payout. As indicated above, dividends are measured as common dividend scaled by total assets. Total payout includes dividends and repurchases. Following Boudoukh, Michaely, Richardson

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and Roberts (2007), we define net payout as dividends plus repurchases minus equity issuance.

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All payout variables are scaled by total assets.

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Figure 1 illustrates six subsamples with distinct combinations of payout levels and

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investment opportunities, which we construct as follows. We divide non-payout paying firms into terciles based on investment opportunities, delete the middle tercile, and define the high tercile group with no payout as Type 1 and the low tercile group with no payout as Type 2. We then divide paying firms into payout terciles and investment opportunity terciles, and delete all middle tercile observations for payout levels or investment opportunities. In addition to Type 1 (high investment opportunities, no payout), two additional types have high investment opportunities: Type 3 firms have high investment opportunities and low payout, presumably to maintain flexibility to fund growth. Type 5 firms have high investment opportunities and high payout payout, which may lead to underinvestment (Myers (1984)). Our expectation is that growth style institutional investors will in general have higher holdings in Type 1 and Type 3

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firms. Next, in addition to Type 2 firms (low investment opportunities, no payout), we consider the additional two types of firms with low growth opportunities. Type 4 firms have low investment opportunities and low payouts. In contrast, Type 6 firms have low investment

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opportunities and high payout, consistent with the idea that when firms do not have good

investment opportunities, they should return cash to investors (Jensen (1986)). We expect that

Empirical Analysis

4. 1

Univariate Analysis

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value style institutional investors will have highest holdings in Type 6 firms.

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Table 2 shows institutional holdings for groups of firms based on the two-way sorts of dividend levels and investment opportunities described above. Panel A contains results for the

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full sample, however, we focus our discussion on results for subsamples of growth and value institutional investors presented in Panels B and C. To conserve space, we do not report test

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statistics for differences in sub-groups in the table, but do discuss which differences are statistically significant. We also focus our discussion on results for the investment opportunity index and report results for its components (market-to-book, R&D, asset growth) for information. We first examine the non-dividend-paying firms in Columns (1) and (2) of Panels B and C. For growth style institutional investors, Type 1 firms (high investment opportunities and no dividend) have significantly higher median institutional holdings of 26.69% compared to median 11.43% holdings in Type 2 firms (low investment opportunities and no dividend). In contrast, value style institutional ownership is significantly higher in Type 2 compared to Type 1 firms. This evidence is consistent with institutions choosing firms with characteristics that match their

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investment style. These results in Columns (1) and (2) obtain for non-dividend-paying firms, which comprise the majority (69.23%) of the firms in our sample. However, as Table 1 indicates, in the sample overall, median institutional holdings in dividend-paying firms are more than

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double that of non-dividend-paying firms (38.32% versus 17.68%). This indicates institutional investor preference for dividend-paying firms already documented in the literature (Grinstein and

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Michaely (2005)).

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The remaining columns (3) through (6) in Table 2 examine relative institutional holdings

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in dividend-paying firms sorted by high/low investment opportunities and high/low dividends. The results show that growth style institutional investors have significantly higher holdings in

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Type 3 firms (high investment opportunities and low dividends) than all other dividend-paying types. In addition, these Type 3 firms have the highest institutional holdings compared to all

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other types for both dividend- and non-dividend-paying. This is consistent with our expectation,

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since Type 3 firms have a combination of low dividends with high investment opportunities,

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which we expect to be the most preferred choice for growth style institutional investors. Panel C shows that value style institutional investors have highest holdings in Type 5 (high investment opportunities and high dividend) and Type 6 (low investment opportunities and high dividend) firms compared to all other firms. This suggests that value style institutional investors are attracted to firms with relatively higher dividends. We note the apparent indifference between high-dividend-paying firms with high and low investment opportunities, which at face value is inconsistent with our underlying hypothesis that value style investors will concentrate in firms with high dividends and low investment opportunities. However, this inconsistency is resolved when we control for firm characteristics in additional analysis described below and reported in Table 3. 9 Page 12 of 33

4.2

Multivariate Analysis

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We next perform conditional analysis of the relationship between institutional holdings and payout policy types by estimating regression models. The dependent variable is institutional

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holdings, defined as the number of shares held by institutional investors divided by total number

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of shares outstanding. The independent variables of interest are the types of dividend policy: Type 1 is high investment opportunities and no payout, Type 2 is low investment opportunities

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and no payout, Type 3 is high investment opportunities and low payout, Type 4 is low investment opportunities and low payout, Type 5 is high investment opportunities and high

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payout, Type 6 is low investment opportunities and high payout. We also include a Type 7 for firms in the middle terciles of payout and growth opportunities. Here, we define investment

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opportunities using the index reported in the last row of Table 2.

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Control variables are included to control for their presumed effect on payout policy and

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institutional ownership. Market to book ratio (MV/BV) controls for investment opportunities. The natural log of sales (Log(Sales)) and market cap control for size. Retained earnings scaled by total assets (RE/TA) is a proxy for firms’ life-cycle (DeAngelo, DeAngelo, and Stulz (2006)). ROA (EBITDA scaled by total assets) controls for performance and cash flow, which are important factors for firms in determining payout policy (Fama and French, 2001). Beta and market adjusted annual return (measured in the year before institutional holdings are observed) are included to control for their effects on institutional investor preferences. Annual betas are obtained using the market model, daily stock return and NYSE value weighted average return. The market adjusted annual return is calculated by year-end stock return minus year-end NYSE value weighted average return. 10 Page 13 of 33

The relationship between institutional holding and a firm’s payout policy can be driven by many factors, some of which may not be observable. In order to control for unobserved heterogeneity, we use panel data and two-way fixed effects models. Firm fixed effects control for

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time-invariant and unobserved firm characteristics, and time fixed effects control for time-series heterogeneity. We use panel data and two-way fixed effects as indicated in equation (1) below

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(Park (2009)).

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IOi ,t 1     X i ,t   i   t   i ,t

(1)

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where X i ,t are all the independent variables, i are firm fixed effects and t are time fixed effects. We estimate within effects for the two-way fixed effect models.

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Many studies use this method to control for unobserved heterogeneity and to address the endogeneity problem. For example, Short, Zhang and Keasey (2002) and Park (2009) use panel

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data and fixed effects methods to examine the relationship between institutional ownership and

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dividend payout ratio. Rubin and Smith (2009) use fixed effects panel regressions to investigate

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how a firm’s dividend policy affects the relationship between institutional ownership and stock return volatility. In examining the relationship between firm payout policy and institutional tax incentives, Desai and Jin (2011) also consider year fixed effects and industry fixed effects. Hartzell and Starks (2003) use fixed effects in their study of the relationship between institutional ownership concertation and executive compensation. Himmelberg, Hubbard and Palia (1999) use panel data and control for firm fixed effects to examine the relationship between managerial ownership and firm performance. Palia (2001) also uses fixed effects and panel data models to control for unobservable heterogeneity in a study of the relationship between firm value and managerial ownership.

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Table 3 contains coefficients for regression models of institutional holdings on the mix of payout and growth opportunities. Columns (1) through (3) contain results for growth style institutional investors. The coefficient on the Type 3 (high investment opportunities and low

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payout) dummy is significantly positive and higher than the coefficients on all other types,

especially for net payout. Results for value style institutional investors in columns (4) though (6)

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show that the coefficient on the Type 6 dummy (Low investment opportunities and high

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dividends) is significantly positive and higher than all other types. We note that, although univariate results in Table 2 appeared to show an indifference by value style investors between

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high and low growth opportunity firms, results here indicate a distinct ranking in favor of high

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dividend / low growth firms.

In unreported analysis, we compute standardized coefficients to evaluate the economic

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and statistical significance of differences in these independent variables’ effects on the dependent

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variable, and find support for our conclusions above. The standardized coefficient indicates how

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many standard deviations a dependent variable will change for every standard deviation increase in the independent variable. This provides a clearer picture of the economic and statistical significance of the effect of the variable of interest relative to other variables. For example, for growth style investors, in the Dividend regression in Column (1) of Table 3, the standardized coefficient for Type 1 (high growth, no payout) is 0.2016, higher than all other types. In additional unreported tests, we also include growth opportunities and payout as dependent variables to check whether the interaction of these two variables drive the results and find that our results are robust to their inclusion. Our results indicate that institutional investors have clear preferences for firms’ dividend and payout policy conditioned on their investment opportunities. We perform additional tests to 12 Page 15 of 33

alleviate endogeneity concerns, in that firms might be tailoring their dividend policies in order to attract institutions. Following Grinstein and Michaely (2005), we use the vector-autoregressive regressions (VAR) methodology to examine causality effects between institutional holdings and

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payout, with lead institutional holdings or lead dividend levels as the dependent variable. The independent variables are current institutional holdings and current dividends. Results are

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reported in Table 4, which contains p-values and coefficient estimates of current dividend level

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when the dependent variable is lead institutional holdings, and p-values and coefficient estimates of current institutional holdings when the dependent variable is lead dividend level. We find that

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during most years the p-values are not significant if we use lead institutional holdings or lead dividend level as the dependent variable, for both growth and value style institutional investors.

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This indicates that there is no clear causality relationship between dividend levels and

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institutional holdings.

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Our evidence is consistent with institutional investors first choosing firms based on their

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investment style, and second, within the set of firms that match their style, favoring firms with dividend policies that align with the investment opportunity set. These results highlight the importance of considering both institutional investor style and firms’ investment opportunities in any study of the relationship between institutional holdings and payout policies. Our results also shed light on the institutional investor preference for low dividends documented in Grinstein and Michaely (2005). Growth style institutional investors prefer firms with high growth opportunities, but they also want these firms to have a dividend policy that maintains flexibility to fund growth.

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5.

Additional Tests

5.1

Funding Payouts

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In developing dividend policy, we expect that firms would not only condition on investment opportunities, but also consider their cash flow available to fund payouts to investors.

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Benartzi, Michaely and Thaler (1997) document that firms change dividend levels based on

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changes in past earnings; dividend increasing firms have significant increase in earnings in the previous year, and dividend decreasing firms have a decrease in earnings in the previous year. In

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light of this, we examine the relationship between institutional holdings and payout policy for subsamples of firms with high and low cash flow, using EBITDA scaled by total assets (ROA) as

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a proxy for cash flow. “Low cash flow” firms are in the lowest tercile of ROA and “high cash flow” firms are in the highest tercile of ROA. Table 5 contains two-way fixed effects regression

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coefficients for these cash flow subsamples. We first discuss results in Panel A for growth style

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institutional investors. Columns (1) and (2) contain results for dividends and show that for low

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cash flow firms, the only significant coefficient is the positive sign on the Type 1 dummy (high investment opportunities, no dividend). In contrast, for high cash flow firms, the Type 3 dummy (high investment opportunity, low dividend) has the highest coefficient, followed by significant and positive coefficients on Type 1 and Type 5 (high investment opportunity, high dividend), respectively. These results suggest that institutional investors consider firms’ available cash flow to pay dividends, showing a preference for high growth firms with low cash flow to pay no dividends. Columns (3) and (4) report results for total payout. For both low cash flow and high cash flow firms, Type 1, Type 3 and Type 5 dummies (high growth firms) all have significantly positive coefficients. Total payout contains special dividends and repurchases, which do not 14 Page 17 of 33

represent a long-term commitment compared to regular dividends. Therefore, total payouts are not as restricted to available cash flow as dividends. For example, a stock repurchase could be funded with a stock of cash available rather than current cash flow. Thus, it is not surprising that

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results here do not show notable distinctions between high and low cash flow firms. Columns (5) and (6) contain coefficients for net payout. For high cash flow firms, we find similar patterns in

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that Type 1, Type 3 and Type 5 dummies all have significantly positive coefficients.

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Results for value style institutional investors are reported in Panel B. First, we note that

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the negative coefficients throughout for Type 2 firms (low growth, no payout) indicate aversion to no payout firms by value style investors; the negative coefficients are of greater magnitude

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when these firms have high cash flow and have no payouts. The remaining results do not show

Dividends scaled by cash flow

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distinctive differences between high and low cash flow firms.

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Throughout this study, we follow Grinstein and Michaely (2005) and scale dividends by total assets. A cash flow scalar is arguably more appropriate given our underlying hypothesis that dividend policy must accommodate the need to fund investment opportunities. Following Guay and Harford (2000), we define cash flow from operations as operating income before depreciation minus interest minus taxes minus change in working capital. We then re-estimate the regression models using the cash flow scalar for dividends and total payouts, and report results in Table 6. Columns (1) to (3) contain results for growth style institutional investors. For dividends and total payout, coefficients on the Type 1 dummy (high investment opportunities, no payout) are significantly positive and higher than the coefficients on all other types. For net payout, coefficients on Type 3 dummy (high investment opportunities, low payout) and Type 5 15 Page 18 of 33

dummy (high investment opportunities and high payout) are significantly positive and higher than the coefficients on all other types. For value style institutional investors (Columns (4) and (6)), Type 6 dummy (low institutional ownership and high dividends/total payouts) has

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significantly positive coefficient and higher than coefficients on all other types. These results are

Sequential sorting

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generally consistent with earlier analysis for dividends and total payouts scaled by assets.

In the main tests, we define payout policy types by individual sorting. Using this

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approach each group will have different numbers of observations. For individual sorting, we rank

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investment opportunity variables by terciles, and also rank dividends/repurchases by tercile separately, then use the rank of investment opportunity variables and rank of dividends/total

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payouts to define payout policy types. For example, if a firm has investment opportunities in

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highest tercile group, and has dividends in highest tercile group, then we define this firm as a Type 3 firm. We check whether our results are robust to using sequential sorting to define payout

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policy types. For sequential sorting, we rank investment opportunity variables by tercile first, and then within each tercile group, we rank dividends by tercile. Therefore, the sequential sorting approach has approximately equal numbers of observations for each type. Results (not reported in tables) are consistent with earlier analysis for dividends and total payouts scaled by assets.

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Conclusion This paper provides new insights into institutional investor preference for dividend policy

by showing how the interaction between firms’ investment opportunities and dividend policy influence institutional holdings. We first document that growth style institutional investors have 16 Page 19 of 33

higher holdings in firms with high investment opportunities and that value style institutional holdings are higher in firms with low investment opportunities. This is an obvious first-order effect. A less obvious second-order effect is that, within the set of firms that match their style,

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institutions prefer firms with dividend policies aligned to their investment opportunities. Growth style institutional investors have higher holdings in growth firms with low dividends or no

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dividend, and value style institutional investors have higher holdings in value firms with high

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dividends. Institutional investors have similar preference for total payouts as they have for dividends. We also find suggestive evidence that available cash flow is an important

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consideration for institutional investors when choosing firms based on the interaction of their investment opportunities and payout policy. Our results highlight the importance of investigating

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institutional investors’ preference for payout policy conditioned on both investment opportunities

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and institutional investor style.

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the past? Journal of Finance 52 (July): 1007–34.

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Benartzi, S., R. Michaely, and R. H. Thaler. 1997, Do changes in dividends signal the future or

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Bennett, J., R. Sias, and L. Starks. 2003. Greener Pastures and the Impact of Dynamic Institutional Preferences, Review of Financial Studies 16:1203-38

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Boudoukh, J., R. Michaely, M. Richardson, and M. Roberts. 2007. On the importance of

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measuring payout yield: Implications for empirical asset pricing. Journal of Finance 62:877–

Brav, A., Graham, J. R., Harvey, C. R., and Michaely, R. 2005, Payout policy in the 21st century.

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Journal of Financial Economics, 77(3): 483-527. Bushee, B. 2001. Do Institutional Investors Prefer Near-Term Earnings over Long-Run Value? Contemporary Accounting Research 18:207-46. Bushee, B. J. and Goodman, T.H. 2007, Which Institutional Investors Trade Based on Private Information About Earnings and Returns? Journal of Accounting Research, 45: 289–321. DeAngelo, H., DeAngelo, L., and Stulz, R. M. 2006, Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory. Journal of Financial Economics, 81(2): 227-254. Del Guercio, D. 1996. The Distorting Effect of the Prudent-Man Laws on Institutional Equity Investment. Journal of Financial Economics 40:31-62.

18 Page 21 of 33

Desai, M., and L. Jin, 2011, Institutional tax clienteles and payout policy, Journal of Financial Economics 11, 68-84. Falkenstein, E. 1996. Preferences for Stock Characteristics as Revealed by Mutual Fund

ip t

Portfolio Holdings. Journal of Finance 51:111-35.

Fama, E. F., and French, K. R. 2001, Disappearing dividends: changing firm characteristics or

cr

lower propensity to pay? Journal of Financial Economics, 60(1): 3-43.

Journal of Financial Economics, 60(1): 45-72.

us

Fenn, G. W., and Liang, N. 2001, Corporate payout policy and managerial stock incentives.

an

Fatemi, A. M. and R. Bildik 2012, Yes, Dividends Are Disappearing: Worldwide Evidence, Journal of Banking and Finance, Vol. 36, No. 3, pp. 662–77.

M

Ferris, S., N. Jayaraman, and S. Sabherwal, 2009, Catering effects in corporate dividend policy:

d

The international evidence, Journal of Banking and Finance 33, 1730- 1738.

te

Grinstein, Y., and Michaely, R. 2005, Institutional Holdings and Payout Policy. The Journal of Finance, 60(3): 1389-1426.

Ac ce p

Grullon, G., and Michaely, R. 2002, Dividends, Share Repurchases, and the Substitution Hypothesis. The Journal of Finance, 57(4): 1649-1684. Guay, W., and Harford, J. 2000, The cash-flow permanence and information content of dividend increases versus repurchases. Journal of Financial Economics, 57(3): 385-415. Gugler, K. 2003, Corporate Governance, Dividend Payout Policy, and the Interrelation Between Dividends, R&D, and Capital Investment, Journal of Banking and Finance, Vol. 27, No. 7, pp. 1297–321 Hankins, K. W., M. Flannery, and M. Nimalendran, 2008, The effect of fiduciary standards on institutions’ preference for dividend-paying stocks, Financial Management 37:647–71.

19 Page 22 of 33

Hartzell, Jay C., and Laura T. Starks, 2003, Institutional investors and executive compensation, Journal of Finance 58, 2351—2374. Himmelberg, Charles P., R. Glenn Hubbard, and Darius Palia, 1999, Understanding the

ip t

determinants of managerial ownership and the link between ownership and performance, Journal of Financial Economics 53, 353–84.

cr

Holder, E. M, Langrehr, W. F, and Hexter, L. J. 1998, Dividend Policy Determinants: An

us

Investigations of Influence of stakeholder Theory, Financial Management, Vol 27, No. 3, pp73-82.

an

Jagannathan, M., Stephens, C. P., and Weisbach, M. S. 2000, Financial flexibility and the choice between dividends and stock repurchases. Journal of Financial Economics, 57(3): 355-384.

M

Jensen, M. C. 1986, Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. The

d

American Economic Review, 76(2): 323-329.

te

Ke, B., and K. Petroni. 2004. How Informed Are Actively Trading Institutional Investors? Evidence from Their Trading Behavior Before a Break in a String of Consecutive Earnings

Ac ce p

Increases. Journal of Accounting Research 42:895-927. Lang, L. H. P., and Litzenberger, R. H. 1989, Dividend announcements: Cash flow signalling vs. free cash flow hypothesis? Journal of Financial Economics, 24(1): 181-191. Laurie Simon, B., and Shoven, J. B. 1989, Cash Distributions to Shareholders. The Journal of Economic Perspectives, 3(3): 129-140. Myers, S. C. 1984, The Capital Structure Puzzle. The Journal of Finance, 39(3): 575-592. Nofsinger, J., and R. Sias. 1999. Herding and Feedback Trading by Institutional and Individual Investors. Journal of Finance 54:2263-95.

20 Page 23 of 33

Palia, Darius, 2001. The endogeneity of managerial compensation in firm valuation: A solution. Review of Financial Studies 14:3, 735-764. Park, H. M. (2009). Linear regression models for panel data using SAS, Stata, LIMDEP and

ip t

SPSS. Working Paper, Center for Statistical and Mathematical Computing, Indiana University.

us

Journal of Banking and Finance. Vol. 35(6), pp. 1477-1490

cr

Renneboog, L. and G. Trojanowski 2011, Patterns in Payout Policy and Payout Channel Choice,

Rubin, Amir, and Daniel R. Smith, 2009, Institutional Ownership, Volatility and Dividends,

an

Journal of Banking & Finance 33(4), 627-639.

Sharma, V., J. Hur and H. Lee,2008, Glamour versus Value: Trading Behavior of Institutions

M

and Individual Investors, The Journal of Financial Research, vol 31, p.p. 65-84.

d

Short, H., Zhang, H. and Keasey, K., 2002, The link between dividend policy and institutional

te

ownership, Journal of Corporate Finance, vol. 8(2), pp. 105-22 Wermers, R., 1999, Mutual Fund Herding and the Impact on Stock Prices, Journal of Finance,

Ac ce p

54, 581-622.

Wermers, R., 2000, Mutual Fund Performance: An Empirical Decomposition into Stock Picking Talent, Style, Transactions Costs, and Expenses, Journal of Finance, 55, pp. 1655-1695. Yan, X., and Z. Zhang, 2009, Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed? Review of Financial Studies 22(2): 893–924.

21 Page 24 of 33

Figure 1

ip t

None Low Median High

Type 6

cr

Type 5

Ac ce p

te

d

M

an

us

Payout Level

Investment Opportunities High Median Low Type 1 Type 2 Type 3 Type 4

22 Page 25 of 33

Table 1: Institutional Holdings in Dividend-Paying and Non-Dividend-Paying Firms

Panel A: Full Sample N

Pay

N

Differences (P-Value)

Mean

27.09

85064

39.99

37803

0.0000

(Median)

(17.68)

(38.32)

cr

Non-pay

ip t

The sample comprises publicly traded U.S. firms with available 13F quarterly institutional holdings data from 1981 to 2011, except for financial companies and utilities. Percentage institutional holdings are year-end institutional holdings divided by total shares outstanding. All firm characteristics variables are obtained from Compustat. Growth and value style institutional investor classification follows Bushee and Goodman (2007).

us

(0.0000)

Panel B: Growth Style Institutional Investors N

Pay

N

Mean

25.97

65555

27.88

32702

(Median)

(16.74)

Differences (P-Value)

an

Non-pay

(21.16)

0.0000

M

(0.0000)

N

te

Non-pay

d

Panel C: Value Style Institutional Investors

23.75

(Median)

(14.35)

70637

N

Differences (P-Value)

37.93

31267

0.0000

(33.68)

(0.0000)

Ac ce p

Mean

Pay

23 Page 26 of 33

ip t

Table 2: Institutional Holdings by Dividend Levels and Investment Opportunities

us

cr

The sample comprises publicly traded U.S. firms with available 13F quarterly institutional holdings data from 1981 to 2011, except for financial companies and utilities. Percentage institutional holdings are year-end institutional holdings divided by total shares outstanding. Dividends are scaled by total assets. All firm characteristics variables are obtained from Compustat. Market cap is year-end stock price times year-end common shares outstanding. Market to book value is market cap plus total assets minus common equity divided by total assets. R&D/TA is research and development scaled by total assets. The index is computed by dividing the sample into deciles based on the three investment opportunities variables, ranking them from 0 to 9, then adding the ranks for each firm. Growth and value style institutional investor classification follows Bushee and Goodman (2007).

(1)

(2)

High-Growth Non-Div

Low-Growth Non-Div

Holding

N

Holding

N

Mean

31.14

28301

22.39

23863

(Median)

(22.35)

Mean

30.17

(Median)

(21.49)

Mean

32.66

(Median)

(25.12)

Mean

32.93

(Median)

(25.38)

Growth Total Asset Index

30289

27.03 (17.13)

26790

21.86 (12.30)

30513

22.35

(13.20)

(4)

(5)

(6)

Low-Growth Low-Div

High-Growth High-Div

Low-Growth High-Div

Holding

N

Holding

N

Holding

N

Holding

N

50.68

1229

30.18

6683

48.85

4574

29.85

1841

(52.34)

36087

45.30

ed

R&D/TA

(14.12)

(23.66)

1119

(43.90)

28728

39.68

24203

50.27

35.63

(51.10) 8528

(29.77) 3908

(35.80)

ce pt

MV/BV

(3)

High-Growth Low-Div

40.60

(51.26)

32.40 (25.67)

2739

(51.74) 2336

(36.84) 1805

47.76

(27.31)

42.19

48.04 (50.76)

5494

(38.46) 2464

(42.32) 5880

40.10

41.80

2705

(41.38) 4168

34.70

2500

(32.42)

Ac

Investment Opportunities

M an

Panel A: Full sample

24 Page 27 of 33

ip t cr

Table 2 - Continued Panel B: Growth Style Institutional Investors

Growth Total Asset Index

(3) High-Growth Low-Div

Holding

N

Holding

N

Holding

N

Mean

32.92

21422

19.97

17951

44.37

1113

(Median)

(25.43)

Mean

29.92

(Median)

(21.60)

Mean

33.56

(Median)

(26.30)

Mean

33.67

(Median)

(26.69)

(11.62) 23387

25.77

20426

21.61

23319

20.01

(Median)

(14.52)

Mean

24.91

(Median) Growth Total Asset

Mean (Median)

Index

24.40

(Median)

(16.19)

N

Holding

N

Holding

N

19.98

5529

36.51

4135

20.30

1552

25.62

7022

(17.90)

32.72

3387

1663

(15.23)

33.96

2259

(29.97)

24.29

2163

(17.99)

41.26

(31.73)

4892

(13.76)

4670

(20.66)

35.13

2034

(29.28)

20.55

27.72

25.04

2374

(19.15)

36.84

3562

(32.47)

20.98

2124

(15.23)

(4)

(5)

(6)

Low- Growth Non-Div

High- Growth Low-Div

Low- Growth Low-Div

High- Growth High-Div

Low- Growth High-Div

N

Holding

N

Holding

N

Holding

N

Holding

N

Holding

N

22988

26.80

19263

35.12

1038

34.72

5462

39.04

3732

38.76

1530

(18.57)

25021

21847

(17.72)

Mean

Holding

(3)

(16.59) 25.81

1024

(38.32)

ce pt

R&D/TA

23.15

17727

(6) Low-Growth High-Div

(2)

High-Growth Non-Div

Mean

34.81

(26.01)

(11.43)

Ac

MV/BV

21668

(5)

High-Growth High-Div

(13.14)

(29.17)

(12.30)

(1)

Holding

26069

(16.63)

Panel C: Value Style Institutional Investors Investment Opportunities

(42.25)

(4)

Low-Growth Low-Div

M an

R&D/TA

(2) Low-Growth Non-Div

ed

MV/BV

(1) High-Growth Non-Div

us

Investment Opportunities

21553

26.99

28396

(18.39) 23.61

(17.34)

39.73

(29.31) 856

(36.02) 23479

(14.06) 26.24

(29.31)

36.09

37.97

6976

(30.46) 3200

(30.37) 19443

35.73

(35.16)

40.36

(32.92)

35.48 (30.34)

2051

(43.26) 1782

(35.87) 1121

44.94

(34.41)

36.95

40.51 (36.79)

4461

(34.79) 1915

(31.70) 4798

38.80

43.17

2221

(41.73) 2529

41.31

2087

(38.50)

25 Page 28 of 33

Table 3: Regression Analysis of Institutional Holdings on Payout and Growth Opportunity Mix

Growth Style Institutional Investors

6.7345***

7.4575***

2.6416***

(0.0000)

(0.0000)

(0.0000)

0.0130

-1.5725***

(0.9795)

(0.0005)

7.6615***

7.5725***

7.8165***

(0.0000)

(0.0000)

(0.0000)

Type 4 (Low Growth, Low Payout)

0.1976

0.2777

(0.7832)

(0.5934)

Type 5 (High Growth, High Payout)

5.9125***

5.6732***

(0.0000)

(0.0000)

Type 3 (High Growth, Low Payout)

Type 7 (All others)

2.6872*** (0.0002)

Log(sale) Market Cap RE/TA ROA

-1.7468***

-1.5597***

-1.4041**

(0.0000)

(0.0000)

(0.0149)

-0.5483

0.1902

1.4861***

(0.4148)

(0.6576)

(0.0087)

2.4261***

0.2767

1.2342*

(0.1815)

(0.0000)

(0.4896)

(0.0931)

-1.3103**

0.9023**

0.6427

(0.0156)

(0.0224)

(0.2957)

3.1769***

3.2293***

4.2846***

(0.0000)

(0.0000)

(0.0000)

3.2661***

2.9834***

1.2521***

1.7107***

2.6923***

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

-0.9093

-2.7978***

-0.9948

0.7773

-1.5981***

(0.8605)

(0.2912)

(0.0000)

(0.6088)

(0.2420)

(0.0029)

-0.0099

-0.0088

-0.0117

-0.0127*

-0.0113

-0.0131*

Ac ce p

MV/BV

0.3803

Net Payout (6)

5.3849*** (0.0000)

te

Payout (scaled by total asset)

0.8122

d

Type 6 (Low Growth, High Payout)

Total Payout (5)

an

-1.0063 (0.1137)

Dividends (4)

cr

Net Payout (3)

M

Type 2 (Low Growth, No Payout)

Total Payout (2)

Value Style Institutional Investors

us

Type 1 (High Growth, No Payout)

Dividends (1)

ip t

The sample comprises publicly traded U.S. firms with available 13F quarterly institutional holdings data from 1981 to 2011, except for financial companies and utilities. The dependent variable in the regression is institutional holdings scaled by total number of shares outstanding. All firms’ characteristics variables are obtained from Compustat. MV/BV is market cap plus total assets minus common equity divided by total assets. Market cap is year-end stock price times year-end common shares outstanding. ROA is EBITDA divided by total assets. RE/TA is retained earnings scaled by total assets. Annual betas are computed using market model, daily stock return and NYSE value weighted average return. The market adjusted annual return is calculated by year-end stock return minus year-end NYSE value weighted average return. Growth and value style institutional investor classification follow Bushee and Goodman (2007). All independent variables are measure in year before institutional holdings. P-values are in parentheses. (Growth: investment opportunities; Dividends: dividends/total assets; Total Payout: (dividend + repurchase)/total assets, Net Payout: (dividends + repurchases – issuance)/total assets)

(0.2332)

(0.2912)

(0.1621)

(0.0680)

(0.1048)

(0.0602)

1.3830***

1.4280***

1.4523***

4.2255***

4.2538***

4.2015***

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

0.0024

0.0036

0.0056

-0.1718***

-0.1727***

-0.1707***

(0.7993)

(0.6995)

(0.5511)

(0.0000)

(0.0000)

(0.0000)

0.0209***

0.0192***

0.0137*

0.0121**

0.0123**

0.0096

(0.0035)

(0.0076)

(0.0568)

(0.0400)

(0.0370)

(0.1010)

0.1270

0.1469

0.2455*

0.0809

0.0946

0.1387

(0.3927)

(0.3233)

(0.0991)

(0.6010)

(0.5410)

(0.3707)

Beta

0.0087**

0.0088**

0.0090**

0.0025

0.0029

0.0029

(0.0168)

(0.0158)

(0.0138)

(0.4502)

(0.3814)

(0.3814)

Adjusted Return

0.1715***

0.1692***

0.1571***

0.1185***

0.1180***

0.1107***

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

6.3890

6.2326

2.5614

36.4525***

35.7544***

38.7659***

(0.5059)

(0.5163)

(0.7895)

(0.0000)

(0.0000)

(0.0000)

Yes

Yes

Yes

Yes

Yes

Yes

63530

63530

63530

68060

68060

68060

0.4686

0.4678

0.4691

0.5875

0.5873

0.5880

Intercept

Firm/Year Effects Number of observations 2

R

26 Page 29 of 33

Table 4: Vector Auto Regressive Coefficients by Year This table reports results of vector-autoregressive regressions by years. The independent variables are Holding (t) and Dividend (t). When the dependent variable is Holding (t+1), the table reports coefficient estimates and p-values of Dividend (t). When the dependent variable is Dividend (t+1), the table reports coefficient estimates and p-values of Holding (t). The analysis is performed on a sample of publicly traded U.S. firms with available 13F quarterly institutional holdings data from 1981 to 2011, except for financial companies and utilities. Percentage institutional holdings (Holding) are year-end institutional holdings divided by total shares outstanding. Dividends are scaled by total assets. Growth and value style institutional investor classification follows Bushee and Goodman (2007).

P-Value

Year

Estimate

P-Value

1981

0.0010

0.1633

0.0007

0.3762

1982

-0.0004

0.6520

0.0005

0.6281

1981

0.2880

0.2965

1982

-0.0133

0.9693

1983

-0.0002

0.8524

0.0007

0.4470

1983

0.5802

1984

-0.0029

0.2854

-0.0019

0.2830

1984

-0.4190

1985

0.0031

1986

0.0145

0.6348

0.0006

0.9141

1985

-0.2649

0.0326

0.0053

0.4008

1986

0.2069

1987

0.0224

0.0438

-0.0023

0.8068

1987

0.1629

1988

0.0266

0.0014

0.0106

0.1770

1988

0.1306

1989

0.0102

0.3341

0.0167

0.0731

1989

1990

0.0081

0.0246

-0.0068

0.0479

1990

1991

0.0019

0.4962

-0.0002

0.9405

1992

0.0056

0.4937

0.0040

0.5755

1993

-0.0054

0.1636

-0.0001

0.9851

1994

-0.0072

0.3094

0.0052

0.1779

1995

0.0176

0.0479

-0.0030

0.6056

1996

0.0023

0.7622

0.0078

1997

-0.0044

0.2030

0.0035

1998

-0.0021

0.4734

0.0016

1999

0.0016

0.5632

-0.0087

2000

0.0014

0.1863

2001

-0.0014

2002

-0.0026

2003 2004

ip t

Estimate

Estimate

P-Value

0.5224

0.0300

0.3279

0.1193

0.0273

0.1785

0.5116

0.0949

0.3895

0.1198

0.1356

0.3320

0.0641

0.0323

-0.2147

0.0635

0.0966

0.0570

0.5658

0.2179

-0.1560

0.1683

0.0531

0.7133

-0.1439

0.2885

0.3474

0.0007

0.0929

0.2589

1991

-0.0771

0.6758

0.1629

0.2909

1992

-0.0906

0.5398

0.2295

0.0647

1993

-0.2612

0.0571

0.2600

0.0629

1994

0.0024

0.9873

-0.1700

0.2508

1995

0.0018

0.9824

0.1303

0.2972

0.2245

1996

0.0442

0.5994

-0.0468

0.5978

0.2368

1997

0.2254

0.0115

0.1195

0.2729

0.5321

1998

0.4386

0.0394

-0.1809

0.5014

0.0001

1999

0.1675

0.4314

-0.2208

0.2553

0.0012

0.3576

2000

0.2834

0.1701

-0.1997

0.3944

0.5050

-0.0013

0.4396

2001

-0.4158

0.2318

-0.0639

0.8414

0.4231

-0.0073

0.0356

2002

0.1052

0.5401

-0.1735

0.3625

0.0030

0.8909

-0.0022

0.7439

2003

-0.7103

0.0491

-0.6305

0.0252

0.0018

0.8841

-0.0287

0.0206

2004

-0.0763

0.7064

-0.5315

0.0010

cr

P-Value

te

d

an

Estimate

Value

us

Value

Ac ce p

Year

Dependent Variable: Dividend (t+1) Growth

M

Dependent Variable: Holding (t+1) Growth

2005

-0.0079

0.0543

-0.0155

0.0126

2005

0.2157

0.2875

-0.1647

0.3664

2006

-0.0008

0.9105

-0.0141

0.1613

2006

-0.7690

0.0003

-0.0524

0.8097

2007

-0.0123

0.1208

-0.0362

0.0004

2007

0.0870

0.6056

-0.2659

0.1593

2008

0.0061

0.3355

-0.0102

0.4962

2008

-0.0748

0.1783

-0.4707

0.0466

2009

-0.0153

0.2468

-0.0266

0.4879

2009

0.0009

0.9959

-0.2068

0.6118

2010

-0.0045

0.2411

-0.0118

0.2898

2010

-0.0242

0.9004

-0.4468

0.1348

27 Page 30 of 33

Table 5: Regression Analysis of Institutional Holdings on Payout and Growth Opportunity Mix by Subsamples of High and Low Cash Flow Firms

cr

ip t

The sample comprises publicly traded U.S. firms with available 13F quarterly institutional holdings data from 1981 to 2011, except for financial companies and utilities. The dependent variable in the regression is institutional holdings scaled by total number of shares outstanding. All firms’ characteristics variables are obtained from Compustat. MV/BV is market cap plus total assets minus common equity divided by total assets. Market cap is year-end stock price times year-end common shares outstanding. RE/TA is retained earnings scaled by total assets. Annual betas are computed using market model, daily stock return and NYSE value weighted average return. The market adjusted annual return is calculated by year-end stock return minus year-end NYSE value weighted average return. Growth and value style institutional investor classification follow Bushee and Goodman (2007). ROA is EBITDA divided by total assets. “Low cash flow” is lowest tercile of ROA. “High cash flow” is highest tercile of ROA. Total payout include regular dividend and repurchase. All independent variables are measure in year before institutional holdings. P-values are in parentheses. (Growth: investment opportunities; Dividends: dividends/total assets; Total Payout: (dividend + repurchase)/total assets, Net Payout: (dividends + repurchases – issuance)/total assets) Panel A: Growth Style Institutional Investors

Type 4 (Low Growth, Low Payout) Type 5 (High Growth, High Payout)

Low ROA

4.2724**

6.0136***

6.3435***

(0.0302)

(0.0000)

(0.0000)

-2.1670

0.1180

0.1075

MV/BV Log(sale) Market Cap RE/TA Beta Adjusted Return Intercept

Firm/Year Effects Number of observations 2

R

(6) High ROA

6.2144***

1.0071

4.4641***

(0.0000)

(0.4272)

(0.0005)

0.5365

-0.7812

-0.8940

(0.9180)

(0.9154)

(0.6454)

(0.4215)

(0.4602)

0.3833

7.7348***

6.3711***

7.9750***

7.0847***

6.8390***

(0.9155)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

-1.5648

3.2185**

0.2671

2.1591*

0.6923

2.6751

(0.4460)

(0.0286)

(0.8007)

(0.0800)

(0.5540)

(0.1031)

0.6629

5.7455***

5.1540***

4.4146***

6.6795***

4.9572***

(0.0000)

(0.0000)

(0.0000)

(0.0089)

(0.0000)

3.0816***

3.1638***

3.3711***

3.4192***

3.1060***

te

1.1403

(0.5555)

(0.0007)

(0.0008)

(0.0000)

(0.0000)

(0.0000)

-3.0645

1.1537

-1.7767*

-0.5405

-2.6323***

-2.7141

(0.3694)

(0.7389)

(0.0723)

(0.7826)

(0.0000)

(0.2154)

-0.0105

0.7941***

-0.0094

0.8790***

-0.0123

0.8252***

(0.3961)

(0.0000)

(0.4457)

(0.0000)

(0.3231)

(0.0000)

1.1967***

1.2302***

1.1864***

1.4020***

1.2485***

1.2985***

(0.0000)

(0.0013)

(0.0000)

(0.0003)

(0.0000)

(0.0008)

0.8983***

-0.0194*

0.9143***

-0.0192*

0.8920***

-0.0166

(0.0000)

(0.0910)

(0.0000)

(0.0957)

(0.0000)

(0.1480)

0.0213***

0.0452

0.0199***

0.0531

0.0176***

0.0429

(0.0000)

(0.8819)

(0.0004)

(0.8614)

(0.0017)

(0.8879)

-0.0064

0.0280***

-0.0063

0.0278***

-0.0062

0.0277***

Ac ce p

Payout (scaled by total asset)

(5)

Low ROA

(0.2667)

(0.8756) Type 7 (All the others)

Net Payout

High ROA

an

Type 3 (High Growth, Low Payout)

(2) High ROA

M

Type 2 (Low Growth, No Payout)

(1) Low ROA

d

Type 1 (High Growth, No Payout)

Total Payout (3) (4)

us

Dividends

(0.2212)

(0.0074)

(0.2329)

(0.0080)

(0.2395)

(0.0083)

0.1280***

0.4141***

0.1247***

0.4164***

0.1104***

0.4035***

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

8.8640

4.8865

7.3358

4.0663

3.8221

4.3959

(0.3459)

(0.6592)

(0.4280)

(0.7135)

(0.6786)

(0.6911)

Yes

Yes

Yes

Yes

Yes

Yes

18149

19225

18149

19225

18149

19225

0.5250

0.5006

0.5248

0.5503

0.5278

0.5007

28 Page 31 of 33

Table 5 – Continued Panel B: Value Style Institutional Investors Dividends

Total Payout (10)

(12)

High ROA

Low ROA

High ROA

-1.7645***

-2.3039**

0.6084

-2.2692*

(0.0000)

(0.0006)

(0.0128)

-0.2509

-0.3880

0.6257

(0.9182)

(0.8042)

(0.5852)

(0.4262)

Type 4 (Low Growth, Low Payout)

1.8641**

4.0945***

-0.0155

2.8250***

(0.0170)

(0.0018)

(0.9800)

(0.0090)

(0.0024)

(0.1693)

Type 5 (High Growth, High Payout)

7.8109**

-1.7026**

-0.0617

0.7267

6.1566***

-0.1544

(0.0322)

(0.0205)

(0.9343)

(0.2600)

(0.0005)

(0.8798)

0.8044

2.7512***

0.2935

3.3577***

4.5697***

3.4760***

(0.6396)

(0.0073)

(0.7290)

(0.0002)

(0.0000)

(0.0017)

-0.0911

0.8611*

-0.2606

1.9167***

2.8853***

2.3598**

(0.7989)

(0.0970)

(0.4877)

(0.0004)

(0.0002)

(0.0137)

-0.8411

-3.2293

-0.1300

1.1242

0.0770

-0.2519

Payout (scaled by total asset) MV/BV Log(sale)

-2.9108***

(0.0152) -0.3168

Adjusted Return Intercept

Number of observations 2

R

(0.2147)

3.2131***

2.5195

(0.3494)

(0.5313)

(0.8888)

(0.8966)

-0.0082

-1.0704***

-0.0080

-1.0721***

(0.1873)

(0.0000)

(0.1902)

(0.0000)

(0.2002)

(0.0000)

2.0202***

7.4553***

2.0284***

7.4029***

1.9737***

7.5153***

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

-0.1961***

0.2467

-0.1972***

0.2414

-0.1983***

te

Firm/Year Effects

(0.0000)

-1.1104***

(0.1619)

(0.0000)

(0.1515)

(0.0000)

(0.1601)

(0.0000)

0.0127***

1.1051***

0.0125***

1.1049***

0.0117***

1.0915***

(0.0032)

(0.0000)

(0.0040)

(0.0000)

(0.0069)

(0.0000)

0.0031

0.0014

0.0032

0.0018

0.0033

0.0020

(0.4315)

(0.8754)

(0.4144)

(0.8369)

(0.3950)

(0.8186)

0.0975***

0.0566

0.0974***

0.0565

0.0879***

0.0509

Ac ce p

Beta

1.3228

-0.0082

0.2406

RE/TA

(0.0783)

(0.7398)

(0.0000) Market Cap

(0.8437)

(0.4813)

3.4822***

ip t

-1.0996**

cr

Low ROA

us

High ROA

an

Type 7 (All the others)

Low ROA

M

Type 6 (Low Growth, High Payout)

(9)

d

Type 3 (High Growth, Low Payout)

(8)

Net Payout (11)

Type 2 (Low Growth, No Payout)

(7)

(0.0000)

(0.1386)

(0.0000)

(0.1390)

(0.0000)

(0.1834)

34.0326***

16.5351

34.3577***

15.7988

30.6918***

14.7270

(0.0002)

(0.1153)

(0.0002)

(0.1325)

(0.0007)

(0.1619)

Yes

Yes

Yes

Yes

Yes

Yes

19714

20627

19714

20627

19714

20627

0.6162

0.5948

0.6160

0.5944

0.6171

0.5947

30 Page 32 of 33

Table 6: Regression Analysis of Institutional Holdings on Payout/Cash Flow & Growth Opportunity Mix

Growth Style Institutional Investors

Type 3 (High Growth, Low Payout)

Total Payout

Net Payout

Dividends

Total Payout

Net Payout

(1) 6.3754***

(2) 6.8959***

(3) 2.7260***

(4)

(5)

(6)

(0.0000)

(0.0000)

(0.0000)

-1.8657***

-0.8432

0.0211

-1.7987***

-1.5027***

-1.5770***

(0.1108)

(0.9632)

(0.0004)

(0.0000)

(0.0000)

(0.0006)

6.3160***

6.3619***

6.4052***

-0.2193

0.1321

1.9143***

(0.0000)

0.4846

0.3107

(0.4127)

(0.5141)

Type 5 (High Growth, High Payout)

5.5466***

5.6464***

(0.0000)

(0.0000)

(0.0000) 1.2064

(0.6081)

Log(sale) Market Cap RE/TA ROA Beta

0.0170

Adjusted Return Intercept

Firm/Year Effects Number of observations 2

R

(0.0003) 3.2772***

(0.0009)

(0.0000)

(0.0301)

(0.0000)

6.6970***

0.8881

1.7201***

1.8597***

(0.0000)

(0.1253)

(0.0000)

(0.0004)

3.4804***

2.9944***

3.4503***

(0.0000)

(0.0000)

(0.0000)

2.6711***

1.4356***

1.6848***

2.4437***

(0.0000)

(0.0000)

(0.0000)

(0.0000)

-1.1300

-3.6410***

-0.6342

0.7095

-1.2812**

(0.2126)

(0.0000)

(0.7759)

(0.3104)

(0.0227)

0.0204

0.0176

-0.0132

-0.0119

-0.0150

(0.2099)

(0.1314)

(0.1952)

(0.2445)

(0.2955)

(0.1867)

1.5307***

1.5756***

1.5355***

4.2584***

4.2302***

4.2155***

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

-0.0032

-0.0023

-0.0003

-0.1869***

-0.1880***

-0.1860***

Ac ce p

MV/BV

(0.7442) -0.9098**

(0.0000)

te

Payout (scaled by total assets)

(0.7016) 2.7155***

3.0468***

d

Type 6 (Low Growth, High Payout) 2.7138***

(0.0000)

1.5880***

M

(0.0000) Type 4 (Low Growth, Low Payout)

Type 7 (All others)

cr

Dividends

us

Type 2 (Low Growth, No Payout)

Value Style Institutional Investors

an

Type 1 (High Growth, No Payout)

ip t

The sample comprises publicly traded U.S. firms with available 13F quarterly institutional holdings data from 1981 to 2011, except for financial companies and utilities. The dependent variable in the regression is institutional holdings scaled by total number of shares outstanding. All firms’ characteristics variables are obtained from Compustat. MV/BV is market cap plus total assets minus common equity divided by total assets. Market cap is year-end stock price times year-end common shares outstanding. ROA is EBITDA divided by total assets. RE/TA is retained earnings scaled by total assets. Annual betas are computed using market model, daily stock return and NYSE value weighted average return. The market adjusted annual return is calculated by year-end stock return minus year-end NYSE value weighted average return. Growth and value style institutional investor classification follow Bushee and Goodman (2007). All independent variables are measure in year before institutional holdings. P-values are in parentheses. (Growth: investment opportunities; Dividends: dividends/Cash flow from operation; Total Payout: (dividend + repurchase)/ Cash flow from operation, Net Payout: (dividends + repurchases – issuance)/ Cash flow from operation)

(0.7595)

(0.8223)

(0.9738)

(0.0000)

(0.0000)

(0.0000)

0.0158**

0.0143*

0.0094

0.0085

0.0092

0.0063

(0.0354)

(0.0563)

(0.2131)

(0.1796)

(0.1447)

(0.3203)

0.1294

0.1552

0.2327

0.0977

0.0883

0.1304

(0.4012)

(0.3143)

(0.1314)

(0.5487)

(0.5874)

(0.4235)

0.0102***

0.0101***

0.0103***

0.0003

0.0006

0.0005

(0.0080)

(0.0084)

(0.0071)

(0.9280)

(0.8686)

(0.8995)

0.1705***

0.1684***

0.1565***

0.1193***

0.1197***

0.1100***

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

(0.0000)

7.6829

7.1147

4.0479

35.7948***

35.3011***

33.6242***

(0.4879)

(0.5208)

(0.7147)

(0.0000)

(0.0000)

(0.0000)

Yes

Yes

Yes

Yes

Yes

Yes

56086

56086

56086

59382

59382

59382

0.4675

0.4667

0.4679

0.5886

0.5888

0.5891

31 Page 33 of 33