Differentiated dividends are a unique cash dividend payment scheme prevailing in Korea which allows managers to pay higher cash dividends to small shareholders than large shareholders. One of the important features of this dividend policy is that it provides an additional choice to managers when deciding on changing firms' dividend policy. Previous studies suggest that managers are expected to initiate differentiated dividends rather than stop paying dividends especially when their company is facing cash constraints. However, we find that a half of the firms changing to differentiated dividend are actually increasing their total dividend payment. In order to explain managers' motivation to initiate differentiated dividends, we employ the time varying fads, dividend premium, suggested by Baker and Wurgler. After conducting logit regressions, we find that dividend premium is positively associated with managers' incentive to initiate differentiated dividends especially when they increase total dividend amount. Also, the firms listed in different stock markets show different motivations when choosing to initiate different dividends.
JCF Special Conference on Emerging Markets, 2009. Journal of Corporate Finance Special Conference on Emerging Markets 2009 (Beijing, China 23-25 August, 2009)