Abstract
Stocks that initiate dividends tend to co-move more with other dividend paying stocks and co-move less with stocks that are non-dividend payers. These changes in return comovement do not come from variations in firm fundamentals or characteristics. Instead, comovement in stock returns and trading activities are related to investor preference for dividends. Mutual funds that prefer dividends hold more of the dividend initiators and flows to these funds move the prices of dividends payers in tandem. Our findings support a clientele-based explanation for return comovement, which becomes stronger following periods of high dividend sentiment.
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