Rational and Behavioral Motives to Trade: Evidence from Reinvestment of Dividends and Tender Offer Proceeds

Abstract

We provide evidence of households’ stock market trading in response to clearly identifiable positive cash flow shocks: dividend payments and tender offer proceeds. Transaction cost motives appear important, and there is some support for rational portfolio rebalancing and life cycle considerations as well. Households’ tendency to reinvest is low, even for large and unexpected dividend payments. This is consistent with a default choice bias, and is not due to dividend clientele effects. Reinvestment of tender offer proceeds is significantly higher, controlling for other important factors. This is consistent with mental accounting, i.e., cash flows from different sources are treated differently.