Dividend Clienteles Research Articles

Investor Income and Local Dividend Clienteles

Investor Income and Local Dividend Clienteles

Social environment and corporate payouts

We investigate if macro-level social capital, which captures the notions of trust and honesty, has any effects on corporate payout policy. We find that firms situated in U.S. states (or counties) with higher levels of social capital (SC) have higher dividend payouts (DP). These results survive a battery of robustness tests dealing with inference and various forms of endogeneity. We find that the positive SC-DP association is more prominent when monitoring is weak. We also find that the positive SC-DP association remains when we account for internal social capital, political corruption, federal and state income taxes, and other possible dividend clienteles such as in-state pension funds and pension-age populations. Our study contributes to the literatures that regional locations and social considerations constitute clienteles who affect important corporate strategic decisions such as corporate payouts.

Behavioral Analysis of Investors’ Attitude towards Dividend Declaration in Developing Country–A Case of Bangladesh

<p>Dividend paying on share is one of the most significant topics of behavioral finance and Capital Market literature. Previous research attempts to evidence on dividend declaration and investors’ perception based on developed economies. This research attempts to fill the gap between developed and developing economies on dividend deceleration of investors’ perception. The aim of this research is to investigate empirical facts on dividend clienteles in Bangladesh Capital Market as well as scrutinize the correlations among various dividend expectation and the diverse attributes of investors’ community in Bangladesh on dividend payment. Also, it aims to test theories those have previously been built concerning on dividends paying stock of investor perceptions. The study has been conducted on 250 active stratified random samples of Bangladeshi investors who provided data related to dividends preferences by conducting face to interview with structured questionnaires. This research support that there is negative association between stipulate for dividend paying stocks and investors demographic attributes in the Bangladesh Capital Market. We find that corporate managers do not consider investors expectation on dividend paying stock. The study also reveals that one of the most important determinants of dividend initiations among Bangladeshi firms are the value-weighted dividend yield in the industry. As well as investors’ perception depends on different attributes of investors’ and dividend preference.</p>

Dividend Policy Responses to Deregulation in the Electric Utility Industry

This paper investigates changes in electric utilities’ dividend policies following the onset of deregulation. Consistent with the theory of dividend clienteles, we find that utilities continue to pay high dividends after the onset of deregulation. Under a regulated regime, we find no systematic pattern of associations between dividend changes and abnormal stock returns or future earnings changes. Post-deregulation, however, we find that, consistent with prior research on unregulated firms, dividend increases (decreases) are viewed by the market as good (bad) news. When we examine earnings following changes in dividends, we do not find evidence in favor of the dividend signaling theory.

Do firms use dividend changes to signal future profitability? A simultaneous equation analysis

This paper retests the signaling hypothesis of dividends by examining whether managers change dividends to signal their expectation of earnings prospects using a simultaneous-equation approach. This approach allows us to more clearly test the earnings prospects signaling hypothesis and facilitates the control of several alternative motives that managers may have for changing dividends. We also examine the information content of dividend changes with respect to future earnings changes in the same model system. Our results show that managers change dividends to signal equity-scaled rather than asset-scaled earnings prospects. In addition, we find evidence that managers also change dividends for signaling previous earnings changes and for catering to dividend clienteles. As for the information content of dividend changes, we find that dividend changes have significant and negative impact on ROA changes. The findings suggest that if investors consistently cannot recognize the signaling purpose and find that dividend increases (decreases) are not useful in predicting favorable (unfavorable) future earnings, managers may someday give up using dividend changes to signal the earnings prospects of their firms because they cannot obtain the expected market benefits anymore.

Market Participation and Dividend Clienteles

Asset allocation and market participation are intimately related investment decisions. Studies of dividend clienteles often attribute the positive relation between age and dividends to lack of self-control, but consumers with self-control problems are precisely those less likely to hold securities. Using data from the Consumer Expenditure Survey (CEX), I model market participation and dividend preferences jointly and find evidence of self-selection bias in traditional regressions linking dividend preferences to investors' demographics. The positive relation between dividends and age is likely due to life-cycle considerations rather than to lack of self-control.

Dividend clienteles: a global investigation

We compare the cross-sectional variation in the dividend payout policies of companies across 32 countries. Beyond the impact of firm-specific accounting and financial variables, this study investigates how the country level variations: shareholder demand due to demographic variations and consumption needs, agency problems manifested in the extent of minority shareholder protection and business disclosures, and market quality in terms of transparency and liquidity; affect the dividend payout policies. We find that firms have generous dividend payout policies when diverse shareholder demands are strong, extents of business disclosures and legal protections are weak, and the market qualities are poor. The empirical evidence supports the presence of strong dividend clienteles in a global setting.

Ownership structure and tax-friendly dividends

The paper examines the existence of tax-based dividend clienteles using the novel environment of Australia, which has operated a full dividend imputation system since 1987. The analysis jointly focuses on the tax-based preferences of five categories of shareholders, including both domestic and foreign-domiciled shareholder classes. Incorporating the dividend franking percentage as a direct measure of the degree of tax benefit associated with dividends, strong evidence supporting the existence of tax-based dividend clienteles is present for both domestic and foreign shareholder categories. This includes domestic corporate blockholders and company directors, and local institutional investors following tax reforms in 2000, and foreign institutional shareholders which, alternatively, demand lower dividends and dividend franking. These findings persist after considering the effect of share repurchases, and under various model specifications controlling for unobserved firm heterogeneity and potential endogeneity between ownership structure and dividend payout policy.

Separating Financial and Operational Synergy

There is strong empirical evidence supporting capital structure targeting, dividend policy targeting, and the existence of dividend clienteles. If these features are understood to enhance firm value, subject to manager preferences, then this evidence also advances the notion that financial synergy could explain the ambiguous landscape of corporate synergy studies. I apply a new structural model of the firm to the problem of determining operational and financial synergies - and in particular, their division between acquirer and target. The results are sensitive to capital structure, dividend policy, and financing. Several empirical studies assume that firm value is linear (and monotonic) in capital structure and financing method. Using the new structural model, I suggest an alternative approach to the calculation of abnormal returns that avoids this assumption. This approach separates financial and operational synergy and provides a testable hypothesis.

Merger Gains Induced by Dividend Tax Capitalization

Under certain conditions shareholders will impound dividend taxes in equity prices. We demonstrate that such a capitalization of dividend taxes may not only be seen as a value decreasing factor but also as a source of value. A mechanism which is proper to endow shareholders with gains derived from dividend tax capitalization is a corporate merger. In corporate mergers shareholders can receive financial synergies from differences in dividend tax rates across the shareholders of the acquired and acquiring firms. This Pareto-optimal synergistic gain is based on an arbitrage scheme which provides for a revaluation of future earnings with the lower dividend tax rates of other shareholder groups. The insight of our analysis also sheds light on the line of inquiry on dividend clienteles, i.e. shareholder groups characterized by their identical tax rates on dividends. The research on dividend clienteles suggests that a change in dividend policy is costly for shareholders (see Elton and Gruber 1970). It seems reasonable to suppose that such costs may incur in a corporate merger where at least one shareholder group should face a change in dividend policy. However, our finding that under dividend tax capitalization shareholders may receive financial synergies only due to differences in dividend tax rates contradicts this suggestion to some extent.

Tax reform and payout policy: Do shareholder clienteles or payout policy adjust?

Changes in taxation of corporate dividends offer excellent opportunities to study dividend clientele effects. We explore payout policies and ownership structures around a major tax reform that took place in Finland in 2004. Consistent with dividend clienteles affecting firms' dividend policy decisions, we find that Finnish firms altered their dividend policies based on the changed tax incentives of their largest shareholders. While firms adjust their payout policies, our results also indicate that ownership structures of Finnish firms also changed around the 2004 reform, consistent with shareholder clienteles adjusting to the new tax system.

Dividend Clienteles Around the World: Evidence from Institutional Holdings

We examine the relation between international institutional ownership and payout policy using a comprehensive data set of equity holdings from 37 countries over the years 2000-2007. We find that foreign institutional ownership is negatively associated with the likelihood that a firm pays dividends and the size of dividend payments. The greater the tax disadvantage of dividends to international investors, and the higher are transaction costs related to repatriating and reinvesting dividends, the more international investors push for fewer dividends. The results support the existence of dividend clienteles around the world. Finally, we find that firms that comply with foreign institutional shareholders preference for lower payouts are able to retain and invest more of their earnings.

Adding shareholder value through dividend policy: Evidence from the United Kingdom on tax-based shareholder clienteles

This paper addresses the question of dividend clienteles based on shareholder-level taxation. In the United Kingdom in 1997, radical changes were made to the way in which the dominant shareholder clientele was taxed on dividend income. These changes provided a unique quasi-experimental opportunity for a direct test of dividend clienteles, and of tax theories. This issue is central to policy formation, and to predicting the likely impact on shareholder value of changes to the dividend policy pursued by firms.Evidence is presented of two distinct tax-based clienteles in the United Kingdom, with contrasting preferences, one of which was strong enough to influence payout in the firms in which this clientele invested. The implication for South African firms is that, as the tax system changes, the payout preference of shareholders may also change. It is imperative that corporate financial managers react to these clienteles, and their requirements.

Market Participation and Dividend Clienteles

Asset allocation and market participation are intimately related investment decisions. Studies of dividend clienteles attribute the positive relation between age and dividends partially to lack of self-control, but consumers with self-control problems are precisely those less likely to hold securities. Using data from the Consumer Expenditure Survey (CEX), I model market participation and dividend preferences jointly and find evidence of self-selection bias in traditional regressions linking dividend preferences to investors' demographics. Moreover, the positive relation between dividends and age is more likely due to life-cycle considerations rather than to lack of self-control.

Ex-Dividend Day Price and Volume: The Case of 2003 Dividend Tax Cut

We examine the impact of the 2003 dividend tax cut, which removes the differential taxation between dividends and capital gains for individual investors, on the ex-dividend day price and trading volume. We find the ex-dividend day price and volume are affected by taxes, risk, and transaction costs. The ex-dividend day price drop ratio (excess return) increases (decreases) and dividend clienteles weaken after the tax cut. Ex-dividend day abnormal volume among high dividend yield stocks decreases after the tax cut consistent with a diminished motivation for tax-induced trading. Our results suggest that individual investors have a measurable effect on the ex-dividend day price and trading volume.

Empirical Evidence on the Existence of Dividend Clienteles

This paper provides new evidence on the existence of dividend clienteles for institutional investors. We directly examine individual institutions' preferences for dividend paying stocks based on the characteristics of stocks held in their portfolio. Many institutions follow persistent investment styles, maintaining relatively high or low dividend yield portfolios over time. Institutions which hold portfolios of higher yielding stocks are significantly more likely to increase their holdings in response to a dividend increase or sell their stock in response to a decrease. For a subset of institutions, we directly observe the proportion of their portfolio managed on behalf of taxable clients. Consistent with tax-induced dividend clienteles, institutions with more taxable clients are less likely to increase their holdings in response to a dividend increase. Finally, we show that stock price reactions to announcements of dividend increases are related to characteristics of the institutions holding the stock. Our results suggest that tax status as well as other factors are important in explaining observed clientele behavior.

Institutional and individual investor preferences for dividends and share repurchases

This study shows that individual investors prefer to invest in high dividend yield stocks and in dividend-paying firms whereas relatively lower-taxed institutional investors tend to prefer low dividend yield stocks and non-paying firms. Consistent with Brennan and Thakor's [Brennan, M. J., & A. V. Thakor. (1990). Shareholder preferences and dividend policy. Journal of Finance, 45, 993–1018] adverse selection model, informationally superior institutional investors are shown to prefer firms that engage in larger share repurchases whereas individual investors do not prefer share repurchases. These results are contrary to the widely held beliefs (a) regarding tax-based and non-tax-based dividend clienteles, (b) that firms pay dividends to encourage monitoring by institutional investors, and (c) that the personal tax rate on equity is low (or zero).

An Examination of Institutional Dividend Clienteles: Evidence from Australian Institutional Portfolio Holdings

Shareholdings for a sample of forty-nine Australian institutional equity funds show that dividend policy affects institutional holdings. Institutions tend to hold stocks that pay dividends, but among dividend-paying stocks there is no simple preference for stocks with either the highest or lowest dividend yields or dividend payout ratios. We also investigate whether dividend franking status affects institutional ownership. Institutions tend to have a higher ownership in stocks which carry full imputation tax credits compared to stocks which have partial, or zero imputation tax credits.

Do Dividend Clienteles Exist? Evidence on Dividend Preferences of Retail Investors

ABSTRACTWe study stock holdings and trading behavior of more than 60,000 households and find evidence consistent with dividend clienteles. Retail investor stock holdings indicate a preference for dividend yield that increases with age and decreases with income, consistent with age and tax clienteles, respectively. Trading patterns reinforce this evidence: Older, low‐income investors disproportionally purchase stocks before the ex‐dividend day. Furthermore, among small stocks, the ex‐day price drop decreases with age and increases with income, consistent with clientele effects. Finally, consistent with the behavioral “attention” hypothesis, we document that older and low‐income investors purchase stocks following dividend announcements.

Institutional and Individual Investor Preferences for Dividends and Share Repurchases

Using aggregate data on institutional and individual holdings for the 1989-1996 period, it is shown that relatively lower (higher) taxed institutional (individual) investors prefer low (high) dividend yield stocks to high (low) dividend yield stocks. Also, individuals prefer dividend paying firms, whereas institutions typically prefer non-paying firms. Institutions show a weak preference for firms that engage in larger share repurchases, whereas individuals do not prefer share repurchases. These results are contrary to the widely held beliefs a) regarding tax-based and non-tax-based dividend clienteles, b) that firms pay dividends to encourage monitoring by institutional investors, and c) that the personal tax rate on equity is low (or zero).